Blackouts and oversupply or regulatory planning and cooperation.

AuthorKincaid, Jess B.
  1. INTRODUCTION II. JURISDICTION OVERVIEW A. The US Electric Production and Distribution System B. Development of Electricity Regulation 1. Regulated Versus Unregulated Utilities 2. Division of Regulatory Authority Between FERC and State Commissions C. Major Modern Developments in the Regulation of Transmission 1. Congressional Actions 2. FERC Orders a. FERC Order No. 888, Non-Discrimination in Transmission b. FERC Order No. 2003, Interconnection Jurisdiction c. FERC Order No. 1000, Requirements for Regional Transmission Planning D. Summary of Regulation III. UNEXPECTED CONSEQUENCES FROM PIECEMEAL REFORMS A. Poor Regulatory Planning Led to Too Little Power in California 1. Restructuring of the California Electricity Market. 2. Meltdown of the Restructured Market 3. Picking Up the Pieces a. Bonneville Power Administration v. F.E.R.C., an Effort to Prevent FERC Regulation of Nonjurisdictional Power Producers b. Post Bonneville, FERC Refund Calculations c. Attempting to Prevent Contract Remedies Based on FERC Refund Calculations 4. Remedies Require Rate Increases Across the Region B. Poor Regulatory Planning Led to Too Much Power in the Northwest 1. Regional Wind Development. 2. Electricity Oversupply C. Lessons Learned from These Case Studies IV. A SMART GRID WITHOUT SMART PLANNING V. COMPATIBLE REGULATORY SOLUTIONS I. INTRODUCTION

    Blackout and oversupply events in the West have proven that market after-the-fact regulation of electricity fails consumers. Lack of planning on state and federal levels has resulted in increased costs for consumers and short-term failure in the distribution of electricity. Without up-front regulatory planning, physical upgrades to the nation's transmission system will likely fall short of state and federal policy goals, and cost increases are likely to result.

    Poor regulatory planning resulted in blackouts following the restructuring of the California electricity market. The State of California restructured its electricity market in the late 1990s in an attempt to reduce electric costs that were higher than the regional average. (1) The deregulated system relied on electricity markets to determine the fair market price at any given time. (2) Under this system, regulators believed that the invisible hand of the market would control prices and adequately incentivize production. (3) Instead, the market proved ripe for manipulation. (4) Power plants were deliberately taken off line to reduce supply, prices skyrocketed, and rolling blackouts spread across the state. (5) Utilities are still litigating settlements from the failure of the market thirteen years later.

    Poor regulatory planning also resulted in periods of excess power in the Northwest. The majority of states in the Northwest have adopted renewable portfolio standards that aim to increase the percentage of power produced from renewable sources. (6) While regulators adopted a series of Orders to ensure fair access to transmission lines, (7) they failed to adequately address the comprehensive effect that additional renewable power would have on the electric grid. Periods when production of renewable power exceeded total regional consumption resulted, and regulators disconnected generating sources to ensure grid safety. (8) These actions, which violated transmission contracts, are currently in litigation, and the cost of violating transmission contracts will be passed on to consumers. (9)

    The complexity of the existing piecemeal U.S. system of jurisdiction over electricity production and transmission makes it difficult to perform comprehensive regulatory planning. While the United States is currently implementing technological upgrades to the electric grid that can mitigate blackout and oversupply events, our current regulatory system prevents hill utilization of these upgrades. State and Federal regulators need to work together to effectively implement regulatory structures that support physical upgrades to the electric grid.

    This paper provides recommendations for addressing the piecemeal system of electricity regulation in the United States. Part Two looks at the current system of electricity regulation and how it developed. Part Three discusses two case studies that demonstrate the impact of poor regulatory planning. Part Four looks at current transmission upgrades to the U.S. electric system. Part Five then applies lessons learned from the case studies to recommend an improved regulatory system that minimizes cost increases for consumers. This Chapter concludes with specific recommendations for State Commissions and the Federal Energy Regulatory Commission to work together on long term power production and integration planning.

  2. JURISDICTION OVERVIEW

    The U.S. electricity regulatory system has not kept up with upgrades to the production and transmission infrastructure. The physical electric grid in the United States developed from small, local, and distinct systems of generation and consumption to a nearly national grid capable of moving electricity in interstate commerce from regions of supply to end consumers. (10) While the electric transmission system has become well integrated, the regulatory system remains piecemeal.

    1. The US Electric Production and Distribution System

      Since the passage of the Federal Power Act (FPA), (11) the United States has seen a significant increase in both the number and type of electricity suppliers. (12) In 1949, the earliest year for which data is readily available, the United States consumed 291 billion kilowatt-hours of electricity primarily produced from fossil fuel sources, but 31% of power generated that year was from renewable sources including hydroelectricity. (13) In 2011, the United States consumed 3,955 billion kilowatt-hours of electricity including only 12.3% of power from renewable sources. (14) Technological advances in the production of electricity have made it possible to generate electricity efficiently in different ways and, in many cases, in smaller scales. (15) Despite advances, the United States has become increasingly dependent on fossil fuels for electricity generation and increasingly dependent on schedulable power sources (16) in the last decade. (17)

      Three major grids currently deliver electricity in the continental United States. (18) More than 9,200 electricity-generating facilities connect to the grids, which transmit power over more than 300,000 miles of transmission. (19) In all but three states, electricity travels in interstate commerce over long distances at low costs. (20)

    2. Development of Electricity Regulation

      Regulation of electricity in the United States occurs through a system that distinguishes based on size, whether the utility received financing under the Rural Electrification Act of 1936, (21) and ownership of the utility to determine whether the utility is subject to regulation. Federal and state entities further divide jurisdiction over regulated entities. As the flow of electricity became increasingly regional and national, this piecemeal system of regulation became increasingly burdensome.

      1. Regulated Versus Unregulated Utilities

        The existing system of electricity regulation in the United States is a complicated, confusing web. Of the four main types of electricity providers, only one--the investor owned utility--is consistently regulated by both the Federal Energy Regulatory Commission (FERC) and State Public Utility Commissions (State Commissions). The other three types may be regulated by FERC, State Commissions, both, or neither depending on local rules. The complexity creates obstacles to improving the regulatory system.

        The FPA defines a jurisdictional utility, in relevant portion, as a utility that is not an entity of the United States, a State, or any political subdivision of a State, not an electric cooperative that receives financing under the Rural Electrification Act of 1936, (22) or a utility that sells less than 4,000,000 megawatt-hours of electricity per year. (23) Frequently, whether a utility is regulated is clarified by whether the utility is investor owned, public power, electric cooperative, or federal power.

        Investor Owned Utility Companies (IOUs)' are private shareholder-owned companies. (24) Approximately 220 IOUs ranging in size from multistate holding companies to small local operations currently exist in the United States. (25) IOUs serve approximately 75% of the United States. (26) Under the FPA, FERC and State Commissions regulate IOUs. (27)

        Public power systems include local, municipal, regional and state-owned power systems. (28) More than 2,000 public power systems operate in the United States. (29) In some states, State Commissions regulate public power, while in others, municipal governments regulate the utility or the utility is self-regulating. (30)

        Electric cooperatives are privately owned electric systems managed and owned by the members they serve. (31) Most electric cooperatives were formed during the Great Depression. (32) More than 800 electric cooperatives currently provide electricity services in the United States. (33) Some State Commissions exercise jurisdiction over electric cooperatives, while others do not. (34) Electric cooperatives with outstanding loans under the Rural Electrification Act of 1936 (35) are subject to regulation by the Rural Utilities Service in the Department of Agriculture. Those without outstanding loans are regulated by FERC. (36)

        Federal power includes wholesale power from federal facilities and federal power marketing agencies including Bonneville Power Administration (Bonneville). (37) Federal power producers primarily sell power at the wholesale level but also sell power directly to end customers. (38) Federal power marketing agencies own and control their transmission. (39)

        In many states, one must know the history of a utility to know whether the utility is regulated by the State Commission, FERC, both, or neither. (40) This jurisdictional issue is just...

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