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IEU-Ohio
Samuel C. Randazzo, Counsel
21 East State Street, 17th Floor
Columbus, Ohio, 43215
phone 614.469.8000
fax 614.469.4653
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OUR ELECTRIC HIGHWAYS & THEIR ROLE IN COMPETITIVE ELECTRIC MARKETS

TABLE OF CONTENTS

The modern electric power industry is characterized by an interconnected grid of high voltage lines (referred to as transmission lines) over which the output of generating units is dispatched. In the past, this dispatch has occurred on an economic basis. Economic dispatch refers to bringing on-line generating units within a service or control area on a least-cost basis until all demand is served . The control area operator determines the dispatch order by fuel costs, unit efficiency, and variable operation and maintenance costs. On a real-time basis, the control area operator is the entity ultimately responsible for ensuring reliability within its control area through the dispatch of generating units and transmission facilities. The regional interaction of generating units, transmission facilities, and control area operators comprise the bulk power system.

The North American Electric Reliability Council (NERC) has the primary responsibility for establishing and encouraging compliance with reliability guidelines for the bulk power system. NERC defines reliability as "the degree to which the performance of the elements of [an electrical] system results in power being delivered to consumers within accepted standards and in the amount desired." NERC's definition encompasses what the industry refers to as adequacy and security. Adequacy relates to long-term planning which requires sufficient generating and transmission resources to meet projected demand in the region. Security implies that the system will continue to operate even after generating plant or transmission outages occur. NERC is comprised of regional reliability councils. Although the regional reliability councils follow NERC's guidelines, they often have different reliability requirements and enforcement measures.

The North American bulk power system includes three major transmission interconnections: ERCOT (which encompasses a large part of Texas), the Western Interconnect (which includes the western states), and the Eastern Interconnect (which includes the midwest, south, east, and parts of Canada). Within the major interconnections are regional reliability councils and control areas. Figure 1 Figure 1 the three US interconnections-select for larger image.shows the locations of the three major transmission interconnections and the 10 regional reliability councils. Theoretically, power can flow from any point within the interconnection to any other point within the interconnection. Practically, power flow capability is affected by a variety of factors that cause theory to deviate from reality.

Reliability within each region is maintained by members adhering to whatever planning and operating rules may have been developed the regional reliability council members and by NERC. For example, MAPP enforces reliability by requiring its member utilities to do reserve planning and by assessing after-the-fact penalties to member utilities failing to meet reserve requirements. Each utility's generating capacity, adjusted for power purchases and sales, for each month, must be equal to or more than its peak demand plus a 15 percent reserve margin. Each MAPP utility is also required to provide sufficient transmission capacity to serve its load without relying on or without imposing an undue burden on other systems. To minimize the effects of the sudden loss of a generating unit or transmission line, MAPP utilities are required to maintain operating reserves. The operating reserve for the MAPP system is the amount of generation sufficient to cover the loss of the largest generation or transmission resource in the region. Utilities are allocated their share of operating reserves based on their peak demand.

The merging of reliability functions is one result of the many changes occurring in the electric utility industry since the passage of the Energy Policy Act in 1992 (EPACT). The EPACT opened the door to competition in the wholesale electricity markets by authorizing non-utility generators to build and operate power plants and requiring the Federal Energy Regulatory Commission to ensure nondiscriminatory, open access to utility transmission systems (similar to the mandates that apply to interstate natural gas pipelines).

In response to the EPACT, the FERC issued Order 888 in April 1996, requiring IOUs to file tariffs for open-access transmission. Order 888 also encouraged utilities to form and join independent system operators (ISOs) to operate regional transmission systems and be independent of all market participants. Within the last few years, several ISOs that own neither generation nor transmission have been formed to take over regional transmission functions in California, New England, New York, Midwest (MISO) and the mid-Atlantic (PJM) region.

Regional Transmission Organizations (RTOs) were the next step in the ISO evolution. In December 1999, FERC issued Order No. 2000 on RTOs requiring IOUs to file with FERC, by October 2000, proposals for joining a RTO or an explanation of why the utility cannot join such a regional organization. The Midwest Independent System Operation (MISO) intends to meet all of the requirements to become an RTO in the timeframe outlined by FERC.

With all the legislative and regulatory changes occurring over the last several years, it is not surprising that the transmission system is being used for new or additional purposes. These new or additional purposes may not be within the design scope of the transmission facilities and related systems. The new or additional purposes may also require the establishment of new commercial practices. The original physical system design, in most cases, functions to connect an individual utility's generating units to captive customers' load centers with interconnections between neighbor transmission systems.

FERC's findings in Order 888 include the determination that the historical, vertically integrated, structure of the electric industry is not in the public interest and that the public interest would be best served by a competitive generation market. It concluded that the transmission system is the critical link to the change required to produce a competitive wholesale market.

While the wholesale market in electricity is increasingly becoming open to competition, the transition has been slow and muddled. Many retail markets are not open to competition although some 24 states have modified their laws and regulations to do so.

Opening the retail electric market involves issues of jurisdiction over transmission pricing. services and reliability. In states that have not opened their markets, retail rates continue to be set on a bundled basis. Bundled rates include the costs of generation, transmission, distribution, and customer services. At the time a state opens its retail markets, rates are unbundled and FERC assumes jurisdiction over transmission pricing. The state regulatory commission continues to price distribution service for investor owned utilities (IOUs). As such, unbundling requires the jurisdictional separation of transmission and distribution facilities. Transmission lines are typically high voltage lines that deliver electricity between generating plants or to wholesale customers. Distribution lines are typically low-voltage lines that connect the transmission system to the ultimate customer.

RTO timeline - select for larger image.The FERC, in Order 888, established a seven-factor test as a guide for making this jurisdictional delineation between distribution and transmission plant, facilities and equipment. FERC has deferred to state commissions in applying the seven-factor test.

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