The domestic interconnected bulk power transmission systems have evolved over the years and are designed to interconnect utility loads and generators. In the past, neighboring utilities established interconnections among themselves and with each other to increase supply options, to augment reliability and to share reserves economically. These arrangements serve not only the needs of individual utilities but also handle inter-system power transfers as part of a larger, integrated system.⁽³⁵⁾

Figure 17. Major Transmission Networks

The existing transmission system in the country consists of three major power interconnections -- the Eastern Interconnect (the largest), Western Interconnect (the second largest) and the Texas Interconnect (Figure 17).⁽³⁶⁾ Potential transfer capability between the three grids (or interconnections) is extremely limited. Each grid, therefore, operates as a single very large utility and functions with a common set of operating guidelines.

The North American Electric Reliability Council (NERC)--an organization formed in the aftermath of the 1965 blackout in the northeastern States--ensures compliance with guidelines with a view to provide overall reliability and system security.

Various legislative initiatives since the late 1970s opened the door for competition in the area of power generation.⁽³⁷⁾ During the early 1990s, specific provisions of the Energy Policy Act (EPACT) of 1992 encouraged competition in promoting wholesale trade in electricity. With a view to advance EPACT's objectives, the FERC issued Order Nos. 888 and 889 on April 26, 1996, to "remove impediments to competition in wholesale trade and to bring more efficient, lower cost power to the Nation's electricity customers."⁽³⁸⁾

To attain the above goal, FERC established procedures to ensure the availability of non-discriminatory trans-mission access to wholesale power marketers over public utilities' transmission facilities under its jurisdiction. FERC expected that issuance of its Orders would alleviate discrimination in transmission services in interstate commerce and would provide an orderly and fair transition to bulk power markets without impairing reliability and system security. ⁽³⁹⁾

FERC's initiatives in promoting competition at the wholesale level have led to several developments that warrant additional fundamental regulatory changes with respect to the modalities in which transmission access should be handled. Since 1996, there has been a significant increase in the number of power marketers.⁽⁴⁰⁾ Nonutility generators (including various subsets of independent power producers) have also increased generating capability and, therefore, their electricity sales at market-based rates. Taken together, these developments have caused an exponential increase in trading at the wholesale level since the issuance of FERC Orders.

In view of what is stated above, the Nation's existing transmission grid is being utilized more intensively and in different ways than in the past.⁽⁴¹⁾ Introduction of competition in the market may also reduce cooperation among transmission owners adding to the complexity of maintaining system reliability. In addition, observed increases in transmission business trends have not been associated with increases in load serving and transfer capability of the bulk transmission system.⁽⁴²⁾ Continuing declines in both annual maintenance and capital expenditures in transmission are another impediment to system improvement.⁽⁴³⁾

States have also been actively paving the way for promoting competition at the retail level--the next frontier. By the end of 1999, 24 States and the District of Columbia had acted to restructure the industry in their States. In some cases, States have called upon their jurisdictional utilities to unbundle their generation, transmission, and distribution activities (including unbundling of tariff components); others worked through a set of pre-designed pilot programs as precursors to the implementation of retail choice for the customers in their States.⁽⁴⁴⁾ The resulting changes significantly affected the way in which electricity was generated, transmitted, and distributed to wholesale and retail customers.⁽⁴⁵⁾ Thus, opening electricity markets to retail competition in States adds another measure of complexity to a complex evolutionary system initiated by FERC in its 1996 Orders.

The cumulative effects of changes in patterns of wholesale and retail trade has been to exacerbate the burden on the transmission grid. Regional development of independent system operators (ISOs), as envisaged in FERC's 1996 Orders, has been uneven. Difficulties in forming multi-State ISOs remain unresolved. The inability to secure agreement in formulating ISOs in some other regions has been a frustrating experience.⁽⁴⁶⁾ According to FERC, these developments have completely changed the landscape from the one that it faced at the time Order Nos. 888 and 889 were being developed and pose new regulatory and industry challenges.

FERC delineated transmission-related impediments to competition in two broad categories:

• Impediments consisting of engineering and eco-nomic inefficiencies inherent in the current operation that hinder development of fully competitive power markets and impose avoidable costs on consumers
  
  
• Continuing opportunities for transmission owners to unduly discriminate in the operation of their transmission system to favor their own affiliates.

Other shortcomings identified by FERC include complaints with respect to the determination of total transfer capability (TTC) and the available transfer capability (ATC). Inability to determine ATC in a timely fashion impacts on trades that can be handled on a given system. Similarly, congestion management issues, if not resolved in a timely fashion, inhibit system capability to provide least-cost power.

With a view to alleviate some of the problems listed above, in a Notice of Proposed Rulemaking (called the NOPR), FERC took a major step by espousing a proposal to create regional transmission organizations (RTOs) nationwide.⁽⁴⁷⁾ On May 15, 1999, the Commission proposed to require each public utility that owns, operates, or controls facilities for transmission of electric energy in interstate commerce to make certain filings (by October 15, 2000) with respect to the formation and participation in RTOs. Minimum characteristics and functions that a transmission entity must satisfy to be considered an RTO were also specified. More specifically, the proposed RTOs are required to be independent from market participants and should have appropriate regional scope and configuration together with the authority over transmission facilities to maintain reliability. FERC proposed a voluntary and collaborative process to accommodate regional needs.

Subsequent to the issuance of the RTO NOPR, the Commission held 11 public conferences across the country to hear views from interested stakeholders. The Commission also received inputs from State regulatory agencies on the subject. On the basis of these deliberations, the Commission issued its ruling in Order 2000 on December 20, 1999.⁽⁴⁸⁾ In its Order, the Commission adopted a flexible approach that permits different types of RTOs like the non-profit independent system operators and the for-profit transmission companies. The Order also embodies a principle of open architecture and permits its members to improve its structure when deemed necessary to meet evolving market needs.

All RTOs are, however, required to abide by four core characteristics and eight key functions. The core characteristics are independence, scope and regional configuration, operational authority, and short-term reliability. The eight key functions are tariff administration and design, congestion management, parallel path flows, ancillary services, Open Access Same-Time Information System (OASIS), market monitoring, planning and expansion, and interregional cooperation (see text box below). The Commission, however, hopes that the RTOs "will alleviate stress on the bulk power system caused by changes in the structure of the industry, improve efficiencies in transmission grid management, improve grid reliability, remove remaining opportunities for discriminatory transmission practices,  cut  transaction costs, facilitate the success of State retail programs, and facilitate lighter-handed regulation."⁽⁴⁹⁾

To attain the above goals, the Commission also provides guidance on a variety of new transmission pricing reforms. These include single system rates and congestion pricing. In addition, the Commission will also consider a variety of other innovative proposals like performance-based regulation, possible changes in determining depreciation, as well as incremental pricing for new investments in transmission.

According to FERC, the proposed RTOs will be operational by December 15, 2001. The Order, however, applies only to those utilities that are under FERC's jurisdiction. Many segments of the transmission network are under the control of utilities but not under FERC's jurisdiction. These utilities (mostly municipals, power districts, State agencies, and cooperatives) are faced with restrictions on usage of electrical facilities funded by tax-exempt bonds. For-profit entities would have access and use of these electrical facilities when they are integrated into a regional transmission organization and this is prohibited under tax-exempt finance regulations. For these utilities to join, they would either have to refinance these bonds and remove the restrictions or acquire a relief of this tax burden. These concerns are under review and it is likely that Congress will enact legislation that permits public utilities to participate without jeopardizing the status of tax-exempt bonds.

Endnotes