Ken Silverstein EnergyBiz Insider Editor-in-Chief

It’s been largely a voluntary process monitored by the North American Electric Reliability Council. And the Federal Energy Regulatory Commission just said that such standards provide a “solid foundation” from which to build a more effective mandatory regulatory regime -- something that the Energy Policy Act of 2005 demands that it do. Already, federal regulators have identified shortcomings in voluntary standards that include ambiguous rules and varying degrees of compliance.

The first step toward building a modern infrastructure is the establishment of a so-called Electric Reliability Organization, which will seek to ensure that all entities comply with new reliability standards. Toward that end, the organization will propose new rules for the full commission to review as well as resolve any inconsistencies in state and federal laws. It will also mediate all disputes in an expeditious manner.

It “may direct violators to comply with the standards or impose penalties for violations, subject to review by, and appeal to, the commission,” says John Moot, general counsel to FERC, in recent congressional testimony.

The 2005 energy law now extends authority to federal regulators to require not just system upgrades but also new transmission development. The U.S. Department of Energy now will be able to identify "national interest electric corridors" while the FERC can site those projects that fail to win state approval. Meantime, North American Electric Reliability Council will have more teeth, not just developing new standards but helping to enforce them as well.

The idea is that the permitting process would take no more than one year. Legal logjams could be broken by federal regulators, at least in theory. But, FERC has similar rights when it comes to permitting natural gas pipelines. And, oftentimes, the process is still mired in court fights and regulatory battles that are time consuming. In any event, FERC emphasizes that the permitting process will always remain open and inclusive.

Any effect so far? PECO will be investing $215 million in about 200 local reliability projects in its southeastern Pennsylvania domain, which it says will build upon its record. Such investments have already led to a decrease in the duration of outages for all customers for three years running, with nearly a 10 percent decrease in the length of outages last year. The shorter outage duration results from the increased deployment of technology on distribution circuits, better tools for dispatching field forces and improved response time by field personnel.

“Our customers count on us to keep the lights on and the natural gas flowing, no matter if it's 90 degrees or 9 degrees outside," said Denis O'Brien, PECO president. “That is a responsibility that we take very seriously. These investments enable us to keep those promises and deliver quality service to our customers.”

Fast Change

The regulatory changes could not come fast enough. Transmission investment has declined in real terms -- adjusted for inflation -- from 1975 to 1998. While there have been increases since 1998, FERC says that the level is still less than what was invested in 1975. Over the same time period, however, the demand for electricity has doubled. That's resulted in a significant decrease in transmission capacity, requiring new lines get built.

Beyond the transition to mandatory reliability standards, the FERC has established incentive-based rates that it says will enhance reliability and cut the cost of delivering power because there would be less congestion. The incentives apply to traditional utilities and to transcos, or those that operate transmission lines but do not own any generation.

The measures are needed. Transmission projects are costly and take too long to get built, forcing investors to put their capital where it can earn superior and faster returns. That’s why the commission would authorize a greater rate of return on these regulated assets as well as recovery of accumulated deferred income taxes. It would also allow companies to recover transmission-related construction costs and provide higher rates of return for utilities that join regional transmission organizations that are independent and schedule all power deliveries for participating utilities.

The incentives are already taking root. Pepco has proposed the construction of a new 500-kilovolt transmission line at a cost of $1.2 billion. The possible 230-mile line will cross through Virginia, Maryland and New Jersey and would take eight years to build.

Pepco is part of the PJM Interconnection, a regional transmission organization that plans to increase transmission capacity throughout its eastern territory. With summer approaching, PJM says that it is in tip-top shape and expects to have 165,303 megawatts of generating capacity on line to meet a peak demand of about 132,000 megawatts. That equates to a reserve margin of 25.8 percent -- well above the 15 percent “cushion” PJM requires for reliability.

"Additional capacity and recent investments in transmission upgrades, particularly in the congested Baltimore and Washington areas, have strengthened reliability,” says Audrey Zibelman, PJM's chief operating officer. “Nevertheless, future reliability requires the addition of resources in some areas.” To get there, PJM has expanded its long-term planning horizon to 15 years to better anticipate the supply and demand outlook.

Looking Forward

Meantime, the Northwest Power Conservation Council and the Bonneville Power Administration have just adopted regional reliability standards that they expect will avert rolling blackouts like those experienced in 2001. The goal is to better predict supply and demand as well as preserve energy resources from hydro-powered generators during plentiful times.

It’s the trend toward longer-term planning that FERC and other industry leaders are pushing. The ultimate aim is to build a transmission infrastructure in line with the digital economy. Palo Alto-based EPRI, for example, is designing an “IntelliGrid” that can predict power problems before they happen by integrating weather data into sensors embedded on the grid. That way, system operators can send signals to users to curtail demand or to firms operating distributed generators to supply new power.

“The intelligent grid will come from the gradual confluence of innovative projects undertaken by individual companies,” says a feature story in the EPRI Journal. Billions, obviously, are required to get there -- money that EPRI says is worth every penny because it would avoid costly outages and create a modern-day grid.

Reliability has long been taken for granted. But disruptive blackouts have prompted federal lawmakers to give regulators more authority, all to help ease congested lines and the rigors of a time-consuming permitting process. It’s a step beyond voluntary standards that U.S. lawmakers said were out-of-date with today’s needs. Now, it’s up to FERC and other industry participants to implement mandatory standards that could add greater certainties and bring innovative projects to the fore.

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