September meeting sends draft legislation back to the drawing board.

Reliability is a self-correcting issue (em if we let it slide, something will happen and it will be corrected ¼ [But] do you want the government to do it?"

That was one industry representative speaking of attempts by the North American Electric Reliability Council (known as NERC) to evolve into a self-regulating reliability organization, or SRRO. But despite a reluctance for more government regulation, the same industry concedes that any transformation will likely require federal legislation, or at least a transfer of oversight to a federal agency, such as the Federal Energy Regulatory Commission.

This past summer the NERC Board of Trustees sought public comments after releasing draft legislation on electric reliability that would restructure the group as an SRRO known as the North American Electric Reliability Organization or "NAERO," the only SRRO in the country. Section 215 of the draft law defines NAERO's threefold mission: 1) develop, promote, and enforce standards to provide for the reliability in operation of the North American interconnected bulk electric system; 2) maintain security for short-term reliability; and 3) assess and encourage long-term adequacy of electric power supply. (See http://www.naero.org/legislation.html.)

Nevertheless, as seen by the public comments, the draft legislation has done little to dispel the controversy that attended NERC's release last winter of the "Blue Ribbon" report of its Electric Reliability Panel. That report drew comments from more than 30 different interests, including most of NERC's 10 regional councils, various utilities, marketers, state PUCs and trade organizations, as well as the Army Corps of Engineers. (See http://www.nerc.com/~blue/)

Those comments, plus those submitted on the draft legislation, have revealed a long list of issues surrounding NERC's transformation to NAERO:

• Structure. A national or a regional organization?

• Governance. What role for regional councils?

• States Rights. Can PUCs participate in NAERO, or impose their own reliability rules?

• Congressional Strategy. Should NAERO wait for a comprehensive electric restructuring bill?

• Generation. Should NAERO still monitor and ensure adequacy of supply?

• Standard-Setting. What process to set reliability rules? Use old procedures or those in place at other institutions, such as ANSI or IEEE?

• FERC Oversight. De novo review of technical standards? Or should FERC 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 are not recovered? Are NAERO participants salaried or will they work voluntarily?

Even as NERC ponders its transformation to NAERO, policy may also develop on two additional fronts.

First, during the past year, the FERC has found itself called upon to rule on the efficacy of proposed NERC standards (em whether they are consistent with the FERC's standards for open transmission set down in Orders 888 and 889. In fact, a coalition of power marketers has filed a petition for rulemaking asking the FERC to take a more active role in reliability and to revamp rules to guarantee transmission access on a commercial basis, while ending preferences for so-called native load.

Second, acting on a parallel track, a task force set up by the Secretary of Energy Advisory Board has been meeting regularly to develop policy on reliability to aid the DOE in presenting legislative ideas to Congress. In fact, on Sept. 29, the DOE Task Force issues its final report, Maintaining Reliability in a Competitive U.S. Electricity Industry. That report sets out 28 specific policy recommendations, most of which involve broader and more active supervision by the FERC. (See http://www.hr.doe.gov/seab.)

Structure: National or Regional?

Last winter's Blue Ribbon report envisioned a "top-down" national structure for NAERO but left open the exact role of any regional reliability organizations, sparking controversy.

Commenting on NAERO's draft legislation, the Mid-Continent Area Power Pool (MAPP (em one of NERC's regional reliability councils) insists that the role of the regional council should be preserved: "First, all regions are not alike." MAPP stresses that "a wealth of expertise resides at the regions in the staff and committee membership." It adds: "The legislation should not permit the electric reliability organization to delegate its authority. It should require it to do so."

Another regional council, the Southwest Power Pool offers that "NERC should maintain strong, positive working relations and shared responsibilities with regional organizations." The SPP, along with other regional councils, maintains that regional organizations "coordinate a more competitive electricity market, while equitably protecting reliability of service."

On the other side, some tout the notion that independent system operators might take over the role of regional governance. As Carroll Scheer, operations vice president for American Municipal Power of Ohio suggests, "Rather than have regional paper organizations, have regional ISOs that are a part of NAERO and serve as the regional organization. These ISOs would not only control the transmission system, but also would be the control area for generation supply." Scheer's comments go on to state that "funding could be built into the transmission charges under the control of the ISO."

The Electric Consumers Resource Council, which represents 37 members using an estimated 5 percent of all electricity consumed in the United States, is concerned about the regulatory oversight of RROs. Representing ELCON, attorney Sarah D. Schotland questions NAERO's plan for regional implementation of reliability rules:

"This provision," notes Schotland, "subjects NAERO to regulatory oversight but does not subject RROs to equivalent oversight.

"The legislation," adds Schotland, "is ambiguous about two key features of the RROs: [Whether] the RRO Board will meet criteria for independence, not just fairness ¼ and second, [whether] any standard or variance adopted by the RRO will be subject to the same degree of regulatory oversight as that adopted by the national body."

At NERC's September Board of Trustees meeting, the status of various efforts to develop model agreements between NAERO and RROs were reviewed. The board discussed two types of agreements: one for RROs that are separate interconnections and one for RROs that are part of larger interconnections. Model agreements would be reviewed in January 1999 with final approval slated for May 1999.

Further down the line from the RROs, the state commissions, observing the possibility of a national governance, fear the loss of their own authoritative power over reliability and stand ready to defend their turf. The New York Public Service Commission worries that "a lack of clarity or specification in the proposed legislation could be interpreted to provide FERC with the ability to intrude in matters that are state jurisdictional." The PSC adds, "Preserving the states' authority will only enhance system reliability." The State of California agrees and goes a step further, stating that public officials from within the relevant agencies of the states within each interconnection should have a role in the governance of the RRO.

Western states question whether the NAERO plan will account for differences between the Western and Eastern interconnections.

As the Idaho Public Utilities Commission points out, "There are important differences ¼ The Eastern Interconnection more closely resembles a network while the Western Interconnection is dominated by load centers and generation facilities separated by long distances. Reliability standards must accommodate these significant differences."

The Idaho PUC seconds comments offered by Roger Hamilton of the Oregon Public Utility Commission, who says there is a "fundamental electrical reality that the Western Interconnection is, for all practical purposes, separate and distinct from the rest of the North American transmission grid." Hamilton goes on to suggest that the legislation should provide for the creation of a state/provincial 'Western Interconnection Oversight Commission.'

Governance: Who Sits on the Board?

The Blue Ribbon panel had recommended a 21-member board, but with only seven slots reserved for particular classes of stakeholders, such as marketers, transmission owners, power producers, etc. Thus, two-thirds of the board would have "no current ties to the electric industry and represent the public interest on the board." That plan drew criticism from Houston Lighting & Power, among others:

"[We are] concerned that the industry sector will provide the majority of funding to the new organization and only be allowed one-third of the board's representation. Essentially ¼ the majority of board members will not be accountable to those who are providing the majority of the funding for the new organization, and would likely encourage overspending on programs."

The Mid-Continent Area Power Pool agreed: "MAPP is not interested in continuing to be a source of funding for an organization over which it has no management control."

Later, NERC's Governance Task Group eventually agreed to recommend an all-member independent board for the end-state NAERO, with a transition period in which nine new independent members would be added to the existing 37-member board in January 1999. This 'augmented' board would serve until NAERO received approval as a self-regulating reliability organization.

The September board meeting failed to decide the issue.

Mission: To Safeguard Supply?

In its report, NERC's Blue Ribbon panel had preserved a secondary mission for NAERO of assessing and encouraging system adequacy, or the sufficiency of grid resources. That idea drew opposition from the California Public Utilities Commission and the Edison Electric Institute. Both felt that a competitive generation market implied no need for a reliability organization to monitor the adequacy of energy capacity. But some in the industry insist that NAERO should ensure resource adequacy.

Listen to Ralph Bourquin, director of energy supplies and sales for Baltimore Gas and Electric, a member of MAAC (Mid-Atlantic Area Council): "We've had an adequacy standard in the MAAC region quite some time. We think that's a critical piece of the reliability puzzle. To focus only on short-term security without worrying about whether you have enough resources available to even keep the system operationally secure (em to us that's just myopic."

Of course, major power marketers, pushing for competitive markets, strongly disagree. They want to limit NAERO's influence in this area. As Enron states, "although a NAERO-type entity may be needed to ensure the reliability of the short-term grid, NAERO's responsibility should not extend to the reliability and adequacy of long-term generation resources or any ancillary service that can be provided through market mechanisms prompted by competitive price signals." Enron adds, "competitive markets provide forward price signals that provide for the adequacy of long-term supply."

Outlook

By drafting legislation, NAERO apparently has entrusted its restructuring to Congress, which so far has shown little inclination to move on electric restructuring. Ironically, the action seems to have shifted to the FERC recently.

On Sept. 29, the U.S. Department of Energy assigned authority to the FERC under Sec. 202(a) of the Federal Power Act to divide the nation into regional districts to promote interconnection and coordination of electric transmission, and formation of independent system operators. That grant of authority might increase the role of regional ISOs in maintaining reliability.

And, as mentioned, the Sept. 29 report by the DOE task force urged a larger role for the FERC. Among its 28 recommendations, the task force has urged federal review of the existing policies of the regional reliability councils, led by the FERC. It also has suggested that the FERC should develop and implement a consistent national policy on ancillary services, plus a training program for system operators. More importantly, the task force would have the FERC "explore formation of regional regulatory agencies" to focus on enhancing the interstate transmission network, and to ensure a consistent policy to allocate the cost of enhancements between federal and state jurisdictions.

Yet, even as the reports target a greater role for the FERC, the newly emerging competitive sector would redefine the role that the FERC already has.

On Sept. 21, the Electric Power Supply Association filed comments supporting a petition for rulemaking submitted last spring by a coalition of power marketers. (See FERC Docket No. RM95-8-000, March 25, 1998.) That petition would have the FERC create a capacity reservation system for a monetary allocation of transmission access rights. In effect, the FERC would create a market solution to reliability.

According to Jeffrey D. Watkiss, counsel for the petitioners, the petition has also gained the support of the American Public Power Association and Electric Power Supply Association, but at press time the FERC had not yet acted on the initiative.

At its September board meeting, NERC said it would reassess its original draft legislation and continue to work on legislative language to provide a statutory framework for a North American SRRO. That language was to be agreed on during November and submitted to the board by January for approval. From there, NERC planned to seek a broad consensus on this core language, while letting others debate related legislative issues regarding industry restructuring.

Stay tuned.

Courtney Barry is a writer who formerly worked for the General Counsel of the Public Utility Commission of Texas.

Reliability Time Line

1997

Jan. 16 DOE Task Force. First meeting. (To help Clinton Administration develop policy.)

May 1 Tagging Rules. NERC's "Operating Policy 3" mandates "tagging" for grid transactions.

Aug. 27 CAPT Complaint. Coalition Against Private Tariffs argues tagging rules violate FERC Order 888.

Aug. 28 NERC Response. NERC says it will modify tagging rules.

Nov. 6 Antitrust Threat. At sixth meeting of DOE Task Force, ELCON's John Anderson hands out legal memo warning that NERC structure violates antitrust law.

Sept. 20 Blue Ribbon Panel. Holds first meeting. Formed to advise NERC on reorganization.

Dec. 22 Blue Ribbon Report. Urges formation of self-regulating reliability organization, with FERC oversight and top-down national structure.

1998

Jan. 5 NAERO Deadline. NERC board sets January 1999 as target for restructuring. Creates four "task groups" to study issues.

Feb. 20 FERC Conference. FERC invites comment on how to meld transmission access rules w/NERC reliability standards.

Mar. 25 Marketer Petition. Coalition of power marketers files rulemaking petition, wants FERC to abandon "native load" preference, allocate grid access on for-profit basis.

Mar. 31 Blue Ribbon Comments. Some 30 groups file comments on Blue Ribbon report.

Apr. 7 Tagging Order. FERC resolves CAPT complaint, says it can reject NERC rules that violate Order 888.

Apr. 17 NAERO Task Group Reports. Filed reports reiterate Blue Ribbon findings.

June 5 TLR Rules. NERC seeks certification for "off-path" rules for transmission line loading relief.

June 9 Task Group Comments. Industry comments on NAERO Task Group Reports.

June 12 TLR Approval. FERC notice says industry can apply NERC's off-path TLR rules in Eastern Interconnection pending final decision, raising ire of some utilities.

June 24-25 Midwest Spikes. Turmoil hits Midwest power markets. Some prices reach $7,000/MWh.

June 26 Placing Blame. Attorney Sara Schotland circulates memo to ELCON members noting that TLR rules have "triggered in-fighting" among electric utilities.

July 13 Birth of NAERO. NERC board launches NAERO, releases draft legislation to make NAERO the one and only reliability organization.

Aug. 6 In Congress. Reps. DeLay (R-Tex.), Markey (D-Mass.) introduce H.R. 4432, "Electric System Reliability Act of 1998."

Aug. 17 NAERO Comments. NAERO receives comments on its draft legislation.

Sept. 21 EPSA Endorsement. Electric Power Supply Association endorses power marketer petition filed 3/25/98.

Sept. 24 Price Spike Report. FERC analyzes Midwest price spikes. Finds no evidence of firm curtailments. Warns of shortfalls in generation.

Sept. 29 DOE Delegates. U.S. assigns authority to FERC under Federal Power Act sec. 2029(a) to divide nation into regional districts for grid coordination.

Sept. 29 Mission Ended. DOE Task Force issues final report and disbands.

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