Grid Operator Reform with Big Implications for a Western Energy Market

The California Independent System Operator leaders enabled a critical governance change that gives new powers to the Energy Imbalance Market Governing Body, which could transform the energy markets across the entire West, analysts said.

The CAISO Board Aug. 20 voted to give the EIM Governing Body more authority in decisions applicable to each the CAISO and EIM markets. The revision also lays out procedures for settling disputes when the two interests diverge.

Any proposal impacting both markets would require a majority vote from each authority to go into effect, according to EIM Governance Review Committee Chair Therese Hampton .

The governance change was a “necessary” but by no means final step towards a western-wide Regional Transmission Organization, said Western Grid Group Director Douglas Howe. He is a member of the CAISO Board-appointed Governance Review Committee that developed the new joint authority.

The voluntary EIM was launched by PacifiCorp, a subsidiary of Warren Buffett's Berkshire Hathaway Energy, and CAISO in November 2014 to optimize real time dispatch. Previously, the West’s 38 balancing authorities met real time supply-demand needs independently.

The EIM’s second quarter 2021 filing showed quarterly benefits of $132.7 million for its 15 participants from optimized cost-effective dispatch.

With EIM cumulative benefits now at $1.42 billion, with six participants being added by 2023, regional leaders see a new opportunity. Moving from the estimated 5% of real-time power flows in the EIM to optimizing dispatch of all the resources in Western markets could save billions of dollars in meeting the high renewables and emissions reduction mandates across the West, stakeholders told Current .

The CAISO Board is appointed by California’s governor and many EIM Governing Body decisions require Board approval. Howe, a former New Mexico utilities regulator, said stakeholders outside California will not accept market governance with that much California leverage.

That issue was resolved by clarifying that tariffs and rules addressing CAISO markets or California resource adequacy are not “applicable” to EIM participants and therefore do not fall under joint authority, he added. Under the compromise wording, however, the EIM Governing Body would share authority on tariffs and rules “applicable” to EIM prices and participants.

The CAISO Board’s unanimous approval of the compromise shows the diverse EIM participants in and outside California recognize it is in their common interest to support governance structure reforms,” said Natural Resource Defense Council Energy Program Co-Director Ralph Cavanagh .

“These are the type of governance reforms needed to assure that entities across the entire Western Interconnection and of every ideological flavor will be fairly treated in a regional market,” Cavanagh added.

This approval of EIM governance reform raises thorny questions: whether it will work, what leaders’ next steps will be, what Western grid integration means, and what it will take to achieve it.

The plan

The revision includes two key elements for resolving conflicts, according to GRC Chair Hampton .

Disputes between the joint authorities could go to the Federal Energy Regulatory Commission , but the plan requires steps be taken before that option is exercised. First, the joint authorities must make “at least two attempts to find a mutually-agreeable proposal,” Hampton said.

If system reliability market integrity is threatened by an impasse, the CAISO Board can authorize a FERC filing. But that filing must include the EIM Governing Body’s input, she added.

If there is a dispute over authority, like whether a CAISO tariff change will impact the EIM, the GRC recommends further debate, Hampton said. If the question remains unresolved, the Board should obtain input from other regional or state regulatory authorities, take a second vote after 45 days, and wait 180 days to take further action such as a FERC filing.

Stakeholders generally support the compromise.

Out-of-state participants see joint authority more positively than some California entities who are concerned those from outside California participating in the EIM may want or refuse things like tariff changes the Board recommends for the larger CAISO system and market because of their outside-the-state perspective, Howe added.

But parties both in and out of CAISO territory have concerns about the governance changes, “which means this isn't the end of the story,” Howe added.

“An important step”

Fragmentation of the western grid was recognized as a threat to power system reliability in a 1998 Department of Energy study , NRDC’s Cavanagh recalled. The EIM has been a major step toward addressing that threat and this governance reform “is an important step” toward doing much more.

Lawmakers and policymakers across the West have rejected past CASIO legislative efforts to turn the CAISO into a western regional market that would optimize dispatch between all balancing authorities. The latest governance changes “signal an evolution” of an EIM with entities that serve close to 80% of Western states’ load, CAISO Spokesperson Vonette Fontaine wrote in an email to Current .

CAISO is developing a west-wide extended day ahead market (EDAM) that can provide “much greater cost savings and emissions reductions,” Cavanagh said. The new joint authority compromise “will give potential participants confidence that new reforms needed for the EDAM can be put in place” as they move “step by step toward a fully integrated Western regional transmission organization.”

It is too soon to anticipate when or how that might happen, but “the best test” of the new governance structure as a step toward an RTO will be how it will be used to move from the EIM to the EDAM , Cavanagh said. A day-ahead market is several times larger than the EIM and the shared authority structure will have to be re-evaluated to assure it will also work for the larger market, he added.

There is a lot of serious discussion outside California about going straight to an regional transmission organization, he said. “There are many regulators, legislators, and other stakeholders in and outside of California who have seen the benefits of the EIM and see opportunities being lost by not having a regional market.”

If CAISO is unable to move toward an EDAM and an RTO, out of state entities may move to another regional market or form their own , though they have acknowledged that is not the optimal solution, Howe cautioned. The new joint authority shows California is willing to take “an incremental step,” but “that is not enough.”

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Grid Operator Reform with Big Implications for a Western Energy Market

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