NERC's plan to set electric grid standards raises questions

April 23, 2001
Who decides on access to power lines, such as the ones above, and whether that access is based on reliability or commercial considerations, is being debated after the North American Electric Reliability Council appointed itself a standards setting organization. Photo is courtesy of the National Renewable Energy Laboratory, Golden, Colo.

By Kate Thomas
OGJ Online

HOUSTON, Apr. 23 -- With reliability legislation stalled in the US Congress, the North American Electric Reliability Council's decision to become a self-appointed standard-setting organization is triggering alarms in some industry sectors.

Three weeks ago NERC elected an independent board, including such well-known industry figures as Don Hodel, former secretary of interior and energy, and Bill White, former deputy secretary of energy. The 10-member independent board replaced a 47-member board that included both transmission owners and independent members. This was the first in a series of steps in NERC's transformation to a self-regulating reliability organization from a voluntary group formed to promote reliability after the 1965 blackouts.

Simultaneously, 7 of 10 regional reliability councils signed or agreed to sign contracts to enforce NERC standards and, in a first, impose financial penalties on violators. Owners of the transmission system became members of a still-powerful advisory stakeholders committee.

The move upped the ante in a contentious struggle over control and access to the grid. With thousands of megawatts of new generating capacity under construction or being planned, economical access to the network of transmission lines crisscrossing the US and parts of Canada and Mexico could make or break a power project.

Who decides on access and whether it is based on reliability or commercial considerations has dogged the electricity deregulation debate almost from its inception. Merchant generators complain utilities use reliability as an excuse for denying them access to the grid. Many are suspicious of a standard-setting group that is not under the Federal Energy Regulatory Commission's jurisdiction. But transmission owners argue their systems were not built to handle the anticipated load and few facilities are under construction.

Public utility commissions have jumped into the debate claiming it to be a states' right issue. In a case pending before the US Supreme Court, Enron Corp. argues FERC has authority to open the grid to merchant power plants. Utility commissioners from a number of states disagree.

Delaware, Maryland, Washington, DC, and Pennsylvania challenged NERC for more specifics about its standards-setting role, especially compliance, penalties, the process the organization will use to set standards, and who regional transmission organizations (RTO) fit into its scheme.

If NERC standards setting leads to balancing daily demand as well, "then it becomes a super RTO for all North America," says Craig Glazer, manager of regulatory affairs for PJM Inc., the Mid-Atlantic grid operator.

Alternately, it becomes a "regulatory agency that doesn't have accountability," he says. "These issues will be controversial. But in fairness to NERC, they are dealing with stakeholders who like the old system."

Absent federal legislation giving NERC statutory authority to set and enforce standards under FERC oversight, NERC says its reorganization is necessary to maintain grid reliability. With so much money at stake, it says the system is already being subjected to much higher and different use than designers ever anticipated.

Between 1995-2000, the number of interregional transactions rose to 2 million from 25,000, according to the Edison Electric Institute. The investor-owned utility trade group says transmission lines are carrying all the power they can in some parts of the country.

Markets in disarray

"With the market in such disarray, things could get worse not better," explains NERC spokeswoman Ellen Vancko. "The need to get standards in place is more critical than ever. People have an economic incentive not to follow the rules. No matter who has access it [the grid] has to be operated in a certain way."

Vancko says the organization hasn't given up on federal legislation being passed that would give the organization statutory authority to accomplish its goals. The US Senate passed a NERC-endorsed bill last year, but it stalled in the House. Reliability language is included in separate omnibus energy bills introduced in the current session by Sen. Jeff Bingaman (D-NM) and Sen. Frank Murkowski (R-Alas.).

However, observers say the outlook for stand-alone legislation is dimming. Former FERC Chairman Jim Hoecker supported the proposal, but current Chairman Curt Hebert is not enthusiastic, sources say. Washington political observers say NERC's reliability legislation may have a better chance in an omnibus energy bill that incorporates provisions that other factions of industry support such as repealing the Public Utility Regulatory Policies Act and the Public Utility Holding Company Act.

"Buyers and suppliers are worried if reliability legislation is taken care of first that will take much of the steam out of restructuring legislation," says Ron Greenhalgh, chief engineer of the National Rural Electric Cooperative Association, Washington, DC, who has participated in the NERC discussions.

Under the NERC initiative, the regional councils contractually agree to abide by NERC standards. In turn, the councils will attempt to convince their members, including utilities and generators, to sign agreements accepting penalties if they violate NERC standards.

Whether the system will work or not seems to be anybody's guess. The idea is modeled after a Western System Coordinating Council (WSCC) program. The reliability councils aren't under any particular deadline to have the contracts in place, and if a company declines to sign an agreement with the council, there is no recourse.

Yet Greenhalgh is optimistic. He says the contracts will be more flexible than legislation. In addition, contracts represent a better avenue for participation by Canadian members outside FERC jurisdiction.

A spokesman for the Electric Power Supply Association said the organization prefers legislation. But if an independent board at NERC means transmission owners will not hold as much power over the grid, some EPSA members consider that a positive development. A change in the organization's financial structure also will give it more independence, the spokesman said.

Signing on with NERC at the outset were the Electric Reliability Council of Texas, the Florida Reliability Coordinating Council, the Eastern Central Area Reliability Coordination Agreement, Northeast Power Coordinating Council, WSCC, and the Southwest Power Pool.

The Mid-America Interconnected Network Inc. signed a letter of intent and Mid-Continent Area Power Pool reported its intent to sign, pending approvals within its region. The Southeastern Electric Reliability Council reportedly voted against the NERC agreement.

Publicly, the state public utility commissions, the Mid-Atlantic Area Council (MAAC), one of NERC's 10 council members, and PJM have raised the most concern about NERC's approach.

In a Mar. 21 letter, the state commissions recommended a series of changes to the NERC agreement, including an opt-out provision if regional council members or a state commission determine a particular standard is inappropriate for the region.

No state function

The letter notes the agreement never defines the term "reliability," even though fostering grid reliability is its intent. The commissioners also complain the standards setting process is not open, and they want assurances the states' role in administering wholesale and retail markets will be respected.

"Our concern is that the proposed agreement does not sufficiently address the need for transparency in the development and enforcement of reliability standards and does not provide a meaningful role for the states in this important function," according to the letter.

One of the stickiest issues to be resolved is the approach NERC uses to clear transmission lines of congestion, compared to new market approaches that have been developed since the organization was created in 1965. It's unclear, says Glazer, what role RTOs will play under NERC rules, what constitutes a reliability standard, and how reliability interfaces with the market.

For instance, when lines get overloaded NERC favors cutting transactions to maintain reliability and keep the grid from collapsing in a process called transmission line loading relief (TLR). Merchant generators and marketers complain this system allows utilities to favor their own transactions.

Glazer says PJM takes a market-based approach to managing congestion. "In PJM, we don't do TLRs," he says. If the lines are congested, users bid to use them and the highest bidder's power gets transported.

Addressing market issues raises reliability issues, Vancko says, and TLRs are a process for handling them. FERC regulators don't think the two are incompatible. Where an economic congestion management system is not in place, the federal agency considers TLR an acceptable approach to relieving transmission constraints.

Nonetheless, MAAC members have asked for clarification if they are subject to more than one standard governing the same subject. "We have standards that are FERC approved," says Bruce Balmat, vice-president of corporate development for PJM and MAAC's board secretary. "If there is a difference, which one holds?"

Vancko says it's up to RTOs and even such organizations as the New York State Reliability Council to follow NERC standards. "They can go beyond what we require as long as it doesn't counter what we are doing," she says. Once signed, the contract terms are enforceable by the courts, while FERC would have oversight over whether rates are just and reasonable.

Greenhalgh says NERC will begin with the least controversial standards. Anything that smacks of commercial practices raises a red flag. To avoid stirring up opposition, he expects NERC to institute technical standards which most operators already adhere to. "They are the most important to keep the lights on anyway," he says.