Can NERC Juggle All Three En Route to Open Access?
At the year's start, the North American Electric Reliability Council decided to leave its "peer pressure" policy behind and require mandatory compliance with its reliability standards. As NERC grapples with its new policy, Public Utilities Fortnightly asked eight industry representatives how they might ensure reliability in a restructured electric industry.
It had taken time for NERC to arrive at this point, but itÆs official: Mandatory sanctions and business incentives will soon be used to enforce compliance. Furthermore, all market participants will have to comply with reliability protocols. NERC has called on regulators to hit those who donÆt comply with financial penalties. It also wants to schedule and ôtagö power transactions.
For the rest of this year, "The Future Role of NERC Task Force II," a broad group of industry reps, will ponder how to carry out these policy positions on the way to the changing competitive market.
As an early step, the task force was expected to propose to the NERC board on May 5 a process for developing and approving new NERC standardsùa piecemeal process that heretofore has involved the separate regional councils, such as the WSCC. The task force had also agreed to suggest that the board should focus its effort on assuring voting rights and representation on the board and its committees. NERC would add two seats to the board and customer-sector committees. Under the same resolution, NERC would work to get a more balanced market representation. Regional councils, as well, would become more balanced.
The task force has yet to review several key topics, including dispute resolution policy and developing enforcement measures and options to ensure compliance.
Most forum participants appear entrenched in the debate. Former Congressman Phil Sharp chairs a Department of Energy task force on electric system reliability. A report is due this fall. Erle Nye, CEO of Texas Utilities Co., holds three reliability seats: vice chair of NERC, DOE task force member and participant in an Edison Electric Institute steering committee examining transmission system standards.
Every other forum participantùfrom power marketer to FERC chair--is equally well-versed in reliability issues.
We posed these questions:
Sanctions First? As the competitive market evolves, power marketers appear increasingly upset with NERC over reliability rules. NERC, meanwhile, says regardless of the electric restructuring that takes place, it will
continue to define compliance with planning/operating policies to ensure a continuous and adequate power supply and that transmission systems are operated within security limits. How can NERC enforce its policy of mandatory compliance? Should it deny access to the transmission system? What form of sanctions, then, should it use to carry out the policy?
Backseat Driver? Some say competition might force reliability, and therefore, NERC, to take a back seat so that new institutions can take NERCÆs place. Do you agree or disagree, and why?
Who Moves the Juice? What is the reliability of the power delivery systemùnot the generation plantsùand who will maintain that reliability in the future?
ISOs vs. NERC. Should a "reliability czar" be appointed over NERC? What if ISOs become widespread? Who would settle ISO-NERC disputes? (NERC has suggested that it may become a sort of ôumbrellaö organization over ISOs.) Further, who will decide when to build new transmission? NERC or the ISO?
Tagging Electrons. What do you think of NERC's proposal to "tag" electricity so that systems operators can follow transactions and see which ones they can interrupt? Is there too much room for market power abuse here?
Finish this sentence: The most key issue in reliability is ...
Response from: Marc W. Chupka is acting assistant secretary for policy and international affairs at the DOE. He directed the research and writing of a key reliability report to President Clinton, The Electric Power Outages in the Western United States, July 2-3, 1996.
"These are pretty intriguing questions ... there is a fundamental question embedded in this first question of the limits of enforcing mandatory compliance in the context of, 'What is a voluntary association?' That issue is one that the task force is examining. And itÆs one that we have been thinking very hard on as we draft our restructuring bill, [deciding] whether or not NERC will be able to enforce mandatory compliance and whether or not there needs to be some buttressing of these voluntary compliance arrangements with some additional federal authority. Could they or should they deny access?
"Certainly they could deny access but there's a fundamental question of whether or not they have the authority to deny access to what is an open access system under FERC regulation. The down side, if they attempt to deny access, is potential litigation and/or people leaving NERC.
"With the proliferation of new actors in this market, it's not clear if the traditional sanctions will work, and again ... there's certainly a question of whether the denial of access is within NERCÆs capacity to enforce. I wouldn't want to speculate on other forms of sanctions. I think the fundamental sanction of basically being able to hook up is the primary one and one which may need some authority either at FERC or DOE.ö
"I think that is a risk under competition--a risk that reliability will take a back seat. We donÆt view any inherent conflict between competition and reliability, but we believe some tension may emerge that needs to be countered.
"NERC is obviously in the midst of, in some sense, trying to redefine itself, given the new competitive realities in the marketplace. The new institutions may emerge to take on some reliability
functions, such as regional transmission groups and independent system operators and that sort of thing, but I donÆt view NERC's role as necessarily receding."
Who Moves the Juice?
"Despite the events of last summer, I think most people agree that, up until now, reliability of the bulk transmission system has been very high.
"I think [maintaining reliability in the future] will be a matter of the incentives in the market. Obviously, we view with some alarm the incentives to cut back on investments in transmission
reliability that may accompany the expansion of competition. But we believe very strongly that reliability is at the heart of the economic value of electricity. So we are looking very carefully at institutional arrangements and market incentives that could be used to ensure a high degree of investment and reliability-related investment.ö
ISOs vs. NERC.
"We have been examining models where federal authorities can be used in some sense as a backstop for NERC. There are a lot of models out there. Interesting ones are the Securities and Exchange Commission [and] hospital accreditation. There are a lot of ways federal authority can be explicitly delegated to voluntary industry associations. And we would look at that. In terms of a reliability czar, one major presence, I donÆt think that would be a useful avenue.
"In terms of ISO and NERC disputes, that really depends on how ISOs develop. They are still, in some very real sense, on the drawing boards. I think a lot of people have very particular ideas about the kinds of functions that the ISO would carry out ... but in terms of the division of responsibility between an ISO and NERC, think that remains to be seen.
Who would decide when to build new transmission is ôa very critical issue that has not received enough attention. Again, we need to adopt a wait-and-see attitude to see how ISOs develop and regional transmission groups.
"The decisions to site and build transmission are right now, obviously, thorny enough, under the existing system ... what will happen here, personally speaking, is we will begin to see some bottlenecks and I think the main contest here is not ISO and NERC, I think it is state versus regional or federal."
"I've got to take a complete pass on that. I donÆt know their proposal really well."
The key issue is ...
"aligning institutional responsibilities with market incentives."
Response from: Jan B. Packwood is chair of the Western Systems Coordinating Council, an association of almost 100 utilities, independent power producers and power marketers responsible for the WestÆs electric grid reliability. He's also executive vice president at Idaho Power Co.
"Neither of those answers have been developed yet by the industry ... sanctions have not been defined and the basis for the authority is just now being debated.
"WSCC, of which I'm more familiar than I am with NERC, is looking at industry compacts which essentially are agreements intended to be codified or institutionalized in contracts or in tariffs that bind all market participants to the rules of the road. So how do you do it? That's the model that's currently on the table.
"There's been additional discussion as to whether you need legislation to give federal regulatory entities such as FERC backstop authority, but to my knowledge that question has not been answered yet.
"As far as what should be mandatory, which is an important piece of this ... the process by which we decide what the reliability criteria is that is going to be made mandatory, I think that process needs further development. We need something that has more balance in it.
"We have a conference call tomorrow where a task force we have working on this kicks off a nine-month effort to try to decide all three of these issues."
"I think thatÆs a good question. I think NERC and the reliability councils still have an opportunity to show that they can fulfill the leadership role that is going to be required from industry to retain a reliable system. As competition approaches and as I talk to customers, I don't hear anyone asking for a less reliable system. IÆve read a number of articles saying, 'The system's too reliable.' Well hell, thatÆs like saying youÆre having too much fun or you're too rich or you have too much class. It can be gold plated and you can certainly go overboard but I think what we learned in the West last summer is there isn't a customer out there asking for reliability to be degraded.
"I think NERC and the reliability councils have a significant role to play there and whether they have the only role will be determined in the public policy debate thatÆs going to surround federal legislation.ö
Who Moves the Juice?
"Certainly transmission owners shoulder the burden for maintaining and operating a reliable system. And we know from studies that most of what a customer would consider a reliability problem is associated with the lines as opposed to the generator. I've seen numbers as high as 99 percent of the reliability problems come with the lines as opposed to a shortfall of generation.
"In the future, all market participants are going to have to pay that cost and it ultimately is going to have to be paid for by load.
"So you do have some tension between the traditional industry, who is footing the bill, and the new market entrants who have not yet picked up their share of it. And it's particularly awkward as we kind of transition through rule 888, rule 889, toward, we believe, independent system operators, because there's really no reliability collection mechanism. So right now, traditional utilities support reliability pretty much out of their hides."
ISOs vs. NERC.
"I certainly donÆt see the need for [a reliability czar]. NERC fills the role of æprovide the high-level oversight on a North American basis.'
"I see the ISO as an implementing and enforcing arm of the reliability councils. Not someone that argues with the reliability councils. I don't see a conflict that's going to have to be arbitrated between an ISO and NERC.
"The ISO will have a regional planning responsibility [to call for new transmission] in most of the models IÆm familiar with. And also through congestion pricing, it identifies where there are economically justifiable reasons to build transmission. It identifies how much money would be cost-justified to invest in the new transmission.ö
"It is badly needed. And I can speak to that on a company basis. The volume of our scheduling transactions has increased by about tenfold in the last 18 months [due to sales and resales with trading utilities and power marketers]. And it is virtually impossible to maintain any accountable trail between where electricity is generated and where it's consumed.
"I don't [see market power abuse problems]. The abuse is occurring without the tagging because you can make a sale and not deliver any product if the accounting is not right."
The key issue is ...
to "maintain accountability for reliability among a rapidly evolving set of new market entrants."
Response from: B. Jeanine Hull is founder of Strategic Energy Advisors, a company that develops restructuring strategies for energy companies. She has been vice president and assistant general counsel for LG&E Power Inc. and has served as president of the Electric Generation Association, precursor to the Electric Power Supply Association.
"The easy way to do that is the regulatory way, which is to take it to FERC, have it adopted as a standard that FERC will then enforce because NERC is not really an enforcement agency.
"I want to give NERC a lot of credit for realizing about two years ago that it was an eighth of an inch away from becoming completely irrelevant. But they also recognized that in the changing market, somebody had to be solely focused on reliability. And power marketers supported that as well as the utilities.
"Last year, there was this huge deal where utilities were requiring usùpower marketersùto identify the source of the generation and the end point of the generation, the user. Well, that is terribly competitively sensitive information. And we would sit down and scratch out heads and try to figure out why they needed to have this information, and the utilities would always tell us it was because NERC required it.
"You need to know the interfaces at which power will be delivered and some of those interfaces, like the first one from the generator. ... But there's no reason why every single control area in that line needed to know.
"NERC immediately saw the problem and sat down and spent a little bit of time on what worked here.
"I would say it would be hard to convince me at this point that NERC should be the executing agency [for sanctions]. In other words, they can recommend sanctions, but sanctions are FERCÆs job."
"Reliability is only going to be enhanced. It is almost a physical impossibility ... for reliability to be in the least bit undermined, so long as there is an entity out there setting the rules.
"What competition is going to force companies to focus on is the one or two things that they do best, and particularly as the more monopoly-like functions are separated from the more competitive functions.
"I think NERC is on the right track, and as long as NERC keeps a real clear view of what their function is, I would not have a problem with that.
"I think things like nine, ten, different reliability regions, that's a little historical. Will NERC remain? Probably. Will it remain exactly the way it is today? No question, it will not. How will it adapt? It will adapt to the changing environment, whatever that is."
Who Moves the Juice?
"Who will maintain the transmission system is whoever will be responsible for the operation of the transmission system. ... There are reliability glitches that are going on now, any time we power marketers get curtailed for any nonemergency reasons. And there's a heck of a lot of curtailment going on right now. There's a lot of curtailment happening on Saturdays and Sundays too. Explain this to me. I don't get it.
"I think we're going to see reliability go up as companies no longer have an interestùI hate to say thisùin not insuring that certain transactions go through. This goes to the whole reason why there is such a pressure for an ISO. Somebody's got to be in there who doesn't have a dog in the fight. To make sure that everybodyÆs transactions get completed. And right now, in every area we've operated, that hasnÆt been the case. There have been numerous situations where our transactions donÆt get completed and the explanations arenÆt quite clear."
ISOs vs. NERC.
"Do we need a reliability czar? No way. We have a reliability FERC.
"I think there is no reason to have much more than [an] East, [a] West and maybe a Midwest connector ISO. I don't see these as lots of itty-bitty things and certainly don't see ten [ISOs] as in NERC regions. I donÆt see the effort of coordination as being intense as it is now ... it takes a lot of infrastructure to support todayÆs system. I think our system is being rationalized. I like this. So I don't think the problem is going to be the NERC-ISO interface or the NERC-gridco interface, because I think they're going to be much more integrated than they are right now."
Deciding when to build new transmission is "a huge issue. I believe that's the ISO's call. I see the ISO as a transitional step. That's the critical thing. ...
"And then this question of, 'Well, who's responsible for expansion?' That only comes when you have a separation of ownership.
"I don't see expansion as a huge issue. I think we're overbuilt on transmission. More bottlenecks than not can be relieved through alternative means than building new wires."
"Like with poolco, it took me a little while to figure out whether I liked it ... IÆm in that same stage with this proposal.
"I am old enough to have gone through the PURPA fights and I remember when Southern California Edison testified before Congress that our [QFÆs] electrons looked funny and acted funny on the grid. And if Congress let our defective electrons on the grid, it was going to bring down the entire system. ThatÆs in congressional testimony--1978! So I have this real hard time with trying to say you can make electrons look different."
The key issue is ...
for "those who donÆt provide [reliability] to feel the pain."
Response from: Robert F. Wolff Jr. was chief executive of the New England Power Pool until his retirement on June 1 this year. He's a former member of NERC's operating committee.
"The way it enforces the policy is through mandatory compliance. Passing NERC rules that the transmission owning and operating companies will be forced to comply with the NERC rules.
"Peer pressure will have little or no value in a competitive market. You just canÆt wave peer pressure against earnings per share.
"The other thing that's interesting here is that there's no agency other than NERC that can do this. This is an international grid that we have between the U.S. and Canada and [neither] FERC rules nor Canadian rules could mandate this. But NERC rules, if they are accepted by the NERC participants, could do the trick.
"The problem is the grid operation is so complex that no marketer or customer or public group could debate the technical aspects of how to operate the system. You need somebody who understands the physics of the transmission system in order to ensure that reliability is here. And the problem is we have to cut people off the system at times when there isn't actually a physical overload but the probability of an overload.ö
"I would completely disagree. The reason being if it [competition] forced NERC to take a back seat and somebody else came to replace them, wouldnÆt that be nothing more than NERC with a different name? I guess what I'm saying is you've got to have a traffic cop. And if it's not NERC you can make it somebody else, but nobody's in a better position to do it with more ongoing knowledge than NERC."
Who Moves the Juice?
"The reliability will come about as a result of the new market rules put in place, if those rules are written properly ... some of that reliability will come from the marketplace in that people will have to purchase enough operating reserve to meet their requirements from the open market. There are long-term swings in the electric supply and demand equation. For the 38 years that IÆve been in this industry, supply and demand have never quite been in match.
"During those periods when we are short of capacity, we will have to allow the price of that capacity to go high enough to generate an immediate urgency and somebody willing to step in and supply it.ö
ISOs vs. NERC.
"Since NERC has authority over the U.S. and Canada, there's no need to appoint somebody over NERC. They have the total electric grid under their responsibility. And they have mandatory rules now, since January.
"The pressure might be to appoint somebody with a political agenda or something like that. I get nervous if politics is brought to bear on physics. I think NERC has to be set up in a way where they can be presumed to be impartial ... and then given the power to go ahead and run the system and not be set up in any way to cause them to take sides or unbalance the market equation in any way.
"I would see there wouldn't be any ISO-NERC disputes because the ISOs and NERC have very congruent goals and objectives. ... The disagreements would come from one participant that said, 'Why did you cut my transmission and not the other guy's?' Neither NERC nor the ISO should be in a position to care.
"In New England ... we have reached agreement with the regulators and with the other participants and expect FERC to be approving the independent ISO. We think an independent ISO with an independent board is extremely important in the assurance of reliability because if we had a 'sector board,' we'd have some people that wanted reliability, some people that wanted economy, some people that wanted maximum utilization.
"We have been charged with looking at the long-term grid and determining when there are shortages. We have also been charged with looking at the market for any undue market power and determining what mitigation needs will be necessary if there's too much market power. I think with those two charges, we will be able to at least raise a flag when problems are occurring.
"Nobody has yet given anybody the authority to demand somebody to building transmission. The feeling is we have agreed to go to an open marketplace and as long as people are alerted to the fact there will be transmission shortages, then the marketplace should be allowed to supply those."
"I don't believe there's too much room for market power abuse because the ISOs have been set up for reliability and as long as the ISO can't play in the game then there should be no reason why they would make the wrong call on that.
"Tagging the contracts is extremely difficult to do. But it really is required because my operators just don't know who to shut off. Right now, when there's power flowing, we've already had a few minor problems determining how to get ahold of somebody to back off generation or contract which is causing the problem.
"Yes I think tagging is necessary, and boy, it's going to be one very big job."
The key issue is ...
"getting the rules right the first time and empowering an Independent, with a capital 'I,' operator to enforce those rules without excessive, after-the-fact litigation."
Response from: Elizabeth A. Moler is chair of the Federal Energy Regulatory Commission and, at press time, a Clinton nominee as deputy secretary of energy. Before being appointed to the FERC in 1988, she was senior counsel to the U.S. Senate Energy and Natural Resources Committee. (She notes that her comments are personal and do not represent statements or opinions of FERC policy.)
"I believe that compliance with NERC reliability criteria should be mandatory on the industry. I believe participation in the NERC governing board should be much broader than it has been historically. I am very pleased that at long last, NERC has recently come to the conclusion that compliance should be mandatory. They have skirted that issue for years. However, at this juncture they have not yet figured out how to accomplish mandatory compliance. Everybody understands that.
"Ultimately, it is conceivable that [enforcement] may need to be part of some major congressional electric restructuring legislation, but they have not yet determined the penalty or compliance kinds of things.
"To the extent that it would involve transmission tariff kinds of penalties, FERC may be able to play a role.
"To the extent they want to extract penalties for noncompliance for certain kinds of things, that is well established at this juncture in the gas industry ... the electric industry is just beginning to work on such things.
"I think that NERC will have to evolve to meet the challenges of a competitive industry. I do believe that it is absolutely essential that there be mandatory--and much better defined than they are today--standards. And that those providing transmission, for example, or those using ancillary services, will have to meet those standards. And I think it is essential that all of the players in the industry play by the same rules. IÆm certainly mindful of the fact that the industry is as strong as itÆs weakest link ... we saw it last summer. It is vitally important that people measure up to 'quantifiable' standards and that someone be able to enforce it."
Who Moves the Juice?
"Those who provide transmission will still be providing public service kinds of obligations and depending on wholesale or retail and what the particular circumstance we're talking about is, they will still have public service obligations. ...
"Now the generating capacity may be being sold at deregulated commodity prices but the services still have to be there.
"Historically [the reliability] has been excellent, and I see no reason that should change in a competitive industry."
ISOs vs. NERC.
"I don't have views on a reliability czar. I think that it's going to take a lot of people working together to make this work. And some entity will clearly need penalty authority.
"As to ISOs, I would expect eventually to have ISOs obligated to meet NERC reliability standards and I would also expect with all ISOs that there will be increasing emphasis on and interest in dispute resolution kinds of things. We've certainly seen that in the RTGs [regional transmission groups] and to the extent that we have any ISO plans that are bubbling along, they typically have ADR kinds of things go into them and I think thatÆs a very positive thing.
"Ultimately, ISOs will be providing transmission in interstate commerce subject to FERC-approved tariffs ... we will play a role as far as whether people are meeting their open access and tariff requirements and I would expect an ISO will develop and the individual members will be obligated to meet NERC standards.
"As to who will build, that will vary according to state law in each of the individual states, as it does today. Whether a given state or a utility will have a residual obligation to build, for example, or whether they will allow nonutility participants to build transmission, there are a hundred different questions that will have to be answered."
"I'm aware of [the proposal], but I haven't studied it in any great detail and I don't have an opinion on it."
The key issue is ...
"everyone playing by the same rules."
Response from: Erle Nye is president and CEO of Texas Utilities Co. He serves on the U.S. Department of Energy's Electric System Reliability Task Force and is vice chair of the North American Electric Reliability Council.
"I don't believe my information and the knowledge I have of this whole matter ... suggests that the mood of marketers is growing worse or more contentious. ... There are obviously concerns that all the elements of the new industry have about, 'How is this going to work?' I think marketers, naturally, have that concern. I think independent power producers have it.
"I think if NERC is to garner the support of a large percentage of the industry, as a self-policing agency, then I don't think you can afford to predicate that on any element of the industry being substantially at odds. That is to say, I think everybody's interest has to be served.
"I think the question is poorly drafted. I donÆt think there is demonstrated proof that power marketers as a broad group are growing upset with NERC. I think they have valid concerns.
"NERC has to move to a posture where it has the support by virtue of its processes and its results of a vast majority of the industry. If it does not get there, it will not be successful.
"The question becomes how do you enforce those broadly supported elements against those few who do not agree with NERC standards? And I think there you're going to see the opportunity for a whole series of industry compacts--and I think that's a pattern that's developed in other comparable industry situations.
"For those who don't comply, well, if you have industry
compacts which call for inserting these provisions into contracts and making them part of the traditional commercial elements ... then you have the basis for compliance as you do with the stock exchange.
"Now when someone does not comply with the stock exchange rules, the only recourse is to a governmental agency and to some governmental sanction."
"I don't think it is likely that a new institution will crop up to replace NERC. Either you will have a new and improved NERC or it's much more likely you will have a governmental process."
Who Moves the Juice?
"Our best hope is to take the processes and the standards that have been developed over the years, by engineers for the most part, and try to modify the governance and the procedures such that everyone is fairly treated. And I think that's what delivers a reliable system. And I think we have to be particularly thoughtful about not impeding the market. It is going to be more complex, but I don't think it's going to be impossible."
ISOs vs. NERC.
"To the extent that a new-and-improved NERC needs governmental direction, [authority should be] assigned to existing governmental agencies, either FERC or DOE. To create a separate czar, I think, is inappropriate.
"If weÆre talking about an independent system operator set up to ensure the security function of the transmission grid, then I think that form of ISO in fact works hand-in-glove with NERC. Because its principle function is to do pretty much the equivalent of part of what the regional councils used to do. And in Texas as you know, we sort of pushed our regional council aside, re-established a new independent system operator and it is directed primarily and essentially at grid operation.
"That ISO, I can tell you, is ever so much pleased to rely upon the NERC standards, as they exist and as they will exist. I would presume in those situations, NERC really becomes a consolidated representative of ISOs that perform the security function. They are symbiotic.
"I would suggest that market demand is going to determine how many new l
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