Since July 31 government and utility officials have been carefully studying a massive proposal to reshape how the power industry ships electricity to its customers.
They are finding that the plan announced this summer by a little-known federal agency presents today’s biggest challenge to the reliability of the nation’s electric power system–and to what you will be paying for electricity.
While lightning or ice storms can interrupt your power temporarily, the proposal by the Federal Energy Regulatory Commission (FERC) would create a long-term shift in overall strategies and day-to-day operations of electric utilities. Some say it would actually replace the transmission system’s goal of providing reliable electric current with a new goal of creating a more orderly economic marketplace.
“As a cooperative, our transmission lines were built to provide reliable service,” says Mike Core, president and CEO of Big Rivers Electric Cooperative, which generates electricity for three distribution co-ops in western Kentucky. “We’ve always needed to be able to keep our generators running efficiently and work together with other co-ops to meet fluctuating demands for electricity. But the plans put forward today would take a system that was designed for reliability and the physics of movement of electricity and turn that system into an economic framework.”
At first glance FERC’s densely worded proposals (600 pages in one set alone) seem like typical bureaucratic tediousness. But there’s a lot more to FERC’s proposals than mere tinkering. FERC’s Standard Market Design (SMD) outlines a complicated set of new rules that raise serious, long-term issues about who can use transmission lines, who’s in charge of those lines, and what it costs to use those lines.
With such fundamental issues at stake, pointed questions are being asked by members of Congress and state governors, led by Kentucky Governor Paul Patton, who currently chairs the National Governors Association.
Deregulating or Reregulating?
The journey to the Standard Market Design proposal began a decade ago with the Energy Policy Act of 1992. At the time the new law seemed just another step toward deregulation of several industries.
Deregulation schemes had already changed long-distance trucking, telephone service, and airlines. One aim of the Energy Policy Act was to encourage competition in the electricity sales that utilities make to each other. Utility specialists refer to these transactions as the wholesale market.
But instead of “de” regulating the electric utility industry, many of FERC’s proposals seem to be “re” regulating utilities. FERC replaces one set of operating conditions for the nationwide grid of transmission lines with another, quite different, set of conditions.
One key feature of today’s transmission system is the way electric utilities can move surplus power to other utilities through a nationwide grid of interconnected transmission lines. In this wholesale market, when demand peaks in one part of the country, and is low in another area, power plants can ship their surplus power over the grid to where it’s needed.
Kentucky is ideally situated for the movement of power going north or south. Our state’s transmission lines are a regular route for such transfers to meet peak demands. The buying and selling utilities, wherever they’re located, agree on a price for the electricity; this wholesale power then moves through the grid, and customers continue to receive their electricity without interruption.
One factor influencing the way regulators now look at the transmission grid is the entry of a new player into the electric utility industry: independent generators of electricity, often called merchant plants.
Merchant plants are built, owned, and operated independently of electric utilities–they do not have any obligation or relationship to investor-owned utilities, municipal utilities, or cooperatives. These new merchant plants wanted to be able to generate electricity, then make a profit by selling it in the wholesale market to whoever needed it. To do that they’d need access to the national grid. They didn’t want to have to pay high fees, either, for the privilege of shipping their newly generated electricity through the existing transmission grid, or get shut out of the process altogether by the established users who built the lines.
The Rise of Regional Transmission Organizations
In 1996, as a follow-up to the Energy Policy Act of 1992, FERC issued its first formal ruling aimed at removing some of the barriers to wholesale electric competition. Order 888 attempted to change the widely varying fees utilities charged each other for shipping power through their transmission lines. Before 888 a utility could discourage others from using its transmission lines by quoting an unusually high fee.
Four years later, FERC issued Order 2000, calling for utilities with transmission lines to join together into formal groups instead of continuing to schedule their own power shipments. These newly required groups are usually referred to as regional transmission organizations, or RTOs, and are supposed to be functioning by 2004.
The first of these RTOs are already taking shape. Utilities in Pennsylvania, New Jersey, and Maryland are working together to form an RTO for the Mid-Atlantic region. Arkansas, Oklahoma, and some Texas utilities are forming a Southwestern RTO.
In an extra twist of bureaucratic pretzel-making, electric cooperatives do not come under the jurisdiction of FERC: they are actually regulated by an entirely different federal group, the Rural Utilities Service (RUS). But as Roy Palk, president and CEO of East Kentucky Power Corporation (which generates electricity for 16 distribution co-ops), points out, “The Rural Utilities Service really deals with financial issues such as loans for capital investments. Transmission issues are governed by Kentucky’s Public Service Commission.”
In case you haven’t been counting, that brings the total number of groups that already have jurisdiction over co-ops to three: state PSCs, the RUS, and FERC.
Here’s the next twist: although technically FERC can tell only investor-owned and municipal utilities to form RTOs, FERC’s made it clear to electric co-ops that if they want to continue to use the portions of the transmission grids that those other utilities use, the co-ops will have to play by FERC’s rules and join RTOs. RTOs add the fourth layer of jurisdictional power. The pretzel keeps growing and twisting.
“The physics of moving power from one point to another means we have to join an RTO,” says Palk. “East Kentucky Power is joining the Midwest Independent System Operator (MISO) in order to meet the rules set out in the FERC’s Standard Market Design plan. MISO will unite utilities in the Upper South, the Midwest, and as far north as Canada’s Manitoba province.”
Questions about the Future
But questions about the effectiveness and practical concerns of the formation of these Regional Transmission Organizations remain unanswered. By joining an RTO to continue to have access to the national power grid, will utilities be surrendering their traditional right and obligation to serve their own customers first? The needs of one’s own customers is called “native load,” and has always been given top priority when scheduling power transfers through the grid.
Big Rivers President Mike Core says, “When we have a surplus, we’re willing to sell our surplus–but we’re not willing to interrupt supply to our own customers who own our co-op.”
Under FERC’s proposals, where authority to arrange wholesale power shipments comes from the Regional Transmission Organization instead of individual utilities, could a situation come along when a co-op would be asked (or required?) to sell power through the grid to a distant utility when it needed that power for its own member-customers?
In the past, the grid functioned very well, with the consent of the neighboring utilities who shared surplus power over relatively short distances. But as East Kentucky Power’s Palk explains, electricity traffic jams, known as “transmission congestion,” have started occurring in the national grid from time to time.
By changing the focus of the grid from a physical system that provides primarily local geographic reliability into a highway for regularly shipping energy all over the country, will transmission congestion become more common? Will the old physical system have to be updated? Many power company executives and engineers believe the entire infrastructure of the nationwide electric utility grid would need to be rebuilt to accommodate movement of more wholesale power shipments.
Evaluating the Cost
But Big Rivers President Mike Core points out, “Building a transmission line is not an easy thing to do these days, even along current right-of-ways.”
Environmental concerns and financing for transmission line projects are just two problems with new construction. Who would pay for new parts of the grid? The customers who live where the power originates? The customers in the area through which the power passes? Or the customers in some distant state who use the electricity?
Another part of FERC’s Standard Market Design proposal would create a national standard wholesale fee for using the grid. Attitudes toward this feature of FERC’s proposals vary according to whether you live in a high-cost state or region, where prices for electricity might go down as the result of imposing uniform fees, or in a state such as Kentucky (which has the lowest average electric rate in the nation) where the effects of such a uniform fee could be quite different. Would the SMD plan interfere with individual state Public Service Commissions’ traditional role in setting rates? What are the short- and long-term economic effects of attempting to equalize electricity prices throughout the United States?
FERC changed the original deadline for comments on the Standard Market Design from October 15 to November 15, largely due to a national effort lead by Governor Patton.
Annette DuPont-Ewing, chair and executive director of the Kentucky Energy Policy Advisory board in Frankfort, says, “Governor Patton and Kentuckians everywhere want to know the answers to three fundamental questions about FERC’s proposals. Number one, what is the impact on our consumers, the hard-working people of our state who must pay their electric bills each month? Two, what is the impact on the energy-intensive industries, such as aluminum and automotive manufacturing, that are so important to communities throughout our state? And three, what is the long-term impact on Kentucky’s future economic development plans?”
The search for answers to these questions seems to lead toward a national debate over whether Americans really want to make such drastic changes in the way electricity moves through the nation. Some see the debate as just a side effect of increasing competition and opening the grid to independent power suppliers. Some see the debate in terms of states’ rights over jurisdiction against a push for more federal authority. Others wonder whether any changes are needed at all.
Kentucky Association of Electric Cooperatives President Ron Sheets sums up it up this way: “In Kentucky, we don’t believe we’re operating with a broken wheel–we’re satisfied now that our system of regulations is sound, effective, and cost-efficient. We don’t want an additional layer of regulation that would increase electric rates unnecessarily.”
The next step for the Standard Market Design proposal comes the middle of this month, when proposals are due from all the states. But that date has changed before, and as Congress and others focus more attention on the FERC plan, the timetable could change again.
What Is FERC?
The Federal Energy Regulatory Commission, part of the Department of Energy, deals with a wide variety of issues, from permits for hydroelectric dams to rules for gas and oil pipelines, as well as policies and procedures for the day-to-day operations of electric utilities.
How Utilities Work Together to Bring You Electricity
Electricity differs from other energy in one key way: it cannot be stored or saved, but must be generated and used immediately. The amount available at any given instant must be matched to the demands of customers in real time. That sets it apart from fuels like oil or gas that can be stockpiled for the future. And unlike airline schedules that can be shifted half an hour today and two hours on the weekend, electricity must flow 24 hours a day, every day, every week.
Throughout the 20th century, three kinds of electric utilities (investor-owned utilities, municipal utilities, and electric cooperatives) spent billions of dollars to build the facilities to provide electricity to Americans everywhere. These companies developed unique combinations of generating facilities (which create the electricity), transmission lines (which carry the electricity through high-voltage wires to the areas where it’s needed), and distribution lines (which lower the voltage to suit customers’ needs at their households, farms, and businesses).
Throughout every region of America, the transmission lines form a grid (made up of many interconnected individual segments owned by various companies), which provides a wire “highway” for electricity to move through on its way to customers. Kentucky’s electric co-ops own 5,548 miles of transmission lines in the national grid.
So far it’s been a very reliable system, consistently matching up supply with demand, providing customers with just the right amount of electricity exactly when they need to use it.
To read Governor Paul Patton’s Senate testimony on FERC’s Standard Market Design proposal to restructure the nation’s transmission system, go to the Web site of the Kentucky Association of Electric Cooperatives at www.kaec.org/info/archive02/pattran.htm.