Article originally published in October 2002
In electricity, everything is connected to virtually everything else. That is why, when electricity began to flow across state lines in significant volumes in the 1920s, regional power pools began to form. By 1965, when a blackout affected 30 million people in northeastern United States, regional power pools blanketed the nation. A national coordination council was established.
Beginning with the creation of the Federal Power Commission (now Federal Energy Regulatory Commission) and the Securities Exchange Commission in the 1930s the federal government played an important role in regulating the electricity industry. But its objective was largely to prevent a recurrence of the widespread interstate corporate shenanigans conducted by holding companies in the 1920s and to ensure that price gouging did not occur at the wholesale level. The blossoming of independent power producers in the 1980s added a new variable to the old equation. By 1991 a majority of all new power generation was built by non-regulated producers. Led by Enron, they aggressively lobbied Congress for easier access to long distance transmission lines. In 1992 Congress ordered FERC to develop rules to do just that.
In 1999 FERC issued Order 2000, which created new regional transmission entities and endowed them with significantly more authority than the existing regional power pools. In July 2001, FERC went a step further by ordering the rapid formation of a small number of very large regional transmission authorities.
State regulatory agencies sued. They argued that FERC had far exceeded its authority and in doing so was undermining their ability to exercise their own authority over in-state electricity systems in a credible and workable fashion.
The Federal courts backed FERC. This August the U.S. Supreme Court affirmed the lower court rulings. FERC Chair Pat Wood has translated the high court’s decision as meaning "full speed ahead, FERC". The Court, he added, in effect had said to FERC, "work with the states, but by and large, you call the shots".
In June, FERC ordered California to change its governance structure for overseeing the state’s transmission systems and directed California to submerge its Independent System Operator (ISO) into a new 11 state RTO. California refused and submitted an appeal. In September FERC, in an unprecedented move, asked the courts to force California to comply with its order even before it acted on California’s appeal.
Some observers noted the irony that all this activism has occurred under the stewardship of the new FERC Chairman, Pat Wood III. Wood previously chaired the Texas regulatory commission. Because of the peculiarities of its own transmission system, Texas is the only state that is largely immune from the current FERC actions. It will, for example, not be required to join a larger region-wide RTO.
Testifying before the House Energy and Commerce Committee in December 2001, Pat Wood insisted, "RTOs will provide significant benefits to electric utility customers across our Nation." On the other hand, he also declared, "I do not support the requirement for a ‘preponderance’ of the evidence instead of ‘substantial’ evidence supporting the Commission’s decisions".
When FERC ordered the formation of just 4 giant regional transmission operators (RTOs) a year ago, state regulatory agencies insisted on a cost-benefit analysis, since FERC’s actions can be justified, by law, only if they are in the public interest.
In February, that analysis, by ICF Consulting, was issued. The state regulatory agencies were enraged. (see Economic Assessment of RTO Policy, ICF Consulting, February 27, 2002, at http://www.ferc.gov/Electric/RTO/mrkt-strct-comments/rtostudy_final_0226.pdf ). The cost benefit study found virtually no savings in going to a very small number of giant-sized RTOs. It did find savings in going to large, autonomous RTOs, but the methodological shortcomings of the study made this conclusion suspect.
Attorneys general of New Mexico and Rhode Island along with the Colorado Office of Consumer Counsel asked FERC in May to apply the brakes. "No documentation has been presented at all supporting FERC’s claim that there are such significant problems with the current (system) that state regulation of bundled retail electric service should be torn asunder, with unknown impact on retail ratepayers".
The North Carolina Utilities Commission commented, "The principal flaw in the current assessment is the use of unrealistic and unsupported assumptions, many of which are not clearly related to the existence of RTOs, in an attempt to model and quantify the assumed benefits. Such a self serving analysis is highly suspect."
Maryland, Delaware and District of Columbia commissions said that same benefits could be "obtained more quickly and with less cost and risk" without RTOS. For example, virtually all the savings predicted by ICF came from reducing peak demand and improving the efficiency of existing power plants, something that does not depend on the formation of RTOs.
The Kentucky PSC urged FERC to "move slowly". It wondered about the benefits of RTOs to non retail-access states adding, "we can only guess, because despite having asked this question numerous times, no one has been able to tell us precisely what the benefits are."
The National Association of Regulatory Utility Commissioners NARUC urged the Commission to "refrain from drawing any substantive conclusions based on the economic assessment’ done by ICF. The 10 states that comprise the Southeastern Association of Regulatory Utility Commissioners also asked that the initiatives be put on hold.
The New England Conference of Public Utilities Commissioners pointed out that the study failed to consider the costs involved in creating RTOs that come from higher risks, one of which is"creating a region that is too big to operate efficiently".
Maureen Helmer, Chair of the New York PSC told Electric Utility Week in June that she is concerned that too much of the resources of the state regulatory commissions are being taken up by the formation of RTOs at the expense of in-state issues. She observed that "stuff is just getting shelved because everyone is consumed with this work on the NERTO (New England Regional Transmission Operator)." And added, "And at some point, I think we need to figure out if this is a good idea, because if it’s not, it’s time to get back to the real work."