FEDERAL TRIANGLE: The Electric Landscape
Last August, this column examined the future of electric power generation in the U.S. and cited both emergence of Independent Power Providers (IPPs) in the deregulated environment of the 1990s and a growing trend to distribute electric power generation using smaller (under 10 MW) and more efficient plants. New turbines up to 85% or more efficient in cogeneration are better than 35% heat recovery experienced by old utilities. The facts cited in August still exist and are often mismanaged by state and local political processes trying to depress prices artificially to gain voter favor.
Today, we have a related problem needing attention: that of improving electric transmission systems authorized by Federal Energy Regulatory Commission (FERC), a more competent regulatory body than lower levels of government, and essential because of the need for reliability and connectivity throughout the power grid. For North American industry and individuals, a fundamental restructuring of how electric power is delivered is underway, so get ready for the RTOs (regional transmission organizations), the long-haul carriers-the equivalent for the electric power sector to bulklinks in telecommunications or natural gas or petroleum product pipelines for fuel. RTOs are an important restructured link in the energy system, created by FERC Order 2000, to increase access to supplies and thereby reduce user's electricity prices.
RTOs began operation in December 2001; ten cover the U.S. and Canada and a western one covers a sliver of northwest Mexico. RTOs have four essential characteristics: they are independent of the generating utility or IPP, must maintain reliable supply to all markets in their exclusive territory, have total transmit operations responsibility and have total authority over grid reliability. FERC also assigned each RTO eight functions covering administration, system capital improvements, congestion management and market monitoring. The RTOs are a new, stand-alone industry created from the fabric of utility's transmission departments, which have neglected this infrastructure investment sector for over a decade. While only 11% nationally of delivered cost of electricity is allocable to transmission (64% for generation and 25% in local distribution), it is a critical element. And for the required new 100 to 200 MW of generating capacity needed by 2004, transmission capacity is the primary system problem. Falling investment levels have not kept pace with two basic issues: the national transmission system was not designed to support market-driven electricity trading and a cost-of-service regulatory approach does not provide incentive for this sector to meet expansion needs. For every ten-year period since 1994, planned transmission expansion ranges from 6 to 10,000 miles (an estimated 7,600 miles additional by 2009 is the current forecast) added to an existing base of 157,810 circuit miles. The unfortunate disconnect is that within franchised (state usually) service territories, wholesale and transmission rates have been under federal jurisdiction while retail rates, sitings and system design remains largely local, regional or state prerogative. Read, formula for failure.
Failure to invest in new transmission has increased congestion costs, limited user supply choices and wholesale competition, prompted higher and volatile consumer prices, and reduced system reliability. Incentives to utilities for generation versus transmission have not been balanced and led to inefficient investment decisions, allocative (global to achieve greatest benefit), productive (greatest output for least resources) and dynamic (best decision sequence to minimize resource use). These incentives (or disincentives) applied to both for-profit and not-for-profit utilities in the past and to RTOs in the future resulted in the balkanized transmission system the U.S. enjoys, complete with "stranded costs" derived from reversals or dithering of political policies.
Because the U.S. electric power system is regionally integrated, it makes sense to ensure system safety and reliability within an RTO landscape. Whether this paradigm is transparent to industrial users or not is primarily up to the consumers of electric power; those who do not pursue and ask suppliers for an explanation of better deals will never get benefits that may be available. It is partially up to "heavy-hitter" users to request options and reduced rates based on RTO establishment in your region but lots of small users equal more than one big guy. It takes a few telephone calls; it's a risk/reward thing. Explain to me your risk in asking questions.