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REGULATIONBy David Dworzak
Since one part of enforcing contracts is to make the language and rules universal, the tendency is for voluntary standards and practices to evolve to mandatory and enforceable rules. FERC's March rule will include such things as how to procure transmission service, schedule energy transactions, assign energy line losses to market participants, design and manage complex data communications and various transactions support databases, and design and build a same-time market and grid status implementation system. It is widely recognized that standards would support public policy goals to provide market discipline, capture efficiency gains in wholesale electricity, encourage efficient investment and use decisions as part of stable market design structures, provide price discovery and transparency, reduce barriers to entry, and reduce transaction costs. Under FERC's initiative, the commission may consider that the design would determine several policy principles, leaving the implementation of such principles to a standards-setting process. These high-level issues include congestion management, real-time energy markets, ancillary services, loop flows, system security, and factoring grandfathered rules and contracts in a new market model. Moreover, there are a wide range of regional and local interests that the commission may need to consider in developing its model. Those issues go to the heart of a competitive market and are widely debated. While the need for wholesale electric standards is broadly acknowledged, the devil is in the details when it comes to moving from voluntary to mandatory platforms. Toward a One-Stop Shop The gas industry fought this battle 10 years ago as FERC promulgated open access natural gas policies under Orders 436 and 636. At the time, electronic bulletin boards (for the posting of information and availability of spot gas and gas delivery capability) were inconsistent, nonstandard, and literally all over the map when it came to their design. FERC ruled, in effect, "Figure out standards, or we'll do it for you." In response, gas producers, transporters, vendors, utilities, and customers formed the Gas Industry Standards Board. Today, GISB has developed more than 500 separate standards covering wholesale gas issues—electronic delivery, capacity nominations, capacity release, invoicing, general business practices, and so on. Now, GISB wants to be a one-stop shop for energy. It has expanded its charter to include retail and electricity issues, is rewriting its bylaws, and recently changed its name to the North American Energy Standards Board (NAESB). NAESB focuses heavily on data, databases, and communications protocols. While there are system safety and reliability issues, NAESB standards focus primarily on commercial practices. As far as retail electricity is concerned, the Retail Electric Standards Board has expressed its willingness in handing over control of its uniform business practices to NAESB, pending NAESB's proposal on how it will govern that aspect of standards. The issues are different for retailers—they are concerned about state rules that govern the complex, back-office operations accompanying a competitive retail electric marketplace. Examples include how and when marketers and delivery companies notify each other when customers are newly enrolled or request changes in their service; and how, when, and in what format they exchange data on such things as a customer's historical energy use, meter readings, and billing details. Still, some suggest that there needs to be coordination between wholesale and retail standards. For example, one issue is whether a retail customer can participate in various real-time load management programs and, if so, what the prices and terms of such programs might be. Some argue this is a wholesale issue, some say it is retail. Some say both. And can wholesale electricity practices be standardized in the same way as they were for gas? Some suggest that the differences might be too great. The North American Electric Reliability Council (NERC, which has provided reliability standards via its 10 councils since 1968) also proposes to become a one-stop shop for electricity, developing commercial practices along with reliability standards. Its basic rationale is that electricity is different from natural gas. Regional transmission organizations exist in the electricity world—no such thing in gas. Electricity is still primarily vertically integrated—historically, such integration has existed to only a small extent in the gas industry. In terms of federal and state regulation, FERC oversees wholesale gas, while electricity is split between FERC and states via unbundling issues. Moreover, FERC nonjurisdictional entities (federal power, municipals, and rural cooperatives) are significant participants in electricity. Currently, NERC is dedicated to operating and planning initiatives that support system reliability and monitor grid performance. Its committees and task forces have over the years developed voluntary operating policies that NERC now seeks to "translate" into measurable, enforceable standards, in anticipation of a future role as an enforcement entity. NERC is also an important information exchange forum for FERC nonjurisdictional entities and develops important technical planning and operational tools for control area operators, security coordinators, and system planners. For example, the Western System Coordinating Council—comprising the 12 Western states, British Columbia and Alberta (Canada), and Baja Norte (Mexico)—is divided almost equally between FERC jurisdictional and nonjurisdictional entities. Commercial Goals and Reliability Standards It goes without saying that the physical integrity and stability of the electricity transmission grid are paramount. On one side are advocates who believe that reliability is a market function. They consider that customers and suppliers will voluntarily reach agreements on the level of reliability provided; for a price, some large customers might be willing to accept curtailments on short notice. Likewise, some customers will actively seek to establish agreements with such suppliers who might be interested in taking energy on short notice when surplus energy is widely available. On the other side are those who say that regardless of how well the rules are written, commercial rules will impinge on reliability. And indeed, in a world of commercial standards, enforcement is a big issue. For instance, there will be times when a generator can take advantage of a short-term commercial opportunity by "leaning" on the delivery system. It's a question of balancing incentives and penalties: If the traffic ticket costs less than the benefit of speeding on the highway, and speeding laws are not strongly and clearly enforced, then there are incentives to speed, as there might be incentives to lean on the delivery system. But, unlike highways, overloads and underloads and system frequency instability could impose significant stresses on the physical system. System security coordination, already a critical element of the existing system, will likely play an increasingly important role in ensuring the safety and reliability of the grid. Will markets derive the right standards? Or is there a need for a specific set of physical standards enforced by a reliability organization? FERC, with its anticipated standard market design, will probably address a set of highly contentious issues and indicate general principles and guidelines. And it will probably assign to a standards-setting process the task of implementing its broad actions. It is possible for two organizations to exist. It is possible for two separate governance bodies to exist. It is also possible that one organization exist with two standards processes, separate and extremely well coordinated with each other. But it is impossible that the two processes not coordinate carefully and constantly. A Set of Goals Perhaps the choice of NERC or NAESB is not the issue—rather, the stakeholders can decide to meet objectives. Grid integrity is one of those objectives—NERC will probably handle that under the NAESB umbrella. If the industry can agree on a framework for standards setting, then it might have a stronger say in what the standards are. In this regard, one critical issue for electric utilities is flexibility—one-size-fits-all standards vs. regional and local variations and whether or how standards can be waived or exemptions established. Other issues include enforcement and compliance of standards—that is, how can you create "police" to enforce the rules of the road to the letter? Also, what are the roles of regional transmission organizations—how do they balance commercial and reliability needs? And how does a standards-setting process (to meet FERC's demands) deal with entities over which FERC has no jurisdiction? The matter of framework comprises several issues:
The devil really is in the details. What's more, however the industry finally defines its standards-setting process, its traditional structures based solely on reliability will have evolved into brand new structures. And all this before what promises to be a most earth-shaking rulemaking from FERC. |
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