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SCOTTMADDEN, INC. | 14 BATTLE LINES: DANCING ALONG THE BOUNDARY BETWEEN FEDERAL AND STATE ENERGY JURISDICTION As states assert their energy policy preferences in new ways, there is contested ground at the formerly “bright line” of federal-state jurisdiction. Making a Market…and Adjusting It…and Adjusting It • When FERC restructured the power industry in 1996 through Order 888 and the subsequent establishment of regional transmission organizations and energy markets, it sought in part to unleash market forces to help drive down prices in an “inherently competitive” power generation sector • Over time, “pure” wholesale electricity markets have been adjusted through a number of administrative (rules-based) mechanisms, including: ›› Price caps ›› Minimum offer price rule ›› Administratively drawn demand curves ›› Capacity markets ›› Capacity performance products • More recently, PJM has proposed an approach to change capacity auction design to effectively remove subsidized capacity resources, and commensurate load, for purposes of calculating capacity values (nudging prices upward). This would result in administratively determined market-clearing prices States Assert Their Interests • States have some overlapping but additional interests other than the “just and reasonable rates” principle that governs federal oversight • Increasingly, states are expanding their involvement in areas that touch upon energy and trying to manage outcomes ›› Expanding and incentivizing renewables and distributed energy resources ›› Suppressing price increases and spikes for state residents and businesses ›› Encouraging generation development and retention of existing power plants ›› Implementing environmental and carbon policies that may differ from their neighboring states • To that end, states have introduced approaches affecting their regulated utilities that can create a hybrid system and can potentially work counter to federally approved market design (see Fig. 1) The Energy Markets Puzzle: How the Pieces Fit Together Matters “Pure” Market RTO/ISO wholesale market Administrative Market Overlay Administratively drawn demand curves Policy-Based Market Overrides Non-bypassable charges Policy-Based Energy Resource Overlay Renewable portfolio standards Traditional Centrally Planned Integrated resource planning • There is a range of options between “pure market” and “pure centrally planned” • We are combining them in unanticipated ways, like putting pieces together from different puzzles • This can produce unintended consequences