Reliability, Market Power, RTO Action On FERC Agenda, With/Without Congress

Federal Energy Regulatory Commission Chairman Pat Wood last week set out an aggressive agenda to tackle reliability and market-power issues in 2004, and repeated his assertion that, unless Congress changes current law, FERC can require utilities to join regional transmission organizations if it deems it necessary.

Speaking at a Washington briefing, Wood said he hopes to finalize reliability standards this summer, including a major focus on improving audits of company compliance with reliability rules. He also said FERC in the coming days would issue an order requiring companies to report their compliance with the existing, voluntary North American Electric Reliability Council standards.

Wood said he would push in this direction regardless of whether Congress passes a comprehensive energy bill this year, although he prefers to move with Congressional approval. A bill that failed to pass the Hill last year would have made NERC standards mandatory, with the commission as a backstop.

"While I think that the energy bill in its comprehensive view is what we really need, if it came to the point where that couldn't happen, then certainly the reliability issues are still very much important and very much there," he said.

After the August 14 blackout, Wood said reliability would be "the top item" for FERC, as the commission is "re-examining our role and legal construct" to make the reliability standards mandatory, with or without Congressional action.

Wood said he was "frustrated" to find that many of the events that led to the blackout—as identified in an interim report released in November—were "the same things" that caused similar blackouts in the past. The industry has "consistently failed to learn from these events," Wood said. "This is not acceptable."

A key aspect of the new reliability rules will be a stronger auditing system that would hold control areas accountable for reliability problems. Current audits have been criticized for being too lenient, and Wood said he would work with NERC "to develop tougher programs."

Observers have lambasted the existing auditing program at NERC, and some claim that if and when new audits are implemented, it could expose the frailty of industry's reliance on a voluntary system. "It has become quite obvious that compliance programs are really held together by gum and rubber bands," one NERC committee member said. NERC's standards "are imposed regionally with a large amount of deference" to control areas.

The "blackout pulled the curtain back on some of NERC's approaches," this source said. "What we need is a strong national standard."

Wood agreed that strong rules are necessary, but did not comment on what sort of penalties the commission could impose if the audits find non-compliance, saying he was still discussing the matter with other commissioners.

But some observers expect the commission to impose tariff conditions and other measures to enforce whatever rules are eventually implemented. "At the end of the day, somewhere, somehow, the heat will be turned up on the transmission owners," one Midwestern utility executive said.

The chairman said tougher FERC-enforced audits should not be a major sea-change for the industry, because if utilities are already following the rules, compliance should be easy. "For those who were operating by the NERC book, it won't be a change at all," he said.

The Edison Electric Institute, in a resolution passed by its board of directors Jan. 9, also called for stronger audits and better performance reviews, but said NERC should take the lead. FERC's role should be one of "supporting and providing oversight to the NERC initiatives," the resolution said.

"We are pleased that the commission wants to take an active role in helping achieve a goal we all share—that of making certain our bulk power system is the world's most reliable," EEI President Tom Kuhn said. "Consistent with the reliability provisions [in the energy bill], our CEOs believe strongly that the expertise to make this happen resides within NERC and the industry, and FERC in an important oversight role."

Meanwhile, Wood also said FERC would take a "fresh look" at proposals to screen companies for the potential to exercise market power. FERC has two workshops this week to discuss its controversial supply margin assessment proposal, and he noted that since its late-2001 inception, 74 companies have failed the new screen. There have been no penalties for failure so far.

Market participants filed a plethora of comments last week regarding SMA and alternatives commission staff proposed in a December 19 notice that scheduled the workshops.

Separately, Wood said he did not expect any major new developments on the RTO front, noting that since the collapse of the Southeastern-based SeTrans RTO proposal--which included Southern Company and Entergy--he is not certain whether a grid operator will form in that part of the country any time soon.

But at this point, Wood said, FERC has the authority to require RTO participation if deemed necessary under section 206 of the Federal Power Act. He noted, though, that if Congress is able to resuscitate the energy bill, FERC would have to continue RTO formation on a voluntary track. If this is the case, Wood said the commission would "make voluntary [participation] very attractive."

Although some have said that FERC's SMA screen—or more appropriately its penalties for failing the screen—are the means by which it would make voluntary participation more attractive, but Wood said that is not necessarily the case.

When it proposed SMA in November 2001, the commission said that those who fail the screen—unless they are in an RTO—would lose their market-based rate authority.

"What we're saying with the SMA and market power tests is that we're taking care of market power wherever it exists," he said in an interview after the briefing. "The fix that we prefer is that you get into an RTO, but we'll fix it even if you aren't."

FERC should be careful when it comes to screening for market power, said Bill Hieronymous, vice president of Charles River Associates. First of all, while not completely opposed to the use of multiple screens, he questioned if a supplier would have to pass all of them to obtain or keep market-based rates. If so, that could cut down on the number of market participants with market-based rate authority, he added.

"If the goal is to promote competitive markets, using cost-based rates to mitigate seems" like a move "in the wrong direction," added Pat Alexander, an energy industry adviser at Dickstein Shapiro Morin & Oshinsky. Sticking up for cost-based rates, Robert O'Neil, general counsel of Golden Spread Electric Cooperative, noted that costs are still recovered under them. Only recently did "the notion of cost-based [being] somehow confiscatory" arise, he said.