What are the essential characteristics of the system of governance that will be required for a new, North American electric industry with interconnected and interdependent transmission networks...
To Pool or Not to Pool? Toward a New System of Governance
that worked in the past will work in the restructured industry.
The industry needs a new regulator or set of regulators and a new governance system for the two natural monopolies that are truly interstate and international in character, the Eastern and Western Interconnections. Equally clearly, that new regulator cannot be the Federal Energy Regulatory Commission (FERC): The FERC's jurisdiction, although extended for some purposes to all transmitting utilities in the Energy Policy Act of 1992, does not extend to control over planning and building
transmission assets for U.S. utilities, and it clearly does not extend to Canadian and Mexican utilities that are included in the Eastern or Western Interconnections. Similarly, the Canadian National Energy Board and the Mexican Regulatory Commission for the Power Sector enjoy only limited areas of jurisdiction. If a government agency is to fulfill the governance role, it must be some partnership of all three, with the FERC's responsibilities expanded by legislation. More likely, a new form of self regulation needs to be developed. Existing reliability organizations will almost certainly be the foundation of the new structure.
To get a new regulatory and governance approach, the nation needs leadership. The FERC and the PUCs, by inherited position at this time in history, are in better positions than anyone else to provide that leadership to
Congress and to the nation.
Leadership in this context means facilitators of debate. The FERC's Mega-NOPR, the California PUC's "Blue Book" orders, and the many proceedings underway in state PUCs offer encouraging examples of such leadership. Almost universally, however, these proceedings focus on the question of how to organize a trading area. Only the FERC, in its proposals for regional transmission groups (RTGs), has addressed the need for a reformed system of governance for an interconnected industry. But for reasons discussed below, that initiative has produced, and will likely continue to produce, disappointing results.
Points of Agreement
The debates over the desired economic structure for trading within a single control area reveal many areas of agreement. No one, to my knowledge, has yet articulated a detailed proposal for operating an extensively interconnected network containing many interconnected PoolCos or many Bilateral Trading Areas or some PoolCos and some Bilateral Trading Areas. The areas of agreement of the proponents are, however, worth examining.
Proponents of PoolCo and bilateral trading models both agree on these points:
1. Transmission and distribution remain natural monopolies and must be regulated.
2. There are no significant economies of scale in generation that cannot be exploited by
competitive generators operating within an extensive transmission network (em if the network provides all necessary services. This big "if" marks the heart of the governance debate.
3. Unless a single control area exhausts the interconnection, there will be trading between control areas and there will be inadvertent power imports and exports into and from each control area.4
4. The task of coordinating use of the transmission system(s) remains a natural monopoly.
5. Competitive power markets will be furthered substantially by an independent system operator (ISO) that coordinates grid operations and preserves reliability. This