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

Fortnightly Magazine - March 1 1996

ISO will be a regulated firm and will need great powers to act in emergencies, but it must also respect private property rights and competitive market positions to the extent possible. In particular, the ISO must owe no special loyalty to any subset of generators, distribution companies, or users. Its primary loyalty must lie with the operating rules and standards essential for preserving system reliability, on which a competitive power market will depend.

6. Interdependent ISOs will be required to cooperate with one another to preserve the reliability of the system, and to facilitate trades.

7. Interconnected ISOs will coordinate and cooperate under a set of objective rules that specifies their reciprocal obligations.

8. Creating new control systems for a competitive generating

sector, and redefining ownership rights in transmission lines and the rights and obligations of unregulated generators to complement a competitive generating sector, must all be accomplished before the full forces of competition are unleashed.

In recapitulation, the industry must preserve those elements critical to the exercise of discretion by network controllers, to the extent necessary to pursue subordinate goals viewed as necessary to ensure reliability. In the past, the range of discretion of controllers (i.e., their abilities to dictate generating outputs and to refuse to meet demands for transmission services) was legitimized by the public utilities immediately involved, acting through their RRC and NERC. As new players enter the industry, the discretion of controllers will likely need explicit approval from the FERC and/or Canadian and Mexican regulators.5 Price and access terms negotiated by buyers and sellers should not deter the preservation and legitimization of controller discretion necessary to preserve system reliability.6

The system in the future, as the system today, will, of technological necessity, be one in which ISOs with obligations to serve can satisfy that obligation with a reasonable degree of efficiency only with the help of neighboring ISOs. Efficiency and reliability in the electric industry demand the preservation and protection of cooperative organizations centered around NERC, or a replacement organization, until better ones can be devised. The "better ones" will probably coordinate regional transmission corporations, each one large enough to encompass all but the largest regional reliability council areas.7

RTGs: The New Source

of Governance?

The FERC's RTG proposal currently offers the "only game in town" for creating the needed governance systems for interconnected networks. Nevertheless, some criticism is warranted.

I endorsed the RTG initiative as useful when the FERC proposed it, and I still think the debate has proved constructive and educational. However, events during the last few years have persuaded me that the RTG effort will not end up sufficient to produce needed reforms. A new proposal is needed.

When circumstances are confused and objectives unclear, logic suggests creating a group representing all stakeholders. The FERC, behaving as a good regulator in the confused circumstances of early restructuring efforts, responded by encouraging the creation of RTGs. In contrast, when the problem is reasonably well understood and objectives are generally agreed upon, it is time to create an institution that can act and can be held accountable