August - September 2001

Electric Reliability in Deregulated Markets: A Look at the Viability of an ERO

by Rick Cordaro

With price caps, Senate hearings, and a national energy plan in the limelight, one topic that is critical to electricity often fades into the background: Who is going to keep the lights on? To answer that question, a group of industry experts have begun touting a concept known as an Electric Reliability Organization (ERO).

That Was Then...

Before industry restructuring, utilities handled generation, transmission and distribution in their respective areas. They were regulated by the federal government to ensure fair prices and adequate supplies, while the North American Electric Reliability Council (NERC) established operating and planning standards for utilities to ensure system reliability. And while participation in NERC was voluntary and there was no enforcement mechanism in place, reliability was rarely an issue because the market players operated under a different set of incentives.

This Is Now...

Now, as certain markets deregulate generation, allowing electricity to be sold on open markets and companies have a keen eye on profitability — reliability enforcement has to come from somewhere. One suggestion is for the Federal Energy Regulatory Commission (FERC) to make related reliability decisions. FERC, however, has no jurisdiction over a large segment of the industry. Instead, many believe reliability is a job for NAERO, the North American Electric Reliability Organization.

As the successor to NERC, NAERO's mission will be to develop, promote, and enforce standards for a reliable bulk electric system. In 1997, a NERC panel recommended creating an independent, self-regulatory electric reliability organization (ERO) that would be unquestionably impartial, technically competent, and have the legal authority to establish and enforce reliability standards compliance.

Many Industry Leaders Agree, But Doubts Exist

President Bush's National Energy Plan agrees with this thinking, noting that one important factor limiting reliability is the lack of enforceable standards. The IEEE, the Edison Electric Institute and a variety of other industry organizations agree with the concept as well.

But not everyone is convinced that such a structure will work. Some believe NAERO can't regulate reliability because it depends on the laws of physics. The electric grid is a complex system that doesn't care about agreements or standards. Some think the current NERC board's technical competency is inadequate because members were picked for their commercial neutrality, not their expertise.

Bruce Radford, editor-in-chief of Public Utilities Fortnightly is among the doubters. He says that with NAERO, "logic collides with politics." He believes that the Independent System Operators and Regional Transmission Organizations would be better suited for reliability standards development and enforcement, since they represent the place where reliability and commercial practices come together.

Could an ERO Be On the Horizon?

In any event, few disagree that federal legislation is required for an ERO to exist. Several bills are currently in play in both houses of Congress. Three main Senate bills seek to amend the Federal Power Act to establish mandatory reliability standards for the bulk power system. These bills would establish an ERO and give FERC jurisdiction over it. All of these bills use similar language, and they are complemented by similar bills before the House. And while the House did not act on this issue during the 106th Congress, political pressure may cause 2001 to be the year for an ERO creation.

References

Casazza, Jack, Personal Interview, 27 June 2001.

Cheney, Dick, Report of the National Energy Policy Development Group, Office of the Vice President of the United States, Washington: GPO 2001.

Cook, David N., Testimony before the United States Senate Committee on Governmental Affairs, 28 June 2001.

Gent, Mike, Personal interview, 19 June 2001.

Need for Legislative Action, 13 June 2001,
<http://www.naero.org/legislation.html>.

NERC to NAERO Transition: Background, 25 June 2001,
<http://www.nerc.com/naero/background.html>.

Radford, Bruce W., "Re: NERC to NAERO," E-mail to the author, 26 June 2001.

Transition to NAERO, 13 June 2001, <http://www.nerc.com/about/naero.html>.

Rick Cordaro was a 2001 IEEE-USA Washington Internships for Students of Engineering (WISE) Intern. He is a full-time student at Iowa State University. For highlights of Rick's WISE experience, click here.