The Geopolitics of the Grid

Deck: 

Is it really so important to preserve regional differences?

Fortnightly Magazine - September 2006

The July 11, 2006, edition of the Wall Street Journal contained an excellent opinion piece by Daniel Yergin, chairman of Cambridge Energy Research Associates, in which he posed the question: “What does ‘energy security’ really mean?”

What is so striking about his article is that his analysis easily could describe power industry politics between low-cost states (suppliers) and high-cost states (consumers).

“Consuming countries declare they want ‘security of supply’—that is, reliability and availability of energy at reasonable prices,” Yergin writes. Does this not sound like the statements often made by high-cost states?

He continues: “Exporting countries, whether Russia or the Middle East, turn around and talk of ‘security of demand’—sufficient access to markets and consumers to justify future investment (and protect their national revenues).” Thus, in the western U.S., state representatives often have questioned whether the benefits of selling their low-cost energy into an energy market would offset the resulting higher cost to their own constituents.

Perhaps the electric industry—including state regulators and politicians—might stand to learn a thing or two from Big Oil.

For one, the oil industry has begun to realize that lack of cooperation can undermine the entire global energy market. Similarly, a lack of cooperation among the 50 states could threaten the entire U.S. energy system.

Whatever one might say about state’s rights and their energy independence, the truth is that there remains only one U.S. energy market. Energy security does not reside in your neighborhood or mine, but is part of the larger pattern of relations among states. How those relations go will do much to determine how secure we are when it comes to energy.

America’s Insecurity

If you had read the report that the Federal Energy Regulatory Commission (FERC) sent to Congress recently on security constrained economic dispatch (SCED), as required under last year’s EPACT law, you would see how regional rivalries still stand in the way of progress in the U.S. electric industry. That is disappointing.

Significant efficiencies and economies of scale can be had by broadening the geographic scope of SCED through consolidation of areas or reduction of seams between areas. Furthermore, greater efficiency can be achieved through transparency in the dispatch of pricing information and the independence of the dispatcher, including demand response and other factors. Of course, many of the existing regional transmission organizations are already exploring each and every one of these issues. Yet, as the report shows, regulators in the West and South who served on regional joint boards to advise FERC on SCED policy are still reluctant to embrace these ideas.

A representative of the West Joint Board at FERC’s July meeting tried to explain:

“First, the Joint Board members generally believe that there should not be a one-size-fits-all approach,” said the representative.

“Differences in the resources and load conditions among the areas in the West, and often differences in state or local conditions within each area, are believed to be too large to warrant recommending a single form for all areas,” was the familiar view. Then in what almost suggests that the West will always have a provincial, balkanized grid, the Westerner said the focus of changes that might be made to the current SCED practices, should be at the state or local level.

But the “regional differences” defense by some states seems without merit overall, and is becoming tired. Technologies are being developed that could compensate for the differences in distance and load, and could offer a more common experience across the nation.

One might ask: Are these arguments not just a smokescreen to hoard or protect state energy resources? These actions would be inconsistent with the American experience in other industries. If we had not reformed big oil, airlines, and banks in the United States, the American consumer today would pay widely different prices for gasoline and airline tickets, and would receive different interest rates on their deposits based on the state where they live.

Does this situation not describe today’s power industry? Why is the average retail price in Georgia still 6.58 cents/kWh, while the average retail price in nearby Florida is 8.16 cents, according to 2004 EIA data? In the West, Californians pay an exorbitant 11.45 cents/kWh on average while most of the West still pays between 5 cents/kWh and 6 cents/kWh on average? And in New York, the price is a sky high 12.55 cents/kWh.

This is not an argument for or against electric competition, an idea that has become so politicized in this nation that no meaningful discussion is possible. Rather, what reforms are available to better use (dispatch) the resources that we already have?

Asking the Right Questions

Harvard’s William Hogan and LECG’s John D. Chandley, in their analysis of FERC’s proposed reforms to the Open Access Transmission Tariff (OATT), argue that the commission is asking the wrong questions in its quest to preserve the “comparability” of transmission service provided to various industry sectors.

As they explain, FERC should put aside its worries about inconsistencies in the way that grid owners calculate ATC (available transmission capacity). Instead, they say FERC should concentrate on the protocols by which that ATC is awarded to resources — i.e., how the plants are dispatched across grid’s available capacity. In other words, it’s not how much grid you have, but whether you are using it wisely. (See, A Path to Preventing Undue Discrimination and Preference in Transmission Service, FERC, Docket No. RM05-25-000).

Hogan and Chandley write: “The emphasis on the past analyses has been on the defects of OATT contract path and ATC framework. Although the commission’s own analyses have recognized these defects, the commission has not been able to address these matters without entangling itself in a larger debate about electricity market design and electric restructuring. Given the impasse, it may be that the emphasis on ATC imposes too much on the commission if it is to find a path to preventing undue discrimination and preference in transmission services.”

Hogan and Chandley believe the only acceptable dispatch protocol is a region-wide, bid-based, least-cost and security-constrained dispatch that respects both physics and economics—as practiced by the regional transmission organizations (RTOs) in the eastern U.S.

But if non-RTO regions such as those in the West are not more willing to move forward on balancing (or dispatch) services, what hope is there of developing a more efficient power grid that offers its services without bias to users? That is a question many are asking about the inequities in today’s grid.

FERC’s Role

FERC recently announced a technical conference in early 2007 on the issue of an electric utility's ability to benefit from an RTO or independent system operator’s regional markets, while avoiding some or all of the costs attributable to membership in the RTO or ISO. At a July 20 FERC meeting on the proposed RTO conference, outgoing Commissioner Nora Brownell said: “I was in the Midwest a couple of weeks ago. I think it’s not only financial free-riders, of whom there are, unfortunately, far too many, but there are reliability free- riders. ... They are particularly concerned about their neighbors at TVA who don’t share the transparency that the RTOs share. I think, whether or not the RTO model continues … everyone, whether a small or big player, needs to have the tools to provide the information necessary for both themselves, but also their neighbors.”