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To Pool or Not to Pool? Toward a New System of Governance

Fortnightly Magazine - March 1 1996

U.S./Canadian border, and later across the U.S./Mexican border.

Three logical consequences evolved from such interconnections: 1) a need for system standards and regulations for the interconnected utilities, 2) opportunities for power trades among utilities, and 3) opportunities for the growth of power pooling.3 Clearly, some regulatory organization, either government or private, was needed to ensure that the pieces of the industry fit together to make an efficient and reliable whole.

Self Regulation:

The Reliability Councils

The historical solution adopted by the industry, and acquiesced to by government regulators, took the form of self regulation by industry cooperating committees, later formalized in nine Regional Reliability Councils (RRCs) with a coordinating agency, the North American Electric Reliability Council (NERC). Events following the Great Northeast Blackout of 1965 solidified and firmly legitimized these nongovernment "regulatory agencies." The principal task of NERC and its nine RRCs is to ensure reliable and efficient operation of the networks by imposing "rules of the road" on the interconnected and interdependent control areas. NERC and RCC committees provide utilities with organizations through which they coordinate operations and planning.

These government-sanctioned, but "voluntary," organizations of utilities (including foreign and domestic FOUs, POUs, COUs, and IOUs) make up major components of the U.S., Canadian, and Mexican regulatory systems. Their self-created charters allow them to ignore, when convenient, legal forms of ownership and state and national boundaries. In fact, it is these regulators that consumers depend upon to keep the lights on, since government regulators, under current allocations of

responsibilities, have neither the power nor the competence to define and enforce rules necessary to ensure reliability of the system. At best they can help enforce the rules created by these "voluntary organizations."

The industry structure that has permitted the North American industry to work as well as it has was one of cooperating, vertically integrated utilities. This system was dominated by the vertically integrated IOUs. Those utilities, such as COUs engaged only in the distribution business and FOUs engaged only in the generation business, developed vertical integration through relatively long-term contracts that preserved the monopoly powers of the various firms in the system. While some of these firms (em municipal and cooperative utilities in particular (em supported competition between IOUs in the sale of power, all these firms agreed that the protection of their own monopoly powers was desirable. Since government regulators generally agreed that it was important to preserve existing monopolies, the system was permitted to function subject to the constraint that the powers of government regulators to control price and terms of service to users were not noticeably diminished.

With the development of wholesale markets, however, both vertical integration and the legitimacy of the generation monopoly become eroded. Enter the problem of governance.

The inherited governance system does not appear sustainable in a restructured industry with competitive generation dominated by nonutility generators (NUGs). Even competition among IOUs, which have dominated the old system, has undermined cohesion among utilities and the legitimacy of their decisions. Clearly, the North American industry cannot assume that the governance system and the system of self regulation