The Federalist Society held a webinar July 9 looking into whether the federal government should continue to rely on wholesale electricity markets in the face of rising prices and narrowing reserve margins.

The development of markets came from the states, many of which — enabled by FERC guaranteeing open access to transmission in Order 888 after some prompting from Congress — restructured their utility industries beginning in the 1990s, recalled Harvard Law School Electricity Law Initiative Director Ari Peskoe.

States started to restructure after several bad bets by utilities, largely on nuclear power, with Peskoe highlighting a project Boston Edison invested in that never got built and led to losses that equaled the firm’s profits in its entire history.

“This would have bankrupted the utility if they had to absorb all the losses,” Peskoe said. “What often happened in these cases was that utility shareholders paid some and ratepayers paid a lot as well. … The one here in Boston was never even finished, so they got paid money for nothing. So, this is a risk allocation problem.”

Restructuring the utility removed the regulated wires firm from the generation function, though often those firms kept subsidiaries that were involved in new markets for generation.

“Now there’s a problem, though, with the development of these markets, which is that utilities controlled market access that would give them an unfair advantage in these new markets. No one’s going to invest in the market if it’s controlled by the utilities,” Peskoe said.

That brings up the issue of market power, which can be dealt with via transmission that investor-owned utilities had always used to improve their own systems’ reliability and enhance trading opportunities with their neighbors.

“Transmission is the industry’s medium of coordination that enables the industry to unlock for short-run and long-run efficiencies through trading real-time operations and joint planning,” Peskoe said. “But to be more straightforward about it, if you control transmission, you can decide who generates power, where it’s generated, the types of fuels used and where it’s delivered to.”

FERC had the authority to prevent “unduly discriminatory” transmission practices for decades, but it was not until the 1990s that it imposed open access on the industry to ensure the new competitors in the generation space, and smaller cooperatives and municipal-owned utilities that had complaints about the old system, could access the grid.

“FERC’s goal was to harness markets to generate power, and it had the idea that really to do that effectively, what you have to do is separate transmission ownership from its control,” Peskoe said. “FERC encouraged utilities to create new entities that it called independent system operators. These would be entities that would oversee and implement FERC open-access transmission rules.”

The ISOs and RTOs developed markets that the competitive suppliers could bid into and planned the transmission grid that enabled that to happen.

But markets have always had their detractors, and the Federalist Society’s John Kennerly Davis Jr., who is a former assistant attorney general in Virginia and worked for Dominion Energy, said one issue is that restructuring has just made things more complicated.

“One thing about the state-centered model was that it was a regulatory system that oversaw and held accountable a single corporation, for the provision of cost-effective, reliable electric service in the franchise service territory,” Davis said. “Now the corporate form emerged a long time ago, I think sometime in the early 1600s, and it has endured over the centuries because it’s a very powerful legal mechanism that combines efficiency with accountability.”

Accountability is a powerful concept and one that can be tricky in the restructured markets, he continued. NYISO might have knitted together seven utility systems into one grid, but its management process involves hundreds of stakeholders, and that model has been repeated around the country.

“No one entity — not a transmission utility, not a power generator, not an ancillary service provider — no single entity in this disaggregated model is responsible to provide electric service like the traditional integrated corporate utility was under the traditional model,” Davis said.

The utilities are still in charge of the distribution system, which is where most outages occur, Peskoe noted. On that level, states’ ability to hold them accountable has been untouched, he said.

“I would argue that some of the best examples of regulators actually holding utilities accountable are in the restructured states where you’ve had winter storms; for example, in my part of the country here, where there have been pretty significant punishments laid down by regulators,” Peskoe said. “So, accountability is only as good as the regulators are willing to sort of punish the utilities for poor performance.”

Davis also argued that subsidized renewables are driving down the prices for other technologies and making the grid less reliable in the process.

“You’ve got a system that is based on power supply technologies that are overly dependent on renewables, which, because of their intermittent, weather-dependent nature, don’t provide the kind of 24/7 reliability support that the customer really needs,” Davis said.

Wind and solar do present some challenges, but Peskoe argued that they were not insurmountable and cautioned against “techno-pessimism.”

“And I would say that the far bigger subsidy, again, is vertical integration, which is a much bigger intervention in the market than any tax credit,” he added.