How a Referee for the Grid Can Lower Utility Bills — Episode 276 of Local Energy Rules

Jon Wellinghoff:
There’s lots of options and lots of permutations of what an IDSO, an independent system operator, could be doing for consumers. But basically what it does is it allows consumers to have more flexibility and options with respect to how they interact with their local distribution grid.

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John Farrell:
The combination of an electricity affordability crisis and the massive energy demands of data centers might be the right time to consider structural reforms. Don’t believe me. Just ask former chairman of the Federal Energy Regulatory Commission, Jon Wellinghoff, who first offered the idea of independent distribution system operators over a decade ago. In his work since leaving FERC, now as the chief regulatory officer at Voltus, he has focused on bringing distribution resources into the mainstream. But in a discussion with me in May 2026, he explained how the monopoly utilities’ conflicts of interest between private profit and public service as a grid operator act as a major barrier to bringing cheaper, cleaner energy to market.
I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance, and this is Local Energy Rules, a podcast about monopoly power, energy democracy, and how communities can take charge to transform the energy system.
Jon, thank you so much for joining me for this conversation.

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Jon Wellinghoff:
Hey, very welcome, John. I’m very happy to be here.

John Farrell:
So I often ask people a question like, is this what you wanted to be doing when you grew up? But I noticed that you mentioned you have grandkids in one of your bios, so I wanted to ask you what is more satisfying for you personally and professionally, was it having the Supreme Court affirm one of the signature orders that was developed under your, order 745 that provided for compensation for demand response providers and wholesale markets, or is it spending time with your grandkids?

Jon Wellinghoff:
Well, I would say that 745 was a very, very big deal. However, my grandkids and my great-granddaughter are just supreme people that I love being with. So I would have to say my two grandsons and my great-granddaughter.

John Farrell:
Well, thanks for entertaining that question. It was pretty interesting to see about the timeframe on that Supreme Court decision, but as a parent of two lovely teenagers, I would’ve also gone with my children or grandchildren on that answer.
Well, let’s dive right in. In 2014, you and James Tong penned a piece saying, I think it was summarized by another reporter that utilities should not operate the distribution grid. I often think about this argument. I’m probably one of those few people out there who kind of revisit this time and again, but especially I’ve been thinking about it in the past few months as non-energy folks like Governor Josh Shapiro of Pennsylvania openly are talking about the utility model as broken. When you first proposed this idea thinking about this concept of an independent distribution system operator, which we’ll get into the weeds in a few minutes, what problems were you trying to solve? Why did it seem important that we have this different structure in terms of managing the distribution grid in particular?

Jon Wellinghoff:
Well, the problems I was trying to solve is how you could integrate in distribution resources into the grid and across both the distribution level and transmission level where I was at the time was before I wrote this paper was at FERC and FERC of course has tried to solve the problem and I don’t think has fully succeeded, but trying to solve the problem of how you operate independent markets and how you independently operate a transmission system, but yet still allow effectively monopoly ownership of the assets and FERC has done so with the creation of ISOs and RTOs across the country, but they’ve done it on a voluntary basis, not a mandatory basis. And it has provided some success, although I certainly believe that there is considerable improvements that still could be made with respect to that system improvements that one of my predecessors, Pat Wood at FERC tried to implement and was not successful, including making ISOs RTOs mandatory across the US and also having a standard market design across the US, but he didn’t achieve those two objectives that he tried to achieve.
But I was then translating that down to the distribution system because I do believe that at the distribution level, there also are certain products that need to be provided for like voltage bar support and local distribution support that can be provided by distribution resources and best could be done so in a quasi market structure. And if you had a quasi market structure at that level, you should then have an independent system and market operator who is in fact overseeing that. You can’t have the owner of the assets that also has a potential interest in that market, i.e. Could be a market participant by providing those services, also running that market because there’s an inherent conflict. You somehow have to take out those inherent conflicts. So FERC has attempted to do it at the national level by putting in these voluntary ISO RTOs, having regional transmission organizations operate the grid functionally and then also have them act as ISOs, independent system operators for the markets that are there.
So I simply was trying to solve for what I saw as a parallel companion problem at the distribution level by coming up with this idea of an IDSO.

John Farrell:
Can you talk a little bit about what sort of the basic premise then behind the independent distribution system operator model? And I will end up shorthanding this with DSO throughout the podcast. I’m curious if you have like a shorthand for describing this idea to people who aren’t grid nerds. Is it just kind of as you alluded this distribution side equivalent of an ISO for transmission? Is the model of open access transmission sort of relevant then in terms of how we think about distribution? What’s your go- to way to describe this to people?

Jon Wellinghoff:
Well, I haven’t thought that much about the open access aspect of it, although I guess that comes into play as well. I mean, it could come in play. Now you’re actually expanding my mind about how I could think about the issue. But the basic way I thought about the issue, and I think you could explain the issue to a person who’s not deep in the weeds of energy markets and transmission operation at the FERC level is that your local retail utility would still be providing you with energy services, but they wouldn’t be deciding specifically what upgrades to your distribution wires were needed, although they could invest in those and they wouldn’t be operating that local distribution system. It would be done by a third party, an independent entity who would operate the system both functionally and also decide whether or not you as a consumer could provide support and products to that system that you could make money from. That would be the ideal thing.
And then if you extend that to what you just said about open access, potentially that independent operator could put in place some kind of a tariff that will allow you to do things like sell solar to your neighbor, which if you had excess solar to sell, your neighbor could buy it or it could be bought out on a local distribution market rather than providing that additional generation service up to wholesale transmission market. It could be done more locally. So there’s lots of options and lots of permutations of what an IDSO, an independent system operator, could be doing for consumers. But basically what it does is it allows consumers to have more flexibility and options with respect to how they interact with their local distribution grid.

John Farrell:
One of the things that I find sort of amazing in retrospect is that you wrote this in, the first paper I came across that you had written about it was in 2014. The technology that we have now both from like the computing and coordination side as well as just cost effective batteries seems to have, I think, really heightened the opportunity for this. I’m curious if you also see that in terms of maybe back then it would have been, we had solar, batteries were kind of expensive, kind of grid management opportunities at the distribution level, I would argue were perhaps a little bit more limited, I think there’s still a good case to have been made for it. Did you imagine that 10 years from now or 10 years from then I should say that we’d be in a situation where we can essentially be building little microgrids all over the place at a fairly competitive price?

Jon Wellinghoff:
Yes. I envisioned that batteries would be ubiquitous and cheap. I envisioned that back in 2008 when we did a demonstration at FERC where we brought down a Toyota Scion that had been converted to an all electric car from the University of Delaware. We brought it down to the FERC driveway, drove it into the FERC driveway and plugged it into a charger that had two-way capabilities and we used that vehicle to provide regulation service to the PGM grid. And I knew that to the extent that EVs were going to become ubiquitous, which they are starting to become so now that everybody would have substantial capacity and energy capabilities within their garage that could be used to support the grid in multiple ways. So yes, I envisioned that people would have microgrids. I have right now, John, 200 kilowatts in my garage. I have a Mustang Mach-E EV and a Rivian RT1 truck.
So in combination, I have over 200 kilowatts, plus I have double Tesla Powerwall in my garage just sitting there most of the time. I mean, sitting there literally 20 hours or more a day, how much to use a car every day that can be utilized for grid services.

John Farrell:
So actually, I’m so pleased that you decided to ground it in this really example, because I also have, I don’t know, a hundred kilowatts sitting in my driveway because of two plugin vehicles. Notably, I’m in Minnesota and we have no distribution grid operator, but also I have no way that I can use those vehicles to provide any kinds of grid services. There is no program offered by my utility where I could share that energy. Certainly even in a wholesale market situation, which is where we’ve seen like in PJM and the Mid-Atlantic, there have been options to do that, although there’s obviously capacity limits on participation. Are you able to use your 200 kilowatts for the grid’s benefit?

Jon Wellinghoff:
No, I’m sitting in Nevada, in Reno, Nevada, and I have a similar situation. There is no market. There’s in fact not even a wholesale market, let alone a distribution market at the distribution level to do so. And of course, the utility has no incentive to create such a market or operate such a market because in doing so it diminishes their opportunities for grid investments. And of course, we currently pay utilities to spend money. So the more they spend, the more they make. And if they can’t spend more money, then they don’t make more money so they do everything they can to continue to spend money. So we’re in a situation where we have to break that cycle in a way that we have some independent entity who is over the creation of a structure that allows consumers to participate in the grid.

John Farrell:
It’s so striking to think of as EVs in particular deploy, which wasn’t even what I was thinking about when I first mentioned batteries, that we all have all of these resources sitting around presumably at more than 50% state of charge because people want the convenience of knowing their car is available to go somewhere and there’s yet all of these grid needs that we have even more energy demand now. I mean, energy demand was relatively flat 10 years ago and now we’re talking about a different environment in which it could really prove particularly useful.

Jon Wellinghoff:
Well, and there’s a lot of grid services that can be supported without diminishing that capacity in your battery to provide assurance that you have sufficient charge to be able to use it when and if you need it for whatever purposes. For example, we demonstrated at FERC when I talked about that car that was brought down from the University of Delaware that you could provide grid regulation services while you were charging the car. In other words, the car would continue to charge while you’re providing this regulation up and down service in small increments and still charge the car. The car would charge you a little bit slower, but the car would still be charging. So there are services that can be provided to the grid, multiple services, voltage support and other services from these types of resources if they’re set up properly and there is a independent structure to operate and access those services.

John Farrell:
And it’s worth pointing out to people just like how simple that is. I mean, I’m assuming that a good deal of what you’re talking about in terms of grid services is literally just faster or slower charging as the grid is requesting because that is varying the amount of energy that’s demanded.

Jon Wellinghoff:
That’s correct. You can do it without having to inject at all. You can simply stop and start charging or faster or slower charging, that’s correct. And doing that can provide grid services that can be compensated. We did some calculations back then at FERC was PGM, that PGM would for that regulation service would be paying a automobile owner somewhere in the neighborhood of $100 a month to do that.

John Farrell:
Remarkable. I wanted to get your reaction to what I see as some of the potentially significant impacts if we had a DSO for distribution grids kind of across some of the different things that are driving the costs of the grid right now. One of them would just be around reliability. So I mean, there’s a couple of factors here. One is I was thinking of PG&E as I thought of this and the fact that one of the reasons that they set some of the fires they did was because they were diverting maintenance funds to pay higher shareholder dividends. But I think more broadly we’re talking about sort of a non-traditional but effective way to use distributed resources to meet reliability needs and that a lot of the information that I’ve seen suggests that we can get reliability benefits at a lower cost because as you said, instead of just building infrastructure to do that, we can tap these resources that customers might already have sitting in their driveway, sitting in their garage, et cetera.
Is that one of the benefits that you see as well, that we can have higher reliability as a result of having independent operation of the system and therefore kind of a broader view of what are the resources that we have to meet reliability needs?

Jon Wellinghoff:
Yes. There would be no trade-off to reliability if you had an independent system operator. That independent system operator would plan the grid and would do the cost allocation and determination of investments. The investments would still be made by the monopoly owner of the asset, which would be utility that could still be providing retail services to end users, but ultimately the planning and operation of the system would be overseen by this IDSO and that planning and operation certainly could include and would take in the opportunity to utilize non-grid assets like consumer assets to provide for reliability and that providing for reliability could include determination of how you’re charging or not charging EVs in your garage or how you’re using various other appliances and loads within a facility, whether it be residential facility or commercial industrial facilities. And of course doing so in a way that those owners of those assets, the end use customers are fully compensated for their vision of right services.
In other words, none of them would be doing it in a way that would be onerous or not at their consent, but completely at their buy-in to a market type system where they ultimately would bid into and agree to participate in improving this reliability of the system. And certainly we’re seeing improvements in reliability and I can talk from a perspective of Voltus now in the larger transmission grid by adding in more demand response load flexibility resources into the grid on a daily basis assisting entities like data centers interconnecting the grid in a more reliable way by what Voltus calls BYOC, bringing your own capacity to the system and you could see that being done at a smaller scale at the distribution level as well where capacity constraints could be relieved on feeders and other smaller distribution sections of the grid that otherwise a utility who is more interested in making investments might upgrade that feeder, but maybe that feeder does not need to be upgraded if certain resources on that feeder can be modulated and made more flexible at a consumer’s choice.

John Farrell:
I really appreciate that you brought the planning into it too, because one of the lessons seems to be from the transmission level and something that’s still, of course, I think on the list to solve perhaps with FERC and with the RTOs is that we’ve had this robust push and pull between utilities that want to make investments and the need for some more coordinated planning that would make investments that potentially span across multiple utilities’ territories. So for example, we find that at the national level and on the transmission system, it’s very hard right now to get regionally built cost effective transmission lines because utilities tend to say, “Oh, well, I’d like to build a transmission line but not go through this competitive bidding process. I’d rather just do it and call it reliability and go through my state commission.” So we have a pressure there that we’re already seeing.
I did some really interesting podcast interviews with the folks who know a lot about that I can link to in the show notes, but it seems like that also is very important to think about at the distribution level then too, that that planning function and that sort of open-mindedness to how we approach the solutions is going to be really crucial to getting the benefits

Jon Wellinghoff:
Yeah, it applies at the distribution level and load flexibility and the opportunity to use that as an asset to enhance operation of the grid, to improve reliability of the grid, to drive down cost of the grid is all transferable to the distribution level as it’s now being done by Voltus and others at the transmission level in organized wholesale markets.

John Farrell:
So we’ve talked about reliability as one of the potential benefits of an independent distribution system operator. It also seems like, and I guess we’ve kind of touched on this already. So the reliability one piece of it in terms of providing the services, but also potentially lower costs because there isn’t that capital bias for this independent operator. They’re doing the planning, they’re helping to identify what is the problem that we need to solve, but they’re not particularly, if we’ve designed it right, unlike the incumbent utility, they’re not saying, “Oh, well, we would prefer to do it one way or the other because there’s a financial reward for that. ” So it seems like we could get more things like virtual power plants that tie together all of these distributed resources as opposed to infrastructure that has traditionally been one of the cost drivers of utility bills.

Jon Wellinghoff:
That’s right. You could use locally placed batteries or EVs for resources instead of system upgrades that would increase the rate base of the utility. And the utility, again, they’re incentivized by every state statute that is based upon compensating those utilities for increasing rate base, i.e. spending more money to do so. But we need to have an independent entity who says, “Wait a minute, that’s not the way that we need to build the system. We need to build the system the cheapest but most reliable and efficient way possible and we need to improve the utilization rate of the system.” Right now transmission distribution systems in this country are utilized at about a 30% rate. I mean, we need to increase that utilization rate substantially and to do so we need to be able to tap into these available distribution level assets that consumers have both at the commercial industrial level and at residential level that are not being effectively utilized.
The reason they’re not being effectively utilized is no one is going out and actively providing a market for them providing market opportunities for consumers to utilize those assets and to support the grid.

John Farrell:
We talked a little bit before about this idea of open access and there could be potentially tariffs or contracts where folks could sell to one another or maybe just would sell that service to the utility, but it wouldn’t have to be negotiated on a one-to-one basis. I’m kind of curious how this relates a little bit to PURPA at the federal level and qualifying facilities. So notably in 78, Congress passed legislation that sort of broke open competition at the federal level or on the transmission system by saying the transmission providers had to take these qualifying facilities if they met certain requirements, they were under a certain size and if they could provide power at equal to or less than the utilities avoided costs. So what the utility was planning to spend and it provided a really helpful framework for saying essentially like, if you can provide something cheaper than the utility is providing it, then you have a right to a contract to provide that service.
All of these contracts and whatnot, they’re set according to federal guidelines, but at the state level and there’s been some fascinating work done on the variation in that, which we don’t need to get into, but I’m curious to what degree that qualifying facility concept at the federal level might apply here where we could say, “Oh, there’s this particular kind of service that’s needed.” Or maybe it’s on a technology basis, like if you had a battery, maybe it’s about a particular service like voltage regulation. How do you think about that idea as applying to the distribution system operator?

Jon Wellinghoff:
Well, John, I love the analogy because I’ve been thinking about this a lot and PURPA is a great example. PURPA was very successful at the start and there were many, many qualifying facilities that came in and got PURPA contracts with the utilities and then the utilities kind of figured it out and they figured out, well, gee, we’re in charge of filing with our state commissions what the PURPA qualifying facility avoided cost tariff is. And they started filing avoided costs that were just ridiculous. I mean, in fact, I participated in some of these PURPA proceedings where they said that the avoided cost for Nevada Power, for example, was the off-peak energy rate, wholesale energy rate and they didn’t include anything else in avoided cost. That was the avoided cost that they were going to pay people. They were going to pay people like two, three cents a kilowatt hour.
And unfortunately, a lot of utilities were successful in convincing their state commissions to drive down these avoided costs in those PURPA avoid cost tariffs. And as a result, PURPA has more or less sort of been eviscerated by the utilities because of the way they manipulated the avoided cost tarrif filings. So this is a good example of why you need an independent entity who oversees and operates and is responsible for filing these tariffs. You need somebody who doesn’t have a incentive to do everything they can to sink the program and the utilities of course did because they didn’t want additional third party generation out there because basically paying for these PURPA avoided costs contracts was like putting more debt on their books because it was an operating expense, not a capital expense and they got no return for it. They got no compensation for paying for these PURPA contracts so they did everything they could to kill them and they were pretty successful doing it.
And I’ve seen the same thing happen. There’s this movement around the country to require utilities to do VPP projects and to put VPP tariffs in, virtual power plant tariffs in place where there is a tariff that allows for distributed microgrid or an aggregation of distributed resources to come together in a virtual power plant in the utility distribution area and the utilities to pay for that. Well, I predict the same thing will happen here if we put the utilities in charge of those tariffs. They’ll do everything they can to ensure that those tariffs don’t work. They don’t operate well. They’re not sufficiently appropriately valued and don’t put in all the values that the distribution company receives from that VPP service to ensure that there’ll be robust development of those VPP projects. I think again, people are deluding themselves if they believe that putting a distribution utility in charge of a VPP tariff is going to ensure that there’s a successful VPP program. It’s not going to happen. You’re going to have to have some independent entity overseeing that program and overseeing the calculations that go into the valuation of that tariff to ensure that the true value of those VPPs are going to be compensated. And again, that comes back to a independent distribution system operator type system where you have an independent entity who oversees the implementation of those types of tariffs.

John Farrell:
I’m reminded of a conversation with a developer in Minnesota who was trying to get a project approved under PURPA and at the time started doing a little research of the differences between different states and noted that in the Mountain West utilities definitely play games with PURPA contracts, both the price and the length of those contracts. I think they were trying to make them so short that essentially you could not get financing to build a project even if you could have met the price that they had. In Minnesota notably though, that price is secret. The utility commission here allows them to consider it a trade secret. So if you want to build a project, you can’t find out until you have proposed the project and done a lot of the pre-development work and spent a bunch of money and then you actually ask the utilities for information about that price and then only after that, and I’ve made all that investment, do you even find out if the price is even workable for you.
And Minnesota is not unique, unfortunately. So I’ve definitely seen the impact of that game playing by utilities to make PURPA as unworkable as possible and for the very reasons that you mentioned.

Jon Wellinghoff:
Yeah. People have to understand what the game is and the basic game is utilities are paid to spend money and so they’re going to do everything they can to protect that. I don’t blame them for that. That’s just the way the system’s set up. If we don’t like it, we need to change the system. We need to put IDSOs in place. We need to put performance-based rate making in place where utilities are paid to be more efficient rather than to spend money to have higher utilization rates of their system rather than to not be efficient and things will change if we do that, but we have to understand what the game is.

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John Farrell:
We’re going to take a short break. When we come back, I ask Jon about how we set the right prices in an open market, how a DSO could simplify management of the wholesale transmission grid and whether utilities have anything to gain under a DSO model. You’re listening to a Local Energy Rules podcast with Jon Wellinghoff, former chair of the Federal Energy Regulatory Commission and currently chief regulatory officer at Voltus.
Hey, thanks for listening to Local Energy Rules. We’re so glad you’re here. If you like what you’ve heard, please help other folks find us by giving the show a rating and review on Apple Podcasts or Spotify, five stars if you think we’ve earned it. As a bonus, I’ll gladly read your review aloud on the show if it includes an energy related joke or pun. Now back to the program.

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John Farrell:
This came up in the recent conversation in Minnesota, it was called the branded name is Capacity Connect. It was originally called the distribution capacity procurement. Utility is going to deploy batteries that they own aligning with their financial self-interest. One of the interesting debates that we had among advocates was if you had a open market program, which is what we had requested the commission to provide in which they had decided not to offer, how would you set the prices? How would you decide, oh, putting the batteries here is going to avoid this other infrastructure investment that we might otherwise make? Essentially, what is the avoided cost at the distribution level? And the thing that was interesting about that conversation is there was sort of broad agreement that utilities don’t actually know what this is. They would actually have to do some work to calculate it. Do you feel like that’s true? Nobody really has a good shorthand for what the avoided cost is at this point?

Jon Wellinghoff:
Well, in California, they’re trying to get handles on that and they’ve required their utilities to do a much more deeper dive and analysis into what their distribution system costs are and what each feeder requires from an avoided cost to maintain it, to keep it reliable, to upgrade it if it needs to be upgraded, if there’s congestion. So California’s getting ahead of that. There fortunately are models now available that a number of companies have put forward to help distribution utilities do that, but there’s a lot of distribution utilities that are way behind the curve on that analysis. And so there’s no question that a lot of that analysis has to take place to determine what those actual values are if you’re avoiding certain investments and certain upgrades to a system by doing alternatives like using distribution resources that are not under utilities’ ownership or controls to do that, but it can be done.
There’s no question that it can be done.

John Farrell:
I wanted to talk to you about an idea. So Lorenzo Kristov, a good friend, formerly worked at CAISO, the independent system operator for California grid. He talks as well about this idea of a distribution system operator. And one of the things that he talks about that I really find compelling is that his argument is that we can actually make wholesale level transmission level grid management easier because these local distribution operators could be managing reliability and variability locally and essentially making it a more predictable and sort of stable interchange at the transmission distribution interface, like at the substations where power goes from high voltage to lower voltage. Sort of similar, I heard this on a different podcast on Volts actually about how Google would cache YouTube videos at various data centers that were closer to users. The idea being like, oh, maybe not everyone in the world loves cats in hats or whatever, but people in New Jersey seem to really love that.
So we’ll have those videos hosted locally. And given the technology that we have, EVs, battery storage, control systems, does that seem like a plausible and useful function that would be provided by distribution system operators?

Jon Wellinghoff:
Yeah, I think it absolutely could be and it could be of value to the distribution system as well, to the extent that they’re able to provide those services in essence to the larger bulk power system, the transmission grid. It could provide additional value into that distribution system and certainly those operators could, especially in those entities where you’ve got RTO operating where there would be that interface between the RTO ISO operator and the IDSO. In fact, you could see ultimately a continuum of the ISO operator also having sort of a subsection of their group being IDSO operators as well because certainly they’re performing many of the same functions and certainly could help with maintaining reliability if that IDSO operator has visibility into assets that the ISO operator does not, they could access those assets that assets meaning different things that consumers have available at their premises, variable loads, low flexibility, battery storage, et cetera, local generation, it could be very valuable to the larger transmission system as well.

John Farrell:
I want to talk a little bit about the challenge in getting those kinds of policy, like bringing this idea to fruition. One of the things that we talk, we’ve talked a lot about the sort of utility business model and the way that profits based on spending are essentially pushing things. I imagine as we’ve talked about that one reason that we’ve made little progress since you first wrote about this idea about independent distribution system operators is because incumbent utilities don’t see a lot of profit opportunity in this concept. I don’t know that their happiness is a really good measure of good policy, but I’m curious if you think that there might be upsides for incumbent utility companies in this. Is there a way to convince them this is a good idea or is this one of those things of like, this is the medicine you have to take because the grid’s a public resource and this is the more effective way that we could manage it?

Jon Wellinghoff:
Well, that’s always a challenge of how you get for- profit entity that is a monopoly to give up their monopoly status and their basis for compensation. Something else that you can convince them is more creative and more financially lucrative for them. It’s like, “Okay, just step over this bridge here and everything will be fine.” No CEO wants to do that. They know how to play the game they’re playing now that play it pretty well. There’s a lot of utilities in this country that are making lots of money. I mean, you can look at Southern Company and how much money they pull in and their monopoly system in Mississippi, Alabama and Georgia. So it’s difficult and I don’t have a good pitch for them with respect to how they could make more money in a world where they give up the operational control and the planning decisions on their own assets.
I’m not sure how FERC was even successful in doing it at the ISO RTO level other than there already were these sort of natural transmission organizations in the East that had operated for a while informally and they understood that those informal operations did provide for some synergies of lowering costs for everybody. And when FERC formalized that and order 888 and order 2000, ultimately they didn’t feel threatened because it was voluntary and it still is voluntary. When Pat Wood suggested it be mandatory, they felt very threatened to the extent that people explained to Pat Wood that this isn’t happening and it didn’t happen. So I’m not sure how you do it. I really do think it does need to be done because certainly utility costs have gotten out of control in this country. We’re in an affordability crisis with respect to utility costs right now. We have this increasing pressure now from loads from data centers that’s causing consumers a lot of angst, tremendous amount of angst.
And I’ve never seen the level of pushback that we’re seeing right now with respect to data centers. I’ve never seen consumers in general be so concerned and upset about an issue. I think that issue relates directly to affordability and they’re concerned about utility costs and how those data center interconnections are going to impact their costs as consumers. So sort of as a long-winded answer to your question, I’m not sure that there is an answer other than somebody having the political will at the legislative level, state legislative level to say, “We’ve got to go there.”

John Farrell:
I mean, you kind of took this conversation right where I was interested in going and I appreciate you being candid about it. I think unfortunately this is, as someone who has worked on this not so much from the electricity system standpoint, although I sort of straddle that and then the climate advocacy side, I think that there’s been for a long time among climate advocates, this belief of the fastest way to get to climate solutions is to essentially buy off the utilities. And I look at us at this moment of a collision course of that philosophy with electric bills and people saying, “We can’t afford to just give utilities what they want in order to get climate progress.” It is going to be too expensive because the way they want to go about it is always going to be profit maximizing and the way that they earn money and the rate of which they earn money is so high it’s causing bills to be unaffordable and people to get their power shut off and whatnot.
So I guess I wonder if we have a political moment that finally allows us to…

Jon Wellinghoff:
We may. We may have a political and an economic moment here because if we have the data centers that truly want to ultimately interconnect the grid and get all this additional power and those entities behind those data centers have tremendous amounts of capital. Just think about Tesla, for example, and the CapEx value of Tesla, the CapEx value of Tesla is more than the CapEx value of all the utilities in the United States combined. So look at Google, I’m sure that would be a similar statement for Google or any of these other big hyperscalers. If those companies truly do want to interconnect the grid, let’s figure out a way that they can help reform this entire system and in essence, quote unquote, pay off the utilities for that reform and get this done. Maybe that’s a way to do it. And I know climate activists do talk about paying off those entities who are ultimately responsible for most of these emissions.
I mean, like paying off the oil companies, which is another whole order of magnitude more money that you’d have to pay off. Paying off the utilities actually is kind of cheap if you look at it in relationship of saying paying off the oil companies. So I don’t think it’s something that’s not doable and perhaps we’re at a moment now given that there is this push for, I just read a analyst report. There’s something like 145 gigawatts of data centers that are actually signed up and that’s not the ones that are just on paper or on the books being proposed, but 145 gigawatts, that’s what, over 10% of the total capacity in the United States currently. So there may be some opportunity here.

John Farrell:
I wanted to ask how important it would be that the distribution system operator be either a public or a not- for-profit entity in designing this model to work well.

Jon Wellinghoff:
It’s interesting. I’m not sure why this is the case, but maybe people don’t know this. PJM is actually incorporated as a for- profit entity. I don’t understand why, because they don’t make any profit and I don’t know what they would do with it if they had it, but I mean, I don’t think it matters. It just has to be an independent entity independent from the underlying monopoly utility and it has to be one whose financial incentive, whatever it may be, is not to make more investment into infrastructure as the utilities’ incentive is currently now. It either can have no incentive, be a nonprofit entity or a quasi-governmental entity of some kind, or could have some profit incentive related to efficiency, improving the efficiency of the system, like I would suggest you would do for the utilities themselves as well, ultimately. Or maybe you wouldn’t even need that for the utilities if you had the IDSO.
Maybe the IDSO is ultimately an alternative to performance-based rate making, which hasn’t been very successful in any jurisdiction either. Neither is an IDSO. You know an IDSO was actually suggested for Maui at one time, the island of Maui, as an alternative. And in fact, a very comprehensive report was written demonstrating that that would be the cheapest alternative for the Island of Maui to do. And of course, Hawaiian Electric quashed that from happening. I think there was an investigation on an IDSO and a proposal for it in Maine. I can’t remember exactly what happened to it in Maine, but obviously it didn’t go anywhere, but those proposals haven’t really gone any farther than a lot of the proposals for performance-based rate making like they tried in Connecticut and that kind of got shut down. The chairman of that commission really was very active and tried to get things going and she ultimately had to leave the commission.
They’ve done a little bit in Hawaii as well on performance-based rate-making, but most other states have really done nothing with it at all.

John Farrell:
Yeah. I think it comes back to what we said before. If we don’t really have a value proposition to offer utilities about how they can make as much or more money than they’re making now and what is a very comfortable situation for them, it’s hard to imagine them wanting to cross the bridge to an IDSO. It really is going to take political will.

Jon Wellinghoff:
Yep, yep. Or the hyperscalers paying them to do it. Yeah.

John Farrell:
Yeah. I’m curious if there are any places in the US that you think have the groundwork laid maybe a little bit better for the concept of an idea. So I think about Texas has a pretty separate distribution network function from the retail sales. You have around a third of states just in general have done a restructuring process where power plant ownership is separated from utility distribution, although I know that that’s being openly debated right now in the PJM system because costs have been so high in the capacity market, not to say that those are fixed, but I’m curious if you feel like any of those circumstances would be sort of more amenable than in terms of adopting an IDSO, say, compared to a state that has a fully vertically integrated monopoly utility.

Jon Wellinghoff:
Yeah. I mean, certainly Texas could do it easier than anybody else I would think because of their history of restructuring and what they’ve done separating out transmission, distribution and generation and they’ve separated out fairly effectively and I think it would be sort of a logical next step to have an independent operator for distribution systems in Texas. So I don’t see that as a big leap for them actually. But beyond that, beyond Texas, I think every place else, even those that have done some level of restructuring and there really isn’t that much restructuring any place else outside of Texas that I really know of. I mean, there are usually the incumbent utility is the default provider in most jurisdictions and as such, there really isn’t any real robust competition for retail services in most other states. So the distribution utility is very much a retail provider of services and a distribution system services provider.
I think you’d have comparable lift in most other areas of the country. Texas was a state that started a change that took a lot of political will that was a big lift that transferred to lots of other states and I can give you example and that’s the renewable portfolio standard. Texas was one of the first states that put a renewable portfolio standard in place because George Bush was talking to some people at Enron who had just bought a little company called Zon. And then George Bush went and talked to Pat Wood and said, “We really like wind. We need to do something here about it.” And as a result, they put a renewable portfolio standard in place in Texas. Well, because of that renewable portfolio standard in Texas, it actually grew to I think something like 25 other, 30 other states in the United States now have renewable portfolio standards, which there’s really nothing in it for utilities to have renewable portfolio standard.
And in fact, most utilities acquire renewables had been requiring renewables through PPAs, purchase power agreements, which again is like debt on the books of utility. There’s no profit in it whatsoever. So utilities were not really in favor of renewable portfolio standards and really had no profit incentive to adopt them in any way, but yet they got adopted in every state because there was political will to do renewable portfolio standards. I mean, I think this affordability crisis and the combination of that and the pushback against data centers may be the right time to start thinking about fundamental reforms to the utility structure, just like the Pennsylvania governor has said, that the model is broken and we need to change the model.

John Farrell:
It’s almost like you knew the time was running out, Jon, because you gave just like a perfect summary for me right there at the end.

Jon Wellinghoff:
Gee, I’ve never done this before, John. I don’t know. I just got lucky, I guess.

John Farrell:
Well, thank you so much for joining me for this conversation. I just really appreciate the intellectual depth that you’ve put into this concept over many years and I just think it’s such a great opportunity to revisit this question as you put so eloquently right at the end here in this moment when people are really struggling about how should this is to be run and for whom. So thank you again for all of the work that you’ve done on this issue for many, many years at the transmission level, at the local level and that you continue to do. Thanks for joining me again.

Jon Wellinghoff:
Thank you for having me, John. It’s been a great pleasure. Anytime you want to have me back, let me know.

*****

John Farrell:
Thank you so much for listening to this episode of Local Energy Rules with Jon Wellinghoff, chief regulatory officer at Voltus and former chair of the Federal Energy Regulatory Commission. On the show page, look for a link to Jon’s earlier writing on independent distribution system operators, my 2024 report on utility monopoly power, Upcharge, and an interview I did in Local Energy Rules, episode 175 with community clean energy developer Dan Juhl, about how utilities create a catch-22 to block competitors’ projects under PURPA. I’ll also link to a Voltz podcast interview with Lorenzo Kristov if you want to hear more about his vision for building a grid from the bottom up. Local Energy Rules is produced by myself and Ingrid Behrsin, with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear how we can take on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.
Hey, hold on a sec. I know that’s usually our sign-off, but you’re still here and that means we share an interest in great research and storytelling to advance energy democracy. So keep in mind that you can support this work at ilsr.org/donate. Nice. Now, I wonder what we’ll start auto playing next.