Subject: UFTO Note – Reliability TF draft Interim Report
Date: Fri, 11 Jul 1997 11:12:59 -0700
From: Ed Beardsworth

— advance copy just received from contacts at DOE —

————————————————————–
| ** UFTO ** Edward Beardsworth ** Consultant
| 951 Lincoln Ave. tel 415-328-5670
| Palo Alto CA 94301-3041 fax 415-328-5675
| http://www.ufto.com edbeards@ufto.com
————————————————————–

—————————————-

The attached file contains a draft Interim Report that will be discussed and marked up at the July 23 – 24 meeting of the Secretary’s Electric System Reliability Task Force.

Please note that this draft has not yet been reviewed by the Task Force members.
—————————————–

DRAFT

Dr. Walter Massey
Chairman, Secretary of Energy Advisory Board
c/o Morehouse College
830 Westview Drive, SW
Atlanta, Georgia 30314

Dear Dr. Massey:

The Task Force on Electric System Reliability of the Secretary of Energy’s Advisory Board is writing to provide you interim comments on several issues important to the maintenance of reliability. Although the Task Force has not yet completed its deliberations under the Secretary of Energy Advisory Board’s Terms of Reference, its members are aware that the Department and the Administration may be making decisions on these issues and we want to be as helpful as possible.

As you know, the 24-member Task Force is a diverse group representing, for example, electricity producers, marketers, state agencies, consumers, environmental advocates, reliability organizations and academia. Not surprisingly, with such differing perspectives on changing and complex issues, it is not easy for the group to rapidly reach a consensus. Naturally, not every member agrees with every detail of this report.

We certainly all do agree, however, that the maintenance of system reliability must be a high priority and that the mechanisms for ensuring reliability must be changed to accommodate the changing electric market.

Since its establishment in January, 1997, the Task Force has convened in four open meetings. Thus far, we have focused primarily on issues relating to the bulk power transmission grid and in particular security issues—that is, questions about the operation and maintenance of that system–rather than the adequacy of supply or generation. We will be assessing a number of additional issues at future meetings.

The Task Force appreciates the opportunity to provide the Department with this Interim Report and respectfully submits the preliminary findings and recommendations contained therein.

Sincerely,

cc: Federico Peña
Elizabeth Moler

————————-
Secretary of Energy Advisory Board
Task Force on Electric System Reliability

Interim Report

July 24, 1997

Background

This report makes recommendations regarding the security of the Nation’s bulk power system consisting of generation, transmission, and control facilities.

Electric reliability can be divided into two areas: reliability of the distribution system and reliability of the bulk power system. Bulk power system outages affect large areas and can have significant regional and national implications. Further, the rules for assuring reliable operation of the bulk power system can have an effect on the transactions occurring on the system. Federal regulators have responsibility for economic regulation of electricity in interstate commerce, including wholesale transactions involving most of the nation’s generation and transmission facilities, within and across state borders. An issue introduced by competition in bulk power markets is the need to assure reliable system operations in a competitively neutral way. While everyone agrees that system reliability must be maintained as a feature of a competitive electric industry and must be under the direction of experienced expert operators, not everyone agrees about how to resolve reliability issues in a manner that does not discriminate for or against certain participants in competitive bulk power markets.

While states have an interest in the performance of the bulk power system, state regulation has tended to focus on distribution system outages, that generally have only localized effects and are frequently characterized as being related to end-user customer service, which is an area of state jurisdiction. States have traditionally also had regulatory responsibility for economic and planning approval for certain generation facilities and recovery of their costs and siting approval of both generation and transmission facilities within the state.

Bulk power system reliability has two components: adequacy and security. Adequacy implies that there are sufficient generation and transmission resources available to meet projected needs at all times, including peak conditions, plus reserves for contingencies. Security implies that the system will remain intact even after planned and unplanned outages or other equipment failures occur. Most view transmission adequacy and system security as “public goods” that benefit all buyers and sellers of electricity, and which exhibit monopoly characteristics. While the market will likely play a role in providing certain services that are needed for transmission adequacy and system security, these are the areas of greatest national interest from a reliability point of view and the primary focus of this report.

Bulk power system reliability has historically been the responsibility of the electricity industry, as opposed to the government which has only indirect jurisdiction primarily through economic regulation of wholesale electricity sales by the Federal Energy Regulatory Commission (FERC). The Department of Energy and the FERC also have some limited authority under certain circumstances to order transmission, require interconnections, make reliability recommendations and collect information. The industry, through the North American Electric Reliability Council (NERC), a self-regulating organization traditionally made up of electric utilities, and the ten regional reliability councils establish reliability standards and monitor compliance. While these organizations have been effective in a world of vertically integrated electric utilities, there is concern today about the voluntary nature of their membership, their dominance by utilities, and the inability to mandate and enforce compliance among their members and other industry participants.

Further complicating reliability issues is incomplete jurisdictional authority. As mentioned above, the NERC and the regional reliability councils have jurisdiction only over their members. There are also thousands of municipal, cooperative, and power marketing utilities that are not subject to FERC or state jurisdiction.

Similarly, we recognize that the bulk power system is an international system. We recognize that the NERC, as a body that includes U.S., Canadian, and Mexican members, has a unique role in setting and monitoring international reliability standards and that close cooperation will be required between national, state, and provincial regulatory agencies that may be given authority for reliability oversight.

Reliability Institutions

The electric utility industry traditionally has been vertically integrated, fully regulated and composed of a limited number of entities. These entities were similar in makeup, in their investments in the bulk power system, and in their expectations for grid operation and use.

In this environment, three institutions evolved that are the focus of this report.

NERC – In 1968, the North American Electric Reliability Council was formed in response to the 1965 power outage that blacked out the northeastern United States and Ontario, Canada. For over two decades, NERC’s mission has been to promote electrical system reliability and thereby prevent further such occurrences. The NERC has been a voluntary, industry-constituted governing body that develops standards, guidelines and criteria for assuring system security and evaluating system adequacy. The NERC has been funded by regional reliability councils which adapt the rules to meet the needs of their regions. Through the work of its ten regional councils and one affiliate council, the NERC has largely succeeded in maintaining a high degree of transmission grid reliability throughout the country. Historically, the NERC has functioned without external enforcement powers, depending on voluntary compliance with standards and peer pressure.

System operators – Today the country is served by approximately 150 separate control areas, each with its own system operator. The operators of these systems rely on communications with each other, access to essential system information, and real time monitoring and control of certain facilities to maintain system reliability. When an emergency occurs on the system, the control area operator takes action — both through communication and direct physical action — to ensure the integrity and security of the system. These people take and direct others to take the actions necessary to “keep the lights on” and to protect against damage to the entire system in the event of emergencies.

FERC — The Federal Energy Regulatory Commission is the federal agency with jurisdiction over the bulk power market, including interstate transmission systems. As part of these responsibilities, the FERC is implementing policies to assure that the owners and operators of bulk power transmission facilities under the agency’s jurisdiction provide non-discriminatory service to all power suppliers in wholesale power markets. Historically, the FERC has not had to involve itself with regulating reliability functions. Increasingly, some parties are calling upon the FERC to begin to exercise its current authorities by addressing reliability issues that intersect with the commercial needs of the industry.

At the onset, we note that the electric industry is changing and, indeed, has already changed in several respects: wholesale electric markets are opening to competition under open access transmission tariffs; several states containing more than one-third of the nation’s population have decided to permit retail consumers to choose their suppliers (nearly all of the remaining states are studying retail competition); energy companies are merging and establishing innovative joint ventures; new competitors are entering markets, and new institutions are forming (e.g., independent system operators; power exchanges; spot markets).

These trends indicate that in the future, market forces will determine when, where and what type of generation sources will be built and which energy trades will be transacted. Also, it is apparent that the nation’s transmission grid will be used by a larger number of entities for many more transactions. There are challenges regarding maintenance of traditional reliability levels in this new environment.

While the traditional reliability institutions and processes have served us well in the past, these institutions and processes need to be modified to assure that reliability occurs in a competitively neutral fashion, without favoring one or another set of market participants. To attempt to accommodate these new reliability issues that arise with competitive markets, today’s existing reliably institutions, and most notably the NERC, have undertaken a number of new initiatives including expanding their membership to include new market participants in addition to those long-standing members drawn from the electric industry. The Task Force welcomes these changes.

Task Force Findings

The Task Force has reached consensus on several key points:
1) Restructuring of the electric industry offers economic benefits to the nation and may result in a more efficient electric industry

2) While the changes brought about by restructuring are complex, the reliability of the system need not be compromised provided appropriate steps are taken. Transmission grid reliability and an open, competitive market can be compatible.

3) The viability and vigor of the commercial market must not be unnecessarily restricted. The market forces being introduced now depend on fair and open access to the transmission grid.

4) Commercial markets should develop economic practices consistent with the ingenuity and mutual interest of the participants. However, grid reliability must be maintained through disciplined technical standards and practices.

5) Reliability standards must be clear, transparent, nondiscriminatory, enforceable and enforced. Compliance must be mandatory for all entities using the bulk power system.
6) Regulatory oversight is necessary to ensure compliance with reliability policies and standards and to resolve disputes.

7) It is reasonable and practical to build on the experience and reliability standards developed by the NERC over the past 28 years. However, these standards as well as NERC’s own system of governance must be modified to accommodate the complexities of the competitive market.

8) Grid reliability depends heavily on system operators who monitor and control the transmission grid in real-time. In order to assure competitive use of the grid, system operators must be independent from owners of generation and transmission; they should have no commercial interests in electricity markets.

9) Bulk power systems are regional in nature and can and should be operated more reliability and efficiently when operators are coordinated over large areas.

10) The reasonable and necessary costs for maintaining the reliability system should be fully recoverable and equitably distributed.

11) Transmission grid reliability is a North American issue; the reliability relationships with Canada and Mexico must be preserved.

Task Force Recommendations

The Task Force recommends that:

1) The NERC expedite — to the fullest extent possible and consistent with assuring sound results — the modification of its governance structure to assure fairness and lack of domination by any single industry sector.

2) The FERC undertake a review of existing NERC policies and standards that affect the operation of an open wholesale market and undertake a review of NERC’s organizational structure and governance. This proposed role for the FERC is important in order to make reliability standards enforceable and to assure that reliability standards and practices are not misused in ways that would be discriminatory in the competitive market. Given the considerable demands currently faced by the FERC, additional resources may be required by the agency in order to undertake this role.

3) Federal legislation may be useful to clarify FERC’s authority and responsibility for overseeing and setting and enforcement of reliability standards.