Reliability, Market Power, RTO Action On FERC Agenda, With/Without Congress
Federal Energy Regulatory Commission Chairman Pat Wood last week set out an
aggressive agenda to tackle reliability and market-power issues in 2004, and
repeated his assertion that, unless Congress changes current law, FERC can
require utilities to join regional transmission organizations if it deems it
necessary.
Speaking at a Washington briefing, Wood said he hopes to finalize reliability
standards this summer, including a major focus on improving audits of company
compliance with reliability rules. He also said FERC in the coming days would
issue an order requiring companies to report their compliance with the existing,
voluntary North American Electric Reliability Council standards.
Wood said he would push in this direction regardless of whether Congress passes
a comprehensive energy bill this year, although he prefers to move with
Congressional approval. A bill that failed to pass the Hill last year would have
made NERC standards mandatory, with the commission as a backstop.
"While I think that the energy bill in its comprehensive view is what we
really need, if it came to the point where that couldn't happen, then certainly
the reliability issues are still very much important and very much there,"
he said.
After the August 14 blackout, Wood said reliability would be "the top
item" for FERC, as the commission is "re-examining our role and legal
construct" to make the reliability standards mandatory, with or without
Congressional action.
Wood said he was "frustrated" to find that many of the events that led
to the blackout—as identified in an interim report released in November—were
"the same things" that caused similar blackouts in the past. The
industry has "consistently failed to learn from these events," Wood
said. "This is not acceptable."
A key aspect of the new reliability rules will be a stronger auditing system
that would hold control areas accountable for reliability problems. Current
audits have been criticized for being too lenient, and Wood said he would work
with NERC "to develop tougher programs."
Observers have lambasted the existing auditing program at NERC, and some claim
that if and when new audits are implemented, it could expose the frailty of
industry's reliance on a voluntary system. "It has become quite obvious
that compliance programs are really held together by gum and rubber bands,"
one NERC committee member said. NERC's standards "are imposed regionally
with a large amount of deference" to control areas.
The "blackout pulled the curtain back on some of NERC's approaches,"
this source said. "What we need is a strong national standard."
Wood agreed that strong rules are necessary, but did not comment on what sort of
penalties the commission could impose if the audits find non-compliance, saying
he was still discussing the matter with other commissioners.
But some observers expect the commission to impose tariff conditions and other
measures to enforce whatever rules are eventually implemented. "At the end
of the day, somewhere, somehow, the heat will be turned up on the transmission
owners," one Midwestern utility executive said.
The chairman said tougher FERC-enforced audits should not be a major sea-change
for the industry, because if utilities are already following the rules,
compliance should be easy. "For those who were operating by the NERC book,
it won't be a change at all," he said.
The Edison Electric Institute, in a resolution passed by its board of directors
Jan. 9, also called for stronger audits and better performance reviews, but said
NERC should take the lead. FERC's role should be one of "supporting and
providing oversight to the NERC initiatives," the resolution said.
"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," EEI President Tom Kuhn said. "Consistent
with the reliability provisions [in the energy bill], our CEOs believe strongly
that the expertise to make this happen resides within NERC and the industry, and
FERC in an important oversight role."
Meanwhile, Wood also said FERC would take a "fresh look" at proposals
to screen companies for the potential to exercise market power. FERC has two
workshops this week to discuss its controversial supply margin assessment
proposal, and he noted that since its late-2001 inception, 74 companies have
failed the new screen. There have been no penalties for failure so far.
Market participants filed a plethora of comments last week regarding SMA and
alternatives commission staff proposed in a December 19 notice that scheduled
the workshops.
Separately, Wood said he did not expect any major new developments on the RTO
front, noting that since the collapse of the Southeastern-based SeTrans RTO
proposal--which included Southern Company and Entergy--he is not certain whether
a grid operator will form in that part of the country any time soon.
But at this point, Wood said, FERC has the authority to require RTO
participation if deemed necessary under section 206 of the Federal Power Act. He
noted, though, that if Congress is able to resuscitate the energy bill, FERC
would have to continue RTO formation on a voluntary track. If this is the case,
Wood said the commission would "make voluntary [participation] very
attractive."
Although some have said that FERC's SMA screen—or more appropriately its
penalties for failing the screen—are the means by which it would make
voluntary participation more attractive, but Wood said that is not necessarily
the case.
When it proposed SMA in November 2001, the commission said that those who fail
the screen—unless they are in an RTO—would lose their market-based rate
authority.
"What we're saying with the SMA and market power tests is that we're taking
care of market power wherever it exists," he said in an interview after the
briefing. "The fix that we prefer is that you get into an RTO, but we'll
fix it even if you aren't."
FERC should be careful when it comes to screening for market power, said Bill
Hieronymous, vice president of Charles River Associates. First of all, while not
completely opposed to the use of multiple screens, he questioned if a supplier
would have to pass all of them to obtain or keep market-based rates. If so, that
could cut down on the number of market participants with market-based rate
authority, he added.
"If the goal is to promote competitive markets, using cost-based rates to
mitigate seems" like a move "in the wrong direction," added Pat
Alexander, an energy industry adviser at Dickstein Shapiro Morin & Oshinsky.
Sticking up for cost-based rates, Robert O'Neil, general counsel of Golden
Spread Electric Cooperative, noted that costs are still recovered under them.
Only recently did "the notion of cost-based [being] somehow confiscatory"
arise, he said.