Is FERC the rightful heir?
Fortnightly Magazine - February 2004


Is FERC the rightful heir?

The possibility that energy legislation drafted last year won't pass in 2004 has created a power vacuum. Who now is czar of electric utility reliability? Language in the proposed bill would have answered that question. But when Congress demurred, did that imply an endorsement of the ?

"We think it's neat that no one's in charge," Congress might just as well have said. Or, perhaps our lawmakers intended a different message: "Nobody makes a move till we say. Don't call us, we'll call you."

For better or for worse, the Federal Energy Regulatory Commission (FERC) stepped into the void in late December when it directed its staff to develop an order requiring transmission system operators to report violations of the industry's power-grid reliability standards. "The pending order marks the first step in the commission's exploration of its authority under existing law to assure power grid reliability in the aftermath of an Aug. 14, 2003, blackout that affected millions in the U.S. and Canada," FERC said.

But FERC's actions have drawn criticism from several quarters in the industry that don't believe FERC has the legal authority to enforce reliability, and that it is too soon for the regulator to begin assuming a role Congress has not given it.

Moreover, many are concerned about a repeat of the August blackout. Rep. John Dingell, D-Mich., has introduced stand-alone reliability rules, and recently Sen. Hillary Clinton, D-N.Y., said she would introduce similar legislation that would require FERC to create a standard-setting board that would propose mandatory rules.

So, if Congress is to make FERC the oversight agency of any entity that makes reliability rules, who cares if FERC is the one setting the rules or overseeing a board or agency that does? Isn't it patently clear that Congress wants FERC to have ultimate responsibility for reliability? No, some executive say, Congress has not made FERC the reliability czar, and the agency is usurping the contribution and potential authority of the North American Reliability Council (NERC), the industry's voluntary, self-regulating organization-which, if the energy bill passes, would become the reliability organization to create and enforce tougher mandatory reliability rules.

Utilities: FERC Should Be at the Top

One utility expert familiar with reliability issues says FERC is ill equipped to set reliability standards. The expert, who requested anonymity, says, "There are three phases of a new approach to reliability that you need to get done. The first phase is the development of new standards. In other words, we have reliability standards, but we need to develop new and tougher standards. The second phase is monitoring compliance with those new standards. That basically involves compliance audits and things of that nature. The third phase is the so-called corrective action or penalty phase.

"It is the unambiguous view of the utilities industry that the historical memory and the knowledge and the expertise for executing the first two phases rest within NERC. And that FERC, appropriately, should be in charge of the third phase, which is the penalty phase. In other words, NERC develops the standards and NERC says company XYZ broke the standards, and the third step [is FERC] using its appropriate oversight and enforcement and supporting role ... [in] the third phase."

The source says utilities are uncomfortable with FERC getting involved in the first two phases. Plus, where will FERC get the expertise to monitor grid reliability? "NERC is the only place where there are engineers who can do what FERC is proposing to do. Wouldn't the agency be taking away valuable human resources from NERC on the eve of its transformation to reliability cop by Congress?" the source says.

Echoing the view that NERC should be in command of setting standards and enforcement is the Edison Electric Institute (EEI). In early January, EEI's board of directors unanimously adopted a resolution declaring that NERC should take the lead in formalizing new electric reliability standards.

Specifically, the resolution suggests prompt action by NERC to implement a number of strategic initiatives to strengthen reliability, including: readiness audits of control areas and reliability coordinators; enhanced compliance performance reviews; vegetation management surveys; and recommendations tracking. The role of the FERC should be one of "supporting and providing oversight to the NERC initiatives," according to the resolution. EEI President Tom Kuhn said of the resolution, "We are pleased that the commission wants to take an active role in helping achieve a goal we all share-that of making certain our bulk power system is the world's most reliable. Consistent with the reliability provisions approved by both the Senate and House as part of the comprehensive energy bill, our CEOs believe strongly that the expertise to make this happens resides within NERC and the industry, with FERC in an important oversight role."

An EEI spokesman points out that the preferred route is quick enactment of the comprehensive national energy legislation, which contains provisions for creation of a national electric reliability organization, rather than any stand-alone legislation on reliability. Moreover, one utility expert does not believe that the August blackout was proof that NERC has failed as an organization and deserves elimination. He and other executives strongly believe NERC has been ineffective because of its inability to mandate reliability standards.

It's All About Authority

Even as some utility executives are putting their full support behind NERC, others believe FERC has the authority to enforce and set reliability standards. They ask, what is to happen if Congress does not act on any reliability legislation? Then the industry and regulators will have done nothing to change a status quo that caused the largest U.S. blackout in history. Furthermore, even if NERC, rather than FERC, sets new standards as Kuhn and other propose, those standards still are voluntary, assuming the energy bill does not pass. In the end, everyone wants to know if FERC has the authority to act.

Attorney James D. Hobson recently submitted to FERC his 1970s analysis related to the New York City blackout of that year. The analysis supports FERC's authority to oversee reliability. "The authority of the Federal Power Commission [as the FERC was then called] in the area of electric system reliability rests exclusively in the Federal Power Act. Specifically, Sections 202, 207, and 311 provide the commission with responsibilities and powers with respect to reliability," Hobson says.

Furthermore, he writes that the commission has exercised its authority in the area of reliability on a national scale by requesting the reporting of pertinent reliability data by the regional reliability councils. The data includes, among other things, descriptions of: load-shedding programs, principal communications and control systems, operating reserve policy, and contingency plans in emergency situations.

Another issue raised by a transmission expert is that many have believed for a long time that RTOs would eventually replace NERC in setting reliability standards, which are under FERC jurisdiction.

Whether you believe FERC, NERC, or some other agency should be in charge of reliability setting and enforcement, let's hope the industry acts soon and decisively. Everyone who experienced the Northeast blackouts or the Hurricane Isabel blackout has a story. For me, it was writing an article for the magazine on deadline, on a laptop with two four-hour batteries, and all by candlelight. I didn't have a quill pen to use as a backup. I hope not to have to shop for one anytime soon.


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