If we want a robust and reliable grid, then we have to think about how to manage and operate transmission. This question has been a core component of restructuring debates over the past four years, and disagreement over the organization of transmission operations continues to be extreme. But transmission is crucial to the development of robust, healthy wholesale markets.
The organization of transmission operations is very complicated and not particularly transparent. Currently most transmission is owned by regulated public utilities, though federal agencies and other entities own a large chuck of transmission, especially in the West. In the northeastern United States and in California, the transmission is managed by an independent transmission provider (RTO or ISO), in the rest of the United States the local monopoly utility company manages most transmission.
Most transmission service is regulated by FERC, a federal government agency (but, paradoxically, FERC does not regulate transmission owned by other federal agencies). A great deal of transmission was built by local monopoly utility companies to serve ratepayers in their “home” service territory, under terms approved by state utility commissions.
Most reliability rules, governing a great deal of the terms of transmission operation and the costs involved, are established by NERC and implemented in conjunction with 12 regional reliability councils. In regions with RTOs/ISOs, that organization usually acts as reliability coordinator. The reliability coordinators oversee control area operators. The control area operators are the “front line” system operators with the job of keeping the interconnected grid up and running.
The Midwest region is much more complicated than most of the country, and the explanation takes all of a half-page sidebar on page 14 of the blackout report. In the Northeast, the ISOs typically cover one or two control areas; the Midwest ISO “provides reliability coordination for 35 control areas in the ECAR, MAIN and MAPP regions and 2 others in the SPP region.” PJM now oversees 9 control areas, but most of these are in the Midwest region, too.
This complex organizational structure to control reliability arose out of the 1965 blackout, which occurred at a time when wholesale power transactions were few, and not much trade crossed control area lines. Now, with power flows crossing between reliability coordinators and through multiple control areas, things have changed. Any lack of clarity or transparency – about who is responsible for system status, about information flow among control areas, or about funding of reliability investment – becomes problematic as trade increases and the quest for efficiency shines light on these worn out, opaque institutions.
Investment in transmission has been lagging for years, and the regulatory response has been to offer more incentives and more assurances that cost recovery is available. Just yesterday at FERC’s open meeting, that Commission issued a policy statement on reliability that again assured transmission owners that prudent reliability costs could be passed along in transmission rates. It is more of the same regulatory approach, and maybe this time it will work….
A recent paper by Paul Kleindorfer, a professor at the University of Pennsylvania, offers a different vision for promoting investment in the grid: treat transmission service as a commercial, for-profit business. He argues that “the complexity and interdependence of the power grid … [makes it] difficult for distributed owners to come to grips with who should pay for reliability.” Kleindorfer points out that existing transmission ownership and operation do not have the transparency and clarity of rules and rights that are crucial to commercial ventures and provide proper incentives and a stable institutional framework for trade.
His discussion focuses on four commercial principles that he argues would make transmission a forward-looking venture that would attract investment in, among other things, reliability. First, transmission entities (let’s call them RTOs for brevity) have to face performance standards and be accountable for their achievements and failures. This is the role that capital markets and shareholders play in for-profit companies. Second, RTOs should focus on customers. Third, operations and planning in RTOs must integrate the engineering of the system with its economics. Finally, the RTO governance structure must be responsive and decisive.
FERC’s current “ideal” organizational structure for transmission, in which transmission assets from several companies are combined and turned over to a independent organization to manage, just doesn’t connect the economic dots well enough to inspire the commercial creativity necessary to motivate capital markets to pony up.
In a presentation hosted by the Progress & Freedom Foundation, Kleindorfer observed that the underlying structural issues may not just be vague, but even actively harmful: incumbent transmission owners may face economic incentives contrary to overall system quality and performance. A paper on the economics of networks by Jacques Cremer, Patrick Rey, and Jean Tirole makes the essential point: the benefits of network quality improvements may go disproportionately to the creative upstarts in the industry, but the quality of the network is largely determined by the investment decisions of larger, established firms. If you are the established firm, how much do you want to pay in order to throw the door open wide to your new competitors? (See Journal of Industrial Economics, December 2000) An excellent paper by Amitai Aviram, “Regulation by Networks,” hidden away in the BYU Law Review (2004), examines the Cremer-Rey-Tirole paper and a number of broader issues.
The current regulatory/administrative approach to transmission planning and operations has, along with a substantial dose of regulatory uncertainty, given us the current mess in the transmission business. The solution may be to treat the transmission business, as more of a business.