No one has yet explained why the electric industry needs independent system operators to manage the transmission grid and a private institution to do essentially the same thing.
That question remains unanswered even now that the North American Electric Reliability Council has released its draft legislation showing how it would recreate itself as NAERO, a self-regulating electric reliability organization insulated from antitrust scrutiny by governmental oversight.
"Reliability does not exist in a vacuum," noted P.R.H. Landrieu, v.p. of electric transmission for Public Service Electric & Gas Co., in comments filed August 17. "The best means of ensuring reliability, and the structure and process of a NAERO, is dependent ¼ on a number of outstanding issues. For example whether ISOs, transcos, gridcos or regional planning entities will be authorized or mandatory.
"It is not appropriate," adds Landrieu, "to engage in advocating piecemeal or patchwork legislation. ¼ If a stand-alone bill is introduced, an intense lobbying effort, including efforts to broaden the scope of the bill to include other issues, is sure to result."
Several years back I heard a comment I liked from Charles Stalon, an alumnus of both the Illinois Commerce Commission and the Federal Energy Regulatory Commission. He noted that utility competition implies a flip-flop in the role of government. Under the old scheme, said Stalon, you had heavy regulation of prices coupled with laissez faire oversight for reliability. NERC called it "peer pressure." Under competition, however, it's just the opposite: laissez faire prices with intensely regulated reliability.
Regulators can feel the turf shifting beneath their feet. State PUCs see power tilting to the FERC. Meanwhile, NAERO has yet to figure out whether it's a national or regional institution - as if it had any choice.
The old NERC functioned from the bottom up, with power emanating from the regional councils. That structure made sense, as reliability is rightly considered by most as a regional or even local concerns. a one-size-fits-all approach doesn't work.
Now logic collides with politics. To avoid any appearance that it will simply duplicate the regional ISOs, NERC unveils NAERO as a top-down institution, enforcing national standards. But NAERO would also make room for ARROs - "affiliated" regional reliability organizations - to appease the current regional councils, who insist on a continuing role after reform. Here the logic breaks down. If NAERO is truly national, why create regional ARROs that seem redundant of the regional ISOs? On the other hand, if NAERO invests real power in the regional ARROs, as would seem necessary, why not just stick with the bottom-up structure that worked for the old NERC, plus FERC oversight to settle antitrust concerns?
When faced with this contradiction last Winter, the "blue ribbon" panel on the future of NERC chose to pass the buck. In its report, the committee said that NAERO should draw up a Memo of Understanding to spell out its relationship with its new regional affiliates. That uncertainty persists in NAERO's draft legislation, a point underscored by the National Association of Regulatory Utility Commissioners, in comments filed by general counsel Charles Gray: "The lack of clarity ¼ concerning the relationship between NAERO and the ARROs is troubling. ¼ The [bill] does not lay out any criteria on which NAERO must consider or defer to standards established on a regional basis by the ARROs."
My favorite quote comes from James Wilson, a consultant with ICF Resources who helped prepare the background report on ISOs for Phil Sharp's DOE Task Force on Electric Reliability. and who . I noted Wilson's ideas last Spring ("Electric Reliability: Sanctions or Commerce? May 1, 1998, p. 52), but his words bear repeating here:
"One theme that emerges ¼ is that regional organizations will play a larger role than is suggested in the [Blue Ribbon] report. ¼ [But] if regional organizations are to have the primary enforcement role, it is not clear to what extent NERC's present role and status, along with enhanced government support for the enforcement of standards, would be insufficient."
NAERO's draft legislation, released for comment this summer, has raised a host of issues:
• Structure. How independent are regional boards?
• Governance. Voting rights for state PUCs on NAERO committees?
• States Rights. Can PUCs still impose their own reliability rules?
• Legislative Strategy. a comprehensive bill or a stand-alone reliability measure?
• Generation. NAERO still ensures adequacy of supply?
• Technical Standards. Use procedures already in place at ANSI or IEEE?
• FERC Oversight. Den novo review of technical standards or defer to NAERO?
• Lawsuits. Immunity for violation of NAERO standards?
• Enforcement. Is NAERO both standard-setter and police force?
• Funding. a nonbypassable charge? Who is at risk if costs not recovered? Will mechanism discriminate against utilities that don't operate control areas?
Antitrust immunity is one reason for NAERO reform, but how far down the chain does immunity reach? What about lawsuits for damages? Jack Davis, executive v.p. for commercial operations at Arizona Public Service Co., raised the point in his comments:
"Traditionally, at least in the West," said Davis, "electric utilities have generally buried their own dead when they or their customers sustained injuries as the result of system outages, regardless of who or what caused the outages."
Davis urged that legislation should grant explicit immunity or, as he put it, "protection to transmission providers who are now being asked to assume responsibilities and potential liabilities."
Another issue lay buried in the description of how the how the FERC would review technical reliability standards. NAERO proposes that the FERC would disapprove any rule standard or variance (a different rule applied on a regional basis) on determining the provision to be "unjust, unreasonable, unduly discriminatory or preferential or ¼ an undue burden on competition."
Several commenters questioned the meaning of the phrase, "an undue burden on competition." One of the regional councils, the East Central Reliability Coordination Agreement, said it should be deleted: "The language immediately prior, i.e., 'unjust, unreasonably discriminatory or preferential,' has a long and well-developed legislative and judicial history and should not be modified."
NARUC General Counsel Charles Gray also questioned the idea that the FERC could overrule reliability standards for their effects on competition. "This is a vague but potentially powerful standard, " Gray noted. "The legislation should be more specific about what would constitute an 'undue burden' and what is meant by 'competition.'"
Gray also chided NAERO for ignoring the importance of commercial practices. "The draft legislation lacks criteria or principles for balancing the costs and benefits of reliability," he said. "In fact, the draft complicates this difficulty by introducing the test of 'undue burden on competition.' This test is undefined.
"NARUC believes that standard-setting should be required to consider ¼ economic value of reliability, the practical engineering of the network, and a full range of alternatives to additional transmission line and power supply investment."
"Reliability does not have infinite economic value," Gray added.
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