On Monday, the Federal Energy Regulatory Commission (FERC) rejected the Energy Department’s anti-competitive proposal to subsidize coal and nuclear plants in the false name of grid resiliency. In so doing, FERC’s integrity proved as resilient as the grid during the Bomb Cyclone, even in the face of intense pressure from allies of an administration that appointed four of its five sitting commissioners. Such an adherence to principles and evidence, rather than political leverage, warrants kudos to its leadership. Fans of fair competition, innovation and “consumer interests” generally can breathe again—but not too deeply.
In the decision, FERC sought exploration of the vague concept of “resiliency” by directing grid operators to submit information on certain resilience issues and concerns. Digging into resiliency is a credible pursuit in theory but, in practice, it can also be a precarious gateway to intrusive government. Specifically, it’s a launch pad to expand central planning that carries some degree of fuel-picking bias. For example, to some, “resiliency” means preparing for exceptionally unlikely scenarios that the private sector cannot foresee. Such a definition invites paternalistic arguments wherein the government defines whatever creative contingencies it wants with little validation of the likelihood of their occurrence. Recently we’ve seen suggestions to “Hollywoodize” electric system planning by using various doomsday scenarios more reminiscent of a Die Hard plot than anything believable. Electric planning already accounts for credible contingencies—it should not speculate wildly to include incredible ones.
For this reason, a constructive approach to resiliency begins not only with defining the concept but by determining whether it differentiates from reliability—and then examining whether there’s any unique market failure present. If so, then proposals for market reforms must focus on aligning the economic incentives of market participants with the efficient and resilient operation of the electric system. Further, any effort to address a newly-defined market failure must fully account for the potential of government failure. In any event, FERC must lay out economic principles that ensure proposed reforms enhance market performance, rather than placate incumbent interests.
To this end, FERC’s new proceeding on resiliency starts on the right track by aiming to:
- Develop a common understanding of bulk power resiliency;
- Understand how organized wholesale electricity markets assess resilience; and
- Evaluate whether additional Commission action regarding resilience is appropriate.
However, if FERC subsequently decides additional action is necessary, it should first advance a robust economic framing to ensure that the initiative does not stray from the principles of market design. After all, misguided resiliency reforms could create foundational flaws in market design that entrench anti-competitive rules for years, as parties that benefit from such rules are highly resistant to later efforts to change them. For this reason, new rules must age well. Efficacious market design should increasingly account for technologies that provide customers with more autonomy to differentiate the degree of reliable service they receive – if regulators permit it – and such a model should extend to any resiliency framework, as well.
Big decisions lie ahead for FERC and the electric industry. The resiliency initiative could emerge as a tool to placate rent-seekers and their political allies. But FERC’s decision offers a new hope that competitive forces have reawakened. Let’s hope cooler heads continue to prevail through future discussions on aligning incentives with resilient grid operations.