The Department of Energy’s cost recovery proposal for fuel-secure resources has raised a direct threat to competitive wholesale electricity markets with its preferential treatment for coal and nuclear generation in the name of additional resilience.

Without much evidence or debate, the Secretary of Energy identified a problem and a solution that gives preference to resources that are out of favor with market economics and market efficiency. Instead of forcing contentious, top-down policy onto electric industry stakeholders, we suggest enhancing more democratic, bottom-up policy development by improving RTO/ISO stakeholder governance processes.

The DOE NOPR is a direct hit on a simmering issue in RTO markets — market efficiency. RTO markets were founded on the premise that competition would create efficiency and efficiency would deliver consumer savings while maintaining a highly reliable grid. Since their inception, the level of market efficiency achieved by wholesale electric markets in the U.S. has been the subject of considerable debate.

One critical point in that debate is whether markets can adapt to evolving policy and technology. With greater market scrutiny, it is time to take a closer look at whether RTO stakeholder governance processes can continue to adapt and deliver market efficiencies.

In a new R Street Institute white paper, Vermont Law School’s (VLS) Institute for Energy and the Environment comprehensively surveyed stakeholder governance processes and their impact on market efficiency. The VLS research team conducted interviews with market participants and interested parties working in each RTO and ISO. While overall finding that stakeholder governance is working, the white paper also found that RTO and ISO stakeholder governance processes have not evolved at the same pace as the electric sector and regular reviews are needed.

For the last decade, change has been the constant in RTO markets. The total number of market participants expanded as more renewable energy generators connected to the grid; virtual market traders staked out positions in the marketplace; and a new set of energy products and providers emerged. Four RTOs and ISOs have expanded their geographic boundaries, adding new regions to the wholesale markets. In PJM, NYISO and SPP, the number of market participants more than tripled in a fifteen-year period.

Yet as innovative technologies, more distributed generation, and the rising influence of state interest push harder on the accelerator of change, stakeholder governance processes have lagged. Sector classifications today closely resemble sector classifications from ten years ago. New participants are concentrating in a subset of sectors. New and incumbent market participants have difficulty effectively participating in governance processes.

As the markets have evolved, stakeholder governance processes have become more complex and complicated. Some markets hold more than 300 meetings per year, requiring a significant investment of time and money simply to be present. Being able to effectively participate requires even more time, money and expertise.

The question at hand is whether the markets are capable of managing these changes within their current stakeholder governance structure. The answer to this question is not simple. There will be no single solution for helping stakeholder governance processes adapt. Each RTO and ISO is a unique creation with a different geography, generation profile and governance structure. What does exist is an opportunity to cast a critical eye on the status quo to determine the best path forward.

We recommend a simple starting point that builds off an already accepted review standard, FERC Order 719’s mandate to RTOs and ISOs to consider the responsiveness of their stakeholder governance processes. Each RTO and ISO should start by creating a regular review process to review both procedural issues and structural matters. RTOs and ISOs should evaluate governance procedures to find opportunities to reduce participation barriers.

PJM and MISO’s annual procedural reviews are examples that can be replicated in other markets. Structural evaluations of the stakeholder governance process can occur less frequently, but they should not be avoided. As wholesale markets have evolved and matured, it is reasonable and prudent to consider if the procedures and structure of the stakeholder governance process are sufficient to meet the new challenges.

A reinvigorated evaluation of stakeholder governance should only be part of a larger process to improve market rule development. If the goal is to produce the best solution, then there are untapped opportunities to create immediate improvements including using market monitor reports to prioritize issues and increasing FERC’s scrutiny of RTO proposals. Market monitors identify market inefficiencies and propose solutions to correct them.

The speed at which corrective actions advance can be ponderous. Identified issues should be prioritized to promote quicker action on issues affecting overall market performance. FERC could also take a more critical view of the proposals and compliance filings brought before it by the RTOs. More consideration of competing proposals, comments and suggestions would enhance the natural checks-and-balance structure of market rule development. Over-deference to RTO proposals can cut out valuable voices, raising critical concerns with the just and reasonable nature of market rules.

As the pace of technological and policy change accelerates, we should take the time to evaluate the market rule development process. Given the complexity of the challenge, the RTO governance process has functioned reasonably well but evolving wholesale markets require sustained vigilance from stakeholders, market monitors, policymakers and FERC.