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How Needed Is NERC?

Critics say its new budget and business plan could simply duplicate the work of RTOs.

Fortnightly Magazine - November 2006

auction-clearing process to set the level of resource capacity deemed adequate for the region.

And regarding transmission adequacy, it bears repeating (as was mentioned in this column in the October issue) that PJM now has proposed to revise the rules by which it decides to initiate its own RTO-sponsored grid expansion projects through its RTEP regime. This revision appears to give greater consideration for grid expansions aimed at increasing market efficiency. According to the RTO, the new rules will help “eliminate artificial distinctions between planning for reliability and planning for economics.” (See, FERC Docket No. ER06-1471, filed Sept. 8, 2006.)

Of course, PJM has given no indication that it will stop considering reliability needs in choosing which projects to add to its RTEP queue. However, in deciding whether to accelerate reliability-based grid enhancements, PJM says it now will compare costs and benefits with and without such projects by reference to a wide range of market metrics, including:

• Total costs of energy production, including fuel costs plus O&M;

• Total payments of locational marginal prices by customer loads;

• Total revenues payable to generators;

• Availability of financial transmission rights (FTRs) and allocable auction revenue rights; and

• Total capacity payments anticipated through PJM’s capacity market (presumably, the RPM construct still pending approval at FERC as of early October).

PJM says it will organize its new RTEP regime around a 15-year planning horizon—meaning that market considerations will become deeply embedded in multi-year infrastructure commitments. It remains to be seen how NERC would propose to facilitate this type of process with its plan for regular, annual surveys of transmission system adequacy, grounded on engineering principles.

Readiness Assessments

In its 2007 business plan, NERC has budgeted funds for a number of national and regional activities that some observers say should not qualify as statutory functions, including training, education, and operator certification, plus something that NERC terms a “reliability readiness audit.”

NERC distinguishes a readiness audit from an actual assessment of reliability or compliance enforcement. It describes this function as “focused on addressing the capabilities of entities.” Among other things, NERC explains in its budget proposal, a readiness audit would “communicate to the industry at least 30 examples of excellence.”

Writing for aluminum producer Alcoa, which purportedly represents more than 2,700 MW of electric demand nationwide, corporate counsel Max Laun likens such programs to a “preview” of issues, and questions their purpose:

“The objectives of the readiness audits,” he writes, “are not clearly delineated from the normal auditing process regarding compliance … since any actual issues of noncompliance that are uncovered would have to be acted upon.”

Moreover, Alcoa worries about potential conflicts of interest:

“The ERO,” writes Laun, cannot wear two hats, one for enforcement and one as a consultant for advice on how to avoid enforcement—the potential for abuse is simply too great.

“This is a classic conflict of interest, similar to what was uncovered and later outlawed with respect to accounting firms providing both auditing and consulting services to the same client.”

Laun and Alcoa explain further that in helping to prepare