Federal Triangle: The Changed Power Scene
Remembering the Northeast U.S. and Canada power blackout of 14 August 2003 should remind us that the nation is probably headed for more cascaded collapses, likely during summer months. That electric power failure involved 50 million people in 8 states and 2 Canadian provinces, over 65,000 MW of load, from 531 generators including 19 nuclear units. Most are unaware that while electric generating capacity and quality is constantly stressed, this blackout happened because of transmission system failures. These topics and many insights into this fast-changing industry were discussed at the Transmission Summit in mid-March in Washington sponsored by Infocast Inc. to assess "the future of the grid."
It is an important distinction, generation and transmission, and a matter experiencing great infrastructure change. New standards from North American Electric Reliability Council went into effect 1 April 2005 regarding transmission and others are expected in 2006, assuring compliance with Federal Energy Regulatory Commission (FERC) initiatives for mandatory and enforceable reliability standards in electric power supplied to the grid. You probably never thought of it this way, but electric power generation is by far the largest manufacturing sector of our economy and any industrial economy. It is a perishable "product" that is not stored and is delivered to consumers at the time of production.
The history of the FERC evolution is interesting and germane. The 1935 Federal Power Act granted FERC's predecessor authority to regulate wholesale transmission and sale of power to satisfy public interests, but FERC did little to promote competition, so utilities operating in a monopoly climate sold directly to consumers. In the mid 1980s FERC adopted policies allowing market-based rates for independent power producers to transport power to buyers, an ability that hinged on securing access to distribution from vertically integrated utilities. That prompted FERC to make utilities assure they grant nondiscriminatory access to transmission services, so a "golden rule" was defined. Transmitting utilities were required to provide access and service with terms, conditions and rates no less favorable than provided to themselves. By 1996, 106 of 166 public U.S. utilities had filed open access tariffs. FERC further encouraged formation of companies to operate but not own transmission systems, and by spring of 1999 a new business class emerged, the Independent System Operator (ISO) or its slight variant, the Regional Transmission Organization (RTO).
FERC has learned that this open access to power transmission by RTOs indeed benefited consumers but came with another price attached. The aging transmission system that has received little attention is old, under-capacity and is falling steadily behind due to demand growth. To encourage necessary investment, regulated prices must reflect unregulated costs to provide the services. Those clever FERC guys figured it out!
This is all happening in a chaotic growth and financially difficult environment. Annual demand growth varies widely by region. Typically, as in middle Atlantic areas, growth rates are about 1.8% but in California, for example, the average is 4 to 6% with some locales expecting 9 to 10%. Governor Schwarzenegger should hope for a mild summer because his state has a 1,700 to 1,900 MW generation deficiency and service is transmission constrained. Further, each state has its own process to permit construction of transmission lines, and state utility commissions determine who pays for investments. In a world where there is and has been under-investment, performance of integrated transmission is not adequate and only marginal tax relief is provided to sellers of assets (transmission lines and their management), it is amazing that RTOs kept things together as well as they have. They have added burdens. Although most are fiscally sound, they have liquidity problems because interest rates are again rising, asset valuation and conversion is uncertain, and there is little confidence in controllable, demand projections. With 35% of earnings of investor-owned utilities derived from non-regulated business and fuel prices rising, electricity generators are leaving transmission headaches to the RTOs. The U.S. and Canada are served by ten major RTOs and there are a few smaller, localized RTOs along seams between boundaries.
Since many readers of this journal are big consumers of electric power, industrial planners must recognize problems faced by their neighborhood RTO. So go lean on a FERC guy and tell him to get with the program.