Fortnightly Magazine - June 1 2000


Scare Tactics

The Wall Street Journal is goading Congress to act. And it might just work, if the warnings come to pass.

On May 8 ISO New England predicted it would have enough electricity to meet peak demand this summer. But how much demand are you gonna see at $6,000 per megawatt-hour, which was the ISO's prevailing price that day from 2 p.m. to 6 p.m?

That's $6 per kilowatt-hour - or about 50 times as high as the total packaged rate that you would expect to pay to your neighborhood monopoly utility. And delivery is extra.

Three days later, the Wall Street Journal reporter Rebecca Smith fanned the flames with her "Gloom and Doom" piece about Oracle building its own power plant "bunker" as insurance against outages. With quotes from Energy Secretary Bill Richardson predicting summer brownouts on the nation's "third-world grid," a thinking person might guess that the administration had engaged the Journal in the battle to sway Congress to pass comprehensive legislation this year on electricity restructuring.

But that's what it will take to get Congress to act - a good scare. Or better yet, a panic. The current system for maintaining electric reliability was born of the great Northeast Blackout of 1966. We probably need another cataclysm of like proportions to put the electric reliability wars into proper focus.

IT'S A WAR, ALL RIGHT. IT'S NERC VS. THE ISOs. At stake is whether the independent system operators now evolving in California, New England, New York, Texas, the Mid-Atlantic, and the Midwest will supplant the regional reliability groups set up by the North American Electric Reliability Council.

And hovering above the fray is the Federal Energy Regulatory Commission, which stands to win regardless of the outcome: either as the nominal oversight board for the new NERC or the father of a revamped system of private regional transmission organizations. Unless, of course, we have massive outages this summer, and Congress comes to blame the FERC, for interfering with NERC's mission by setting up this new system of fledgling RTOs, and NERC can position itself as the spurned and untarnished suitor.

In fact, NERC's image may now be on the rebound - largely because it has faded so far into the background during the last year. Meanwhile, it appeared during the last two months that just about every major ISO - whether operating or still planned - was foundering in disarray or at least locked in a major controversy.

The California ISO has announced a plan to revamp its scheme for pricing transmission access (to make it more uniform and logical) but so far has encountered protests from just about every category of participant, including both public power and representatives from the investor-owned utilities. The ISO is trying to be all things to all people, and is floundering in the process.

In New York, the ISO faced allegations of price manipulation in its 10-minute-ahead reserve market, and found the preliminary evidence so damning that it decided on its own to ask the FERC to suspend market pricing without even waiting for the case to be resolved. A few weeks after, the New York ISO proposed an absurdly complicated document setting standards for market monitoring, giving examples of what sorts of bids would be viewed as suspicious.

In New England, they were still waiting at this writing for the New England Power Pool to submit its plan for congestion pricing and management. In the absence of leadership from the top, the region has split into several factions - each attempting to get the jump on the others. One group of utilities called itself the "Anti-Subsidy Complainants." They seized the high ground, as if to box NEPOOL and the ISO into a corner, by advising the FERC that already there was a "clear consensus" in NEPOOL for locational marginal pricing, but that certain naysayers wanted to retain the current "socialized" method for assigning congestion costs during the two-year period that it would take to get LMP up and running. According to the ASC group, that would only perpetuate subsidies.

And then, if that weren't enough, go back and look at the New England power prices for May 8. If you do, you'll see that during the same afternoon that energy prices hit the ceiling, the price for 10-minute non-spinning reserves climbed above the price for spinning reserve during three of the four hours. That's the same upside-down pattern that prevailed in New York that led the ISO there to acknowledge possible price manipulation. (Logic would dictate that spinning reserve should carry a higher price.)

Amid the shouts, the ISOs and NERC were jockeying for position.

On April 13, the PJM ISO vice president (legal), Richard Drom, posed several questions on how it would fare if Congress were to crown the new North American Electric Reliability Organization (NAERO) as the unquestioned reliability czar. PJM showed particular interest in its installed capacity requirement (in its "Reliability Assurance Agreement"), which differs from other regions by giving the ISO the right to recall capacity to serve intra-ISO load during emergencies.


These questions quickly elicited a 13-page letter from NERC general counsel David Cook, who must have worked hard to suppress his Cheshire Cat grin as he put pen to paper.


ON MAY 11, THE DAY THE STORY BROKE IN that electric utilities had set up a secret fund to lobby some congressmen to block federal electricity legislation, I caught up with Oliver "Rick" Richard, the Columbia Energy CEO and former FERC commissioner, at a reception of energy lawyers and project developers in suburban Fairfax County, Va. After dinner he took several questions from the group. They went something like this:

  • Will deregulation mean more blackouts?
  • Will fuel cells make it big?
  • Why are customers so uninterested in electricity choice?
  • Why has Wall Street hammered the electric utility stocks so badly?

There, in a nutshell, is everything you need to know about electricity restructuring. The secretary of energy is warning about blackouts. As a remedy, the technicians continue to design these impossibly complicated corporate machines that seem only to make things worse. As Richard paraphrased an expert from the health care industry, "Anyone who really understands how all of this works would never want to fix it."

And fuel cells ...

"Why not?" said Richard. "It makes too much sense."


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