Evolution of The Electric Industry For Emrf 10-8-13

EvolutionoftheElectricIndustry
StructureintheU.S.and
ResultingIssues
Preparedfor:
ElectricMarketsResearchFoundation
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October8,2013
2013 Navigant Consulting, Inc.
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ElectricMarketsResearchFoundation
NavigantconductedthisstudyfortheElectricMarketsResearchFoundation(EMRF).EMRFwas
establishedin2012asamechanismtofundcredibleexpertresearchontheexperienceintheUnited
Stateswithalternativeelectricutilitymarketstructuresthosebroadlycharacterizedasthe
traditionalregulatedmodelwhereutilitieshaveanobligationtoserveallcustomersinadefined
serviceareaandinreturnreceivetheopportunitytoearnafairreturnoninvestments,andthe
centralizedmarketmodelwheregenerationisbidintoacentralmarkettosetpricesandcustomers
generallyhaveachoiceofelectricsupplier.
Duringthefirstfewyearsofrestructuredmarkets,numerousstudiesweredonelookingathow
thesetwotypesofelectricmarketswereoperatingandtheresultsweremixed.Butsincethoseearly
studies,limitedresearchhasbeendoneregardinghowcentralizedmarketsandtraditionally
regulatedutilitieshavefared.TheElectricMarketsResearchFoundationhasbeenformedtofund
studiesbyacademicsandotherexpertsonelectricmarketissuesofcriticalimportance.
TableofContents
1.ExecutiveSummary................................................................................................................i
HistoryandDevelopmentofTraditionalRegulationandCompetitiveMarkets..................................i
TodaysTwoBroadModels.........................................................................................................................iii
SystemReliability.........................................................................................................................................iv
EnvironmentalIssues....................................................................................................................................v
RelativeAllocationofRisksoverTime......................................................................................................vi
ResponsibilitiesforPlanningandtheTypesofPlanningPerformed....................................................vi
InnovationandtheLevelsofResearchandDevelopmentPursued.....................................................vii
StateandFederalGovernment.................................................................................................................viii
2.Introduction............................................................................................................................1
3.HistoryandDevelopmentofTraditionalRegulationandCompetitiveMarkets.....2
3.1DevelopmentofTraditionallyRegulatedMarkets..............................................................................3
3.2PeriodofGrowthandDecliningCosts,19451970..............................................................................6
3.3SlowedGrowthandInflation,SeedsofCompetition,19701990......................................................7
3.4TheAdventofCentralizedMarkets,19901999...................................................................................9
3.5TraditionalRegulationandCentralizedMarketsToday..................................................................13
4.TodaysTwoBroadModels...............................................................................................20
4.1CurrentStatusofCentralizedWholesaleGeneratingMarkets.......................................................20
4.1.1TodaysCentralizedWholesaleGeneratingMarkets..........................................................20
4.1.2EnergyMarkets........................................................................................................................21
4.2 BilateralWholesaleGeneration.............................................................................................................23
4.3TodaysRetailChoiceStatus................................................................................................................23
4.4CostBasedRatesandTraditionalUtilityRegulation.......................................................................24
4.5TheRetailChoiceModel.......................................................................................................................24
4.6DifferencesBetweentheTraditionalandRetailChoiceModels.....................................................26
4.6.1RetailChoiceMarkets..............................................................................................................26
4.6.2PricingforGenerationServices..............................................................................................27
5.SystemReliability................................................................................................................28
5.1DevelopmentoftheMandatoryReliabilityStandards.....................................................................28
5.2TransmissionReliability.......................................................................................................................31
5.2.1TheNERCStandardsandWhoMustComply....................................................................31
5.2.2RoleoftheRegisteredEntitiesandStates.............................................................................33
5.2.3ComplianceMonitoringandEnforcement...........................................................................34
5.3ResourceAdequacy...............................................................................................................................34

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6.EnvironmentalIssues..........................................................................................................39
6.1ImpactsofEnvironmentalRegulation................................................................................................39
6.2DifferingImpactsforDifferentStructures.........................................................................................39
6.2.1GreenhouseGasInitiatives.....................................................................................................40
6.2.2RenewablePortfolioandEnergyEfficiencyResourceStandards.....................................42
6.2.3MercuryandAirToxicsStandards........................................................................................44
6.2.4NationalAmbientAirQualityStandards.............................................................................44
6.2.5CleanAirInterstateRule/CrossStateAirPollutionRule...................................................44
6.2.6RegionalHaze...........................................................................................................................44
6.2.7CoolingWaterIntakeStructures............................................................................................45
6.2.8CoalCombustionResiduals....................................................................................................45
7.RelativeAllocationofRisksoverTime...........................................................................46
7.1TraditionallyRegulatedModel............................................................................................................46
7.2CentralizedMarketModel....................................................................................................................47
8.ResponsibilitiesforPlanningandtheTypesofPlanningPerformed......................51
8.1TheTransmissionPlanningFramework.............................................................................................51
8.1.1RegionalPlanningandtheInclusionofNonIncumbentTransmissionDevelopers.....51
8.1.2InterregionalPlanningCoordination....................................................................................53
8.1.3CostAllocation.........................................................................................................................54
8.1.4PlanningforPublicPolicyRequirements.............................................................................56
8.2TransmissionSitingandTransmissionGridExpansion..................................................................59
8.3AdequacyPlanningandIntegratedResourcePlanning...................................................................60
8.3.1IntegratedResourcePlanningandProcurementPlans......................................................60
9.InnovationandtheLevelsofResearchandDevelopmentPursued..........................63
9.1DecliningCostsandIncreasingFlexibilityofGenerationTechnologies........................................63
9.2EmergenceofDemandSideAlternatives...........................................................................................65
9.3SmartGrid...............................................................................................................................................66
9.4ResearchandDevelopmentInvestment.............................................................................................67
10.StateandFederalGovernment........................................................................................70

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ListofFiguresandTables
Figures:
Figure1.HistoricalTimeline19201945................................................................................................................3
Figure5.HistoricalTimeline1999Present.........................................................................................................13
Figure6.RegionalTransmissionOrganizations................................................................................................18
Figure7.StatusofElectricityRestructuring(RetailChoice)byState..............................................................19
Figure8.NERCRegions........................................................................................................................................31
Figure9.StateRPSPolicies...................................................................................................................................42
Figure10.StateEERSPolicies...............................................................................................................................43
Figure11.ForecastedEnergySalesfromAlternativeSuppliers......................................................................49
Figure12.StateswithIntegratedResourcePlanning(orsimilarplanningprocess).....................................62
Tables:
Table1.WholesaleandRetailMarketStructurebyState.................................................................................20
Table2.CentralizedMarketsandtheirAttributes.............................................................................................22
Table3.ExamplesofMarketBasedResourceAdequacyMechanisms..........................................................37
Table4.ExamplesofCostAllocationApproachesUsedbyPlanningRegion...............................................55
Table5.EstimatedNationalAverageLevelizedCostofNewGenerationResourcesin2018.....................64
Table6.EPRIPlannedR&DFundingfor2013and2014..................................................................................69

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1. ExecutiveSummary
Thispaperexploresthekeypolicyquestionssurroundingtwobroadregulatory/marketstructuresthat
currentlyexistintheUnitedStates(U.S.)invaryingdegrees:traditionalutilityregulationwithout
centralizedmarketsontheonehand,andcentralizedelectricitymarkets,ofteninvolvingrestructured
regulation,ontheother.1Thepaperisintendedasaneducationalpiecefornonindustryexpertsonhow
andwhyelectricutilityregulationhasevolvedandonemodelhasdevelopedinsomeareasofthe
countrywhilenotinothers.Thispaperdoesnotprovideacritiqueofthemarketstructuresnora
quantitativecomparisonbetweenthetwomodels.Thispapermayalsoserveasafoundationfor
identifyingtheissuesthatcharacterizethekeydifferencesbetweentheapproachesandhelpguide
decisionsonfutureresearchprojectsfortheElectricMarketsResearchFoundation.
HistoryandDevelopmentofTraditionalRegulationandCompetitiveMarkets
TheevolutionoftheU.S.electricindustryisahistoryofadaptationtochangesintheoperatingand
regulatoryenvironment.Thefirstchaptertracesthehistoryofthetworegulatory/marketstructures.It
beginsfromtheearlystructureoftheelectricutilityindustryasitdevelopedaroundtheconceptofa
centralsourceofpowerwithverticallyintegratedutilitiesandregulationoftheseentitiesbymunicipal
andstategovernmentalentities.
Duringtheearlytwentiethcentury,electricsystemsgrewrapidly.UndertheRuralElectrificationAct
servicewasextendedtounserved,orunderserved,ruralareas,whichalsogaverisetoruralelectric
cooperativesinmanyareasoftheU.S.Disenchantmentwithprivatelyownedpowerspurredthe
developmentofgovernmentownedutilities,particularlyhydroelectricpowerfacilities.Duringthe
presidencyofFranklinD.Roosevelt(1933to1945),anumberofthesefacilitieswerebuilt,usheringinthe
beginningofpubliclyownedpower.
In1920,theFederalWaterPowerActwaspassedtocoordinatethedevelopmentofthesehydroelectric
projects.ThisactcreatedtheFederalPowerCommission(FPC),nowtheFederalEnergyRegulatory
Commission(FERC).In1935thelawwasrenamedtheFederalPowerActandtheFPCsregulatory
jurisdictionwasexpandedtoincludeallinterstateelectricitytransmissionandsalesofpowerforresale
Withinthetwodifferentgeneralmodelstherearefurtherdistinctions.Thetraditionallyregulatedmodelisoften
characterizedatthewholesalelevelbybilateralresourcetransactionswhileattheretaillevelthetraditional
verticallyintegratedutilityprovides/purchasesallfunctionsrequiredtoprovideservicetotheendusers.The
centralizedmarketmodelgenerallyinvolvestheexistenceofaRegionalTransmissionOrganization(RTO)or
IndependentSystemOperator(ISO)thatadministercentralized,bidbasedmarketsatthewholesalelevelwithsome
degreeofretailcompetitionwherethecustomerhastherighttoprocurepowercompetitivelywithtransmissionand
distributionserviceprovidedbyaregulatedutility.Transmissionanddistributionunderbothmodelsremains
governedbyacostofserviceregulatoryapproach.Further,thereadershouldbeawarethattheremaybeinstances
whereregionsorentitiesgenerallycharacterizedasfunctioningunderacertainbroadmodelmaynotexhibitall
featuresofthatmodel.Forexample,thereareregionsthathavecentralizedwholesaleenergymarketsthatmaynot
haveimplementedretailchoiceinallstateswithinthatregion.Similarly,thereareregionsthatremaintraditionally
regulatedbuthaveelementsofcentralizedmarketsandretailchoice.
1

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andformedthebasisforfederaljurisdictionovertheelectricandnaturalgasindustries,andthe
responsibilitiesoftheFERC.Inthatsameyear,afterseverallargeholdingcompanysystemscollapsed,
thePublicUtilityHoldingCompanyActof1935(PUHCA)waspassed,givingtheSecuritiesand
ExchangeCommissionresponsibilityforregulatingutilityholdingcompanies.UnderTitleII,PUHCA
chargedtheFPCwithregulatingutilitiesinvolvedininterstatewholesalemarketingortransmissionof
electricpower.Regulatoryadministrationoftheratecaseestablishedbaseratesbasedontheactual
normalcostsofprovidingservicedeterminedbytheutilitysrevenuerequirement.
Anumberofdamagingeventsoccurredinthe1960sand1970sthatinterruptedthegrowththathad
occurredinthepriorseveraldecades.First,theNortheastBlackoutof1965raisedconcernsabout
reliability;then,thepassageoftheCleanAirActof1970anditsamendmentsin1977increasedutility
coststoreducepollutingemissions.And,mostsignificantly,theOilEmbargoof19731974resultedin
increasesinfossilfuelprices.In1978,Congresspursuedlegislationtoaddressthesepressuresby
reducingU.S.dependenceonforeignoilanddevelopingrenewableandalternativeenergysources.The
PublicUtilityRegulatoryPoliciesActof1978usheredinagreaterrelianceonmarketforcestoset
wholesaleenergyprices,whilerequiringutilitiestobuypowerattheiravoidedcostfromunaffiliated
alternativeenergyresourcesmeetinganumberofqualifications.Throughoutthelate1980s,utility
interestinwholesaletransactionsgrew,promptedbyanumberoffactors.Someutilitiesfound
themselveswithexcessgenerationbecauseexpecteddemandgrowthdidnotmeetprojectedlevels.In
addition,inthewakeofaggressiveutilityconstructionprograms,regulatorsdeterminedthatsomecosts
wereimprudentandrefusedtoallowtheutilitiestorecovertheminrates.Utilitiessoughttosell
electricityinwholesaletransactionsatmarketbasedrates,andFERCwouldgranttheserequestsupona
showingthattheutilitycouldnotexercisemarketpowertosetprices.
Twosignificantpolicydecisionsoccurredinthe1990sthatprovidedafoundationforenergymarket
development.ThefirstwasthepassageofthefederalEnergyPolicyActof1992(EPACT),whichcreated
anumberofincentivesformarketdevelopment.Thesecondwasthecornerstoneinthecreationof
competitivewholesalepowermarkets,FERCsOrderNo.888.OrderNo.888strovetoeliminateanti
competitivepracticesandunduediscriminationintransmissionservicesthroughauniversallyapplied
openaccesstransmissiontariff.Atthesametimethesechangeswereoccurringinthewholesale
electricitymarkets,agrowingnumberofstateswerealsopursuingarelianceoncompetitivemarketsfor
theretailsupplyofelectricpower.Thistypicallyrequiredtheincumbentutilitytodivestsomeorallof
itsgenerationandbecomeawiresonlydistributionutility.
By2000,FERCwascallingforthevoluntaryformationofregionaltransmissionorganizations(RTOs)
throughitsOrderNo.2000.ThebasisofOrderNo.2000wasFERCsbeliefthatRTOswouldfacilitate
thecontinueddevelopmentofcompetitivewholesalepowermarketsandwouldleadtoimprovements
inreliabilityandmanagementofthetransmissionsystem,eliminatinganyremainingdiscriminatory
practices.However,concurrentwithFERCseffortsunderOrderNo.2000,challengeswerearisingin
theCaliforniamarkets.In2001,Californiasufferedfromflawsinitspowermarketstructureleadingto
theinsolvencyofoneofthelargestutilitiesinthestate.FollowingtheCaliforniaenergymarketcrisis
andablackoutthataffectedalargeportionofthenortheasternU.S.andCanadain2003,Congress
enactedtheEnergyPolicyActof2005(EPAct2005)onAugust8,2005.ThislegislationprovidedFERC
greaterauthoritytooverseewholesaleelectricitymarkets.FERCsubsequentlyissuedOrderNo.890in
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early2007tocorrectflawsinitsproformaOpenAccessTransmissionTariff(OATT)thathadbeen
uncoveredduringthetenyearssinceOrderNo.888wasissued.
Duringtheautumnof2008,largedisruptionsinthefinancialmarketsalsouncoveredvulnerabilitiesin
theelectricitymarkets.Inresponse,FERCissuedOrderNo.741proposingextensiverevisionstoits
policyonRTO/IndependentSystemOperator(ISO)creditpractices.Congresstookadditionalactionsin
responsetothe2008financialcrisis,includingenactingtheDoddFrankAct,whichhadthepotentialto
affectenergytradingcompaniesandwholesaleenergymarkets.
TodaysTwoBroadModels
Atthewholesalelevel,bilateraltransactionsprevailintheSoutheast,mostoftheSouthwest,partsofthe
MidwestandtheWest,excludingCalifornia.Underthisregime,utilitiesengageinwholesalephysical
powertransactionsthroughbilateralarrangementsrangingfromstandardizedcontractpackages,to
customized,complexcontractsknownasstructuredtransactions.Thisischaracterizedasacomponent
ofthetraditionallyregulatedmodel.AcentralizedmarketmodelisthenormintheNortheast,Mid
Atlantic,muchoftheMidwest,theElectricReliabilityCouncilofTexas(ERCOT),andCalifornia.In
thesemarketsparticipantsbid/offerresourcesintoacentralizedmarketandarepaidauniformclearing
price.
Similarly,twomodelsarecurrentlyemployedintheUnitedStatestodeliverelectricpowertoretail
consumers.ThetraditionalmodelistheVerticallyIntegratedUtility,wherevariousservicesare
bundled,meaningthatallenergyandenergydelivery(transmissionanddistribution)services,aswell
asancillaryandretailservices,areprovidedbyoneentity.2Customersdonothavetheoptionof
selectinganotherproviderforanyoftheseservices,andtheutilityschargesaresetentirelybythe
regulatoryauthorityorgoverningbodyinthecaseofpublicpower.Incontrast,undertheretailchoice
model,customerchoicehasbeenpartiallyorfullyimplemented.Inthismodel,customersmayoften
selecttheirenergyprovider,andtheutilitywilldeliverthepower.Nonutilityenergyproviderscanset
theirownpricingforpower,buttheutilityschargesfordeliveryandrelatedservicesaresetbythe
regulatoryauthority.Traditionalbundledpricingmayalsobeavailablefromtheutility,forsomeor
alltypesofcustomers.3
IntheUnitedStates,traditionalutilitypricing(orratemaking)iscostbased,meaningthattheutilityis
allowedtochargepricesthatwillrecoverprudentoperatingcostsandprovideanopportunitytoearna
reasonablerateofreturnonthepropertydevotedtothebusiness.Amongthehistoricalcriticismsof
costbasedratemakingarethatitcreatesanincentivetooverinvestincapitalintensiveprojectsandfails
toprovideutilitiesproperincentivestooperateefficiently.
AlthoughinthecaseofPublicPower,generationandtransmissionmaybeprovidedbyjointauthoritiesand
bundledbythelocaldistributionutility.
3ItisworthnotingthattheRetailChoicemodelencompassesaspectrumoffeaturesthatmayvaryfromstateto
state.Thekeyfeatures,suchastheexistenceofretailchoiceforatleastsomecustomersandtheavailabilityof
organizedwholesaleenergymarketsarethesame,althoughtheremaybedifferencesinthemanneranddegreeto
whichthesefeaturesareimplemented.
2

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ThecustomerchoiceaspectoftheRetailChoicemodelwasintroducedintheUnitedStatesinthe1990s
inresponsetohighregulatedpricesinsomeregionsrelativetothecostofwholesalemarkets.Many
consumergroupsfoundretailcompetitionattractivebecausethepricesinemergingwholesalemarkets
weresignificantlybelowtheregulatedretailpriceschargedbyutilities.
Incontrasttothetraditionalregulatedmodel,thecustomerchoicefeatureoftheretailchoicemodel
limitstheoperationoftheregulatedutilitytothetransmissionanddistributionfunctions,where
traditionalcostbasedpricingisimplementedandapprovedbyregulators.Generationservicesare
providedeitherbycompetitiveserviceprovidersorthroughadefaultprovideroflastresort.Retail
choicealsohasitscriticisms;amongthemarethatresidentialparticipationinsomeretailmarketshas
beenslowtomaterialize,inpartbecauseretailsuppliershavenotpursuedresidentialcustomersas
aggressivelyascommercialcustomersduetotheirrelativelysmallsize.Otherfactorsmayincludealack
ofincentives(i.e.,lowerprices)orinformation.
SystemReliability
Reliabilitystandardsorcriteriausedforplanningandoperationsareanintegralpartoftheelectric
powerindustryandhavebeensincetheveryfirstsystemsweredevelopedinthelatenineteenth
century.Therearetwoprincipalcomponentstobulkpowersystem(BPS)reliabilityresourceadequacy
andtransmissionsecurity.4TheareaoftransmissionsecurityisgovernedbyFERC,theNorthAmerican
ElectricReliabilityCorporation(NERC),andtheRegionalEntities(REs).Thestatesstillretainarolein
resourceadequacyandinregulatingthereliabilityoflocaldistributionsystems.
Overtheyears,aseriesofblackouts(the1965NortheastBlackout,theblackoutontheEastCoastinJuly
1977,theWestCoastblackoutsinJulyandAugustof1996,andtheblackoutonAugust14,2003affecting
thenortheasternU.S.andCanada)ledtothecreationofNERCanditsREs.Priorto2005,compliance
withreliabilitystandardswasvoluntary.TheenactmentofEPAct2005eliminatedthevoluntarynature
oftheNERCreliabilitystandards.FERCwaschargedwiththeultimateoversightofelectricreliabilityof
theBulkPowerSystem(BPS).NERC,astheindependentElectricReliabilityOrganization(ERO),along
withitsREsdevelopmandatoryreliabilitystandardssubjecttoFERCapproval,monitorindustry
participantscompliancewiththesestandards,andcanlevypenaltiesfornoncomplianceuptoone
milliondollarsperdayperviolationforthemostseriousviolations.
Currently,thereare102standardswithmorethan1,300requirementsapplicableandmandatoryinthe
U.S.WithintheUnitedStates,otherthanAlaskaandHawaii,allusers,owners,andoperatorsoftheBPS
mustcomplywiththereliabilitystandardsdevelopedbytheEROandregionalreliabilitystandards
developedbytheREs.ThisresponsibilityextendsFERCjurisdictionnotonlytothegovernmentowned
andothersocallednonjurisdictionalutilities,butalsotoutilitiesinTexasaswellastoawiderangeof
nonutilityentitiesthatusethetransmissiongrid.
TheEROscomplianceregistryprocessisusedtoidentifythesetofentitiesthatareresponsiblefor
compliancewithaparticularreliabilitystandardandtheapplicabilitysectionofaparticularreliability
standarddeterminestheapplicabilityofeachreliabilitystandard.TheNERCFunctionalModelprovides
Reliabilityisalsodependentatthelocallevelonthereliabilityofthelocaldistributionsystem.

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guidanceconcerningthetypeoffunctionforwhichanentityisregisteredand,therefore,theirrolein
maintainingreliability.
RegardlessofwhetherentitiesarelocatedinregionsthathavecentralizedmarketsandRTOs/ISOsora
traditionalregulationstructure,theREsandNERCwillidentifywhomustberegisteredandaswhat
typeoffunctionalentity.Theprimarydifferencebetweenfunctionalresponsibilitiesofentitiesthatexist
inRTOs/ISOsandthosethatdonotisthatRTOs/ISOsoftenperformthefunctionalrolesofbalancing
authority,reliabilitycoordinator,transmissionoperator,andtransmissionplanner.Inregionsthatdo
nothaveRTOs/ISOs,theelectricutilityoftenperformsallthefunctionsandisregisteredasmultiple
functionalentitytypes.Thestatesandothergovernmentalentitiesthathaveregulatoryoversight
functionsmayparticipateasnonvotingmembersinNERCandREactivities,underthegovernment
sector,andmayalsoprovidecommentsinFERCproceedings.
Twoapproacheshavebeenappliedtoachievingtheresourceadequacygoalsmarketbasedandan
administrativeapproach.Withacapacitymarket,suppliersreceiveperiodic(i.e.,annualormonthly)
paymentsforprovidingreliablecapacitytoasystemandLoadServingEntities(LSEs)arerequiredby
theregulatorystandardtopurchasethecapacity.ExamplesofcapacitymarketsarePJM,NYISO,and
ISONE.Therearealsoothervariationstothemarketbasedapproach;theseareenergyonlymarkets(in
ERCOT)andmarketswithadministrativeresourceadequacyrequirementsforLSEs(CAISOandMISO).
Onekeyconcernforconsumersispricevolatilityanduncertainty.Questionsalsoremainastohow
currentmarketdesignwillworktoensurecapacityadequacyinthelongtermateconomicallyefficient
levels.Undertheadministrativeapproach,resourceadequacyisachievedthroughtraditionalIntegrated
ResourcePlanning(IRP)andcompetitiveresourcesolicitation.Onekeyconcernwiththeadministrative
approachisincreasedconsumercostduetouneconomiclongterminvestmentdecisions.Examplesof
administrativeapproachesaretheSouthwestPowerPool,mostoftheWesternElectricityCoordinating
CounciloutsidetheCAISO,andthesoutheastU.S.
EnvironmentalIssues
Market/regulatorystructureplaysanimportantroleinwhetherandhowenvironmentalrequirements
andpoliciesaffectelectricentities.Wherethetraditionallyregulatedmodelprevails,theimpacts
whatevertheyarefallontheutilityandtheassociatedcostsflowtoitscustomersthroughcostbased
rates.Incontrast,wheretherehasbeenarestructuringofutilityregulationandthedevelopmentof
centralizedelectricitymarkets,impactsvarywidely.Autilitythatownsnogenerationwouldnotincur
thedirectexpenseofcomplyingwithenvironmentalrulesrelatingtoemissions,althoughgenerators
wouldtrytoraisepricestorecovercosts.Similarly,generationonlyentitieswouldnotnormallybe
subjecttorenewableportfoliostandards(RPS)orpoliciesfavoringtheuseofrenewableenergy
resources.
Independentgeneratorsincentralizedmarketsareparticularlysensitivetothecostsofenvironmental
regulation,sincethesegeneratorsrelyonmarketpricingratherthancostofservicerates.Uneconomic
generationincompetitivemarketsmayberetiredratherthanoperatedatalossforanyextendedperiod
oftime.Underthetraditionalregulatedmodel,verticallyintegratedutilitiesarealsosensitiveto
environmentalregulation,includingpoliciesorregulationsfavoringrenewables,sincecompliance
wouldincreaseordecreaseitscosts.
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Thecostsandrisksfromproposedenvironmentalregulationswilldifferbyregion,largelyaffecting
thoseregionsofthecountrywithsignificantamountsofexistingcoalfiredgeneration.Whether
environmentalcostsendupbeingpassedthroughincostbasedratesorresultinhighermarketbased
rates,theimpactonelectricityconsumersinthoseregionswillbeconsiderable.
RelativeAllocationofRisksoverTime
Underthetraditionalregulatedmodel,theallocationofrisksiswellestablished.Theutilityhasa
monopolyrighttoprovideelectricservicetoretailcustomers,whointurnareentitledtoelectricityata
reasonablecost.Theutilitysriskinthetraditionalmodelisthatitsrateswillnotrecoveritsactual
investmentandoperatingcostsormeettherateofreturnrequiredforitsinvestorstorisktheirmoney.
Theutilityalsorisksthatitscostswillbedeterminedtohavebeenprudentlyincurredandthatitwill
receivetimelyrecoverythroughtheregulatoryprocess.Thecustomersfacemuchoftheriskofutility
overinvestmentorunderinvestment(eitherthroughbaddecisionmakingoroutofconcernthatitwill
notrecoveritscosts),andunreliableserviceandhighcostsasaresultofineffectiveoperationsorbad
decisionmaking;totheextenttheregulatorsallowutilitiestorecovertheircosts.
Inacentralizedmarketmodel,therisksforcustomersandthemechanismsforaddressingthemarethe
samewithrespecttothetransmissionanddistributionsystem.Ratecasesandregulationarethe
principaltoolstoprotectcustomersfrommonopolyabusesandtosettheutilityspricingforthedelivery
ofelectricity.However,withrespecttogeneration,themarketsetswholesaleenergyprices.Inthese
markets,manygeneratorsinaregioncompetewithoneanothertosupplyelectricity.Theseregionsalso
relyonmarketforcestocauseneededgenerationtobeaddedwhenandwhereitisneededbutsome
marketshavefoundthattheseforcesmaynotbeenoughincentive.Afurthercomplexityinsome
centralizedmarketsiscustomerchoicewhereautilitymustbepreparedtoprocurepowerforachanging
customerbase.
ResponsibilitiesforPlanningandtheTypesofPlanningPerformed
Planningfunctionsencompassadequacyandtransmissionsecurityplanning.Stateandfederal
governmentshaveoverlappingresponsibilitiesforthesetwoaspectsofplanning.Theoversightof
resourceadequacyplanninghastraditionallybeenastatefunctionwhiletransmissionsecurityplanning,
withtheimportantexceptionoftransmissionsiting,hasnowbecomegovernedbyfederallawand
regulationoverseenbyFERC.
Inrecentyears,twokeyFERCOrdershaveencompassedthefieldoftransmissionplanning.Theyare
OrderNo.890andOrderNo.1000,whichapplytoentitieswhetherinRTO/ISOregionswithcentralized
marketsornot.OrderNo.890promotedincreasedopen,transparentandcoordinatedtransmission
planningonsubregional(local)andregionallevels.OrderNo.1000builtuponandextendedmanyof
theideasinitiallyintroducedunderOrderNo.890.AmongthechangesintroducedinOrderNo.1000
arerequirementsforregionalandinterregionalplanning,costallocation,considerationofpublicpolicy
requirements,andeliminationoftheRightofFirstRefusalinwholesaletariffstoconstructnewfacilities.
InareaswhereRTO/ISOshaveformed,transmissionplanningoftenencompassesalargerregionthan
previouslyexistedandiscoordinatedaroundacentralizedprocessesadministeredbytheRTO/ISO.In
areaswheretraditionalregulationremains,planningiscoordinatedbytheverticallyintegratedutilities
October 8, 2013
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orpublicpowerentitieswithintheirterritory.Theseterritoriesmayalsoencompasslargeareasdueto
mergersandholdingcompanyconsolidation.Bothtraditionallyregulatedandcompetitivemarket
(RTO/ISO)regionshaveinplaceprocessestocoordinateplanningwiththeirneighboringentities.
Theauthorityovertransmissionsitingisapatchworkquiltofoverlappingandsometimesunclear
divisionsofauthority.Whilethemajorityofsitingauthoritycurrentlylieswiththestates,thereare
instanceswherefederalapprovalsarerequired.TheEnergyPolicyActof2005establishedalimitedrole
fortheU.S.DepartmentofEnergy(DOE)andtheFERCintransmissionsiting.TheactdirectedDOEto
createtransmissioncorridorsinlocationswithadequatetransmissioncapacitythathadnational
interestimplications.TheactalsograntedFERCsecondaryauthorityovertransmissionsitinginthese
corridors,whichmaynotbeexercisedbyFERCunlessthestatewherethefacilitywouldbesitedlacks
theauthoritytoissuethepermit,theapplicantdoesnotqualifyforthepermitinthestate,orthestate
haswithheldapprovalofthepermitformorethanoneyear.
Whilesomeregionshavemovedtodevelopcapacitymarkets,discussedearlier,toensuregeneration
adequacy,manystates,particularlyinareaswherethetraditionallyregulatedmodelremains,have
retainedtheIRPapproach,whichbeganinthelate1980s.StepstakeninanIRPincludeforecasting
futureloads,identifyingpotentialsupplysideanddemandsideresourceoptionstomeetthosefuture
loadsandtheirassociatedcosts,determiningtheoptimalmixofresourcestakingintoaccount
transmissionandothercosts,receivingandrespondingtopublicparticipation(whereapplicable),and
creatingandimplementingaresourceplan.
InnovationandtheLevelsofResearchandDevelopmentPursued
Innovationsintheelectricindustry,technicalandeconomic,havecomeaboutthroughtheapplicationof
researchanddevelopment(R&D)ofprojectsbytheelectricsector,governments,andotherindustrial,
communications,andtechnologysectors.
Theexpansionofcombinedheatandpowerandnaturalgasfiredcombinedcycleplantsinthelate1970s
intothe1990swasastrongcontributingfactortogrowthintheclassofnonutilitygeneration.Thecost
effectivenessofsmallerincrementsofgenerationhasreducedtheneedforutilitiestoperiodicallyhave
large,lumpy,capitalintensiveinvestmentsandcorrespondinglargeadditionstotheirratebase.
Moreover,sincegenerationcanbeaddedinsmallerincrementsandwithleadtimesclosertothetimeof
anticipatedneed,theinvestmentcyclehasbecomesmoother.Thisbenefitsbothtraditionaland
competitivemarketentities.
Demandsidemanagement(DSM)inducedreductionsinloadgrowthreduceordefertheneedfornew
generationplantinvestmentandthecostsoftheDSMalternativesmaybelessthanthecostofnew
generation.Centralizedmarketregionsaregraduallyimplementingmarketrulesthatseektoplace
supplyanddemandsideoptionsonequalfootingwithrespecttobiddingintocapacityandenergy
markets.Traditionallyregulatedregionsseektomaintainequalfootingforthesetwotypesofoptions
throughintegratedresourceplansvettedbystateregulators.
Inthelastdecade,orless,theSmartGridhasbecomeahottopicinpoliticalandacademiccirclesaswell
asothergroupsnottraditionallyinvolvedintheregularprocessesoftheelectricsector.Theexpectation
October 8, 2013
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isthatSmartGridimplementationwillgeneratepotentialsavingstocustomersbyprovidingthemthe
toolstomanagetheirenergyconsumptionhabitsandcosts,aswellasprovidingpotentialsavingsto
utilitiesandtheircustomersthroughoperatingefficiencies.Utilitiesinbothmodelswouldbenefitfrom
savings.Similarly,customerscanbenefitfromsmartmetersandusageinformationunderbothmodels.
R&Dinvestmentbyelectricutilities(includingtheircontributionstotheElectricPowerResearch
Institute)issmallwhencomparedtootherindustrialsectorsandwhenobservedinthecontextofthe
roleelectricityplaysinournationaleconomyandsociety.However,historically,electricequipment
manufacturershaveprovidedthemajorityoftheR&Dinthesector;thisisprimarilybecauseutilities
cannotnecessarilyinternalizethebenefitsoftheinnovationsdevelopedthroughR&D.Nostudyhas
definitivelyassessedtheimpactofrestructuringeffortsonR&Dinvestmentintheelectricityindustry.
However,severalstudieshavenotedadeclineinR&Dinvestmentinsomeareasandconcludedthat
utilityrestructuringisthelikelycause.However,therearealsostudiesthathaveconcludedthatthe
centralizedmarketmodelencouragesmoreinnovationthanthetraditionallyregulatedmodel.5
StateandFederalGovernment
TheelectricutilityindustryintheUnitedStatesisregulatedatthestateandfederallevels.State
regulationextendstomostareasofutilityoperations,rates,andenduserissues.Federalregulation,
foundedoninterstatecommerceimpacts,generallyrelatestothewholesalesideoftheutilitybusiness,
includinginterstatetransmissionandsalesofelectricityforresale.StateandFederaljurisdictionover
transmissionsiting,resourceadequacyandtransmissionsecurityplanning,andelectricreliabilityhave
beendiscussedabove.
Investorownedutilitiesaresubjecttostateregulationastotheirdutiestocustomers,system
requirements,financingarrangements,andretailrates.Governmentownedutilitiesandruralelectric
cooperativesarenotgenerallysubjecttoregulationunderstateutilitylaws,butmustfollowthe
requirementsoftheordinanceorlawestablishingthemandhavegoverningboardsthatprovide
oversight.
Underboththetraditionallyregulatedmodelandthecentralizedmarketmodel,interstatetransmission
ratesareapprovedbyFERCandFERCregulatestheinterstatetransmissionandgenerationactivitiesof
publicutilities.FERCdoesnotregulategovernmentownedutilitiesormostcooperatives,whichare
oftenreferredtoasnonjurisdictionalentities.Inaddition,becausemostoftheTexastransmission
gridisnotinterconnectedwiththerestoftheinterstatetransmissiongrid,TexasisnotsubjecttoFERC
rateregulation.InTexas,thestateregulatorisresponsibleforapprovingtransmissionrates(because
Texastransmissionisintrastate)aswellasregulatingallotheraspectsoftheelectricutilitybusinessin
Texas.
WhileFERCsregulatoryreachisnotabsolute,FERChaseffectivelyextendedmanyofitsregulationsto
nonjurisdictionalutilitiesthroughreciprocity.Forexample,ifanonjurisdictionalutilitywantstotake
advantageofthetermsofapublicutilitysOpenAccessTransmissionTariff(OATT),thenitmustitself
haveanOATTwherethetermsofserviceotherthanratesmustcomplywithFERCrequirements.
Thesestudiesarediscussedingreaterdetailinsection9.4.

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Similarly,inordertobepartoftheregionalplanningprocessandtotakeadvantageofproposedcost
allocationmechanisms,FERChassaidthatnonjurisdictionalentitieshavetoagreetoparticipateinthe
FERCregulatedplanningprocessesandbesubjecttotheoutcomeoftheseprocesses.

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2. Introduction
Thispaperexploresthekeypolicyquestionssurroundingtwobroadregulatory/marketstructuresthat
currentlyexistintheUnitedStatesinvaryingdegrees:traditionalutilityregulationwithoutcentralized
marketsontheonehand,andcentralizedelectricitymarkets,ofteninvolvingrestructuredregulation,on
theother.ThelatterstructurealsogenerallyinvolvestheexistenceofaRegionalTransmission
Organization(RTO)orIndependentSystemOperator(ISO).
Thispaperprovidesabriefhistoryofregulationandcompetitionintheelectricindustryandidentifies
theissuesthatcharacterizethekeydifferencesbetweenthetwomajorregulatory/marketstructures,
whichforeaseofreferencearebeingcalledatraditionallyregulatedmodelandacentralizedmarket
model.6Thepaperisintendedasaneducationalpiecefornonindustryexpertsonhowandwhyelectric
utilityregulationhasevolvedandcentralizedenergymarketshavedevelopedinsomeareasofthe
countryandnotinothers.Itfocusesonconsumerimpactsanddiscusseshowvariousissuesare
addressedunderthetwobroadmodelsaswellasidentifyingongoingissuesandchallenges.Thispaper
doesnotprovideacritiqueofthemodelsnoraquantitativecomparisonbetweenthetwomodels.
Asecondarypurposeofthepaperistoserveasafoundationforidentifyingtheissuesthatcharacterize
thekeydifferencesbetweenthetworegulatory/marketstructuresthatwillhelpguidedecisionson
futureresearchprojectsfortheElectricMarketResearchFoundation(EMRF)tomeetitsgoalof
informingthepublicpolicydebateontheprosandconsofthemajormarketstructures.
Withinthetwodifferentgeneralmodelstherearefurtherdistinctions.Thetraditionallyregulatedmodelisoften
characterizedatthewholesalelevelbybilateralresourcetransactionswhileattheretaillevelthetraditional
verticallyintegratedutilityprovides/purchasesallfunctionsrequiredtoprovideservicetotheendusers.The
centralizedmarketmodelgenerallyinvolvestheexistenceofaRegionalTransmissionOrganization(RTO)or
IndependentSystemOperator(ISO)thatadministercentralized,bidbasedmarketsatthewholesalelevelwithsome
degreeofretailcompetitionwherethecustomerhastherighttoprocurepowercompetitivelywithtransmissionand
distributionserviceprovidedbyaregulatedutility.Transmissionanddistributionunderbothmodelsremains
governedbyacostofserviceregulatoryapproach.Further,thereadershouldbeawarethattheremaybeinstances
whereregionsorentitiesgenerallycharacterizedasfunctioningunderacertainbroadmodelmaynotexhibitall
featuresofthatmodel.Forexample,thereareregionsthathavecentralizedwholesaleenergymarketsthatmaynot
haveimplementedretailchoiceinallstateswithintheregion.Similarly,thereareregionsthatremaintraditionally
regulatedbuthaveelementsofcentralizedmarketsandretailchoice.
6

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3. HistoryandDevelopmentofTraditionalRegulationandCompetitiveMarkets
TheevolutionoftheU.S.electricindustryisahistoryofadaptationtochangesintheoperatingand
regulatoryenvironment.Duringtimesofsignificanteconomicandtechnologicalchange,policymakers
adaptedregulatorypolicytoensurethepublicinterestcontinuedtobeserved,economicprinciplesof
efficiencyandcompetitionwereadvanced,andthereliableandefficientdeliveryofelectricserviceto
consumerswasmaintained.Thedecisionsmadebyregulatorsandpolicymakersshapedthetwo
regulatorypathsthathaveemergedtraditionalratemakingbasedoncostofserviceregulationand
centralizedmarketdevelopment.Today,bothoftheseapproachescoexistandcontinuetoevolveto
meetchangingeconomicandtechnologicalchallenges.
Theallocationofregulatoryauthoritybetweenthefederalgovernmentandthestatesisdistinguishedby
whatconstitutesinterstatecommerceandwhatconstitutesintrastatecommerce.7Furthermore,thereis
thepreemptiveeffectoffederalwholesalerateordersonstateretailrateauthority.8Thisdichotomyhas
resultedinanumberofdistinctionsamongindustryparticipantsastowhethertheyaresubjectto
federal,stateorbothfederalandstateregulationbyvirtueofhowtheyareorganizedandwhetherthey
operatewithinasinglestate.Further,distinctionsastotheapplicabilityoffederalvs.stateregulation
turnonwhichspecificphysicalandfunctionalcomponentsoftheelectricsystem(e.g.,generation,
transmission,distribution,andcustomerservice)areinquestion.
Thesectionsthatfollowdescribe,fromtheearlybeginningtopresentday,thekeyeventsthat
transformedapproachesinelectricregulationpolicyandtheevolvingapproachesdesignedby
regulatorsandpolicymakersonboththefederalandstatelevelstomeetthosechallenges.
Seealso,NewYorkv.FERC, 535U.S.1(2002).ThecourtacknowledgedthatFERCcorrectlycouldchoosenotto
regulatethetransmissioncomponentofbundledretailsales.Bundledsalesaresalesthatcombineenergyand
transmissionserviceasasingleunit.
8UndertheNarragansettlineofcases,NarragansettElec.Co.v.Burke,381A.2d1358(1977),cert.denied,435U.S.972
(1978),comprisingwhatisnowcalledthefiledratedoctrine,stateregulatorsmusttreatautilitysFERCapproved
wholesalepowercostsasreasonableoperatingexpensesinthecompanysretailcostofservice.Inotherwords,the
retailregulatorcannot,initsretailratehearing,questionthereasonablenessofthewholesaleratethattheFERChas
fixed.
7

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3.1 DevelopmentofTraditionallyRegulatedMarkets
Figure1.HistoricalTimeline192019459
Theearlystructureoftheelectricutilityindustrydevelopedaroundtheconceptofacentralsourceof
powersuppliedbyefficient,lowcostutilitygeneration,transmission,anddistribution.Regulationof
utilitiesbeganinthelatenineteenthcentury,withmunicipalitiesissuingfranchises,oftenoverlapping,
asamethodofregulation,promotingcompetitionbetweenutilities.Thisregulatoryoversightderived
fromaseriesofnineteenthcenturycourtdecisionsintheU.S.thatheldindustriessuchasgrain
elevators,warehouses,andcanalsweremonopolyprovidersofserviceaffectedwiththepublic
interest7andthattheirratesandtermsofservicecouldthereforeberegulated.10Municipalregulation
gavewaytostateregulationfollowingthepassageoflawsinNewYorkandWisconsindeveloping
powerfulstatecommissions.11
Intheearlypartofthetwentiethcentury,theelectricindustryevolvedquicklythroughthecreation,
growth,andconsolidationofverticallyintegratedutilities.Arapidincreaseinelectricitygeneration
encouragedgrowthandconsolidationoftheindustrytoachieveeconomiesofscale,whichresultedinan
expansionintomoreandmorecitiesacrosswidergeographicareas.12Duringthisperiod,vertically
integratedelectricutilitiesproducedapproximatelytwofifthsofthenationselectricity.13Overtime,
statesgrantedtheseconsolidatedutilitiesmonopolyfranchiseswithexclusiveserviceterritoriesin
exchangeforanobligationtoservecustomerswithinthatterritoryatratesforservicebasedonstate
regulated,costofserviceratemaking.14Asutilityserviceterritoriesgrewthroughoutthe1900s,state
Source:NavigantConsulting,Inc.
SeeMunnv.Illinois,94U.S.113,126(1877).
11Therearealternativeviewsofwhythemunicipalregulationended.Thenaturalmonopolyviewisthatstate
regulationwasnecessarytodistancetheregulatorfromthelocallevelandtoenforceuniformregulationthroughout
thejurisdiction.Thisviewassumesthatonefirmcanservethemarketmorecheaplythantwoormorefirmsandcan
keepoutrivalfirmsbyexpandingoutputandloweringpricewhenthreatened.Thealternativeviewwasthatthe
movefrommunicipaltostateregulationwasinthepublicinterest. See R.RichardGeddes,AHistoricalPerspective
onElectricUtilityRegulation,CATOREVIEWOFBUSINESS,
http://www.cato.org/sites/cato.org/files/serials/files/regulation/1992/1/v15n18.pdf,atpp.7577.
12SeeU.S.ElectricPowerIndustryContextandStructure,AnalysisGroupforAdvancedEnergyEconomy
(November2011)(AEEContextandStructure).
13EnergyInformationAdministration,TheChangingStructureoftheElectricPowerIndustry2000:AnUpdate
(October2000)PartI,Chapter2,pg.5(EIAChangingStructure).
14SeeAEEContextandStructure.
9
10

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regulationofprivatelyownedelectricutilitiesincreased.Amongthefirststatestoregulateelectric
utilitieswereGeorgia,NewYork,andWisconsin,whichestablishedstatepublicservicecommissionsin
1907.15Thesestatesweresoonfollowedbymorethan20otherstates.Partofthejustificationfor
exclusiveserviceterritorieswasthatasingledistributionsysteminanareawasmoreefficientdueto
economiesofscope;competingdistributionfacilitiesonthoroughfaresandincommunitieswould
requireredundantcapitalinvestmentandexpenditures.
Despitethelureofexclusivefranchises,someareaswereinevitablylessattractivethanothers.Thiswas
particularlytruewithrespecttoruralareas,wheretheprogressofelectrificationwasmuchslowerthan
inurbanareas.TheRuralElectrificationActwasenactedtoprovidepowertounserved,orunderserved,
ruralareasandgaverisetotheadventofruralelectriccooperativesinmanyareasoftheU.S.
Duringthe1920sandtheearlyyearsoftheDepression,thepublicbecamedisenchantedwithprivately
ownedpowerandbegantosupporttheideaofgovernmentownershipofutilities,particularly
hydroelectricpowerfacilities.Thisdisenchantmentresultedprimarilyfromabusesimposedbyholding
companiesonutilities,andultimatelyontheircustomers,causingthepriceofelectricitytoincrease.A
fiercedebateatthetimewaswhethergovernmentownedhydroelectricpowerfacilitiescouldproduce
powercheaplyandsellittopubliclyownedutilitiesfordistribution.DuringthepresidencyofFranklin
D.Roosevelt(1933to1945),anumberofthesefacilitieswerebuilt,usheringinthebeginningofpublicly
ownedpower.16
ThedevelopmentofhydroelectricprojectsintheUnitedStateswascoordinatedundertheFederalWater
PowerActin1920.TheactcreatedtheFederalPowerCommission(FPC),nowtheFederalEnergy
RegulatoryCommission(FERC),asthelicensingauthorityfortheseplants.TheFPCalsoregulatedthe
interstateactivitiesoftheelectricpowerandnaturalgasindustries.TheresponsibilityoftheFPCwasto
maintainjust,reasonable,andnondiscriminatoryratestotheconsumer.In1935thelawwasrenamed
theFederalPowerAct(FPA),andtheFPCsregulatoryjurisdictionwasexpandedtoincludeall
interstateelectricitytransmission.TheFPCwasalsogivenauthoritytoregulatenonfederalhydropower
projects.TheFederalPowerActisthecorelegislationprovidingfederaljurisdictionovertheelectricand
naturalgasindustriesanddefiningtheresponsibilitiesoftheFERC.17However,theFPAexempts
EnergyInformationAdministration,AnnualOutlookforU.S.ElectricPower1985,DOE/EIA0474(85)(August1985),
pg.3.
16EIAChangingStructure,PartI,Chapter2,pg.6.Aspartoftheprogram,PresidentRooseveltproposedthatthe
governmentbuildfourhydropowerprojectsand,withinayearafterhisproposal,hisadministrationbeganto
implementtheprojects.
HooverDambegangenerationin1936,followedbyotherlargeprojects.
GrandCoulee,thenationslargesthydroelectricdam,beganoperationin1941.
UndertheTennesseeValleyAuthorityActof1933,thefederalgovernmentsuppliedelectricpowerto
states,counties,municipalities,andnonprofitcooperatives.
TheBonnevilleProjectActof1937pioneeredthefederalpowermarketingadministrations.
15
From1933to1941,onehalfofallnewcapacitywasprovidedbyfederalandotherpublicpowerinstallations.Public
powercontributed12percentoftotalutilitygeneration,withfederalpoweralonecontributingalmost7percent.See
Id.ItshouldbenotedthatthefederalpowergeneratingentitieswerenotsubjecttoregulationbyStates.
October 8, 2013
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certainentitiesfrommanyprovisionsoftheAct,includingentitiesinthestateofTexas,whichisa
singlestateInterconnectionwithnointerstatetransactions,aswellascertainnonpublicutilities(i.e.,
MunicipalUtilities,Cooperatives,PowerMarketingAdministrations,andstateauthorities).18
Afterseverallargeholdingcompanysystemscollapsed,aninvestigationbytheFederalTrade
Commissionwasordered,leadingeventuallytothepassageofthePublicUtilityHoldingCompanyAct
of1935(PUHCA).PUHCAwasaimedatbreakinguptheunconstrainedandexcessivelylargetrusts
thatthencontrolledthenationselectricandgasdistributionnetworks.19
PUHCAgavetheSecuritiesandExchangeCommission(SEC)responsibilityforregulatingutility
holdingcompanies.UnderTitleIIofPUHCA,theFPCalsoregulatedutilitiesinvolvedininterstate
wholesalemarketingortransmissionofelectricpower.20OneofthemostimportantfeaturesoftheAct
wasthattheSECwasgiventhepowertobreakupthelargeinterstateholdingcompaniesbyrequiring
themtodivesttheirholdingsuntileachbecameasingleconsolidatedsystemservingacircumscribed
geographicarea.Anotherimportantfeatureofthelawpermittedholdingcompaniestoengageonlyin
businessthatwasessentialandappropriatefortheoperationofasingleintegratedutility.21
IntheSupremeCourtcaseofFPCv.Hope,theCourtstated:[t]heratemakingprocessi.e.,thefixing
ofjustandreasonablerates,involvesabalancingoftheinvestorandtheconsumerinterest.22This
balancingofconsumerandinvestorinterestsevolvedintowhathasbecomeknownastheregulatory
compact.23Inaddition,HopegaverisetoanEndResultsDoctrinerelatingtorates.Underthisdoctrine,
onlytheendresultnotthemethodologymattersindeterminingwhetherratesarejustand
reasonable.24
Theregulatorycompactispremisedontheexistenceofasetofrights,obligations,andbenefitsthatare
sharedbetweenutilitiesandtheircustomers.25Inreturnforthegrantofafranchiseandtherightto
recoveritscostsplusamarketdeterminedprofitequaltothecostofdebtandequitycapital,the
Section201(f)oftheFPAgenerallyexemptstheUnitedStates,astateoranypoliticalsubdivisionofastate,an
18
electriccooperativethatreceivesfinancingundertheRuralElectrificationActof1936(7U.S.C.901etseq.)orthat
sellslessthan4,000,000megawatthoursofelectricityperyearfromPartIIoftheFPA.However,itshouldbenoted
thatthereliabilitysectionoftheFPAaddedunderEPACT2005extendstoentitiesthatweredescribedunder201(f)
oftheFPA.SeeFederalPowerAct215(b),16U.S.C844o(b).
19EIAChangingStructure,PartI,Chapter4,pg.29.
20Ibid.,PartI,Chapter2,pg.5.
22FederalPowerCommissionv.HopeNaturalGasCo.,320U.S.591,603(1944).
23Theconceptofaregulatorycompactisnotthatthereisaformalagreementbetweentheutilityandgovernment
butratherthatthelegalobligationsofregulatorsandutilitieshaveevolvedthroughalongseriesofcourtdecisions,
SeeRAPPublications,ElectricityRegulationintheUS:AGuide(March2011),
www.raponline.org/document/download/id/645, pp. 4-5.
24Dr.KarlMcDermott,CostofServiceRegulationIntheInvestorOwnedElectricUtilityIndustry(June2012),pg.3
(CostofServiceRegulation).
25CostofServiceRegulation,pg.vii.
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investorownedutilitymustsubmittorateregulationandprovideserviceefficiently.26Theregulatory
compacthasatwofoldfocus:(1)establishpricesbasedontheactualprudentcosts(i.e.,avoidmonopoly
pricing);and(2)provideincentivestomaintainareasonablelevelofefficiencyinservingthe
customers.27
Undertraditionalutilityregulation,thisdeterminationoftheappropriatecostofservicethatcanbe
chargedbytheutilityisdeterminedthroughwhatdevelopedastheratecaseprocess,whichexamines
theprudencyofcostsaftertheyareincurred.28Thisformofregulationservesasanadministrative
replacementformarketmechanismsindeterminingwhatcostswereefficient.29
3.2 PeriodofGrowthandDecliningCosts,19451970
Fromthe1940sthroughthe1960stheindustrysawextensivegrowthandincreasingelectricity
consumption.Economiesofscaleincreasedasnew,largergeneratingunitswerebuiltwhichdrove
downcosts,andstimulatedanincreaseddemandforelectricity.31
Regulatoryadministrationoftheratecaseprocessdescribedabovebecameroutineduringthisperiod
andestablishedthenormalcourseofutilityoperationsandfunding.Utilitieswouldprovideserviceto
allcustomersintheirfranchiseareaandinreturnwereguaranteedareasonablereturnontheir
investmentsdeterminedthroughtheratecaseprocess.Bothutilitiesandcustomershavebenefitedfrom
thisrelationship;utilitiesreceivedaguaranteedserviceterritorywithareturnoninvestment(ROI)and
customersreceivedprotectionfrommonopolypricing.
Theratecasewouldestablishratesbasedonthenormalcostsofprovidingservicedeterminedbythe
revenuerequirement.Theutilityhadtoworkwithinaframeworkofregulatorylag,demandgrowth,
andcostinstabilityinrealtimeoperations.Exposuretorealtimeoperationsprovidedbothariskand
SeeIbid.Theutilitywasobligatedtosupplyserviceefficiently,buthadtherighttorecoveritscosts,includingan
opportunitytoearnareturn/profitequaltoitsmarketdeterminedcostofdebtandequitycapital.Ibid.
27Ibid.,pg.vii.
28Aratecaseisaformaladministrativeprocessinwhichtheutilityprovidessupportforitsproposedcostofservice
andthepublic,includingtheregulatorybody,isprovidedtheopportunitytoscrutinizethedata,policyarguments,
andanyotherrelevantinformation.Ibid.,pg.12.
29Ibid.,pg.viii.
30Source:NavigantConsulting,Inc.
31CostofServiceRegulation,pg.ix.
26

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incentive.Iftheoriginalassumptionsremainedfairlyaccurate,utilitieswouldbeabletooperatefairly
successfully;however,iftheassumptionsprovedtobeincorrect,eithertheutilityortheregulatorwould
seekadjustments.32
Thisworkedwellformostofthisperiod,althoughtheNortheastBlackoutof1965raisedpressing
concernsaboutreliability.
3.3 SlowedGrowthandInflation,SeedsofCompetition,19701990
Anumberofdamagingeventsoccurredinthe1970sthatinterruptedthegrowththatoccurredinthe
priorseveraldecades.AftertheNortheastBlackoutof1965,stateandregionalpowerpoolswerecreated
ortookonexpandedroles.ManyofthesearethepredecessorstotodaysRegionalTransmission
Organizations.Inaddition,regional,voluntaryreliabilitycouncilswereformedbytheutilitiesinan
efforttoenhancereliabilityandstaveoffregulation.
ThepassageoftheCleanAirActof1970anditsamendmentsin1977requiredutilitiestoreducetheir
emissionofpollutants,raisingtheiroperatingcosts,particularlyforutilitiesoperatingcoalfired
generation.ProbablythemostsignificanteventwastheOilEmbargoof19731974,whichresultedin
burdensomeincreasesinfossilfuelpricesduetotransportationcosts.Althoughtheembargolastedonly
untilMarch1974,itseffectsincreasedpublicawarenessofenergyissues,resultedinhigherenergy
prices,andcontributedtoinflation.
TheaccidentatThreeMileIslandin1979ledtohighercosts,regulatorydelays,andgreateruncertainty
forcompaniespursuingnucleargeneration.Ingeneral,inflationcausedinterestratestomorethan
triple.Theescalatingfuelcosts,reductionindemandgrowth,andaccompanyingunprecedented
inflationinlabor,capitalcosts,andconstructionmaterialsmeantthatutilitieswerenotrealizingthe
incrementalcashflowsthathadhelpedfinancenewconstructioninthepast.34
In1978,CongresspursuedlegislationintendedtoreduceU.S.dependenceonforeignoil,develop
renewableandalternativeenergysources,sustaineconomicgrowth,andencouragetheefficientuseof
Ibid.,pg.16.
34CostofServiceRegulation,pg.ix.
32
33

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fossilfuels.35Agreaterrelianceonmarketforcestosetwholesalepowercostswasintroducedthrough
thePublicUtilityRegulatoryPoliciesActof1978(PURPA),whichadoptedavoidedcostpricingfor
energypurchasedbyutilitiesfromcertaintypesofthirdpartysuppliers.36PURPAbecameacatalystfor
competitionintheelectricitysupplyindustry,becauseitallowednonutilityfacilitiesthatmetcertain
ownership,operating,andenergyefficiencycriteriaestablishedbyFERC(referredtoasqualifying
facilitiesorQFs),toenterthewholesalemarket.37Utilitiesdidnotinitiallywelcomethisforced
competition.38TheQFsthemselvesarenotsubjecttocostofserviceregulation,andthepricespaidto
themarenotbasedontheircostofproducingtheelectricity.39Instead,thepricestheyarepaidreflect
theavoidedcostofthepurchasingutility(generallydeterminedbytheutilitysregulatoryauthority),
thatis,thecosttheutilityavoidedbynotproducingtheelectricityreceivedfromtheQForpurchasingit
fromanothersource.40Insomecasesutilityregulatoryauthoritiessetanavoidedcostthatwasveryhigh
leadingtofinancialproblemsforutilitiesthatwereforcedtopaythesehighprices.
Theeconomicchallengesofthe1970sfeddirectlyintothe1980s.Demandgrowthcontinuedtobeslow.
Thebeginningofthedecadesawhighinflationinthecostofconstructionmaterialsandlaboralongwith
doubledigitfinancingrates.Thisledtodramaticcostoverrunsincoalandnuclearplantsunder
construction.InthewakeoftheThreeMileIslandaccidentin1979,thecosttocompletenuclearplants
underconstructionsoaredasnewsafetyrequirementscameintoplay.Someplants(nuclearandnon
nuclear)werecancelledbeforecompletion.Thesefactorsledtoincreasedutilitycostsforplantsthat
wereultimatelycancelledandsubstantialrateshocksforplantsthatwerecompletedandenteredthe
ratebase.Regulatorsrespondedtothechallengeofconstructioncostoverrunsbyexpandingtheir
oversightoftheprudenceofprojectcosts.Thenumberofratecasesexpandeddramaticallyfromthefew
dozenmajorprudencecasesbetween1945and1975toover50duringthe1975through1985period.41
Inaddition,regulators,publicinterestgroups,andutilitiesbegantorecognizeinthelate1970sandearly
1980sthatactionstakentopromoteconservationanddemandsidemanagement(DSM)couldbeless
costlyundersomeconditionsthanconstructionofnewpowerplants.Whiletheeconomicconditions
thatsupportedthepremisethatincrementalcostsofDSMcouldbelessthantheincrementalcostsof
newgenerationwerereversedduringaneraoflowerednaturalgaspriceslater,newstateandfederal
EIAChangingStructure,PartI,Chapter2,pg.8.
CostofServiceRegulation,pg.24.
37EIAChangingStructureatPartI,Chapter2,pg.8.
38Ibid.,PartI,Chapter2,pg.8.PURPAdefinedanewclassofenergyproducerscalledqualifyingfacilities.These
producersareeithersmallscaleproducersofcommercialenergywhonormallyselfgenerateenergyfortheirown
needsbutmayhavesurplusenergy,orincidentalproducerswhohappentogenerateusableelectricenergyasaby
productofotheractivities.Whenafacilityofthistypemeetstherequirementsforownership,sizeandefficiency,
utilitycompaniesareobligedtopurchasetheirenergybasedonapricingstructurereferredtoasavoidedcostrates.
Theseratestendtobehighlyfavorabletotheproducer,andareintendedtoencouragemoreproductionofthistype
ofenergyasameansofreducingemissionsanddependenceonothersourcesofenergy.SeeAEEContextand
Structure.
39EIAChangingStructure,PartI,Chapter4,pg.32.
40Ibid.atPartI,Chapter4,pg.32.
41CostofServiceRegulation,pg.25.
35
36

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regulationsorconservationprogramsintroducedtheretailcustomerclasstomuchgreaterinvolvement
inutilityplanningthanhadexistedbefore.
Animmediateimpactonregulatorsthinkingwasthattherewasaneedtoplantoavoidthesesituations
andtosearchforsmallerincrementsofsupplyordemandreductions.Theleastcostutilityplanningand
IntegratedResourcePlanning(IRP)processeswerepartoftheresponsetothisneed.42
Theseprocessesweredesignedtotakeintoaccountabroadrangeofinformationandalternatives,
producedemandforecastsinapublicprocess,andattempttoevaluatesupplyanddemandoptionson
anequalfooting.Muchofthelate1980ssaweffortstoestablishmoreeffectiveformalplanning
frameworksinanattempttoavoidthemistakesthatoccurredinthe1970s.Regulatorsembracedthis
processtovaryingdegrees,attemptingtointegratetheplanningandratecasesequencestogetherina
waythatreinforcedbothfromaninformationandimplementationperspective.
Anothersignificantdevelopmentinthelate1980swasanincreasedutilityinterestinsellingtheir
generationinwholesaletransactions.Thiswaspromptedbyexcesscapacityintheearly90sthat
occurredbecauseloadgrowthdidnotmeetprojectedlevels.FERCbeganallowingutilitiestosellpower
atmarketbasedrates(ascomparedtocostbased)iftheutilitycouldshowithadnopowertosetprices
inthemarket,wouldcaptheratesatavoidedcost,orwouldprovidenondiscriminatorytransmission
accesstocompetitivegenerators.43Thisformofregulatoryratetreatmentwasviewedbymanyinthe
industryassuperiortotheriskofbuildinganewunitundertraditionalregulationatthestatelevel.44By
1991,FERChadreceived40ofthesemarketbasedpricingrequests.45
3.4 TheAdventofCentralizedMarkets,19901999
Ibid.,pg.26.
Ibid.,pg.3031.
44CostofServiceRegulation,pg.31.ThemovetogreaterrelianceonmarketswasacceleratedbyFERCs1988pre
constructionrateapprovalinOceanStatesPoweraswellasthenoticeofproposedrulemakingsonmarketbased
pricingofelectricity.Allofthesefactorswerelayeredontopoftheincentiveprovidedfornonutilitygenerationby
PURPA.Ibid.,pg.30.
45Ibid.,pg.31.
42
43

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PassageofthefederalEnergyPolicyActof1992(EPACT)wasasignificantenablerofmarket
development.First,itcreatedanewclassofelectricsuppliers,theexemptwholesalegenerator(EWG),
extendingthetrendstartedbyFERCwiththemarketbasedratepolicyandopenaccesstothe
transmissionsystem.47
LikeQFs,EWGswerewholesaleproducersthatdidnotsellelectricityintheretailmarketanddidnot
owntransmissionfacilities.48UnlikethenonutilitiesthatqualifiedunderPURPA,EWGswerenot
regulatedandcouldchargemarketbasedrates.49ThegrowthofEWGsmarkedanothersteptoward
increasingthelevelofcompetitioninthewholesaleelectricitymarket.
MarketingofEWGpowerwasfacilitatedbytransmissionprovisionsinEPACT1992thatgaveFERCthe
authoritytoorderutilitiestoprovideaccesstotheirtransmissionsystemstoutilitiesandnonutilities.50
Inaddition,EPACT1992requiredstatestoconductanIRPprocessandevaluatetheimpactofpurchased
powercontractsonthelocaldistributioncompany.51Somestatestookthisevenfurther,takingstepsto
breakuptheverticalintegrationofutilitieswithinthosestates,tointroduceretailcompetition.52
Thesecondcornerstoneinthecreationofcompetitivewholesalepowermarketscamein1996through
FERCsOrderNo.888.53Atthattime,OrderNo.888wasconsideredthemostfarreachingand
ambitiousprojectundertakenbyFERCtoeliminateimpedimentstowholesalecompetitionintheelectric
powerindustry.54OrderNo.888hadtwobasicgoals:(1)toeliminateanticompetitivepracticesand
unduediscriminationintransmissionservicesthroughauniversallyapplied,openaccesstransmission
EIAChangingStructure,PartI,Chapter2,pg.8.TheCommissionceasedmakingcasebycasedeterminationsof
exemptwholesalegeneratorstatusfollowingtheenactmentofEPACT2005callingfortherepealofPUHCA.See
RepealofthePublicUtilityHoldingCompanyActof1935andEnactmentofthePublicUtilityHoldingCompany
Actof2005,DocketNo.RM0532000,(Sept.2005)atP21.
4949EIAChangingStructureatPartI,Chapter2,pg.8.
53TheactionstakenbytheCommissioninOrderNo.888paralleledandinmanyinstanceswereguidedbyGas
Restructuring,OrderNo.636,openaccesstransportingas.
54EIAChangingStructure,PartII,Chapter7,pg.64.
47
48

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tariff,and(2)toensuretherecoveryofstrandedcosts55autilitymightaccrueinthetransitionto
competitivemarkets.56
AnotherequallyimportantcomponentofOrderNo.888wastherequirementfortransmissionownersto
functionallyunbundletheirservices.Functionalunbundlingrequiredthetransmissionownertotake
transmissionserviceunderthesametariffasothertransmissionusersunderacomparabilitystandard.
Theywererequiredtoseparateratesforwholesalegeneration,transmission,andancillaryservicesand
torelyonthesameelectronicinformationnetworkthatitstransmissioncustomersreliedontoobtain
informationaboutpricesandavailablecapacityofthetransmissionsystem.Theconceptofunbundling
wastoprecludetheappearanceofpossiblefavoritismanddiscriminatorypracticeswithinavertically
integratedutilitybyseparatingitstransmissionservicesfunctionsfromotherbusinessactivitiesinthe
companyandbyrequiringutilitiestoprovidetransmissionservicetoothersforwholesaletransactions
inthesamemannerastheyprovideittothemselves.57
Accompanyingtherequirementfornondiscriminatoryaccesstothetransmissionsystem,timelyand
accuratedaytodayinformationabouttransmissionwasalsomadeavailabletoalltransmissionusers.58
OrderNo.889requiredallinvestorownedutilities(IOUs)toparticipateintheOpenAccessSameTime
InformationSystem(OASIS),whichfacilitatedthefunctioningofcompetitivepowermarkets.59
Atthesametimethesechangeswereoccurringinthewholesaleelectricitymarkets,agrowingnumber
ofstateswerealsopursuingarelianceoncompetitivemarketsfortheretailsupplyofelectricpower.
RetailchoicewasintroducedintheUnitedStatesinthe1990sinresponsetohighregulatedpricesin
someregions.Asnoted,excessgenerationcapacitywastriggeredbythegenerationconstructioncycle
thatbeganinthe1960sandcontinuedintothe1970s.Consumergroupsinsomeregionsfoundretail
Strandedcostsrefertoaninvestmentmadeunderregulationwhosevaluewillnotberecoveredunderprices
determinedinaderegulatedenvironment.RecognizingthatFERConlyhadjurisdictionoverapartofthestranded
costsissue,FERCsoughttopermitpublicutilitiestoseekrecoveryatFERCastheprimaryforumforalimitedsetof
existingwholesalerequirementscontracts,thoseexecutedonorbeforeJuly11,1994,termedretailturnedwholesale
transmissioncustomers.Recoveryisonlypermittedwherethereisadirectnexusbetweentheavailabilityanduse
ofaCommissionrequiredtransmissiontariffandthestrandingofthecosts.Furthermore,recoveryatFERCfor
strandedcostscausedbyunbundledretailwheelingwouldonlybeforthosestrandedcostscausedbyretail
wheelingwherethestateregulatoryauthoritydidnothaveauthoritytoaddressretailstrandedcostsatthetimethe
retailwheelingisrequired.OrderNo.888atpg.8.Astheprimaryvehicleforrecovery,FERCconcludedthatdirect
assignmentofstrandedcoststothedepartingwholesalegenerationcustomerthrougheitheranexitfeeora
surchargeontransmissionistheappropriaterecoverymethod.PromotingWholesaleCompetitionThroughOpen
AccessNondiscriminatoryTransmissionServicesbyPublicUtilities;RecoveryofStrandedCostsbyPublicUtilities
andTransmittingUtilities,OrderNo.888,FERCStats.&Regs.31,036(1996),orderonrehg,OrderNo.888A,
FERCStats.&Regs.31,048(1997),orderonrehg,OrderNo.888B,81FERC61,248(1997),orderonrehg,Order
No.888C,82FERC61,046(1998),affdinrelevantpartsubnom.TransmissionAccessPolicyStudyGroupv.FERC,
225F.3d667(D.C.Cir.2000),affdsubnom.NewYorkv.FERC,535U.S.1(2002),pg.477.(OrderNo.888)
56Ibid.
58Ibid.,PartII,Chapter7,pg.66.
59TheOASISisaninteractive,Internetbaseddatabasecontaininginformationonavailabletransmissioncapacity,
capacityreservations,ancillaryservices,andtransmissionprices.
55

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competitionattractivebecausethepricesinemergingwholesalemarketsweresignificantlybelowthe
regulatedretailpriceofutilities,reflectingbothexcessgenerationcapacity(depressingwholesaleenergy
prices)andthelargenumberandcostofnewgeneratingassetsrecentlyplacedinservice(increasing
regulatedretailrates).Inaddition,thesefactorsalsoraisedconcernsthatthegenerationplanningas
implementedbyutilitiesandreviewedbyregulatorsintheseregionswasflawed.
Incontrasttothetraditionallyregulatedmodel,retailchoicelimitstheoperationoftheregulatedutility
tothetransmissionanddistributionfunctions,wheretraditionalcostbasedpricingisimplementedand
approvedbystatelevelregulators.Generationservicesareprovidedeitherbycompetitiveservice
providersorthroughadefaultprovideroflastresort(POLR).
Ultimately,15states,plustheDistrictofColumbia,implementedretailchoice.60Thistypicallyrequired
theincumbentutilitytodivestitsgenerationandbecomeawiresonlytransmissionanddistribution
utility.Somestatesforcedtheirutilitiestodivestutilityownedgenerationtounaffiliatednonregulated
entities;otherstatessimplypermittedthemtocreateaffiliatedgenerationsubsidiaries;stillotherstates
requiredonlyoperationalandmanagementseparation(i.e.,functionalseparation)fromtheutilities
transmissionand/ordistributionfunctions.Intherestructuredstates,policymakerswerepresentedwith
ahostofnewissuesrequiringsignificantpolicyresponses.Challengesincludedstrandedcosts,
developmentofmarketrules,thedesignationofaprovideroflastresortwhereretailchoicewasnot
exercised,andlevelofcostforwiresonlycompanies.61Somestatesthatadoptedcompetitionfaced
marketconditionsthatresultedintheabandonmentofrestructuringandareturntotraditional
regulation.62
Seehttp://www.eia.gov/electricity/policies/restructuring/restructure_elect.html.
62Ibid.,pg.34.InDecember1998,23StatepublicutilitycommissionssentCongressaletterexpressingconcernsthat
issuesaffectingthemmaynotbegivenadequateconsiderationinthedebateaboutrestructuring.Kentucky,whose
electricitypricesarethelowesteastoftheRockyMountains,isoneofthesestates.Recently,KentuckysSpecialTask
ForceonElectricityRestructuringconcludedthattherearenocompellingreasonstorestructuretheirelectricpower
industry.EIAChangingStructure,PartII,Chapter8,pg.81.Furthermore,notallcommissionsmaybeendowed
withthenecessarylegalauthoritytomanageanevolvingcompetitivemarketstructure.Accordingly,legislation
maybenecessaryinsomestatestogranttheutilityregulatoryagencytheauthoritytoaddresstherestructuring
issuesortoconsideralternativeratemakingprocesses(incentiveorperformancebasedregulation).Insomecases,
legislativeactionsmaybecomenecessarytoadoptdecisionsrecommendedbythecommission(s)for
implementation.Ibid.,PartII,Chapter8,pg.82.
60
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3.5 TraditionalRegulationandCentralizedMarketsToday
Figure5.HistoricalTimeline1999Present63
InDecember1999,FERCreleasedOrderNo.200064callingforthevoluntaryformationofRTOs.FERC
believedthatRTOswouldfacilitatethecontinueddevelopmentofcompetitivewholesalepowermarkets
andwouldleadtoimprovementsinreliabilityandmanagementofthetransmissionsystem,eliminating
anyremainingdiscriminatorypractices.65OrderNo.2000askedalltransmissionowningutilities,
includingnonpublicutilities,tovoluntarilyplacetheirtransmissionfacilitiesunderthecontrolofan
appropriateregionaltransmissionorganization.Sothatutilitiescouldcomplywiththisrequest,the
characteristicsandminimumfunctionsofanappropriateRTOweredefinedintheOrder.
OrderNo.2000envisionedthecreationofindependentRTOsthatwouldoperatethetransmission
systemsofitsmembers,engageinregionaltransmissionplanningandoperatewholesaleenergy
markets.TheRTOswouldprovidetariffedtransmissionserviceandeliminateratepancakingtothe
greatestextentpossible.OrderNo.2000resultedinthecreationofseveralRTOs,aswellasadoptionof
variousRTOcharacteristicsbythethenexistingISOs.
ConcurrentwithFERCseffortsunderOrderNo.2000,challengeswerearisingintheCaliforniamarkets.
In2001,California,whichledthenationtowardcompetitiveretailelectricmarkets,sufferedfrom,
amongotherthings,anoverrelianceonspotmarkets.66Utilitieswererequiredtosellalloftheirpower
into,andbuyalloftheirloadservingpoweroutof,theCaliforniaPowerExchange(PX),whichoperated
adayaheadhourlyspotmarket,holdingauctionsandmatchingbidsforpurchaseandsale.Asaresult,
Californiautilitiesincurredhighcostsofwhichtheywereonlyallowedtopassthroughaportionto
63
64
RegionalTransmissionOrganizations,OrderNo.2000,19962000FERCStats.&Regs.,Regs.Preambles31,089
(1999),orderonrehg,OrderNo.2000A,19962000FERCStats.&Regs.,Regs.Preambles31,092(2000),petitionsfor
reviewdismissedsubnom.Pub.Util.Dist.No.1v.FERC,272F.3d607(D.C.Cir.2001).
66Therewereadditionalexacerbatingfactorsidentifiedincludingincreasedpowerproductioncostscombinedwith
increaseddemandduetounusuallyhightemperaturesandascarcityofavailablegenerationresourcesthroughout
theWestandCaliforniainparticularandflawedmarketrules,includingrestrictionsontheabilitytoforward
contract,andretailregulatorypolicies.SeeInvestigationofPracticesoftheCaliforniaIndependentSystemOperator
andtheCaliforniaPowerExchange,93FERC61,121at61,354355(2000).
October 8, 2013
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retailcustomers,67leadingtoabankruptcyfilingbyoneoflargestutilitiesinthestate.Thestatewas
forcedtostepinandprocuretheutilitiesresidualpowerrequirementsthatcouldnotbemetbyutility
retainedgeneration.68
Atthewholesalelevel,thedivestitureofratebasedgeneratingassetsmaderestructuredutilitiesmore
dependentonwholesalepurchases.Evenutilitiesthatremainedverticallyintegratedfaceduncertainties
aboutfuturestaterestructuringpolicy.Thisledmanytorelyonwholesalepurchasesratherthan
commitnewcapitaltobuildratebasedfacilities.Atthesametime,thedevelopmentofcompetitive
wholesalemarkets69broughtenergypricevolatility,leadingtouncertaintiesabouttheoptimaltimingof
purchases.70
IntheaftermathoftheCaliforniaenergymarketcrisis,FERCtookstepstoinvestigatethecausesand
introducecorrectivepolicies.FERCsreportontheinvestigationintotheCaliforniaBulkPowermarket
concludedthattheelectricmarketstructureandmarketrulesforwholesalesalesofelectricenergyin
Californiaareseriouslyflawedandthatthesestructuresledtounjustandunreasonablerates.71Among
theremediesorderedbyFERCwastheeliminationoftherequirementthatCaliforniasinvestorowned
utilitiessellalloftheirgenerationinto,andbuyalloftheirenergyneedsfrom,thePX.FERCconcluded
thatthebuy/sellrequirementledtooverrelianceonspotmarketsandoverexposure.TheCommission
alsourgedbuyerstoenterintolongtermcontractsandnotrelyonlyonspotmarkets.Furthermore,
FERCstaffwasdirectedtodevelopamarketmonitoringandmitigationprogramtobeappliedtothe
Californiawholesalemarkets.
FollowingtheCaliforniaenergymarketcrisisandablackoutthataffectedalargeportionofthe
northeasternU.S.andCanadain2003,72CongressenactedtheEnergyPolicyActof2005(EPAct2005)on
August8,2005.73ThislegislationprovidedgreaterauthoritytotheCommissionsoversightof
jurisdictionalwholesaleelectricitymarkets.EPAct2005authorizedtheCommissiontorequire
transmissionowningutilities,exceptforcertainsmallentities,toprovideaccesstotheirtransmission
facilitiesonacomparablebasis.CongressalsodirectedtheCommissiontofacilitatepricetransparency
inmarketsandauthorizedtheCommissiontoprescriberulestoprovideforthedisseminationof
informationabouttheavailabilityandpriceofwholesaleelectricenergyandtransmissionservice.74
RetailpriceschargedbytheCaliforniautilitieswerecappedatadiscountperTheElectricUtilityIndustry
RestructuringActAssemblyBill1890(AB1890).
69Includingopenaccesstransmission,marketpricingauthority,andtheintroductionofspotmarkets.
7193FERC61,121at61,349.Seealso,StaffReporttotheFederalEnergyRegulatoryCommissiononWestern
MarketsandtheCausesoftheSummer2000PriceAbnormalities(November2000).
72OnAugust14,2003,aseriesofeventsleadtoablackoutaffectingmuchofthesysteminthenortheasternU.S.,
Canada,andportionsoftheMidwest.Ateamofindustryexpertsconcludedthattherehadbeenviolationsofthe
NERCvoluntaryreliabilitystandards,whichresultedindramaticchangesinreliabilityenforcement.The2003
blackoutanditseffectonutilityregulationarefurtherexplainedinSection5.
73EnergyPolicyActof2005,Pub.L.No.10958,119Stat.594(2005).
74EPAct2005alsoresultedinthedevelopmentofmandatoryreliabilitystandards,whichisdiscussedinSection5.
67

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Finally,CongressemphasizedcompliancewiththeCommissionsregulations,adoptingandincreasing
thecivilandcriminalpenaltiesforviolationsofCommissionadministeredstatutesandregulations.
Atthesametimethatthewholesaleandretailmarketswereevolving,stateswerepromulgatingnew
mandatestoimproveenergyefficiencyanddemandresponse.Thegrowingcostsofenvironmental
controlsresultingfromtheCleanAirActandotherregulationsplacedgreaterpressureonutilitiesand
statecommissionstoadoptalternativecostrecoveryprogramsforthesetargetedexpenditures.In
addition,theneedtoreplaceaginginfrastructureandthepotentialformodernizationofthenetwork
throughtheuseofdigitalandSmartGridtechnologyincreased.75
Toaddressthesechallenges,regulatorsexperimentedwiththeuseofalternativeratemaking,including
theuseoftrackermechanisms,riders,andothermechanismstoprovidecostrecoveryinamannerthat
wastimelierthantraditionalratecases.Thesemechanismswereusefulincaseswherethecostsofthe
specificactivitywereidentifiedandrecoveredasincurred.Theprudenceoftheassociatedcostswas
reviewedperiodically.Thesetrackersallowedthetimelyrecoveryofcostsandmaintainedtheutilities
financialintegrity,protectingthelevelofserviceprovidedtocustomers.Inaddition,thesemechanisms
ofteninvolvedatrueupprocesssincetheprocessofgrantingrateincreasesaheadofthecompletionofa
projectinvolvesariskthatcustomerscouldoverpayforthefinalproduct.Thetrueupmechanism
representedanappropriateretroactivemethodforprovidingcustomersarebateshouldcostoverruns
occur.76
Similarly,governmentmandatesregardingrenewableportfoliostandards(RPS)haveresultedinnew
costsforwind,solar,andbiofuelsthatmaybeabovemarket.Thesecostshavealsosometimesbeen
treatedasaseparatecostcategoryforrecoverythrougharideroradjustmentclausemechanism.The
trackermechanismsdevelopedwereanattemptbyregulatorstomatchrateswithcosts.Nevertheless,
relianceontraditionalregulatorytoolssuchasprudencereviewsandratecasescontinuestoservea
fundamentalroleinprovidingasubstituteformarketmechanismstoinduceefficientbehaviororto
furtherpublicpolicyobjectives.77
InFebruaryof2007,FERCissuedOrderNo.89078tocorrectflawsinitsproformaOpenAccess
TransmissionTariff(OATT)thathadbeenuncoveredduringthetenyearssinceOrderNo.888was
issued.TheCommissionrecognizedthatalthoughOrderNo.888hadbeensuccessful,theneedfor
additionalreformwasapparenttorealizeitsgoalofremedyingunduediscriminationinthewholesale
marketplace.ThechangesintroducedinOrderNo.890wereintendedto:(1)strengthentheproforma..
.OATTtoensurethatitachievesitsoriginalpurposeofremedyingunduediscrimination;(2)provide
greaterspecificitytoreduceopportunitiesforunduediscriminationandfacilitatetheCommissions
Ibid.,pg.39.
77Ibid.,pg.39.
75
76
OrderNo.890alsointroducedreformsintransmissionplanningthatwerefurtherrefinedthrough
OrderNo.1000.BothoftheseordersarediscussedfurtherinSection8.PreventingUndueDiscriminationand
78
PreferenceinTransmissionServ.,OrderNo.890,FERCStats.&Regs.31,241(2007),onrehg,OrderNo.890A,FERC
Stats.&Regs.31,261(2007),onrehg,OrderNo.890B,123FERC61,299(2008),rehgdenied,OrderNo.890C,126
FERC61,228(2009).
October 8, 2013
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enforcement;and(3)increasetransparencyintherulesapplicabletoplanninganduseofthe
transmissionsystem.79However,FERCretainedseveralcoreelementsofOrderNo.888suchasthe
existingdivisionoffederalandstatejurisdictionincludingFERCssevenfactorfunctionalunbundling
test,nativeloadprotection,firmnetworkservice,andfirmandnonfirmpointtopointtransmission
service,anddeclinedtorequirecorporateorstructuralunbundling,optinginsteadtoretainfunctional
unbundling.80Themajorreformsincluded:(1)consistencyandtransparencyofmethodologiesand
calculationsforavailabletransfercapability(ATC);(2)open,transparent,andcoordinated
transmissionplanningonsubregional(local)andregionallevels;(3)transmissionpricingreforms;(4)
increasedefficiencyoftransmissiongridutilization;(5)increasedtransparencyandcustomeraccessto
information;(6)enhancedcomplianceandenforcementefforts;and(7)revisionstononratetermsand
conditionsoftransmissionservice.81Complementarytothewholesalemarketreformsintroducedin
OrderNo.890,inJuneof2007,theCommissionissuedOrderNo.697toclarifyandcodifyitsmarket
basedratepolicy.82
Duringtheautumnof2008,largedisruptionsinthefinancialmarketsaffectedthecreditmarketsand
reducedtheavailabilityofcredit.Theelectricitymarketswerevulnerabletotheeffectsofthisbroader
financialcrisis.DefaultsincertainmarketswithinthePJMRTOspurredaneedforcreditreformsasthe
threatofdefaultsformlargermarketparticipantsraisedconcerns.InOrderNo.741,theCommission
proposedextensiverevisionstoitspolicyonRTO/ISOcreditpractices.83
Ibid.,preamblesummary.
Ibid.
81Ibid.
82SeeMarketBasedRatesforWholesaleSalesofElectricEnergy,CapacityandAncillaryServicesbyPublicUtilities,Order
No.697,FERCStats.&Regs.31,252,clarified,121FERC61,260(2007),orderonrehg,OrderNo.697A,FERCStats.
&Regs.31,268,clarified,124FERC61,055,orderonrehg,OrderNo.697B,FERCStats.&Regs.31,285(2008),
orderonrehg,OrderNo.697C,FERCStats.&Regs.31,291(2009)..TheOrderpresentedanupfrontanalysisto
determinewhethermarketbasedratesshouldbegrantedandifamarketbasedrateselleroranyofitsaffiliateshas
marketpoweringenerationortransmission,whetherthatmarketpowerhadbeenmitigated.Theorderalso
establishedtwoclassesofMBRsellers:Category1sellers(anyonebelow500MWinthatmarket)aregenerally
exemptfromsubmittingtriennialmarketpowerstudiesandCategory2sellers(allothers)mustcontinuetofile
triennialstudies.TheCommissionalsotooktheopportunitytoclarifyitsinterpretationofseveraldecisionsbythe
UnitedStatesCourtofAppealsthatmayhavecreateduncertaintyforsellerstransactingpursuanttoitsmarket
basedrateprogram.TheCommissionaffirmeditspositionthatanexantefindingoftheabsenceofmarketpower,
coupledwiththeEQRfilingandeffectiveregulatoryoversight,qualifiesassufficientpriorreviewformarketbased
ratecontractstosatisfythenoticeandfilingrequirementsofFPAsection205.
83TheCommissionproposedthefollowingreformsrelatedtotheadministrationofcreditintheorganizedmarkets:
(1)implementationofabillingperiodofnomorethansevendaysandasettlementperiodofnomorethanseven
days;(2)reductionintheallocationofunsecuredcredittonomorethan$50millionpermarketparticipantanda
furtheraggregatecappercorporatefamily;(3)eliminationofunsecuredcreditforFTRmarkets,(4)clarificationof
theISOs/RTOsstatusasapartytoeachtransactionsoastoeliminateanyambiguityorquestionastotheirability
tonetandmanagedefaultsthroughtheoffsetofmarketobligations;(5)establishmentofminimumcriteriafor
marketparticipation;(6)clarificationofwhentheISOorRTOmayinvokeamaterialadversechangeclausein
requiringadditionalcollateral;and(7)establishmentofastandardgraceperiodtocurecollateralcalls.SeeCredit
ReformsinOrganizedWholesaleElectricMarkets,OrderNo.741,FERCStats.&Regs.31,317(2010),orderonrehg,
OrderNo.741A,FERCStats.&Regs.31,320(2011),orderdenyingrehg,OrderNo.741B,135FERC61,242(2011).
79
80

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InCongress,additionalactionsweretakingplaceinresponsetothe2008financialcrisis.Whileinitially
directedtowardsfinancialinstitutions,theDoddFrankActhadthepotentialtoaffectenergytrading
companiesandwholesaleenergymarkets.Entitiescategorizedasswapdealersormajorswap
participantsfacednewcapital,margin,andreportingrequirements.Whileentitiesthatqualifiedas
endusersofphysicalenergylikeutilitiesandenergyproducers84couldapplyforindividual
exemptions,tradebytrade,theprocesscouldbeextremelybulkyandburdensome.85Oneserious
questionleftopenwaswhetherpowerpurchaseagreementsfordeliverywithinISOregionsthatactas
brokersforalltrades,suchasNYISOorPJM,wouldqualifyasexempttransactions.InFebruaryof2012,
theCommissionapprovedRTO/ISOs86filedapetitionwiththeCommodityFuturesTrading
Commission(CFTC)foranexemptionforcertaintransactionsintheirorganizedmarketsregulatedby
FERCorthePublicUtilityCommissionofTexas(PUCT).TheCFTCissueditsfinalRTO/ISOOrderon
March28,2013,whichwouldexemptfromCFTCregulationSpecificElectricRelatedProduct
transactionsinthefollowingmarkets:FinancialTransmissionRights(FTRs);EnergyTransactionsin
DayAheadandRealTimeMarkets;ForwardCapacityTransactions;andReserveorRegulation
Transactions.87ThisexemptionapplieswhenthepurchaseorsaleoftheabovelistedSpecificElectric
RelatedProductsisexecutedinanRTO/ISOmarketpursuanttoaFERCorPUCTapprovedtariff.88
Acompanythatcanproveitusesswapssolelyforthepurposeofhedgingagainstpricefluctuationsmayqualify
asanenduser,exemptingitfromsomeoftheactsrequirements.
85Qualifyingwilldepend,amongotherthings,onthenumberofswapstraded,whothecounterpartiesare,andthe
aggregateamounttradedinagivenperiod.
86CaliforniaIndependentServiceOperatorCorporation(CAISO),PJMInterconnection(PJM),MidwestIndependent
TransmissionSystemOperator(MISO),ISONewEngland(ISONE),NewYorkIndependentSystemOperator
(NYISO)andERCOT.
87FinalOrderinResponsetoaPetitionFromCertainIndependentSystemOperatorsandRegionalTransmission
OrganizationsToExemptSpecifiedTransactionsAuthorizedbyaTarifforProtocolApprovedbytheFederal
EnergyRegulatoryCommissionorthePublicUtilityCommissionofTexasFromCertainProvisionsofthe
CommodityExchangeActPursuanttotheAuthorityProvidedintheAct,78Fed.Reg.19880(Apr.2,2013)(CFTC
RTO/ISOFinalOrder).
88TheCFTCdeclinedtodelineatespecifictransactionsthatqualifyfortheRTO/ISOexemptionandalsodeclined
requeststoexpandtheexemptiontocovertransactionsthatareoutgrowthsof,oreconomicallycomparableto,
thespecificElectricrelatedProducts.TheCFTCclarifiedthatvirtualandconvergencebidsandoffersinDayAhead
Marketsareexemptenergytransactions,andthatexemptenergytransactionsmaybecashsettled.CFTC
RTO/ISOFinalOrder,19886.
84

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Today,thecentralizedwholesalemarketsthathavebeenapprovedbyFERCareCaliforniaISO,ISO
NewEngland,NewYorkISO,Pennsylvania,NewJersey,Maryland(PJM)(officialnameisPJM
Interconnection),SouthwestPowerPool,andtheMidwestISO.Inaddition,theERCOT(Texas)market
runsundertheauthorityoftheTexasPUC.Thecurrentstateofthecentralizedwholesalemarket
developmentacrosstheU.S.isshowninthediagrambelow.
Figure6.RegionalTransmissionOrganizations
Source:http://www.ferc.gov/industries/electric/indusact/rto.asp

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ThecurrentstateofretailchoiceintheU.S.isshowninthegraphicbelow.
Figure7.StatusofElectricityRestructuring(RetailChoice)byState
Source:http://www.eia.gov/cneaf/electricity/page/restructuring/restructure_elect.html.

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4. TodaysTwoBroadModels
Atthewholesalelevel,therearetwoapproaches,centralizedgenerationmarketsandtraditionalbi
lateralmarkets.Similarly,therearetwoapproachesattheretaillevel;thetraditionalvertically
integratedapproachandretailchoice.Whileregionsadoptingacentralizedmarketmodeloftenalso
providesomeformofretailchoice,thisisnotnecessarilyageneralrule.Thevariationunderthetwo
generalapproachesisshowninTable1.
Table1.WholesaleandRetailMarketStructurebyState
Vertically Integrated Utility
Centralized Wholesale Market
Bilateral Wholesale Market
AR*, CA, IA*, IN, KS, KY*, LA*,

MN, MO, MT*, ND*, NE*, NM*,
OK, SD*, VA, VT, WI, WV
AK, AL, AZ, CO, FL, GA, HI, ID,

MS, NC, NV, SC, TN, UT, WA,
WY
Retail Choice
CT, DE, IL, MA, MD, ME, MI, NH,

NJ, NY, OH, OR, PA, RI, TX
Note: Asterisked states are partially in Centralized and Bilateral Markets
4.1 CurrentStatusofCentralizedWholesaleGeneratingMarkets
4.1.1 TodaysCentralizedWholesaleGeneratingMarkets
Consumersenergycostsincludeawholesalecostcomponentconsistingofthecostsoftransmissionand
energy.89Aspreviouslynoted,traditionalverticallyintegratedutilitiescanoperatewithinboth
centralizedwholesaleenergymarketsandtraditionalbilateralmarkets;however,restructuredutilities
withcustomerchoicearecloselylinkedtoorganizedwholesaleenergymarkets.
Energymarketsprimarilyrefertowholesalemarketsforgeneration.Whiletransmissionisnecessary
andbecomesapartofthedeliveredcostoftheenergy,utilitytransmissionisaregulatedservice
providedatcostofservicerates.90AnumberofregionsincludingtheNortheast,MidAtlantic,much
oftheMidwest,theElectricReliabilityCouncilofTexas(ERCOT),andCaliforniaorganizetheirenergy
SeeNantahalaPower&LightCo.v.Thornburg,476U.S.953(1986)(Statecannotdisallowawholesaleratethatthe
FERChassetasjustandreasonable);seealsoMississippiPowerv.MISS.ExRel.Moore,487U.S.354(1988).Butsee,
PikeCountyLight&PowerCo.v.PennsylvaniaPublicServiceCommission,465A.2d735,738(1983)((Statecanreview
prudencyofautilitychoosingbetweentwochoicestopurchasepower).
90FERCrequiresthatpublicutilitiesthatowntransmissionlinesusedininterstatecommerceoffertransmission
serviceonanondiscriminatorybasistoalleligiblecustomers.Thepricefortheserviceiscostbasedandpublished
intheOATT.SeeOfficeofEnforcement,FederalEnergyRegulatoryCommission,EnergyPrimer:AHandbookof
EnergyMarketBasics,AstaffreportoftheDivisionofEnergyMarketOversight,(July2012),pp.57and62(Energy
Primer:AHandbookofEnergyMarketBasics).Merchanttransmissionprovidersmayinsomecasesprovide
serviceatnegotiatedratesthatarenotcostbased.
89

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marketsunderanISOorRTO.Moststatesintheseregionsalsoallowretailcompetition.91Other
regionsoftheUnitedStates,includingtheSoutheastandWest,excludingCalifornia,havechosento
retainthetraditionalregulatorymodel.Underthisregime,verticallyintegratedutilitiesandcertain
publicpowerentitiesretainfunctionalcontroloverboththetransmissionsystemsandgeneration
dispatch.
4.1.2 EnergyMarkets
ThecentralizedwholesaleenergymarketsintheU.S.payauniformclearingpricetoallgenerators
biddinginthemarket,whichisintendedtoencouragegeneratorstooffertheirelectricityatthe
margin,theirbreakevenpointforvariablecosts.92
MostofthecentralizedwholesaleenergymarketsintheU.S.haveimplementedwhatisknownas
locationalmarginalpricing(LMP)ornodalpricing.ExamplesincludethePJMInterconnection,ERCOT,
NewYork,andNewEnglandmarkets.Thetablebelowliststhemarketsandtheirkeyattributes.Inan
LMPmarket,thebids/offerssubmittedbymarketparticipantsareusedtodeterminethepricesof
electricityateachnodeonthenetwork.93Thenodalpriceisthehighestpricedbidthatisdispatchedto
meetloadinanyhourandallsuccessfulbiddersarepaidthisnodalorLMPprice.Whereconstraints
existonatransmissionnetwork,94moreexpensivegenerationmaybedispatchedonthedownstream
sideoftheconstraint,resultinginapriceseparationoneithersideoftheconstraint.Thisresultsinwhat
istermedcongestionpricingorconstraintrents.95Somesystemsalsoaccountformarginallossesinthe
nodalpricecalculation.Dependingonthemarket,pricesettlementsoccurdayahead,hourly,orinreal
time.
Someofthecentralizedwholesaleenergymarketshavealsodevelopedcapacitymarketstoensurethere
issufficientgenerationtomeetreliabilityrequirements.Inaddition,thecentralmarketsalsotypically
includeancillaryservicemarketstomeetotherreliabilityrequirementssuchasvoltagesupport,and
financialhedgingdevicescalledFinancialTransmissionRights(FTRs)orTransmissionCongestion
Contracts(TCCs),whichenablemarketparticipantstomanagetransmissioncongestionrisksandcosts.
ApproximatelytwothirdsofthenationselectricityloadisservedinRTOregions.SeeEnergyPrimer:A
HandbookofEnergyMarketBasics,pg.42.
92Thealternativeapproach(notadoptedinanyU.S.market)isapayasbidmarket,whichencouragesgeneratorsto
offertheirelectricityattheexpectedmarketprice.
93Fromthebids/offers,thetheoreticalpriceofelectricityateachnodeonthenetworkiscalculatedasashadow
price.Theshadowpricereflectsthehypotheticalincrementalcosttothesystemfromanoptimizeddispatchof
availableunitstomeetoneadditionalkilowatthourofdemandatthenodeinquestion.
94Transmissionsystemsareoperatedtoallowforcontinuityofsupplyevenifacontingentevent,likethelossofa
line,weretooccur.Thisisknownasasecurityconstrainedsystem.
95Ifthelowestpricedelectricitycanreachalllocations,pricesarethesameacrosstheentiregrid.
91

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Table2.CentralizedMarketsandtheirAttributes
Market
Key Elements
California ISO (CAISO)

(established 1996)
Midcontinent ISO (MISO)

(established 2002 as Midwest
ISO)
ISO New England (ISO-NE)

(established 1997)
New York ISO (NYISO)

(established 1999)
PJM Interconnection (PJM)
Energy market: three-settlement (day ahead, hour ahead, and real time). Spot market
with locational marginal pricing
Ancillary services, and Financial Transmission Rights market
Administers a two-settlement (day ahead and real-time) energy market known as the
Day-2 market. It produces hourly locational marginal prices that are rolled up into 5
regional hub prices.
Also administers a monthly financial transmission rights (FTR) allocation and auction
MISO bilateral trading is active on the IntercontinentalExchange (ICE) at the Cinergy
Hub and Northern Illinois Hub.
Voluntary annual and monthly capacity auction
Energy market: two-settlement (day ahead and real-time) spot market with locational
marginal pricing (an internal hub, eight load zones, and more than 500 nodes)
Capacity market
Forward reserves market
Regulation market, and financial transmission rights market
marginal pricing
Regional and locational capacity market with deliverability requirement
Financial transmission rights market
Market participants trade electricity bilaterally through brokers, the ICE, and the New
York Mercantile Exchanges (NYMEX) ClearPort, using NYISO zones as pricing points
but bilateral deals that go physical must be scheduled with the ISO.
marginal pricing (prices are calculated at each bus every five minutes)
Capacity markets with deliverability requirement
Ancillary services markets
Financial transmission rights market
Energy and capacity in the region are also traded bilaterally through brokers and the
ICE
Southwest Power Pool (SPP)

(granted RTO status in 2004)
Market participants trade physical electricity bilaterally, either directly or through

brokers, and through the energy imbalance service (EIS) market.
ERCOT
Administers the Texas competitive retail market

Operates wholesale markets for:
o Balancing energy
o Ancillary service markets with zonal congestion management
Source:InformationinthistableobtainedfromtheFederalEnergyRegulatoryCommissionwebsiteavailableat:
http://www.ferc.gov/marketoversight/mktelectric/overview.asp

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4.2 BilateralWholesaleGeneration
UnliketransactionsintheRTO/ISOenergymarkets,inbilateraltransactions,buyersandsellersknow
theidentityofthepartywithwhomtheyaredoingbusiness.96Bilateraltransactionsmayoccurthrough
directcontactandnegotiation,throughabrokerorthroughanelectronicbrokerageplatform,suchasthe
IntercontinentalExchange(ICE).97Bilateraltransactionsrangefromstandardizedcontractpackages,to
customized,complexcontractsknownasstructuredtransactions.98
TraditionalwholesaleelectricmarketsexistprimarilyintheWest(otherthanCalifornia)andSoutheast.
Inthesetraditionalwholesalemarkets,utilitiescontinuetoberesponsibleforsystemoperationsand
management,and,typically,forprovidingpowertoretailconsumers.99Nearlyallthewholesale
transactionsintheSoutheastaredonebilaterally.Longtermenergytransactionsarecommon,and
transactiondurationsforayearormoreoutweighspottransactions.Furthermore,manylongterm
agreementsinvolvefullrequirementscontractsorlongtermpurchasepoweragreements.100Bilateral
transactionsalsopredominateamongentitiesintheWest,otherthanCalifornia.Thoseentitiesalsosella
smallamountofpowerintotheCaliforniaISOsmarket.101
4.3 TodaysRetailChoiceStatus
TwomodelsarecurrentlyemployedintheUnitedStatestodeliverelectricpowertoretailconsumers.
ThetraditionalmodelistheVerticallyIntegratedUtilitywherevariousservicesarebundled,whichis
definedbytheU.S.EnergyInformationAdministration(EIA)asameansofoperationwherebyenergy,
transmission,anddistributionservices,aswellasancillaryandretailservices,areprovidedbyone
entity.102Underthismodel,theenergyprovidedbytheutilitymaybeprovidedbyitsowngeneration
orprocuredfromothers,generallyinbilateralwholesaletransactions.Manynonverticallyintegrated,
governmentownedandcooperativeentitiesalsooperateinaverticallyintegratedmodeusingjointly
ownedtransmissionandgeneration.Incontrast,thereareregionswhereutilityrestructuringhas
occurredandretailchoice103isavailableforalargenumberofcustomers.Thesecondmarketmodel
SeeEnergyPrimer:AHandbookofEnergyMarketBasics,pg.64.Whilebilateraltransactionsbetweentwoparties
donotoccurthroughanRTO,somebilateralactivityoccursinareaswherethereareRTOs/ISOs.
97Ibid.,pg.60.
98Ibid.,pg.60.
99Id.,pg.63.
100Ibid.,,pg.73.
101TheWestincludestheNorthwestPowerPool(NWPP),theRockyMountainPowerArea(RMPA)andthe
Arizona,NewMexico,SouthernNevadaPowerArea(AZ/NM/SNV)withintheWesternElectricityCoordinating
Council(WECC),aregionalentity.
102U.S.DepartmentofEnergyEnergyInformationAdministration,
http://www.eia.gov/tools/glossary/?id=electricity.
103Retailchoiceisaregulatorymandatetoallowretailcustomerstouseautilitystransmissionanddistribution
facilitiestomovebulkpowerfromonepointtoanotheronanondiscriminatorybasisforacostbasedfee.U.S.
DepartmentofEnergyEnergyInformationAdministration,http://www.eia.gov/tools/glossary/?id=electricity.
96

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ofteninvolvescentralized,bidbasedwholesalegenerationmarkets.Thispapergenerallyreferstothe
secondmodelastheretailchoicemodel.104
Asofthewritingofthisreport,15statesandtheDistrictofColumbiahaveadoptedelectricretailchoice
programsthatallowendusecustomerstobuyelectricityfromcompetitiveretailsuppliers.105
Overall,competitiveretailsuppliersprovided16%oftotalU.S.retailsalesbyvolumein2010.106
4.4 CostBasedRatesandTraditionalUtilityRegulation
ThetraditionalmodeofregulationintheUnitedStatesiscostbased,whichpermitstheutilityto
establishpricesthatwillrecoverprudentoperatingcostsandprovideanopportunitytoearna
reasonablerateofreturnonthepropertydevotedtothebusiness.Thegoalsofcostbasedutilitypricing
areasfollows:107
1.
2.
3.
4.
5.
Attractinginvestmentcapitalatareasonablecost
Reasonablepricesforelectricservice
Efficiencyincentive
Demandcontrol
Revenuegeneration
Costbasedratemakingisnotwithoutitscriticisms.Themostfrequentcriticismofcostbased
ratemakingisthatanincentiveexiststooverinvestincapitalintensiveprojectsbecausetheutilitys
incomeisderivedbyinvestment(AverchJohnsonBehavior).108Costbasedregulationisalsosometimes
criticizedbecauseitfailstoprovideutilitieswithanincentivetooperateefficiently.
4.5 TheRetailChoiceModel
Inasmuchastheretailchoicemodelisrelativelyimmature(lessthan15yearsoldinmostjurisdictions),a
numberofcriticismshaveemerged.First,participationinretailmarketsinmanyjurisdictionshasbeen
anemicduetoalackofincentives(i.e.,lowerprices)orinformation.Second,insomejurisdictions,
marketdesignissueshaveledtopricespikeswhichhavenegativelyaffectedconsumers.
Thedescriptionsofthetraditionalvs.retailchoicereflectsimplifyingassumptions.Therearevertically
integratedutilitiesthatoperateinareaswithbidbasedmarkets.Similarly,insomeareas,limitedcustomerchoice
hasbeenmadeavailabletolargecommercialorindustrialcustomersandnobidbasedmarketmayexist.The
RetailChoicemodelgenerallyreferstotheutilityandmarketstructurethatexistsasaresultofbroadretailchoice
forthecustomersofanumberofutilitiesinagivenregion.
105http://www.eia.gov/electricity/policies/restructuring/restructure_elect.html
106U.S.EnergyInformationAdministration(EIA),Stateelectricretailchoiceprogramsarepopularwith
commercialandindustrialcustomers(May14,2012),
http://www.eia.gov/todayinenergy/detail.cfm?id=6250#tabs_RenewablesMaps1.ThiswebsitehasamapofU.S.and
identifiesbyregionSalesforRetailchoicevs.defaultservices.
107JamesBonbright,AlbertDanielsenandDavidKamerschen,PrinciplesofPublicUtilityRates,PublicUtilities
Reports,Incorporated(1988),pg.112.
108HarveyAverchandLelandJohnson,BehavioroftheFirmUnderRegulatoryConstraint,AmericanEconomic
Review(1962).
104

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Attheheightoftheutilityrestructuringmovementinthe1990s,nearlyhalfofthestateswere
consideringretailchoiceinoneformoranother.Californiaandseveralnortheasternstatesledtheway,
inmanycasesrequiringinvestorownedutilitiesdivestsomeoralloftheirgeneration,whichwas
requiredfordifferentreasonsbaseduponthejurisdiction.Commonreasonsfordivestureofgeneration
included:(1)mitigationofperceivedmarketpower;and(2)quantificationofthevalueoftheseassetsfor
thepurposesofdeterminingstrandedinvestment.
AftertheCaliforniaenergycrisisin2001,however,somestates,includingCalifornia,abandonedthese
efforts.Therearecurrentlyonly15statesplustheDistrictofColumbiathatpermitallcustomersto
chooseanenergysupplier.109
Therestructuringeffortswerecontentious,withutilitiesarguingthatthey(andtheirshareholders)
wouldbeleftwithstrandedcosts(i.e.,generationandotherinvestmentsmadeinanticipationof
needingtoservetheloadwithintheirfootprintsthatwouldnotberecoveredwhenexposedtomarket
prices).Theseissueswereresolvedinvariousways,includingbytheadditionoftransitioncostadders
toelectricitydeliverychargeswithorwithoutsecuritizationarrangements.110Residentialratefreezesor
reductionswerealsomandatedinsomecasestoprovideanimmediatebenefittosmallerconsumers.In
somestates,utilitiesandregulatorswrestledoverProviderofLastResort(POLR)111ratesandsupplyto
ensurethatallcustomerswouldcontinuetohaveaccesstoservice,whileatthesametimefostering
competition.
UtilitiesthatnolongerowngenerationandretainanobligationtoserveunderaPOLRrequirement
mustprocurepowerinwholesaletransactions,eitherthroughbilateralarrangementsormarket
purchases.Thecostofpower,likeotherutilitycosts,issubjecttoreviewforreasonableness.FERCrules
requirecarefulscrutinyofsalesofpowerbetweenutilitiesandtheiraffiliates.112Atleastonestate,
Illinois,haspartiallytakenovertheroleofpowerprocurementfortheutilityselectricsupplycustomers.
However,morerecently,municipalaggregation(wherethemunicipalitynegotiatesapurchasepower
agreementonbehalfoftheresidentsofthecommunity)isincreasinglyreplacingthestatesroleasan
electricpowersupplier.
http://www.eia.gov/electricity/policies/restructuring/restructure_elect.html
Securitizationarrangementsallowedtheissuanceofbindsorothersimilarfinancialinstruments,whichwere
securedwithapropertyrighttoanonbypassablerevenue.
111APOLRisadefaultproviderwhoprovidesservicetocustomerswhodonotelecttosecurepowersupply
througharetailelectricsupplier.
112CrossSubsidizationRestrictionsonAffiliateTransaction,OrderNo.707,73FR11013(Feb.29,2008),FERCStats.
&Regs.31,264(Feb.21,2008)(AffiliateTransactionsFinalRule),orderonrehearing,OrderNo.707A,73FR43072
(July24,2008),FERCStats.&Regs.31,272(2008)(AffiliateTransactionsFinalRuleRehearing);OrderNo.697
(MarketBasedRateFinalRule).
109
110

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4.6 DifferencesBetweentheTraditionalandRetailChoiceModels
InboththeVerticallyIntegratedandRetailChoiceregulatorymodelsthedistributionandtransmission
functionsarepriceregulated,generallyusingsomevariantofcostbasedpricing.Nojurisdictioninthe
UnitedStateshasseriouslyentertainedthenotionofretailcompetitionfordistributionfacilities.113
TheprimarydifferenceintheVerticallyIntegratedandRetailChoiceregulatorymodelsliesinisthe
treatmentofthegenerationfunction,asdiscussedbelow.
1.
2.
GenerationPlanningandConstruction
VerticallyIntegratedUtilities
Traditionally,regulatedutilitiesengageingenerationsystemplanningaspartoftheirdaytoday
businessfunctions.Theobjectiveofregulatedgenerationsystemplanningistoprovidecustomerswith
reliableelectricserviceatthelowestlongrunprice.Generationsystemplanninggenerallyconsidersthe
followingvariablesinmakinggenerationdecisions:(1)thecostofnewgenerationtechnologyor
availablewholesalemarketpurchases;(2)whatcostswouldbeincurredtoretainexistinggenerating
unitsinservice;(3)expectationsregardingthefuturecostsofgeneratorfuels(e.g.,coal,naturalgas,and
petroleumproducts);(4)theimpactsofexistingandfutureenvironmentalrules;(5)thedeliverycosts
associatedwithgenerationsitingoptions,and(6)expectationsregardingthedemandfornewload.The
utilitymanagementperformsanalysesthattypicallyrelyuponcomplexsimulationstoascertainwhich
combinationsofnewandexistinggenerationandtransmissionsystemimprovementswillprovidefor
thegoalofsafeandreliablegenerationserviceatthelowestreasonablecost.Thisprocessisreferredto
asintegratedresourceplanning.Oncethedecisionsofthesystemplanningarecompleted,thecosts
associatedwiththosedecisionsarerecoveredfromcustomersthroughregulatedprices.
4.6.1 RetailChoiceMarkets
Incontrasttoverticallyintegratedutilities,theretailchoiceregulatorymodelreliessolelyupon
competitiveenergymarketstoprovidecustomerswithgenerationservices.Generationisconstructed
byindependentpowerproducers(IPPs)whorelyuponthemarkettoproviderevenuestreamsin
exchangefortheirinvestmentsandarethereforesubjectedtomarketrisk.Althoughmarketdesign
variesfromjurisdictiontojurisdiction,customersaregenerallyservedbyretailelectricsuppliers(RESs)
licensedtooperateinthatjurisdictionorthroughaPOLRmechanismforcustomerswhoeitherdonot
electtochoosearetailpowermarketerordonothavetheabilitytochoosearetailpowermarketer.The
lattercaseincludesanumberofjurisdictionsthathaveabandonedtheverticallyintegratedmodelbut
havenotprovidedallcustomerswiththeabilitytocontractdirectlywitharetailpowermarketer.
Retailchoicemarketsdonotrequirethatanyorganizedplanningprocessbeadheredtowhen
introducingnewgenerationintotheelectricpowersystem.Developerspurchaseexistingassetsor
developnewprojectsbaseduponexpectationoffuturemarketprices.
Thereareafewexceptions,includingthecompetitionwhichexistsbetweenFirstEnergyandClevelandPublic
PowerincertainareasofCleveland,Ohio.
113

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Acriticaldifferenceinretailchoicemarketsistheexistenceofretailpowermarketers.Retailpower
marketersprocureelectricpowereitherthroughownedassetsortransactionsonwholesalepower
marketstosupplycustomersonacontractualbasis.
4.6.2 PricingforGenerationServices
Verticallyintegratedutilitiesreceivearegulatedreturnforbundled(generation,transmission,and
distribution)services.Althoughthenuancesofregulatedratemakingdifferfromjurisdictionto
jurisdiction,moststateshaveadoptedsomevariationofrateofreturnratemaking.
Pricinginretailchoicestatesismarketbasedforgenerationorpowersupplyserviceandnotcost
based.Ifthegenerationserviceisprovidedbyaretailelectricserviceprovider,pricesaredetermined
competitivelybaseduponanarmslengthagreement.Inmostcasestheretailelectricsuppliermaynot
beaccessingphysicalgenerationresourcesdirectlyandinsteadwillreplyuponfinancialinstruments
tiedtotheelectricpowermarkettoprovidepricecertainty.
Asignificantproportionoftheloadinmanyretailchoicejurisdictionsisservedbydefaultproviders,
whoprovideservicetocustomerswhodonotelecttosecurepowersupplythrougharetailelectric
supplier.Defaultprovidersaregenerallysecuredthroughacompetitivesolicitationsuchasarequestfor
proposals(RFP)orauction.Furthermore,manystateslistedasretailopenaccessjurisdictionsrestrictthe
competitiveshoppingoptiontocertaincustomers(e.g.,Michigan).

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5. SystemReliability
Reliabilitystandardsorcriteriausedforplanningandoperationsareanintegralpartoftheelectric
powerindustryandhavebeensincetheveryfirstsystemsweredevelopedinthelatenineteenth
century.Aspowersystemsgrewincomplexityandevolvedintothelargesynchronousinterconnections
oftoday,thesestandardshavebecomeincreasinglyimportant.114
TherearetwocomponentstoBulkPowerSystem(BPS)reliabilityresourceadequacyandtransmission
security.Resourceadequacyensuresadequategenerationordemandresponsetomeetexpectedpeak
loadsplusareserve.Transmissionsecurityensuresreliablesystemoperationinthefaceof
contingencies,lossofgenerationortransmission.115Planningauthoritiesmustconstructfacilitiesto
meetbothoftheseidentifiedreliabilityneeds.
FERCregulateswholesalemarketsincentralizedmarketregionswheremarketsarethesourceofthe
newresourcestomeetresourceadequacyneeds.Intheseregions,theRTOs/ISOsandFERCarefacing
challengesofaligningtransmissionplanningwithprocurementofmarketdrivensolutions(generation,
demandresponse)toinducethemostefficientoutcome.Thereisalsothestrugglebetweenthestates,
whichhavehistoricallyhadregulatoryresponsibilityforassuringgenerationresourceadequacyfor
retailelectriccustomers.FERChasprovidedoversightofresourceadequacyunderFERCopenaccess
tariffsandincompetitivemarkets,andinsomecasesFERCoversighthasconflictedwithstateresource
planningobjectives.
FERCalsooverseestheNorthAmericanElectricReliabilityCorporation(NERC)astheElectric
ReliabilityOrganization(ERO)undertheFederalPowerAct.Inturn,NERCdelegatescompliance
monitoringandenforcementoversighttoitseightRegionalEntities.Instateswithverticallyintegrated
companies,statesoverseeautilitysresourceplanningandprocurement,andthesitingofjurisdictional
powerplants.Statesgenerallymustapprovethesitingofjurisdictionaltransmissionlinesand
equipment.
Underthissharedjurisdictionalframework,thestatesandFERCworktoensurethebulkpowersystem
(BPS)isdesignedandoperatedinareliablemanner.116
5.1 DevelopmentoftheMandatoryReliabilityStandards
Throughoutmostofthetwentiethcentury,increasedsysteminterrelationtookplace.Bytheearly1960s,
powersystemsinmostoftheUnitedStatesandCanadahadformedintofourlargesynchronous
SeeKennethLotterhosandCeliaDavid,NERCandMandatoryElectricReliabilityCompliance,Lexis(Apr.2011),
Ch2,pg.3(NERCandMandatoryElectricReliabilityCompliance).
115SeeNERCandMandatoryElectricReliabilityCompliance,Ch2,pg.1.
116SeeAdvancedEnergyEconomy,U.S.ElectricPowerIndustryContextandStructure(Nov.2011),Figure6.
114

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interconnectionsorgrids.117Duringthisperiod,individualpowersystemseachdevelopedand
appliedtheirowncriteriaforreliability.
Withthe1965NortheastBlackout,itwasplaintoseethatamorecoordinatedapproachwasnecessary.
Followingthe1965blackout,theNorthAmericanElectricReliabilityCouncil,whichlaterbecame
NERC,118andRegionalReliabilityCouncils,whichlaterbecametheRegionalEntities,formed.119The
U.S.systemsalsoformedtwonewpowerpools:theNewEnglandPowerPoolandtheNewYorkPower
Pool.120Acrossthenationsystemscametogethertoestablishregionalreliabilitycouncils,until
collectivelytheyencompassedessentiallyallofthecontinentalU.S.andCanada.121
SubsequentblackoutsontheEastCoastinJuly1977andtheWestCoastinJulyandAugustof1996
furtherunderscoredtheneedforgreatercoordinationandadherencetotheexistingreliabilitystandards.
AcommoncauseofthesethreemajorregionalblackoutswasviolationofNERCsvoluntaryOperating
PoliciesandPlanningStandards.122TheNortheastPowerCoordinatingCouncil(NPCC)adopted
criteriathatincorporatedtheNERCstandards,butalsoestablishedstricterrequirementsrecognizingthe
impactonthenationseconomyandfinanceswiththelossofNewYorkCity.Compliancewiththe
NPCCcriteriawasmademandatoryforNPCCmembersbycontract,whiletheNERCstandardswere
stillvoluntary.123
InresponsetotheWestCoastJulyandAugust1996cascadingoutages,theSecretaryofEnergy
convenedataskforcetoadvisetheU.S.DepartmentofEnergy(DOE)onmaintainingthereliabilityof
theBPS.Thetaskforcerecommended,amongotherthings,thatfederallegislationshouldgrantmore
explicitauthorityfortheCommissiontoapproveandoverseeanorganizationhavingresponsibilityfor
bulkpowerreliabilitystandardsandthatFERCbegivenjurisdictionoverreliabilityoftheBPS.124This
SeeNERCandMandatoryElectricReliabilityCompliance,Ch2,pg.3.
ThesystemsthathadbeenaffectedbytheblackoutformedtheNortheastPowerCoordinatingCouncil(NPCC),
theRegionalEntityforthenortheastportionoftheU.SandEasternCanada.SeeNERCandMandatoryElectric
ReliabilityCompliance,Ch2,pg.5.OneofNERCsroleswastoestablishoverallreliabilitycriteria.NERCsoriginal
planningcriteriaweregeneralinnatureguidelinesastowhattopicstheregionalcouncilsshouldaddressintheir
owncriteria.AnotherofNERCspurposeswastoprovideaforumforthediscussionofreliabilityissues.NERC
adoptedNAPSICsbulkpowersystemprotocols,includingthenowfamiliarN1systemcontingencydesign,and
operatingcriteriathatcontinuetobeusedinoperatingthebulkpowersystem.Ibid.,Ch2,pp.56.
119Theprimaryroleoftheregionalreliabilitycouncilswastoestablishandmaintainuniformreliabilitycriteriatobe
appliedintheplanningandoperationoftheirrespectivebulkpowersystems.Eachalsodevelopedproceduresfor
assessingconformance.Ibid.,Ch2,pg.6.
120AsderegulationproceededintheNortheast,theseevolvedintoIndependentSystemOperatorsNewEngland
(ISONE)andtheNewYorkISO.BothbecameconstituentareasofNPCC.
121Individualsystemsandpowerpoolssometimesdevelopedtheirownmoredetailedormorestringentcriteria,but
theywerealwaysresponsibleforadherencetotheregionalcriteriaasaminimum.SeeNERCandMandatoryElectric
ReliabilityCompliance,Ch2,pg.6.
122Ibid.,Ch2,pg.6.Seealso,http://blackout.gmu.edu/archive/a_1977.html.
124SecretaryofEnergyAdvisoryBoard,U.S.DepartmentofEnergy,MaintainingReliabilityinaCompetitiveU.S.
ElectricityIndustry,FinalReportoftheTaskForceonElectricSystemReliability(September1998),pp.2527,6567.
117
118

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laidthegroundworkfortheeventualadoptionoflegislationthatenactedthemandatoryreliability
enforcementstructurethatexiststoday.125
OnAugust14,2003,aseriesofeventsledtoablackoutaffectingmuchofthesysteminthenortheastern
U.S.,Canada,andportionsoftheMidwest.Ateamofindustryexpertsconcludedthattherehadbeen
violationsoftheNERCvoluntaryreliabilitystandards.Thisconclusionresultedindramaticchangesin
reliabilityenforcement.126OnAugust8,2005,theElectricityModernizationActof2005,whichisTitle
XIIoftheEnergyPolicyActof2005,wasenactedintolaw.127EPACT2005eliminatedthevoluntary
natureoftheNERCreliabilityguidelines,chargedFERCwithultimateoversightofelectricreliabilityof
theBPS,andestablishedanindependentEROtodevelopmandatoryreliabilitystandardssubjectto
FERCapproval,monitorindustryparticipantscompliancetothesestandards,andlevypenaltiesfor
noncomplianceuptoonemilliondollarsperdayperviolationforthemostseriousviolations.128The
EPACT2005languagewasbasedonareportbytheNationalEnergyPolicyDevelopmentGroupthat
recommendedenforceablereliabilitystandardsbyaselfregulatoryorganizationsubjecttoFERC
oversight.129
SeeNERCandMandatoryElectricReliabilityCompliance,Ch2,pg.7.
Ibid.,Ch2,pg.8,citing,U.S.CanadaPowerSystemOutageJointTaskForcesFinalReportontheAugust14,2003
BlackoutintheUnitedStatesandCanada:CausesandRecommendations(April2004).
127SimilaractionshavebeentakenbytheregulatoryauthoritiesintheCanadianProvincesandMexico.
129NationalEnergyPolicyDevelopmentGroup,NationalEnergyPolicy(May2001),pg.76.
125
126

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Figure8.NERCRegions130
5.2 TransmissionReliability
5.2.1 TheNERCStandardsandWhoMustComply
TheReliabilityStandardsaregroupedinto14broadcategoriesrelatingtobulkpowersystemoperations
andplanning.Eachstandarddescribeswhatmeasuresaretobecompleted,whobyregisteredentity
functionmustcompletethem,andhowcompliancewillbemeasured.131
Currently,thereare102ReliabilityStandardswithover1,300requirementsapplicableandmandatoryin
theU.S.,notincludingthenineregionalstandardsthathavebeenapprovedandthatareonlyapplicable
Source:NorthAmericanElectricReliabilityCorporationwebsiteavailableat
http://www.nerc.com/AboutNERC/keyplayers/Documents/NERC_Regions_BW_072512.jpg.
130

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inthespecificRegions.132AstandardisnotmandatoryandenforceableintheUnitedStatesunlessithas
receivedapprovalbyFERC.133
WithintheUnitedStates,otherthanAlaskaandHawaii,allusers,owners,andoperatorsoftheBPS134
mustcomplywiththereliabilitystandardsdevelopedbytheERO.135TheEROscomplianceregistry
processisusedtoidentifythesetofentitiesthatareresponsibleforcompliancewithaparticular
ReliabilityStandard.136TheapplicabilitysectionofaparticularReliabilityStandarddeterminesthe
applicabilityofeachReliabilityStandard.137
AcleardefinitionofthetermBulkElectricSystem(BES)138isessentialtodefiningthescopeand
applicabilityofthemandatoryreliabilitystandardsandisapartoftheNERCentityregistrationprocess.
Thedefinitionestablisheswhichparticularfacilitieswillbesubjecttothereliabilitystandardsand,
therefore,hasadirectimpactondeterminingwhichentitiesmustregisterundertheNERCFunctional
Model.ThedefinitionoftheBESdoesnotincludefacilitiesusedinthelocaldistributionofelectric
NERChasbeenworkingtoreducethisnumberofstandardsandinFebruaryNERCfiledapetitiontoretire34
requirementswithin19ReliabilityStandards.FERChasnotyetruledonthisfilingbutNERCissuedaguidance
statementinstructingRegionalEntitiestoceaseactivelymonitoringcompliancetotheserequirements.SeeNERC
GuidanceforComplianceMonitoringandEnforcementPendingRetirementofStandardsandRequirements
PursuanttoParagraph81(Apr.9,2013).NERCisalsopursuingothereffortstoeliminatestandardsthatdonot
improvethelevelofBPSreliabilityandimprovetheoverallstandardsdevelopmentprocess.
13316U.S.C.824o(d)(1);18C.F.R.39.5;MandatoryReliabilityStandardsfortheBulkPowerSystem,OrderNo.693,
FERCStats.&Regs.31,242atP26,orderonrehg,OrderNo.693A,120FERC61,053(2007)(explainingtheERO
mustfileeachofitsReliabilityStandardsandanymodificationtheretowiththeCommission).
134InOrderNo.743,FERCtheCommissionclarifiedthatthetermBulkPowerSystem(BPS),usedintheFPA,was
distinctandmoreexpansivethantheNERCdefinedterm,BES,whichdeterminestheenforcementapplicabilityof
theReliabilityStandards.SeeRevisiontoElectricReliabilityOrganizationDefinitionofBulkElectricSystem,133
FERC61,150(OrderNo.743)(Nov.2010)atP36.
135SeeFederalPowerAct215(b),16U.S.C844o(b);18C.F.R40.1.Noteapplicabilityalsoextendstoentities
describedunder201(f)oftheFPA.Section201(f)oftheFPAgenerallyexemptstheUnitedStates,astateorany
politicalsubdivisionofastate,anelectriccooperativethatreceivesfinancingundertheRuralElectrificationActof
1936(7U.S.C.901etseq.)orthatsellslessthan4,000,000megawatthoursofelectricityperyearfromPartIIofthe
FPA.Seealso18C.F.R39.2,40.1(a).
136OrderNo.693atPP92101.
137Ibid.,P127.
138OnNovember18,2010,theCommissionissuedOrderNo.743directingNERCtorevisethedefinitionofbulk
electricsystemandalsorequiredNERCtoprovideanexemptionprocess.SeeRevisiontoElectricReliability
OrganizationDefinitionofBulkElectricSystem,133FERC61,150atPP112113(OrderNo.743)(Nov.2010).
NERChasfiledandFERChasapprovedthedefinitionwithminimalchanges.SeeRevisiontoElectricReliability
OrganizationDefinitionofBulkElectricSystem,141FERC61,236(OrderNo.773FINALRULE)(Dec.2012);order
onrehg,143FERC61,053(OrderNo.773A)(Apr.2013).TheimplementationdateissetforJuly1,2014.See
RevisiontoElectricReliabilityOrganizationDefinitionofBulkElectricSystem,143FERC61,231(Orderon
Extension)(June13,2013).
132

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energy.139However,whatconstituteslocaldistributionwasneverdefinedbyCongressandithassince
beenlefttotheCommission,asmadeclearinOrderNo.773.140
5.2.2 RoleoftheRegisteredEntitiesandStates
Asdiscussedabove,allusers,owners,andoperatorsoftheBPSmustcomplywiththeNERCstandards
wheretheNERCregistryprocessidentifiestheentitiesthatmustberegistered.TheNERCFunctional
Modelprovidesguidanceconcerningthetypeoffunctionforwhichanentityisregisteredand,
therefore,theirroleinmaintainingreliability.TheFunctionalModelidentifiesvariousroles,or
functionsthatanentitymayperformwithrespecttothegrid.141Asingleutilityororganizationmay
performseveralfunctionsandberegisteredforeachofthosefunctions.
RegardlessofwhetherentitiesarelocatedinregionsthathavecentralizedmarketsandRTOs/ISOsora
traditionallyregulatedstructure,theRegionalEntitiesandNERCwillidentifywhomustberegistered
andaswhattypeoffunctionalentity.Theprimarydifferencebetweenfunctionalresponsibilitiesof
entitiesthatexistinRTOs/ISOsandthosethatdonotisthatRTOs/ISOsoftenperformthefunctional
rolesofBalancingAuthority,ReliabilityCoordinator,TransmissionOperator,andTransmissionPlanner.
Otherentitiesintheregionarethenregisteredtoperformtheremainingfunctions.Thereissometimes
someoverlapinfunctionalroles,suchasTransmissionOperator(TOP).142
InregionsthatdonothaveRTOs/ISOs,theinvestorownedutilityorlocalpublicpowerentitiesoften
performallthefunctionsandareregisteredasmultiplefunctionalentitytypes.Evenhere,however,a
traditionalutilitymaynotperformallfunctions.Wheregenerationhasbeendivested,thegeneration
ownerwillberegisteredastheGenerationOwner(GO)andGenerationOperator(GOP)(andpossiblyas
aTOandTOP,dependingontheinterconnectionfacilitiestheyown).Furthermore,inseveralofthe
nonRTO/ISOregions,anoperatingaffiliateoftheRegionalEntityservesastheRC.Theseregionsare
WECC,FloridaReliabilityCoordinatingCouncil(FRCC),andSPP.
TransmissionreliabilityisgovernedbyFERC,NERC,andtheREs.Thestatesstillretainarolein
resourceadequacy,asdescribedlaterinthissection.Inaddition,thestatesretainoversightforreliability
ofdistributionfacilitiesandmaytakeactiontoensurethesafety,adequacy,andreliabilitywithinthat
stateprovideditisnotinconsistentwithanyNERCreliabilitystandard.143Thestatesandother
FederalPowerAct215(a).
SeeOrderNo.773atP69.
141TheFunctionalModelwasdevelopedtoaddresstheadventofopenaccessandtherestructuringoftheelectric
utilityindustrytofacilitatetheoperationofwholesalepowermarkets.Thisnewindustrystructurereflected
functionaldisaggregationunderopenaccess,thatControlAreasnolongerprovidedasinglereliabilitystructure,
andtheRTOsandISOsdidnotallperformthesamefunctions.ThefunctionsdescribedintheFunctionalModel
includeGenerators,TransmissionServiceProviders,TransmissionOwners,TransmissionOperators,Distribution
Providers,LoadServingEntities,PurchasingSellingEntities,SecurityAuthorities,BalancingAuthorities,
InterchangeAuthorities,andtheComplianceMonitor.AnadvantageoftheFunctionalModelsisthatitdoesnot
dependonhoworganizationsare,orwillbe,structuredoronhowfunctionsareimplementedinthefuture.
142AnexceptiontothisruleisintheWECCregion,wheretheWECCReliabilityCoordinatorperformsthereliability
coordinationfunctionfortheentireregion,includingtheCAISOarea.
143SeeFPA215(h)(3),SavingsClause.
139
140

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governmentalentitiesthathaveregulatoryoversightfunctionsmayparticipateasnonvotingmembers
inNERCandREactivities,underthegovernmentsector,andmayalsoprovidecommentsinFERC
proceedings.OneimportantdistinctionisinthecaseoftheNewYorkStateReliabilityCouncil,which
existsasaseparateentitywithinNPCCandmaydeveloprulesthatresultingreaterreliabilitywithin
NewYorkprovidedtheydonotresultinlesserreliabilityoutsidethatstate.144
5.2.3 ComplianceMonitoringandEnforcement
TheNERCComplianceMonitoringandEnforcementProgram(CMEP)requiresbulkpowersystem
owners,operators,anduserstoregisterwithNERCandcomplywithallapprovedReliabilityStandards.
TheymustalsoreportallviolationsoftheReliabilityStandardstotheirRegionalEntity.TheCMEPuses
variousmonitoringprocessestocollectinformationinordertomakeassessmentsofcompliance,for
example,audits,selfcertifications,spotchecks,andselfreports.145
NERC,astheinternationalERO,hasdelegatedauthoritytomonitorandenforcecompliancewith
reliabilitystandardsofowners,operators,andusersoftheBPStoqualifiedRegionalEntities.Theeight
RegionalEntities,underNERCsoversight,areresponsibleforcarryingouttheCMEPwithintheir
respectiveregionsbasedontheregulatoryauthorityapproveduniformCMEP.146
Section215oftheFPAalsogavetheEROtheauthoritytolevypenaltiesfornoncompliance,withfines
ofuptoonemilliondollarsperdayperviolationforthemostseriousviolations.147FERCalsohas
separateinvestigationandenforcementauthorityundersection215oftheFPA.148WhileNERC,with
FERCapproval,hastheauthoritytoassesspenaltiesaslargeasonemilliondollarsperdayperviolation,
initialpenaltiesweremodest,withmaximumpenaltiesintherangeofseveralhundredthousand
dollars.Thistrend,however,hasbeguntochangeandinlate2011and2012penaltiesuptoand
exceedingonemilliondollarshavebeenassessedtoregisteredentities.149
5.3 ResourceAdequacy
Thedesireforresourceadequacystandardsisdrivenbyabeliefthatelectricitysupplyinterruptions
shouldbeveryrare,orpreferablynonexistent.150Historically,statecommissionshavehadregulatory
responsibilityforassuringgenerationresourceadequacyforretailelectriccustomers.However,when
changesareimplementedthroughFERCjurisdictionaltariffstoachieveresourceadequacyobjectives,
SeeFPA215(h)(3),SavingsClause.
SeeNERCandMandatoryElectricReliabilityCompliance,pg.Ch8.
146Ibid.,Ch8,pg.84.
147ThewayNERCapproachescomplianceandenforcementisalsounderrevisionthroughitsCompliance
EnforcementInitiativeaimedatstreamliningitsenforcementmechanismsandtheReliabilityEnforcementInitiative,
wherethefocuswillbetomovestandardsdevelopmentandcompliancemonitoringtowardstheassessmentof
internalcompliancecontrolsdevelopedbytheregisteredentities.SeeNERCwebsitelinks:
http://www.nerc.com/pa/comp/Pages/ReliabilityAssuranceInitiative.aspx.
148SeeFPA215(e)(3).InvestigationsareperformedunderPart1boftheFERCRulesofProcedure,18 CFR Part 1b.
149Seehttp://www.nerc.com/pa/comp/Pages/EnforcementandMitigation.aspx.
150JamesBushnell,ElectricityResourceAdequacy:MatchingPoliciesandGoals,CenterfortheStudyofEnergy
Markets(CSEM)(August2005),pg.2.
144
145

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forexamplethroughcapacitymarkets,FERChasassertedauthorityoverapprovaloftheresource
adequacydetermination.151Likewise,FERChasassertedauthorityoverresourceadequacystandards
wheretheypotentiallyaffectthereliableoperationoftheBPS.152
Intheelectricpowersector,thetermresourceadequacyreferstothetransmissionproviders
probabilisticabilitytomeetendusedemandforelectricpowerduringsystempeakhours.153
UnderlyingmostresourceadequacystandardsintheU.S.arecriteriasetbytheREsforgeneration
adequacy,typicallya1in10LossofLoadExpectationorLOLE.154FERChasacceptedthisstandard
forresourceadequacydesign,155althoughthereareopponentsassertingthatthe1in10objectiveis
overlyconservativeandmayimpedetransitionfromresourceadequacybasedonadministrative
capacitymechanismstomarketdrivenresourceadequacy.156Regardless,thechoiceofresource
adequacyobjectiveandthemeanschosentoachieveitwillhaveanimpactonconsumerelectricrates.
FERCstatedinPP2932ofitsMarch23,2005,orderinDevonPower,L.L.C.etal.,DocketNo.ER03563030,etal.,
andinP33ofitsMay9,2005,orderinDocketNo.ER05715000etal.thattheISONewEngland(ISONE)hadthe
authoritytoestablishgenerationresourceadequacystandardsonthegroundsthattheISONEsinstalledcapacity
marketisgovernedbyatariffthathadbeenfiledforapprovalbytheFERCandthattheISONEstariffand
ParticipantsAgreementauthorizetheISONEtoseekFERCapprovaloftheISONEsproposedresourceadequacy
determinations.
152InOrderNo.747,FERCapproveduseofthe1in10resourceadequacyobjectivebyRFC;regionalreliability
standard,BAL502RFC02.SeePlanningResourceAdequacyAssessmentReliabilityStandard,134FERC61,212
(2011)(OrderNo.747).However,PUCOchallengedFERCsjurisdictionthatinsufficientresourceadequacyfalls
underitsjurisdictionbysupposedlyimpactingjustandreasonablewholesaleprices.PUCOassertedthatFERC
jurisdictionunderFPA215adoptingreliabilitystandardsislimitedtothoseactionswhichprovideforreliable
operationofthebulkpowersystemandthatalackofadequateresourcestoservefirmloaddoesnotleadto
unreliableoperation(instability,uncontrolledseparationorcascadingfailures)sincemeasuressuchascontrolled
loadsheddingmaybetaken.FERCdismissedthisargument,statingthatthemerepotentialforinstability,
uncontrolledseparationorcascadingfailuresjustifiesitsactions,evenwheresuchsupplydemandimbalancesmay
becuredbyfirmloadshedding.
153SeeChristineTezak,ResourceAdequacyAlphabetSoup!,STANFORDWASHINGTONRESEARCHGROUP,
(June2005),pg.2(ResourceAdequacyAlphabetSoup!).
154SeeResourceAdequacyAlphabetSoup!,pg.2.LossofLoadExpectation(LOLE)meansthenumberoffirm
loadshedeventsanelectricsystemexpectsoveraperiodofoneormoreyears.Theutilityindustry,fordecades,has
usedanLOLEof1dayoffirmloadshedin10years(referredtoasthe1in10reliabilitystandard)astheprimaryif
notsolemeansforsettingtargetreservemarginsandcapacityrequirementsinsuchresourceadequacyanalyses.
Whilethisstandardisaccepted,thereisnottechnicaljustificationsupportingthisrequirement.Forexample,in
NPCC,Theprobability(orrisk)ofdisconnectingfirmloadduetoresourcedeficienciesshallbe,onaverage,not
morethanonedayintenyearsasdeterminedbystudiesconductedforeachResourcePlanningandPlanning
CoordinatorArea.SeeNPCCReliabilityReferenceDirectory#1DesignandOperationoftheBulkPowerSystem
(December2009),section5.1.1.
155InOrderNo.747,FERCapproveduseofthe1in10resourceadequacyobjectivebyRFC;regionalreliability
standard,BAL502RFC02.
156SeeEnergyChoiceMatters,FERCMandatesUseofConservativeResourceAdequacyStandardWhichWillRaise
RetailRates,(March18,2011).
151

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Inretailchoiceregions,resourceplanninghasbecomemorecomplex.Priortotransmissionunbundling
andretailaccess,resourceadequacywaspartofeachutilitysIRP,aprocessdiscussedbrieflyinSection
5andmorethoroughlyinSection8ofthispaper.Whereutilitieshaverestructured,however,itisnot
feasibletoplanforresourceadequacyinthisfashion.157UnderbundledserviceandIRPratemaking,the
FERChadlittlesayoverresourceadequacydecisions,whichtraditionallywerehandledbythestatesin
coordinationwiththeregionalreliabilitycouncil.158Inretailchoiceregions,plannerscannolongerrely
onasingleentitytomeetforecastsystemneeds.Anarrayofmerchantsuppliersbuildinggenerationin
responsetoanticipatedfuturemarketprocessreplacedasingleutilityinfulfillingpowersupplycontract
obligations.159Thisuncertaintyinsupplysourcecouldmeanthataplannercouldoveror
underestimatetheiroptimalsupplytarget.160
TwoapproachesareusedintheCentralizedMarketmodeltoachieveresourceadequacygoalsa
marketbasedandanadministrativeapproach.Withacapacitymarket,suppliersreceiveperiodic(i.e.,
annualormonthly)paymentsforprovidingreliablecapacitytoasystemandLoadServingEntities
(LSEs)arerequiredbytheregulatorystandardtopurchasethecapacity.161Onekeyconcernfor
consumersispricevolatilityanduncertainty.ExamplesofcapacitymarketsarefoundinPJM,NYISO,
andISONE.
Therearealsoothervariationstothemarketbasedapproach;theseareenergyonlymarketsand
marketswithadministrativeresourceadequacyrequirementsforLSEs.Anexampleofanenergyonly
marketisERCOTinTexas;however,decliningreservemarginsareforcingareevaluationofthis
approach.
BothCAISOandMISOareexampleswherethemarketbasedmechanismusesadministrativeresource
adequacyrequirements.Undertheadministrativeapproach,resourceadequacyisachievedthrough
traditionalIRPandcompetitiveresourcesolicitation.Theseprocessesarediscussedingreaterdetailin
Section8,ResponsibilitiesforPlanningandtheTypesofPlanningPerformed.Onekeyconcernis
increasedconsumercostduetouneconomicinvestmentdecisions.Examplesofadministrative
approachesareSPP,mostofWECCoutsidetheCAISO,andthesoutheastU.S.
Table3liststhekeyfeaturesofthemarketbasedresourceadequacyapproachesintheU.S.
SeeResourceAdequacyAlphabetSoup!,pg.2.
Ibid.,pg.4.
159SeeJamesBushnell,ElectricityResourceAdequacy:MatchingPoliciesandGoals,CenterfortheStudyofEnergy
Markets(CSEM)(August2005),pg.3.
160Overinvestmentofresourcescanresultinhighercoststoretailcustomerswhileunderinvestmentcanalsoresult
inhighcosts,e.g.,blackoutsandincapacitymarketspricespikes.SeeBushnell,pg.4.Forexample,in1998and
1999,theMidwestexperiencedsignificantpricespikeswherethepriceofelectricityinthewholesalemarketswent
to$1,000/MWh.
161SeeBushnell,pg.4.
157
158

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Table3.ExamplesofMarketBasedResourceAdequacyMechanisms
Region/
Entity
Market-Based
Method
CAISO
LSE Resource
Adequacy
Requirement
CPUC established resource adequacy obligations applicable to all Load-Serving

Entities (LSEs).
Two distinct requirements: Annual and monthly System resource adequacy Filings
and annual Local resource adequacy Filings
Each LSEs system requirement is 100 percent of its total forecast load plus a 15
percent reserve.
PJM
Capacity Market
Reliability Pricing Model that has a locational (subregional) capacity mechanism

3-year capacity obligation
Market clearing price paid for all resources committed in the auction with
performance-based penalties
Prices determined using an offer-based supply curve and simulated downwardsloping demand curve (Variable Resource Requirement or VRR)
PJM auctions consist of a Base Residual Auctions to meet the 3-year obligation and
Incremental Auctions to meet unfilled commitments.
LSEs can self-supply, but their resources must be offered in the base auctions.
A Fixed Resource Requirement (FRR) allows LSEs to meet fixed capacity obligations.
Minimum Offer Price Rule (MOPR) to discourage efforts to depress market clearing
prices by offering non-competitive bids with a conduct screen to identify noncompetitive bids
PJM has a capacity deliverability requirement.
NYISO
Capacity Market
New York State Reliability Council sets an Installed Reserve Margin, currently 118%
of peak; NYISO determines the Minimum Unforced Capacity Requirement.
The NYISO runs Capacity Period (seasonal), monthly, and spot market UCAP
auctions.
NYISO also has locational capacity requirements for NYC and Long Island (LI).
Market clears along an administratively determined demand curve.
NYISO has a capacity deliverability requirement.
ISO-NE
Capacity Market
Has a forward reserves market

Does not have a deliverability requirement for capacity
MISO
LSE Resource
Adequacy
Requirement
Annual resource adequacy requirements (reserve margin is 11.3% in 2012) and

voluntary planning resource auction
Seven local resource zones with local clearing
Opt-out provision allowing participants to submit a fixed resource adequacy plan,
allowing utilities to opt out of the yearly auction
Deficiency charge for entities that are short on capacity (based on the cost of new
entry)
Relies on state processes for resource planning, load forecasting, demand response,
and energy efficiency investment decisions

October 8, 2013
Key Features
Page 37
Region/
Entity
Market-Based
Method
ERCOT
Energy Only
Key Features
Energy-only nodal market with the system-wide offer cap of $3,000
$3,000 offer cap not based on a VOLL (customers value of lost load)
Target reliability standard of 1-in-10 (13.75% reserve margin) but target is not
enforced through specific requirements or market structures
Two out-of-market reliability mechanisms: Emergency Response Service (ERS)
demand curtailment program and reliability-must-run (RMR) contracts for units
needed for local reliability

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6. EnvironmentalIssues
6.1 ImpactsofEnvironmentalRegulation
Theelectricindustryissubjecttosignificantenvironmentalregulation,bothdirectlyandthrough
policiesorrequirementsrelatingtorenewableenergyandenergyefficiency.Forthemostpart,newand
proposedregulationsaffectelectricitygeneration,ratherthanthetransmissionordistributionsectors.
Thissectionprovidesanoverviewofrelevantenvironmentalregulations(existingandproposed)facing
electricitygenerationintheUnitedStates.Italsodiscusseshowrenewableenergypoliciesand
requirementsaffectentitiesoperatingunderthetwomarketstructures.
6.2 DifferingImpactsforDifferentStructures
Market/regulatorystructureplayanimportantroleinwhetherandhowenvironmentalrequirements
andpoliciesaffectelectricentities.Wherethetraditionallyregulatedmodelprevails,theimpacts
whatevertheyarefallontheutilityandtheassociatedcostsflowtoitscustomersthroughcostbased
rates.Incontrast,wheretherehasbeenarestructuringofutilityregulationandthedevelopmentof
organizedelectricitymarkets,impactsvarywidely.
Forexample,autilitythatownsnogenerationwouldnotincurthedirectexpenseofcomplyingwith
environmentalrulesrelatingtoemissions.162Instead,generatorcompliancecostswouldbereflectedin
thecostofenergypurchases.Similarly,generationonlyentitieswouldnotnormallybesubjecttoRPSor
policiesfavoringtheuseofrenewableenergyresources.Instead,generatorswouldfeeltheimpactof
theseitemsthroughincreasesordecreasesindemandfortheiroutputand,accordingly,inenergyprices.
Allofthisultimatelyaffectsthepricesendusecustomerspay.However,marketforcesmaydrive
energypriceshigherorlowerthanwouldtakeplaceunderthetraditionallyregulatedmodel.Ifa
verticallyintegratedutilityissupplyingitsenergyprincipallythroughitsowncoalfiredgeneration,
futureenvironmentalcostsarepotentiallyhigh,andmayoutstripanypotentialproductioncost
differentialthatwouldotherwisefavorcoal.Similarly,ifamarketisdominatedbycoalgeneration,
environmentalcostsmaydriveuptheoverallcostsofenergy.
Independentgeneratorsincentralizedmarketsareparticularlysensitivetothecostsofenvironmental
regulation,sincethesegeneratorsrelyonmarketpricingratherthancostofservicerates.Uneconomic
generationincentralizedmarketsmayberetiredratherthanoperatedatalossforanyextendedperiod
oftime.163Environmentalregulationsfacingcoalplantsaswellaschangingeconomicshaveencouraged
thegrowthofnaturalgasgenerationaswellasrenewableresources.Renewableresourcesinthese
marketsparticularlywherethereisahighrenewablesrequirementareusuallynotcompetingwith
nonrenewablesonthebasisofcost,butinsteadarecompetingwithdemandresponseorother
Thisexcludescontractualarrangementsthatwouldsubjectanonownertothosecosts.
WhileanRTOorISOmaybeabletokeeptheseunitsinoperationforalimitedperiodthroughsocalled
ReliabilityMustRunarrangementsthatcovertheownerscosts,thisisnotintendedtobeapermanentorlong
termsolutiontoaretirement.
162
163

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renewables.Similarly,requirementsrelatingtorenewablesmayaffectelectricserviceproviders
differently,dependingonwhethertheyareallsubjecttothesamerequirements.
Underthetraditionallyregulatedmodel,utilitiesarealsosensitivetoenvironmentalregulation,
includingpoliciesorregulationsfavoringrenewables,sincecompliancewouldincreaseordecreasetheir
costs.While,intheory,newratecasescanbefiledtoreflectincreasedcosts,inpracticetheyareoften
expensiveandmaymeetresistanceascoststocustomersincrease.Regulatorylagi.e.,theperiod
duringwhichrecoverablecostsareincurredvs.whentheyareactuallyreflectedinratescanalsobea
majorconcerntoaverticallyintegratedutility.Nonetheless,totheextenttheutilityisabletopassonthe
coststoitscustomers,theimpacttotheutility(thoughnotitscustomers)maybemuted.
Therefore,thedecisiontoretrofittocomplywithenvironmentalregulationsorretireandreplacewith
newgenerationinvolvesdifferentstakeholdersandconsiderationsforregulatedutilitiesand
independentgenerationowners.Forindependentgenerationowners,thesedecisionsaregenerally
madebasedonwhetherornottherevenuesfromaretrofittedplantoutweighthecostsofoperatingthe
retrofittedplant(includingcapitalcostsfortheretrofit).Forregulatedutilities,retireorretrofitdecisions
mustbeapprovedbythestatepublicutilitycommission(PUC)andweightherateimpactoftheretrofit
comparedtotherateimpactofreplacementgenerationordemandsideoptions.PUCsmayalsochoose
toorberequiredtotakeothernonmonetaryissuesintoconsideration,suchasreliability,fueldiversity,
andpublicinterest.164Whileeachcaseisspecific,theoreticallyitiseasierforamerchantgeneration
ownertoretireaplantduetothehighcostsofanenvironmentalregulationthanaregulatedutility.
Alsoofimportanceisthefactthatwhileregulatedentitiesownjustoverhalfofallcurrentlyoperational
generation,theyownnearlythreequartersofallcurrentlyoperationalcoalfiredgeneration,thetype
thatismostaffectedbyenvironmentalregulations.165
Thecostsandrisksfromproposedenvironmentalregulationswilldifferbyregion,largelyaffecting
thoseregionsofthecountrywithsignificantamountsofexistingcoalfiredgeneration.Whether
environmentalcostsendupbeingpassedthroughincostbasedratesorresultinhighermarketbased
rates,theimpactonelectricityconsumersinthoseregionswillbeconsiderable.
6.2.1 GreenhouseGasInitiatives
Theregulationofexistingpowerplantshasthepotentialtosignificantlyaffectthenationsoverall
emissionofcarbondioxide(CO2);approximately40percentofnationalCO2emissionsarefromthe
electricsector.Overall,threepossiblepathsforCO2policyhaveemerged:legislationofacapandtrade
ortaxapproach,regulationbytheU.S.EnvironmentalProtectionAgency(EPA),andnofederal
regulationofCO2.
Intheabsenceoflegislation(whichisunlikelyinthenearterm),theEPAhastheobligationundera2009
settlementagreementtoregulateCO2;however,congressionalRepublicanshavethreatenedtostripthe
ForfurtherdiscussionoftheroleofPUCsinutilitydecisionmakingrelatedtoenvironmentalregulations,see
SectionIIof:MonastandAdair,ATripleBottomLineforElectricUtilityRegulation:AligningStateLevelEnergy,
Environmental,andConsumerProtectionGoals,ColumbiaJournalofEnvironmentalLaw,38(1)(2013).
165StatisticsfromNavigantsanalysisofdatadownloadedfromEnergyVelocityinJulyof2013.
164

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EPAoftheauthority.166OnJune25,2013,PresidentObamaannouncedthathisadministrationplansto
meetthefollowingdeadlinesforregulatingcarbonemissionsfrompowerplants:
September20,2013modifiedproposedrulefornewpowerplants
June1,2014proposedruleforexistingpowerplants
June1,2015finalruleforexistingpowerplants
June30,2016deadlineforstatestosubmitimplementationplans167
Giventhedivisivenessofopiniononthistopicandtheotherprioritiesforthefederalgovernmentover
thenearterm,itisuncertainwhetherafederalgreenhousegas(GHG)programwillcomeintoeffectin
theverynearterm.
TheEPAreproposedNewSourcePerformanceStandards(NSPS)rulesforCO2emissionsfornewfossil
fuelpowerplantsonSeptember20,2013;themodifiedproposallimitscoalfiredandsmallnaturalgas
firedpowerplantstoemitting1,100poundsofCO2perMWh,andlimitslargenaturalgasfiredplantsto
emitting1,000poundsofCO2perMWh.TheoriginalproposalsetoneCO2emissionstandard(1,000lbs.
perMWh)forbothnewcoalandnewnaturalgaspowerplants.TheEPAsanalysisoftheimpactsofthe
regulationshowthatdespitethefactthattherulewouldessentiallybarnewcoalpowerplantsfrom
beingbuiltwithoutcarboncaptureandsequestration(CCS),atechnologythatisnotyetcommercially
operational,theruledoesnotdisruptanyplannedcoalpowerplantconstruction.
6.2.1.1 CaliforniaAB32
CaliforniasAssemblyBill(AB)32,enactedinSeptember2006,establishedacomprehensiveprogramto
achievequantifiable,costeffectivereductionsofGHGsby2020.AB32requiresthereductionof
CaliforniaGHGemissionsby2020downto1990levels,estimatedtobea16percentdecreasefromthe
CaliforniaAirResourcesBoards(CARBs)projectedbusinessasusual2020levels.CARBplansto
obtainasignificantcomponentofGHGreductionsintheenergysector,specificallyviaacapandtrade
regime.CARBscapandtradeprogramhasbeenthesubjectofseverallitigationchallenges,including
oneinwhichCARBsScopingPlanwasupheldinaJune2012decision.
CARBheldtheirfirstGHGauctioninNovemberof2012,andheldtwoauctionsinthefirsthalfof2013;
priceshaveremainednearthefloorof$10/allowance.
6.2.1.2 RegionalGreenhouseGasInitiative
Connecticut,Delaware,Maine,Maryland,Massachusetts,NewHampshire,NewYork,RhodeIsland,
andVermonthavejoinedtheRegionalGreenhouseGasInitiative(RGGI),whichisacapandtrade
programtocurbcarbondioxideemissionsthatbeganin2009.TheoverallCO2capwasreducedin2012,
andwillcontinuetobereducedeachyear.TwentyRGGIauctionshavebeenheldtodate,withclearing
pricesfallingbetween$1.87/tonand$3.51/ton.
SeeSettlementAgreement:http://www.epa.gov/airquality/cps/pdfs/boilerghgsettlement.pdf
SeePresidentialMemorandum:http://www.whitehouse.gov/thepressoffice/2013/06/25/presidential
memorandumpowersectorcarbonpollutionstandards
166
167

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6.2.2 RenewablePortfolioandEnergyEfficiencyResourceStandards
RenewablePortfolioStandards(RPS)arestatepoliciesthatrequireelectricityproviderstoobtaina
minimumpercentageofpowerfromrenewableenergyresourcesbyspecifieddates.Currently,thereare
29statesplustheDistrictofColumbiathathavemandatoryRPSpoliciesinplace;8stateshave
nonbindingrenewablegoals.AnoverviewoftheRPSobjectivesineachstatehasbeenprovidedin
Figure9.
Figure9.StateRPSPolicies
Source:DatabaseofStateIncentivesforRenewables&Efficiency(DSIRE.org)
Thetargetlevelofrenewablepenetration,deadlines,definitionofrenewableoralternativeenergy
sources,andcomplianceoptionsallvaryfromstatetostate.SomestateshaveprovisionswithintheRPS
thatlimitcompliancecoststoregulatedentities,utilities,orendusecustomers.ManystatesRPS
policiesincludespecialcarveouts,incentivesorotherprovisionstoaddresslocalneeds;acommon
exampleisacarveoutthatrequiresasubsetoftherenewabletargetbefromsolarordistributed
generation(DG)sources.Sofar,moststateshavemetorcomeclosetomeetingtheirRPSandcarveout
targets.ManyofthestatesthatdonothaveRPSarelocatedinthesoutheasternU.S.,wherethereislittle
potentialforlowcostwindgeneration.Thesestatestendtohavemoderatesolarpotentialandhigh
biomasspotential,bothofwhichhavehighercoststodevelopthanwind.Conversely,northeastern
statestendtohavemoderatetoaggressiveRPSpoliciesandalsolacksubstantialonshorewind
potential.
TheexistingRPSlandscapeischangingassomestatespassrevisionsthroughlegislation;todate,no
statehasrepealeditsRPS.Astheyrequireutilitiesandregulatedentitiestoobtainpowerfrom
renewablesources,whichtendtohavehighercoststhantraditionalsources,RPStargetstendtoincrease

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thecoststotheentitiesrequiredtomeetthem.168Inregulatedmarkets,thesecostsarepasseddirectlyon
totheenduser,but,asdescribedabove,inderegulatedmarketstheimpactonenduserratesisless
transparent.
TwentystateshavemandatoryEnergyEfficiencyResourceStandards(EERS)orsimilarprovisionsto
ensurethatcosteffectiveenergyefficiencymeasuresareusedtohelpoffsetgrowingelectricitydemand.
Anadditionalsevenstateshavenonbindingenergyefficiencygoals.MostEERSpoliciesrequirea
reductioninannualpeakdemandbyacertainpercentagethroughtheimplementationofenergy
efficiencyinitiatives.AnoverviewoftheEERSobjectivesineachstatehasbeenprovidedinFigure10.
Figure10.StateEERSPolicies
Source:DatabaseofStateIncentivesforRenewables&Efficiency(DSIRE.org)
ThesuccessofEERSprogramsisdifficulttoquantify,astheydependonestimatesfordemandreduction
comparedtoabusinessasusualforecast.StateswithEERSalsotendtohaveloweraveragepower
demandgrowththanstateswithoutEERSthathavecomparableeconomicprofiles.169Energyefficiency
improvementscanbemorecosteffectivethanbuildingnewgenerationtomeetdemandgrowth;thus,
energyefficiencymeasureshavethepotentialtoreduceenduserrates.
SeeU.S.EnergyInformationAdministration,LevelizedCostofNewGenerationResourcesintheAnnualEnergy
Outlook2013(January2013),http://www.eia.gov/forecasts/aeo/electricity_generation.cfm.
169U.S.EnergyInformationAssociation,ElectricityDetailedStateData,1990
2011,http://www.eia.gov/electricity/data/state/.
168

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6.2.3 MercuryandAirToxicsStandards
OnDecember21,2011,theEPAunveiledthefinalversionoftheMercuryandAirToxicsStandards
(MATS)rule,whichsetsemissionslimitsonmercuryandothertoxicpollutantsfrompowerplants.The
rulewillaffectexistingcoalandoilfiredunitsthatarecapableofatleast25MWofelectricaloutput.
TherulerequiresemissionreductionsbyAprilof2015.Thepolicyallowsforanadditionalyear,and
possiblytwo,forgeneratorstoinstallthenecessaryemissioncontrolequipment;thiswilllikelyreduce
thecostofcomplianceforentitiesthatownmanyaffectedunitsasretrofitscanbespreadamongthe
entirecompliancetimeperiod.Additionally,powerplantshavetheoptiontousefacilitywide
averagingtomeetmercurylimitsandtheemissionsareaveragedover90days.TheMATSruleis
expectedtoaddsignificantretrofitcoststooldercoalpowerplants,resultingintheretirementof
some/many.
6.2.4 NationalAmbientAirQualityStandards
AsrequiredundertheCleanAirAct(CAA),theEPAhassetprimary,andinsomecasessecondary,
NationalAmbientAirQualityStandards(NAAQS)forsixcriteriapollutants:carbonmonoxide,lead,
nitrogendioxide,ozone,particulatematter(PM)(diameter2.5mmand10mm),andsulfurdioxide,which
areupdatedbytheEPAeveryfiveyears.Carbonmonoxideandleadstandardsdonotapplytothe
electricindustry,buttheothercriteriapollutantsareemittedorresultfromthecombustionoffossil
fuels.AftertheEPAfinalizesaNAAQS,statessubmitStateImplementationPlans(SIPs)thatoutline
howthatstateplanstobringareasthatdonotmeettheNAAQSintocompliance.IftheEPAdoesnot
approveastatesSIP,itcanimplementaFederalImplementationPlan(FIP)inthatstate.Therefore,
NAAQSSIPscanhaveverydifferentimpactsongeneratorsstatetostateorevenwithinstates,
dependingonageneratorsproximitytoareasthatareabovetheNAAQS.
6.2.5 CleanAirInterstateRule/CrossStateAirPollutionRule
FromtheEPAsNAAQSforPM,NOx,andSO2,theCAAalsorequiresstatestolimittheiremissionsof
pollutantsthatcancontributesignificantlytoanotherstatesNAAQSnonattainmentproblemwhen
theydriftdownwind.TheEPAhaspromulgatedtworegulationsdesignedtoreducethesepollutants
thatdriftdownwindinlessthanadecade,butbothhavebeensuccessfullychallengedincourt.Most
recently,inAugustof2012,theU.S.CourtofAppealsfortheDistrictofColumbiavacatedtheCross
StateAirPollutionRule(CSAPR);theSupremeCourtrecentlyagreedtoheartheEPAsappealofthat
decision.SeveralcoalpowerplantsannouncedtheirretirementduetotheCSAPR,andhavesince
retractedthatannouncement.CSAPR,andtheCleanAirInterstateRule(CAIR)beforeit,usedacap
andtrademechanismtoallowflexibilityinmeetingemissionreductions.Inthenextfewyears,either
theCSAPRwillbereinstatedbytheSupremeCourt,thoughttobeanunlikelyoutcome,ortheEPAwill
comeupwithareplacementrule.
6.2.6 RegionalHaze
TheEPAsBestAvailableRetrofitTechnology(BART)rulewasfinalizedin1999.Theruleisdesignedto
improvevisibilityinnationalparksandappliestopowerplantsbuiltbetween1962and1977.However,
theruleonlyrequiresNOxandSO2emissionreductionsforthoseplantsforwhichitisdeemed
necessarythroughaunitbyunitstudy.Theregulationrequiresaffectedunitstoconductanalysesto
determinetheimpactofitsemissionsonvisibilityinnationalparks.
October 8, 2013
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6.2.7 CoolingWaterIntakeStructures
TheEPAproposedastandardforcoolingwaterintakestructuresatexistingpowerplantsonApril20,
2011,undersection316(b)oftheCleanWaterAct(CWA).TheEPAplannedtoissueitsfinalrulefor
coolingwaterintakestructuresbyJune27,2013;however,theydidnotmeetthisdeadlineandstatethat
theywillfinalizetherulebyNovember4,2013.Theproposedruleofferedseveralcomplianceoptions,
includingintakescreenmodificationforimpingement,andclosedloopcoolingsystemsorasitebysite
determinationofBestTechnologyAvailable(BTA)basedonclosedloopcoolingsystemsfor
entrainment.Thisrulehasthepotentialtointroducehugeretrofitcoststoanumberofplants,
potentiallyraisingenduserratesandcausingreliabilityproblemsintheprocess.
6.2.8 CoalCombustionResiduals
Coalcombustionresiduals(CCRs)areresiduesfromthepowerplantscombustionofcoalthatare
capturedbypollutioncontroltechnologies,likeelectrostaticprecipitatorsorbaghouses.InJune2010,
theEPAissuedaproposaltoregulatecoalashinanattempttoaddresstherisksfromthedisposalofthe
wastesgeneratedbycoalplantsinsurfaceimpoundments(forliquidwaste)andlandfills(forsolid
waste).TheEPAhasnotsetatargetdateforissuingthefinalCCRregulation.

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7. RelativeAllocationofRisksoverTime
7.1 TraditionallyRegulatedModel
Underthetraditionallyregulatedmodel,theallocationofrisksiswellestablished.Theutilityhasa
monopolyrighttoprovideelectricservicetoretailcustomers,whointurnareentitledtoelectricityata
reasonablecost.Utilitiesareallowedtorecovertheirprudentinvestmentsinthesystem,plusa
reasonablereturnoninvestment,plusreasonableoperatingcosts.Inreturn,theutilityhasadutyto
serveallcustomerswithinitsfootprintandmustexpandandmaintaintheelectricsystemasneededto
meettheneedsofitscustomers.
Theutilitysriskinthetraditionalmodelisthatitsrateswillnotrecoveritsactualinvestmentand
operatingcostsormeettherateofreturnrequiredforitsinvestorstorisktheirmoney.Theutilityalso
risksthatitscostswillbedeterminedtohavebeenprudentlyincurredandthatitwillreceivetimely
recoverythroughtheregulatoryprocess.Thecustomersrisksinclude:
1.
2.
3.
4.
Utilityoverinvestmentoroverbuilding(sinceitgetsarateofreturnonitsinvestment)
Utilityunderinvestment(eitherthroughbaddecisionmakingoroutofconcernthatitwillnot
recoveritscosts)
Unreliableserviceasaresultofineffectiveoperations
Highcostsduetoinefficientutilityoperationsorbaddecisionmaking
Thetraditionalmodelusesregulationandregulatoryproceedings170tomitigatetheserisks.Ratecases
areintendedtoprotectthecustomerfromoverinvestment(andinefficientoperationswhileallowingthe
utilityanditsinvestorstorecoveritsprudentlyincurredcostsplusareasonableinvestmentreturn.Rate
casesandotherregulatoryproceedingsalsoaddresstheutilitysreliability,operatingcosts,and
management.Regulationandmandatedsystemrequirementsarealsousedtoprotectcustomersandthe
publicatlargefromunderinvestment,unsafeoperations,andenvironmentalimpacts.However,the
consumerprotectionsaffordedbyratecasesmayaresometimescriticizedbecause:(1)litigationis
expensiveandconsumersmaytobeabletoaffordthecostsofthelitigation;and(2)manyjurisdictions
donothaveconsumeradvocates.
Inthetraditionalmodel,utilitiesaregenerallyverticallyintegrated,owningboththetransmissionand
distributionsystemswithintheirterritory,aswellasthegenerationnecessarytoservecustomers.The
traditionalmodelalsoincludesgovernmentownedandcooperativeutilitiesthatmayjointlyown
transmissionandgenerationfacilitiesortheirownfacilities.Becauseutilitiesmustserveloadatall
hoursoftheyear,theymusthaveenoughgenerationtoservepeakdemand,whichmayexceedwhat
wouldbeneededtoserveloadformostoftheyear.Theymustalsohaveaccesstoadditionalresources
intheeventthatageneratorbecomesunabletooperate.
Overtheyears,utilitieshavedevelopedarrangementstoassistoneanothertomeetemergenciessuchas
thelossofageneratororanunexpectedspikeindemand,suchascapacityreservesharingagreements.
Includingproceedingsbeforethegoverningbodyofautilitythatisnotinvestorowned.
170

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Inaddition,utilitiesmaypurchasepowerfromothercompaniesonalongorshorttermbasis.Where
thereisnocentralizedwholesalemarket,thesearegenerallybilateral,negotiatedtransactions.These
purchasesandsalesallowutilitiestomanagethecostsofprovidingforpeakloadseitherbyselling
excesspowerorbypurchasingsomeoftheutilitysrequirements.Otherwise,eachutilitywouldhaveto
buildandownsufficientgenerationtomeetitspeakload,plusarequiredreliabilityreservemargin.
Independentpowerproducerscanbeadditionalsourcesofpowertoutilitiesinareaswherethe
traditionalutilitystructureprevails.Intheabsenceofancentralizedenergymarket,anindependent
wholesalegeneratorinaregionsubjecttotraditionalutilitystructuremayrequirealongtermpower
purchaseagreementwithautilityinordertoobtainfinancingandtosupportitsoperations.171Forthe
utility,apurchasepowerarrangementmaybealessexpensivealternativetoconstructingandowninga
powerplant,anditprovidescertaintyastopricingoveralongterm.However,thedownsideriskisthat
theutilitymaylockinpricesthatturnouttobetoohigh.
Thus,inatraditionalmodel,onerisktoconsumersisthatprices(rates)willreflecthighergeneration
costseitherthroughoverbuildingorthroughlongtermpowerpurchaseagreements.Ontheplus
side,however,longtermpricingagreementsmayprotectconsumersfromenergypricevolatility.In
fact,FERCfoundthattheunavailabilityoflongtermcontractswasoneofthecausesoftheCalifornia
powersupplycrisis.172Inaddition,inbothtraditionallyregulatedandcentralizedmarketmodels,the
risksoflongtermcontractscanbehedgedthroughfinancialinvestments.
7.2 CentralizedMarketModel
Inacentralizedmarket,therisksforcustomersandthemechanismsforaddressingthemarethesame
withrespecttothetransmissionanddistributionsystem.Ratecasesandregulationaretheprincipal
toolstoprotectcustomersfrommonopolyabusesandtosettheutilityspricingforthedeliveryof
electricity.However,withrespecttogeneration,themarket(oftenwithapricecapasabackstop)sets
wholesaleenergyprices,whichinturnmaydriveinstallationofnewgenerationornewtransmission.
Utilitiesmayormaynotowngeneration.Inmanycases,utilitiesintheseareashavebeenrequiredto
divesttheirgeneration.Inothercases,utilitieshavedivestedsomeoralloftheirgenerationvoluntarily.
Inthesemarkets,manygeneratorsinaregioncompetewithoneanothertosupplyelectricity.The
centralizedmarketsareassociatedwithRTOsorISOsthatareresponsibleforregionaltransmission
planning.InthewakeofFERCsOrderNo.888,requiringinvestorownedutilitiestofileOpenAccess
TransmissionTariffsandrequiringnonjurisdictionalentitiestodosotogainthebenefitofreciprocity,
utilitiesmustmaketheirtransmissioncapacitynotneededtoservetheirowncustomersavailableto
othersonthesameterms.173Theycannotfavortheirownortheiraffiliateswholesaletransactions.
Utilitiesinthesemarketsarenotnecessarilyplanningandbuildinggeneration.Instead,theseregions
relyonmarketforcestocauseneededgenerationtobeaddedwhenandwhereitisneeded.Locational
IPPdevelopmentintheseareasmayalsobeimpactedbytransmissionconstraints,whichmaylimitthe
generatorsabilitytodeliverthepowertoabuyerotherthanthelocalutility.
172InvestigationofPracticesoftheCaliforniaIndependentSystemOperatorandtheCaliforniaPowerExchange,93
FERC61,121at61,354.
173SeeOrderNo.888,pg.370.
171

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MarginalPricingencompassesthedeliveredcostofenergyintoanarea.Inalloftheexistingorganized
markets,allgenerationofferedinanareaispaidthesameclearingpriceforthegivenhourorservice,
withthedifferencebeingthecosttodelivertheenergytotheintendedzone.Thisisintendedtodrive
overallcostsdownandtoensurethatthelowestcostgenerationisdispatchedfirst.Intheory,new
capacitywillbeaddedinareaswherepricesarehigh.However,somemarketshavefoundthattheLMP
differentialsthemselvesmaynotbeenoughincentive.PJMandISONE,forexample,haveadopted
capacityauctionmechanismstoensurethatthereissufficientcapacitywithinthemarket.
Whilethemarketsarephysicaltherearemanypurelyfinancialparticipants.Financialparticipants
provideliquidityanddepththatwouldbedifficulttoachieveiftheonlyplayerswereutilitiesand
generators.Inaddition,thereareanumberoffinancialhedgingmechanismsthattheorganizedmarkets
offerthathelputilitiesandothersreduce(oratleastmanage)risk.Theseincludeitemssuchasthe
FinancialTransmissionRights(FTRs)offeredthroughPJM(andcomparabletoolsavailableinother
markets)thatenableparticipantstomanagetransmissioncongestionrisksandcosts.Credit
requirementsarestringentandmonitoredbythemarketoperators.Eachmarkethasamarketmonitor
whoseroleistodeterminewhetherpricingiscompetitive.Inaddition,variousruleshavebeenadopted
byFERCtoaddressandpreventpotentialmarketabusesandmanipulation,particularlyafterenhanced
civilpenaltyauthorityunderPartIIoftheFederalPowerAct(FPA)174andtheCaliforniaenergycrisisof
2000andresultinglitigation.
Inareaswherethereisretailchoice(whichismostcommonunderthecentralizedmarketsmodel),the
presenceoflightly(ornon)regulatedalternativeretailenergyproviderspresentsarangeofnewrisks
forutilitiesandforcustomers.Theseprovidersmaybethinlycapitalizedoroverextended.Inaddition,
theenergysavingsmaybelessthanexpected(ornonexistent).Customersruntheriskofhigherratesif
thealternativeproviderfailstoperform,althoughinmanyinstanceretailprovidersarerequiredtomeet
financialresponsibilityrequirementswhichtosomeextentmaymitigatethisrisk.Insomecases
particularlywhereindustrialorcommercialcustomersareconcernedtheutilitymaychargeahigher
ratetoreturningcustomers.Inpart,thisistodiscouragetheselargecustomersfromreturningtoutility
supplyifthereareotheroptions.Thisnotonlysupportsthegrowthofcompetition,butalsoprotectsthe
utilityfromlargeswingsinenergyrequirementsduetocustomersarbitragingenergycosts.
Figure11showsNavigantResearchs2011forecastthattherateofcommercialandindustrialcustomer
purchasesfromalternativesuppliersislikelytocontinuetooutpaceoverallindustrygrowthforthenext
severalyears.
EPACT2005expandedFERCsremediestoaddressmarketmanipulation,enhancingFERCthepowertoimpose
174
civilpenaltiesunderPartIIoftheFederalPowerAct(16U.S.C.825o1(2000)(asamendedbyEPAct2005,
1284(e));16U.S.C.823b(2000)).
October 8, 2013
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Figure11.ForecastedEnergySalesfromAlternativeSuppliers175
3,000.0
2,500.0
2,000.0
1,500.0
1,000.0
500.0
1998
2003
Total Energy-Only C/I Sales (MWh Millions)
2009
2015 (Projected)
2020 (Projected)
Total Utility C/I Sales (MWh Millions)
Total C/I Sales (MWh Millions)
Onlyrecentlyhavealternativesuppliersbeguntotargettheresidentialmarketinsomestates,aidedin
somecasesbymunicipalaggregation.176
Ascustomersleaveutilities,however,theriskstoutilitiesandremainingcustomersmayincrease.The
utilityinmanycasesmustcontinuetoprocurepowerforthesecontinuingcustomers.Inaddition,the
utilitymustalsobepreparedtoresumesupplyingservicetoreturningcustomers,evenasthisnumber
grows.Howwellutilitiesmanagethisriskmayaffectcoststonotonlyitsremainingelectricsupply
customersbutalsotoitsdeliveryservicecustomers.Asaresult,theexistenceofaliquidmarketis
essentialtoutilitiesinrestructuredstates.
Asnotedearlier,underthecentralizedmarketmodel,independentgeneratorsarenotassuredareturn
oftheirinvestment;rather,theyaresubjecttomarketpricing.Aswithotherinvestments,therateof
returnrequiredtosupportnewgenerationwillreflecttherelativerisksandrewardsinvolved.Where
theriskstorepaymentofdebtorgenerationofaprofitseemhigh,thegenerationmaynotbebuilt.In
addition,generatorsarecompetingagainstothersolutions,suchastransmissioninvestments.Various
techniquescanoftenbeusedtomitigatetheserisks,suchaspowerpurchaseagreementsorother
arrangements.Ultimately,however,thedecisiontoconstructthegenerationwilldependonmarket
forcesi.e.,expectedenergypricesvs.costs.
Source:NavigantResearch(formerlyPikeResearch)reportCorporateandInstitutionalProcurementof
Electricity,2011.
176See,forexample,thediscussionofthistopicinthe2013EnergyProcurementPlanoftheIllinoisPowerAgency,
http://www2.illinois.gov/ipa/Documents/IPAPlan_complying_with_120544Order.pdf,pg.3.Municipal
aggregationisaprocessbywhichamunicipalgovernmentcancombinetheelectricitysupplyneedsofitsresidences
andsmallbusinessesintoapooltoobtainvolumepricingforthem.
175

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Incontrast,underthetraditionallyregulatedmodel,theutilitydetermineswhethertobuildgeneration
(oftenwithitsregulatororaspartofitsIRP)andmaychoosetobuildgenerationbasedonitsvalueand
costscomparedtootheroptionsincludingwholesalepurchases.Theutilityunderthismodeldoesnot
havetoconsidergenerationasastandaloneinvestment,butmayviewitincomparisonwith
transmissionorotherinvestments.Andthefranchiseutilityhasclearresponsibilitytoprocure
adequatesupplytomeetexistingandfuturedemandofcustomers.Regulatoroversight,including
prudencereviews,takestheplaceofmarketforcesunderthetraditionallyregulatedmodel.

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8. ResponsibilitiesforPlanningandtheTypesofPlanningPerformed
BPSplanningfunctionsencompassresourceadequacyandtransmissionsecurityplanning.Resource
adequacyplanninginvolvesassessinganddeterminingthatadequategenerationsupplywillbe
availabletomeetload.Transmissionsecurityplanningaimstoensurethereisadequatetransmission
infrastructuretodelivergenerationtoloadcenters.Thereissomeoverlapoffederalandstateregulation
withrespecttothesetwoareas.Theoversightofresourceadequacyplanninghastraditionallybeena
statefunctionwhiletransmissionsecurityplanning,withtheimportantexceptionoftransmissionsiting,
hasnowbecomegovernedbyfederallawandregulationoverseenbytheFERC.Theplanningofthe
distributionsystemisentirelyundertheoversightofstateandlocalgovernments.Thekeyplanning
challengestoentitiesinboththetraditionallyregulatedandcompetitivemarketregionsarediscussed
below.
8.1 TheTransmissionPlanningFramework
Inrecentyears,FERChasissuedtwokeyOrdersgoverningtransmissionplanning:OrderNo.890and
OrderNo.1000.BothapplyregardlessofanentitysRTO/ISOaffiliation;however,themannerinwhich
entitiesaddresstheirrequirementsdiffersbasedonwhethertheyoperateunderanRTO/ISO.
OrderNo.890requiredthattransmissionprovidersparticipateinopen,coordinated,andtransparent
transmissionplanningonbothlocalandregionallevels.177TheplanningprocesshadtomeetFERCs
nineplanningprinciples,whichinclude:coordination,openness,transparency,informationexchange,
comparability,disputeresolution,regionalcoordination,economicplanningstudies,andcostallocation.
TransmissionplanningprocessesunderOrderNo.890alsohadtobeopentocustomers,andcustomers
mustbegivennecessaryplanninginformation.Futuresystemplanswererequiredtobecoordinated
withcustomers.178
OrderNo.1000builtuponandextendedmanyoftheideasinitiallyintroducedunderOrder890.
AmongthereformsintroducedinOrderNo.1000arerequirementsforaregionaltransmissionplanning
process,costallocation,considerationofpublicpolicyrequirements,eliminationoftheRightofFirst
Refusal(ROFR)inwholesaletariffstoconstructnewfacilities,andimprovementstothecoordination
betweenneighboringtransmissionplanningregionsfornewinterregionaltransmissionfacilities.Order
No.1000A,issuedinMay2012,andOrderNo.1000B,issuedOctober2012,madesomeclarifications.
Eachofthesechangesisdiscussedinthesectionsthatfollow.
8.1.1 RegionalPlanningandtheInclusionofNonIncumbentTransmissionDevelopers
TheCommissioncarriedtheOrderNo.890planningprinciples,designedprincipallytoincrease
transparency,intoOrderNo.1000,requiringthatallregionalplanningprocessescomplywiththose
OrderNo.890atPP3,524.
Ibid.,P3.
177
178

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principles.OrderNo.1000alsomandatedthatstakeholdersbeprovidedwithanopportunityto
participateinthatprocessinatimelyandmeaningfulmanner.179
TheplanningrequirementsinFERCOrderNo.1000requirethateachpublicutilitytransmission
providerparticipateinaregionaltransmissionplanningprocessthatproducesaregionaltransmission
planandthatcomplieswithcertaintransmissionplanningprinciples.Throughtheregional
transmissionplanningprocess,publicutilitytransmissionprovidersmustevaluate,inconsultationwith
stakeholders,alternativetransmissionsolutionsthatmightmeettheneedsofthetransmissionplanning
regionmoreefficientlyorcosteffectivelythansolutionsidentifiedbyindividualpublicutility
transmissionprovidersintheirlocaltransmissionplanningprocess.Publicutilitytransmission
providershavetheflexibilitytodevelop,inconsultationwithstakeholders,proceduresbywhichthe
publicutilitytransmissionprovidersintheregionidentifyandevaluatethesetofpotentialsolutionsthat
maymeettheregionsneedsmoreefficientlyorcosteffectively.180Theproceduresmustresultina
regionaltransmissionplanthatreflectsthedeterminationofthesetoftransmissionfacilitiesthatmore
efficientlyorcosteffectivelymeettheregionsneeds.
InthecentralizedmarketswhereRTO/ISOshaveformed,transmissionplanninggenerallyencompasses
largeregionsandiscoordinatedaroundacentralizedprocessesadministeredbytheRTO/ISO.Interms
ofidentifyingviabletransmissionsolutions,severalregions,includingPJM,181ISONE,andCAISO,
adoptedacompetitivesolicitationprocessintheirtransmissionplanningproceduresasaresultofOrder
No.1000.182
Inareaswhereatraditionallyregulatedmodelremains,planningiscoordinatedbythevertically
integratedutilitieswithintheirterritory.InseveralnonRTOareasplanninggroupswereestablishedto
coordinateplanningactivitiesandmeetOrderNos.890and1000requirementsforregionalplanning
processes.Forexample,theSoutheasternRegionalTransmissionPlanning(SERTP)includes
predominantlyjurisdictionalandnonjurisdictionalsystemsinSERCthathavecometogethertoforma
groupforpreparingaregionalplanningprocessproposalforpurposesofrespondingtoFERCOrder
No.1000.Also,theCaliforniaTransmissionPlanningGroup(CTPG)includesjurisdictionalandnon
jurisdictionalsystems(includingLADWP).TheCTPGwasoriginallyformedin2009tocomplywith
OrderNo.890,andwasreorganizedtoaddressFERCOrderNo.1000.
TransmissionPlanningandCostAllocationbyTransmissionOwningandOperatingPublicUtilities,136FERC61,051
atP150(2011)(OrderNo.1000).
180NotethattheCommissionusesthephrasemoreefficientandcosteffectiveandmoreefficientorcost
effectiveinOrderNo.1000creatinganambiguityastowhetheraprojectshouldbebothefficientandcosteffective.
181SeeWithnoROFRprovisionsatissue,FERCmostlyreachesconsensusonOrder1000Filings,SNLFinancial,
Apr.18,2013.
182TheCAISOcompetitivesolicitationprocessappliestolinesabove200kV.SeeFERCmostlyacceptsCAISO
Order1000filing,butClarkdissentsontwoissues,SNLFinancial,Apr.19,2013.TheISONEprocesswas
introducedconditionally.SeeWithnoROFRprovisionsatissue,FERCmostlyreachesconsensusonOrder1000
Filings,SNLFinancial,Apr.18,2013.Forexample,ISONEusesitsAttachmentKprocess,wheremerchant
transmissionsolutionscanbeproposedinresponsetoaneedasidentifiedintheRegionalSystemPlan.
Additionally,ISONEmay,actingthroughitsBoard,solicittransmissionsolutionsasalternativeproposalsfromthe
marketwhennoviablesolutionshavebeenproposed.Similarly,theNYISO,throughitsComprehensiveReliability
PlanningProcess,mayalsosolicitmarketsolutionstomeetreliabilityneeds.
179

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WhileOrderNo.1000doesnotrequirenonpublicutilitiestoparticipateintheplanningprocesses,it
doesencouragethemtodoso.183Somenonpublicutilitieshavechosentoenroll184intransmission
planningregionsdependingonwhethertheyhaveloadintheregionwheretheyseektosponsora
project.185
FERCalsodoesnotrequireMerchantTransmissioncompaniestoparticipateinOrderNo.1000
processes,recognizingthatthecostsofthoseprojectsarerecoveredthroughnegotiatedratesandthat
MerchantTransmissiondevelopersassumetheentireriskfordevelopmentoftheseprojects.However,
ifaMerchantTransmissiondeveloperwishestotakeadvantageoftheregionalcostallocation
mechanisms,itmustparticipateintheregionalplanningprocess.186
Severalregions,RTOandnonRTO,initiallyelectedtohavetheirstateregulatorybodiesdecidewhich
competingtransmissiondeveloperprojectswouldbeselected;theCommissionrejectedthisoption.187
Whilethestatemayparticipateinthedecisions,itistheplanningregionthatmustmaketheultimate
decision.
8.1.2 InterregionalPlanningCoordination
IntheOrderNo.1000FinalRule,FERCadoptedseveralmeasurestobroadenthegeographicscopeof
transmissionplanningandenableanadequateanalysisofthebenefitsassociatedwithinterregional
transmissionfacilitiesthataddresstransmissionneedsinanefficientorcosteffectivemanner.188FERC
requiredthateachpublicutilitytransmissionprovider,throughitsregionaltransmissionplanning
process,(1)developproceduresforsharinginformationregardingtherespectiveneedsofneighboring
transmissionplanningregions;(2)developandimplementproceduresforneighboringpublicutility
transmissionproviderstoidentifyandevaluatetransmissionfacilitiesthatareproposedtobelocatedin
bothregions;(3)exchangeplanningdataandinformationbetweenneighboringtransmissionplanning
regionsatleastannually;and(4)maintainawebsiteoremaillistforthecommunicationofinformation
relatedtointerregionaltransmissioncoordination.189However,theCommissiondeclinedtorequirea
SeeOrderNo.1000atPP815822andOrderNo.1000AatP774.
Asanenrollee,theentitywillhaveaccesstoregionalcostallocationforitsacceptedprojectsandwillalsohave
votingrightsinthetransmissionplanningprocess;nonenrolleesdonothavetheserights.SeeWithnoROFR
provisionsatissue,FERCmostlyreachesconsensusonOrder1000Filings,SNLFinancial,Apr.18,2013.For
examplenonpublicutilityenrolleesincludeLIPAintheNYISOregionalplanningprocess,TennesseeValley
Authority(TVA),AssociatedElectricCooperativeInc.(AECI),andEastKentuckyPowerCoop(EKPC)alljoined
theSERTPregionalplanningprocessforpurposesoftheFERCOrder1000.Also,LADWPjoinedtheCalifornia
TransmissionPlanningGroupforpurposesofFERCOrderNo.890andforFERCOrderNo.1000regionalplanning
process.
185SeeWithnoROFRprovisionsatissue,FERCmostlyreachesconsensusonOrder1000Filings,SNLFinancial,
Apr.18,2013.
186SeeOrderNo.1000AatP275.
187SeeSCE&G(ER13107000),NYISO(ER13102000),andCAISO(ER13103000)Orders.
188SeeOrderNo.1000atP368.
189Ibid.atP345.
183
184

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formalplanningagreementbetweenpublicutilitytransmissionprovidersofneighboringtransmission
planningregions,asitproposed.190
Bothtraditionallyregulatedandcentralizedmarket(RTO/ISO)regionshaveimplementedprocessesfor
thesharingandexchangeofinterregionalplanningdata.Furthermore,inresponsetotheinterregional
requirementsofFERCOrderNo.890,andthemorespecificrequirementsoftheFERCOrderNo.1000
FinalRule,thereareseveralcoordinatedinterregionalplanninginitiativesunderwayinbothRTOand
nonRTOregionstocomplywiththeserequirements.OneexampleistheNortheasternISO/RTO
PlanningCoordinationProtocol(theProtocol),adocument,describingasetofprocessesand
proceduresthroughwhichcoordinatedplanningactivitieswillbeconductedandimplementedbythe
ISOsandRTOsinthenortheasternUnitedStatesandCanada.191TheProtocolprovidesaprocessfor
conductinginterregionalplanningstudies,andincludes:theresponsibilitiesofthestakeholderprocess,
dataandinformationexchange,thecoordinationofprojectevaluationcriteria,proceduresfor
conductinginterregionalassessments,andproceduresfortheevaluationofprojectsthatcanaddress
regionalneedsconsistentwithFERCOrderNo.1000.TheProtocolwasfirstdevelopedtosupportthe
NortheasternCoordinatedSystemPlan,oneofthefirstcomprehensiveinterregionalplanningstudies.
PublicutilitytransmissionprovidersthatarenotaffiliatedwithanRTO/ISOhaverespondedtothe
requirementsofFERCOrderNo.1000usinganapproachsimilartotheabove,perhapsrelyingonan
existingframeworkthatwasdevelopedinresponsetoFERCOrderNo.890requirementsorearlier.
Thesesystems,whetherverticallyintegratedutilityorothertransmissionserviceprovider,typically
participateinaregionaltransmissionplanningprocessthatprovidesasimilarframeworkforaddressing
therequirementsofFERCOrderNo.1000.Forexample,PugetSoundEnergy,autilityinthePacific
Northwest,participatesintheColumbiaGridregionaltransmissionplanningprocess,whichisgoverned
bytheprovisionsofitsPlanningandExpansionFunctionalAgreement(PEFA).ThePEFAaddresses
memberentitiesdataandanalysesrequirements,andisdesignedtofacilitatemultisystemplanning
throughacoordinated,open,andtransparentprocess.192TheSoutheasternRegionalTransmission
Planning(SERTP)associationisasimilarorganization,whichincludesjurisdictionalandnon
jurisdictionalutilitiesinthesoutheast.
8.1.3 CostAllocation
OrderNo.1000alsomandatedthateachplanningregiondevelopacostallocationmechanismfor
allocatingthecostsofprojectsthatareselectedintheplanningprocessforinclusioninaregionalplan.
Transmissioncostallocationisasubjectofconsiderabledebateamongvariousstakeholdersinthe
electricityindustry.Costallocationraisesanumberofquestionsdependingonthestakeholders
perspective.Fromthestateregulatorandendusecustomerside,issuespertaintoelectricityrates.For
otherstakeholders,itisaquestionofwhoisabeneficiaryofanewtransmissionproject.Forrenewable
energydevelopers,costallocationcanbeasignificantdetrimenttothedevelopmentanddeliveryof
SeeIbid.atP475.
190
ThepartiestotheProtocolarePJM,NYISO,andISONE.OntariosIndependentElectricitySystemOperator,
HydroQuebec,andNewBrunswickPowerarenotpartiestotheProtocolbuthaveagreedtoparticipateinthedata
andinformationexchangeprocessandinregionalplanningstudiesforprojectsthatmayhaveinterregionalimpacts.
192SeeColumbiaGridPEFA,ThirdAmendmentandRestatement.
191

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renewableresources.193Somestakeholdersadvocatesocializing,orspreadingnewtransmissioncosts
aswidelyaspossiblewhileothersarguethatonlythosewhoreceivedirectreliabilityand/oreconomic
benefitsfromnewtransmissionassetsshouldpay.Inaddition,partieshavearguedthatthesocialization
oftransmissioncostsmasksthetruedeliveredcostofpowerfromspecificresourcesandtherefore
distortsthegenerationandconsumptionincentivesofdifferentresourcesorloads.194
OrderNo.1000adoptedsixprinciplesforbothregionalandinterregionalprojectcostallocation,
includingthatallocatedcostsmustberoughlycommensuratewithbenefitsandthecostallocation
processmustbetransparent.195
APJMpaperidentifiedfivegeneralcostallocationapproachesinuseintheU.S.,includingallocation:1)
betweenloadandgeneration,2)byamountofusage,3)bypeakconsumptionorgeneration,4)byflow
basis,and5)byamonetaryimpactbasis.196
Table4.ExamplesofCostAllocationApproachesUsedbyPlanningRegion197
Methodology
Description
RTO/ISO or Planning Region
License Plate
Each utility recovers the costs of its own transmission

investments (usually located within its footprint).
Southeast
CAISO (< 200 kV)
ISO-NE (< 115 kV)198
WECC (outside CAISO)
Beneficiary Pays
Various formulas that allocate costs of transmission

investments to those entities that benefit from a project,
even if the project is not owned by the beneficiaries.
In the case of FRCC, system benefits include avoided
transmission costs.
FRCC (>230kV)199
PJM (<500 kV)
NYISO (reliability and economic)200
MISO (<345 kV)
SeeASurveyofTransmissionCostAllocationIssues,MethodsandPractices,PJM,Mar.10,2010,pg.3(A
SurveyofTransmissionCostAllocationIssues,MethodsandPractices).
194SeeASurveyofTransmissionCostAllocationIssues,MethodsandPractices,atpg.3.
195OrderNo.1000atP622.
196SeeASurveyofTransmissionCostAllocationIssues,MethodsandPractices,pg.1.
198AppliestononPoolTransmissionFacilities(PTF)only.Transmissionlinesthataredeterminedtocontributeto
thereliabilityofthesystem(basedontariffcriterion)thatarelessthan115kVarealsoallocatedusingapostage
stampmethodology.
199TheBeneficiaryPayscostallocationmethodappliestoFRCCsCostEffectiveand/orEfficientRegional
TransmissionSolution(CEERTS)Projects.
200Forreliabilityupgradesspecificlocationalviolationsoccurringinazoneorzonesareallocatedtothezoneor
zonesinwhichthoseviolationsoccur.UpgradessolvingreliabilityviolationsinonlypartoftheNYISOdueto
constrainedinterfacesareallocatedtothezonescausingtheviolationbasedoneachaffectedzonesshareofthe
coincidentpeakloadoftheaffectedzone.UpgradessolvingNYISOwideviolationsareallocatedtoallzonesinthe
NYISObasedontheirshareofthecoincidentpeakloadintheNYISO.Costsforeconomicupgradesareallocated
baseduponthezonalshareoftotalenergyexpendituresavingsacrosszonesthathaveenergysavings.Loadserving
entitiesidentifiedasbeneficiariesareeligibletovoteonwhethertocontinuewiththeproject.
193

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Methodology
Description
RTO/ISO or Planning Region
Postage Stamp
Transmission costs are recovered uniformly from all

loads in a defined market area (e.g., RTO-wide in
ERCOT and CAISO).
ERCOT
PJM (>= 500 kV)
MISO (>=345kV)
CAISO (>= 200kV reliability and
economic)
SPP(reliability201; economic >345 kV)
ISO-NE (>= 115 kV)
Regions using load ratio share either allocate based on

coincident peak demand or energy (MWh) of the
member systems, as described in its tariff.
Merchant Cost
Recovery
Some regions use a combination of methods for

allocating costs. For example, SPP uses a ratio of 33%
postage stamp and 67% Beneficiary Pays for allocating
costs for reliability projects. Similarly, for >=345kV
projects, MISO uses 20% Postage Stamp and 80%
Beneficiary Pays for reliability projects.
Project sponsors recover the cost of the investment
(e.g., via negotiated rates with specific customers);
largely applies to DC lines where transmission use can
be controlled.
CAISO
ERCOT
PJM
NYISO
ISO-NE
Multi-Value Project
(MVP)
100% of the annual revenue requirements for MVP are

allocated on a system-wide basis to Transmission
Customers that withdraw energy from the system,
including export and wheel-through transactions sinking
outside the region, and recovered through an MVP
Usage Charge.
MISO
Tehachapi Location
Constrained Resource
Interconnection (LCRI)
Approach
Upfront postage stamp funding of project, later charged

back to interconnecting generators.
CAISO
8.1.4 PlanningforPublicPolicyRequirements
PriortoOrderNo.1000,someregionsalreadytookintoaccountpublicpolicyrequirementstotheextent
thattheydrovespecificactionssuchasplantretirementstomeetfederalandstateenvironmental
mandates.Somesinglestateregionsalsotookintoaccountstaterenewableresourceintegrationtargets.
However,OrderNo.1000madeitarequirementtoconsiderthesepublicpolicyrequirementsaspartof
aregionsplanningprocess.
8.1.4.1 PlanningforPublicPolicyRequirementsinOrderNo.1000
OrderNo.1000requiresthatregionalplannersconsiderpublicpolicyrequirementswhenconducting
theirstudies.Inthefinalrule,FERCnarrowedthedefinitiontoincludeonlyenactedstatutes(i.e.,
passedbythelegislatureandsignedbytheexecutive)andregulationspromulgatedbyarelevant
Forallupgradesatallvoltagelevelsandwithupgradecostgreaterthan$100,000.
201

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jurisdiction,whetherwithinastateoratthefederallevel.202FERCdidnotdictatehowthiswouldbe
accomplished,permittingstakeholderstoproposedifferentapproachesthatitwouldevaluate.203
Whiletheprovisionsarestilllargelyuntested,severalissueshavearisenrelatingtothepublicpolicy
planningrequirements.TheCommissionrejectedtheNYISOsintentiontoaskonlyincumbent
transmissionownerstoproposesolutionstomeetpublicpolicyrequirements,findingthistobe
discriminatory.ItalsoorderedthattheNYISOmustdetailhownontransmissionalternativescanbe
submittedforconsideration.204Finally,FERCrejectedtheNYISOsplantohavetheNewYorkPUC
decidewhichpublicpolicyprojectsshouldbeadvanced,notingthatthiswasadecisiontheNYISOitself
mustmake.InCalifornia,theCommissionrequiredthattheCAISOhaveauthoritytoorderincumbent
utilitiestobuildeconomicorpolicydrivenlinesthatnootherqualifiedtransmissionownerwaswilling
tobuild.205
8.1.4.2 IntegrationofRenewableResources
Thelocationofrenewableresourcessuchaswind,largescalesolar,andgeothermalgenerationislargely
dictatedbynature,duetothelocationofandtheinabilitytotransportthefuelsourceofrenewables.
Connectingtheselocationconstrainedresourcestothetransmissionnetworkinthemostcosteffective
mannercanpresentspecialchallenges.
IntheNortheast,stateregulatorsandregionalplanningauthoritiesacknowledgethehurdlesof
transmissiondevelopmenttointegraterenewableresources.ThesixNewEnglandstates206andNew
YorkhaveadoptedsomeformofRPS,whichrequireutilitiesandothersuppliersofretailserviceto
obtainspecifiedpercentagesoftheirelectricityfrompowerplantsthatrunonrenewablefuels.An
overviewoftheRPSobjectivesineachstatehasbeenprovidedinFigure9,inSection6.2.2ofthispaper.
TransmissioninfrastructuredevelopmentintheMidAtlanticregionisalmostexclusivelydrivenby
PJMsRegionalTransmissionExpansionPlanningProcess(RTEP).Aspartofthatprocess,PJM
evaluatesalternativesthatintegrateemergingaggregatedpowerresourceareasincludingprojectsthat
addressreliabilityissuesposedbyclustersofdevelopmentbasedonrenewableenergysources.
Texasleadsthenationinwindpower,mostofwhichcomesfromitsremotewesternplains,andithas
madedevelopmentofsupportingtransmissioninfrastructureapriority.Transmissionupgradesto
supportadditionalwindgenerationareplannedbyERCOTwithalltransmissionsystemconstruction
costsbeingbornebytheERCOTgridandultimatelybyloadwithinERCOT.Allcostsforwind
generationinterconnectionsarerolledintotheERCOTsystemwidetransmissioncostsandassignedto
loadinthesamemannerassystemupgrades.
OrderNo.1000atP2.
SeeWithnoROFRprovisionsatissue,FERCmostlyreachesconsensusonOrder1000Filings,SNLFinancial,
Apr.18,2013.
204SeeFERCorderschangestoNYISOOrder1000filing,includingpublicpolicyprovisions,SNLFinancial,Apr.
22,2013.
205SeeFERCmostlyacceptsCAISOOrder1000filing,butClarkdissentsontwoissues,SNLFinancial,Apr.19,2013.
206TheRPSinVermontaregoals,notmandatoryrequirementsatthistime.
202
203

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IntheSouthCentralregion,whilethereareseveraltransmissionprojectsbeingdevelopedby
TransmissionOwners,liketheMidAtlanticregion,transmissionsystemdevelopmentisledprimarily
bytheregionsRTO,theSouthwestPowerPool(SPP).
RenewableresourcedevelopmentintheSoutheasthasbeenlimited.Renewables,likesolarpowerand
windturbines,arefacedwithseveralchallengestotheirconsistentandwidespreaduseintheSoutheast.
Solarenergyrequireslargetractsofopenlandtoinstall,whicharenotreadilyavailable,andcloudcover
limitsitsreliability.Inaddition,onshorelocationswithgoodwindprofilesaregenerallynotavailable
inthisregion.UnlikethestatesinothergeographicregionsoftheUnitedStates,thoseintheSoutheast
generallylackRPSrequirementsthatwouldfurtherencouragethedevelopmentofrenewableresources.
TheMidwesthasseverallargescalestudiesunderway.TheRegionalGenerationOutletStudy
(RGOS)207identifiesmajorareasofrenewableenergydevelopmentzones,wheretransmissioncanbe
builtinabuilditandtheywillcomeapproach.Finally,theJointCoordinatedSystemPlan(JCSP)was
amultiRTO/ISOinitiative208ledbytheMidwestIndependentSystemOperator(MISO)todetermine
transmissioninfrastructurethatcouldbeconstructedtosupportthedeliveryenergyandcapacityfrom
renewableresourcesintheMidwesttoloadcentersintheeast.
TransmissionconstructionintheWesttointegraterenewableresourcesisbesttypifiedbythe
developmentofnumerous,largetransmissionlineprojectsintendedtotapvastrenewableresource
reserves.CaliforniahasinitiatedtheRenewableEnergyTransmissionInitiative(RETI)tohelpidentify
thetransmissionprojectsneededtoaccommodatetheStatesrenewableenergygoals,supportfuture
energypolicy,andfacilitatetransmissioncorridordesignationandtransmissionandgenerationsiting
andpermitting.
TheprocessesusedtoidentifytransmissionsolutionsarestrikinglydifferentbetweensomeRTOand
nonRTOinterregionalplanningregions.SomeinterregionaltransmissionplanningapproachesforRTO
regionshaveproposedasystematicalapproachforidentifyingtransmissionsolutionstomeetapublic
policyorreliabilityneed.Forexample,asmentionedearlierafewRTOswillsolicittransmission
solutionsusingaRFPapproach.Incontrast,somenonRTOplanningregionswillreceiveinputfrom
stakeholdersonapublicpolicyrequirement,andevaluatethecurrentlyproposedtransmissionprojects
todeterminewhichsolutionmaybestmeettherequirement.
207BackgroundinformationontheRGOSislocatedat
https://www.midwestiso.org/Planning/Pages/RegionalGenerationOutletStudy.aspx.
208MembersareMISO,PJM,SPP,andTVA.Thiseffortperformedalongtermplanningstudyincorporatingboth
economicandreliabilityanalysisofsystemperformanceforthecombinedfourJCSPareasincollaborationwiththe
parallelDepartmentofEnergyEasternWindIntegration&TransmissionStudy,whichwillprovideunderlying
inputassumptionsforgenerationscenarios.TherewasasubsequentEasternInterconnectionwidestudyperformed
undertheEasternInterconnectionPlanningCollaborative.Thefinalreportsforthisstudyareavailableat:
http://www.eipconline.com/.
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8.1.4.3 ROFRandNonIncumbentTransmissionOwners
OrderNo.1000envisionsalevelplayingfieldwherenewtransmissiondeveloperscancompetewith
establishedtransmittingutilitiesfortherighttobuildnewtransmissionlines.TheCommission
determinedthatincumbentutilitiesmustremoveprovisionsfromtheirCommissionjurisdictionaltariffs
andagreementsthatgrantthemarightoffirstrefusal(ROFR)toconstructtransmissionfacilities.209
Theseprovisions,FERCstated,havethepotentialtounderminetheevaluationofmoreefficientorcost
effectivesolutionstoregionaltransmissionneeds.210
InaMay17,2013ISONEComplianceOrder,theFERCstateditwouldeliminatetheROFRrequirement
inmanyinstances.TheCommission,however,didagreethattoavoiddelaysinthedevelopmentof
transmissionfacilitiesneededtoresolveatimesensitivereliabilitycriteriaviolation,certainreliability
relatedtransmissionprojectsshouldbeexemptfromthecompetitivesolicitationincertainlimited
circumstances.211Onesuchcircumstancewouldbewhenaprojectisneededinthreeyearsorlessto
solveareliabilityissue.212Also,whiletheROFRforincumbentTOstobuildandownnewtransmission
facilitieswithcostsallocatedregionallyhasbeeneliminated,theTOsretainROFRtobuildandownlocal
transmissionfacilities(under200kV)locatedwithintheexistingserviceterritoryoftheTO.213
8.2 TransmissionSitingandTransmissionGridExpansion
Theauthorityovertransmissionsitingisapatchworkquiltofoverlappingandsometimesunclear
divisionsofauthoritybetweennumerousgovernmentalbodiesderivingauthorityunderseveralbodies
oflaw.Whilethemajorityofsitingauthoritycurrentlylieswiththestates,thereareanumberof
instanceswherefederalapprovalsarerequired.
Undercurrentlaw,thestatePUCsoftenhavetheprimaryauthoritytoissuecertificatesofpublic
convenienceandnecessity,whichpermitelectricutilitiestoconstructtransmissionlines.Althoughprior
certificationfromFERCisrequiredforpipelinefacilitiesunderSection7oftheNGA,214thereisno
analogouscertificationrequirementundertheFPA.Furthermore,atthefederallevel,thereiscurrently
nocomprehensiveprogramforregulatingtheconstructionofelectricutilityfacilitiesexceptinthe
instanceofnuclearandhydroelectricprojects.215
SeeOrderNo.1000atP226.
Ibid.atP253.
211SeeUPDATE:FERCexplainsreasonsforfindingpublicintereststandardovercomeinISONEROFRdecision,
SNLFinancial.May21,2013.Seealso,ISONewEnglandInc.,143FERC61,150atP236(May17,2013).
212SeeUPDATE:FERCexplainsreasonsforfindingpublicintereststandardovercomeinISONEROFRdecision,
SNLFinancial.May21,2013.ThisdecisionappearstosupportpartofPJMsapproachtoROFR,whichprovidesthat
itsROFRwouldstillapplytoprojectsthatdidnothaveenoughtimetogothroughthecompetitivesolicitation
process.
213BothMISOandCAISObothproposedthisexceptiontotheeliminationtoROFR.SeeWithnoROFRprovisions
atissue,FERCmostlyreachesconsensusonOrder1000Filings,SNLFinancial,Apr.18,2013.
214NaturalGasAct7,15U.S.C.717f(2001).
215Infact,fornonhydroelectricandnuclearprojectstheFPAexpresslyexcludestheregulationofgenerating
facilities.FederalPowerAct201(b),16U.S.C.824(b)(2001).
209
210

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Atthestatelevel,acertificateofpublicconvenienceandnecessityfortheconstructionofhighvoltage
transmissionfacilitiesisrequiredbymanystates.Themajorityofstateshaveatleastoneagency/board
thathasauthoritytoissueordenyconstructionpermits.216Abouttwothirdsofthestatesthatissue
certificationsfocusprimarilyonlinesgreaterthan60kVinsize.217
EPACT2005establishedalimitedroleforDOEandFERCintransmissionsiting.TheactdirectedDOE
tocreatetransmissioncorridorsinlocationswithadequatetransmissioncapacitythathadnational
interestimplications.218TheactalsograntedFERCsecondaryauthorityovertransmissionsitingin
thesecorridors.219ThisauthoritymaynotbeexercisedbyFERCunlessthestatewherethefacilitywould
besitedlackstheauthoritytoissuethepermit,theapplicantdoesnotqualifyforthepermitinthestate,
orthestatehaswithheldapprovalofthepermitformorethanoneyear.220Sincethepassageofthis
lawtherehavebeenproposalstobothexpandFERCsauthorityaswellascontractit.Therehavealso
beenseveralcourtcaseswhichhavefurtherlimitedFERCsbackstopauthority.221
8.3 AdequacyPlanningandIntegratedResourcePlanning
Theoversightofadequacy(resource)planningremainsprimarilyastatefunction;however,FERChas
introducedsomeregulationgoverningtheinterconnectionofgenerationresourcestoestablishanopen
andtransparentprocess.
8.3.1 IntegratedResourcePlanningandProcurementPlans
Manystatesdevelopedandretainedapproachestoaddressincreasesanddecreasesindemandand
changesintheirgenerationfleets,whiledoingsoinacosteffectivemannerthatmaintainsrequired
levelsofreliability.Integratedresourceplanning222beganinthelate1980sasstatesbegantorespondto
theoilembargosofthe1970sandnuclearcostoverrunsthatoccurredduringthesametimeperiodand
intothe1980s.
216Thosestatesthatdonothaveoversightoftransmissionsitingexceptwhereitpertainstospecificlocational
attributes(i.e.,rivercrossings)areGeorgia,Indiana,Louisiana,andOklahoma.Severalstateshavemultipleagency
processes.SeeEdisonElectricInstitute
StateGeneration&TransmissionSitingDIRECTORY(2012)availableat
http://www.eei.org/issuesandpolicy/transmission/Documents/State_Generation_Transmission_Siting_Directory.pdf.
217Ibid.
218EnergyPolicyAct2005,1221.
219Ibid.
220Ibid.
221See,e.g.,PiedmontEnvtl.Councilv.FERC,558F.3d304(4thCir.2009),cert.deniedsubnom,EdisonElectricInstitute
v.PiedmontEnvtlCouncil,130S.Ct.1138(2010);CaliforniaWildernessCoalition,etal.vDept.ofEnergy,631F.3d1072
(9thCir.2011).
222Theintegratedresourceplan(IRP)isacomprehensiveplanningprocessdesignedtoprovideinsightintohowa
utilitymaybestmeetitsresourceneedsoveralongterm(1020year)planninghorizonwhileconsideringall
resourceoptionsandarangeofrisksanduncertaintiesthatareinherentintheutilityindustry.AnIRPistypically
developedwithconsiderablepublicandotherstakeholderinvolvement,andresultsinapreferredimplementation
plan.
October 8, 2013
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IRPsaretypicallylongterm,witha20yearperiodbeingthemostcommonplanninghorizonand
periodicupdatestoreflectchangingconditionsevery25years.223StepstakeninanIRPinclude
forecastingfutureloads,identifyingpotentialsupplysideanddemandsideresourceoptionstomeet
thosefutureloadsandtheirassociatedcosts,determiningtheoptimalmixofresourcestakinginto
accounttransmissionandothercosts,receivingandrespondingtopublicparticipation(where
applicable),andcreatingandimplementingaresourceplan.224IRPsconsidersystemoperation,suchas
diversity,reliability,dispatchability,andotherfactorsofrisk.225Commissionsdonotactivelymonitor
utilityactionsthataretakenbasedontheIRP,butratherreviewtheresultsoftheIRPduringratecases,
prudencereviews,fuelcostadjustments,certificatesofpublicconvenienceandnecessity,reviewof
utilitypowerpurchases,andresourceacquisitioncases.226
ManystatesbegantoreconsidertheIRPapproachinthemid1990sastheelectricindustrybeganto
restructure.227Severalstateseitherrepealedthemwithrestructuringlaws,orbegantoignorethem.228
Recently,however,therehasbeeninterestinreturningtointegratedresourceplanninginsomeofthe
statesthathaverestructured.229
ThepresenceandstatusofIRPproceduresvarywithsomestateIRPrulesremainingunchanged,other
stateshaveamendedorrepealedtheirrules,andsomehavereinstatedtheirIRPrules.Figure12shows
thosestatesthatcurrentlyhaveIRPrules,statesthataredevelopingorrevisingIRPrules,andstatesthat
donothaveanIRPrule.
SeeRachelWilsonandPaulPeterson,ABriefSurveyofStateIntegratedResourcePlanningRulesand
RequirementsPreparedfortheAmericanCleanSkiesFoundation,SynapseEnergyEconomics,Inc.(April28,2011),
pp.78(ABriefSurveyofStateIntegratedResourcePlanningRulesandRequirements).
224SeeABriefSurveyofStateIntegratedResourcePlanningRulesandRequirements,pg.3.
225EnergyPolicyActof1992,111(d)(19).Textavailableat:http://www.ferc.gov/legal/majordreg/epa.pdf.
226SeeABriefSurveyofStateIntegratedResourcePlanningRulesandRequirements,pg.4.
227Ibid.atp.13.
228Ibid.atp.13.
229Ibid.atp.16.
223

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Figure12.StateswithIntegratedResourcePlanning(orsimilarplanningprocess)

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9. InnovationandtheLevelsofResearchandDevelopmentPursued
Innovationsintheelectricindustry,technicalandeconomic,havecomeaboutthroughtheapplicationof
researchanddevelopmentofprojectsbytheelectricsector,governments,andotherindustrial,
communications,andtechnologysectors.Thesehaveaffectedtheelectricsectorsregulatorymodelina
numberofways.Thissectionreviewsseveralkeymajorinnovationsandtheirrelativeimpactsonthe
traditionallyregulatedandcentralizedmarketmodels.Inaddition,thissectionreviewstheongoing
impactofthesemarketmodelsoninnovation,includingresearchanddevelopment.
9.1 DecliningCostsandIncreasingFlexibilityofGenerationTechnologies
Expansionofcombinedheatandpower(CHP)andnaturalgasfiredcombinedcycle(CC)plantsinthe
late1970sintothe1990swasastrongcontributingfactortogrowthintheclassofnonutilitygeneration.
MuchoftheearlyimpetusforCHPandCCmightbeattributedtothePURPA(1978)provisionsthat
requiredutilitiestopurchasepoweratavoidedcostfromcogenerators,andtofederallegislativeand
regulatoryactionsthatledtoopenaccesstogassupplies.230
Butjustassignificanthavebeenthetechnicalandeconomicstridesofthesetechnologiesrelativetoother
thermalandnucleargeneration.Inits2013AnnualEnergyOutlook,theU.S.EnergyInformation
Administration(EIA)estimatedthatanew,advancedCCpowerplantwouldcostapproximately
$1,006/kW(2011$)tobuildandwouldgenerallybearound400MWinsize,whereasanewscrubbedcoal
powerplantwouldcostapproximately$2,883/kW(2011$)tobuildandwouldgenerallybearound1,300
MWinsize.231Inadditiontoreducedovernightcosts,thelevelizedcostofmanyofthesesourceshas
droppednearorbelowthatofanewcoalplant,asseeninTable5.Thelevelizedcostisthecostperunit
ofelectricitygenerated,includingcapitalcosts,fixedandvariableoperationsandmaintenance(O&M)
costs,fuelcosts,andtransmissioninvestmentcosts.NotethatthevaluesprovidedinTable5donot
includetaxcredits,nordotheyassumeanypotentialCO2emissionrelatedcosts.
230NaturalGasPolicyActof1978,Pub.L.No.95621,92Stat.3351(codifiedat15U.S.C.33013432(1982)).
RegulationofNaturalGasPipelinesAfterPartialWellheadDecontrol,OrderNo.436,50FR42408(Oct.18,1985),FERC
Stats.&Regs.[RegulationsPreambles19821985]30,665(1985),vacatedandremanded,AssociatedGasDistributorsv.
FERC,824F.2d981(D.C.Cir.1987),cert.denied,485U.S.1006(1988),readoptedonaninterimbasis,OrderNo.500,52
FR30334(Aug.14,1987),FERCStats.&Regs.[RegulationsPreambles,19861990]30,761(1987),remanded,
AmericanGasAssociationv.FERC,888F.2d136(D.C.Cir.1989),readopted,OrderNo.500H,54FR52344(Dec.21,
1989),FERCStats.&Regs.[RegulationsPreambles19861990]30,867(1989),rehggrantedinpartanddeniedinpart,
OrderNo.500I,55FR6605(Feb.26,1990),FERCStats.&Regs.[RegulationsPreambles19861990]30,880(1990),
affdinpartandremandedinpart,AmericanGasAssociationv.FERC,912F.2d1496(D.C.Cir.1990),cert.denied,111S.
Ct.957(1991);PipelineServiceObligationsandRevisionstoRegulationsGoverningSelfImplementingTransportationand
RegulationofNaturalGasPipelinesAfterPartialWellheadDecontrol,OrderNo.636,F.E.R.C.STATS.&REGS.30,939
(1992),orderonrehg,OrderNo.636A,F.E.R.C.STATS.&REGS.30,950(1992),orderonrehg,OrderNo.636B,61
F.E.R.C.61,272(1992),noticeofdenialofrehg,62F.E.R.C.61,007(1993),affdinpartandvacatedandremandedin
part,UnitedDist.Cos.v.FERC,88F.3d1105(D.C.Cir.1996),orderonremand,OrderNo.636C,78F.E.R.C.61,186
(1997)..
231U.S.EnergyInformationAdministration,AssumptionstotheAnnualEnergyOutlook2013:ElectricityMarketModule.
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Table5.EstimatedNationalAverageLevelizedCostofNewGenerationResourcesin2018
Technology
Total System Levelized Cost (2011 $/MWh)
Conventional Coal
$100.10
Advanced Coal
$123.00
Advanced Nuclear
$108.40
Natural Gas Conventional CC
$67.10
Natural Gas Advanced CC
$65.60
Geothermal
$89.60
Biomass
$111.00
Wind
$86.60
Solar PV
$144.30
Source:U.S.EnergyInformationAdministration,AnnualEnergyOutlook2013,December2012
Thecosteffectivenessofsmallerincrementsofgenerationhasreducedtheneedforutilitiesto
periodicallyhavelargelumpycapitalintensiveinvestmentsandcorrespondinglargeadditionsto
theirratebaseleadingtolargeonetimerateincreases.Sincegenerationcanbeaddedinsmaller
incrementsandwithleadtimesclosertothetimeofanticipatedneed,theinvestmentcyclehasbecome
smoother.Ascomparedwithlargegenerationinstallations,combinedcycletechnologyismore
modular,hasrelativelylowercapitalcoststhanbaseloadcoalandnuclearplants,hasbeenwidely
adoptedacrossthespectrumofregionalmarkets,andhasadecadeslongtrackrecordofperformance.
Thesefactorsreducetherisksrelatingtocapitalandconstruction,makingiteasierformerchant
generationdeveloperstogetfundingandforregulatedutilitiestogothroughtheratecaseprocess.
However,thesamewidespreadadoptionofthistechnology,coupledwithhighlevelsofretirementin
thecoalfleet,maydiminishsupplydiversityovertimeandincreasevolatilityofelectricenergyprices.
Anindicatorofthisdevelopmentmaybeseeninthehighelectricitymarketpricesthatwereexperienced
inconjunctionwithhighnaturalgaspricesduring20032008,followedbylowpowerpricesduringthe
pastfouryearsasgaspricesdroppedbacktopre2000levels.
Overall,competitiveentryinwholesalemarkets,whethercentralizedorbilateral,haslikelybolstered
investmentincombinedcycleplants.232Theconverseargument,thatcontinuedimprovementof
combinedcycletechnologyhasaugmentedthemovementawayfromtheverticallyintegratedutility
modelinderegulatedstates,mightbededucedfromthecoincidenceofthetechnologysexpansionwith
theopeningofmarkets,butthecausalargumentisnotfirm.
PeterKind,DisruptiveChallenges:FinancialImplicationsandStrategicResponsestoaChangingRetailElectric
Business,EdisonElectricInstitute(January2013);PaulL.Joskow,RegulationandDeregulationAfter25Years:
LessonsLearnedforResearchinIndustrialOrganization,ReviewofIndustrialOrganization,26(2)(March2005),P.
169193.JoskowobservesthattheadoptionandrapiddiffusionofefficientCCGT[CombinedCycleGasTurbine]
generatingtechnologywasstimulatedbyallowingcompetitiveentryintoelectricitygeneration.
232

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9.2 EmergenceofDemandSideAlternatives
Activeloadcontrolandapplicationofenergymanagementtechnologiesgainedprominenceasutility
toolsinthe1980s,andcontinuetoseetechnologicalandeconomicimprovementstoday.Therehasalso
beennearcontinualimprovementintheenergyefficiencyofmostclassesofenergyusingequipment,
includingbutnotlimitedtoresidentialandcommerciallighting,residentialandcommercialappliances,
heating,ventilation,andairconditioning(HVAC),electricmotors,electronics,andexternalpower
supplies.233Theseactiveenergymanagementeffortsaswellaseffortsbyutilities,regulators,and
governmentenergyagenciestoincentormandateadoptionbyelectricityendusersofhigherefficiency
equipmentarecollectivelyreferredtoasDSM.234Theactiveprogramsallowforthebalancingofelectric
supplyanddemandonthesystembyadjustingtheload,ratherthanthetraditionalbalancingmethodof
onlyadjustingthesupply,andadoptionofefficientproductshelpstoreducethegrowthrateof
electricitydemand.
Thesetechnologieshaveaffectedutilityoperations,theelectricsectorsregulatorymodel,andcustomers
indistinctwaysonthescaleofscopeofutilityinvestment,onthestructureofretailratetariffs,andon
thenatureofutilityplanningandutilitiesinteractionwithcustomersandotherinterestgroups.
DSMinducedreductionsinloadgrowthreduceordefertheneedfornewgenerationplantinvestment
andthecostsoftheDSMalternativesmaybelessthanthecostofnewgeneration.Byextension,these
alsoreduceadditionstoutilityratebaseandtheratebasedearnings,allotherthingsbeingequal.
Traditionaltariffstructuresforelectricserviceincludemonthlyfixedcharges,perkWdemandcharges,
andperkWhenergycharges,andtheratesunderthesetariffsaretypicallysettobesufficienttoallow
theutilitytorecovertheirongoingoperatingcostsaswellasearnanallowedrateofreturnontheirfixed
investment.However,itisalsorarethatthefixed(monthlyandperkW)andvolumetric(perkWh)
chargesarefullyinalignmentwithactualfixedandvariablecostssincemostratestructuresrecovereda
sizableportionoffixedcostsandreturnonratebasefromvolumetriccharges.Recognitionofthisraised
parallelconcernsamongutilitiesandDSMadvocatesreductionsinkWhsalescouldresultinunder
recoveryofallowedearningsand/orfixedcosts,andtheriskofthisunderrecoverycouldcreate
disincentivesforutilitiestoparticipateinorembraceDSMinitiatives.Insomestates,anearlysolution
forthisincludedimplementationofDSMrateadjustmentmechanismstolevysurchargesonremaining
kWhsalesinordertocorrectforthelostfixedcostrecovery.Whilethisapproachisattractivetosome
utilitiesandtoDSMadvocatesandfairlyeasytoimplement,italsoledtocomplaintsfromvarious
partiesthatthecustomersemployingDSMandreceivingratesavingswerebeingsubsidizedby
customersthatwerenotemployingDSMandhadbeengenerallyabandoned.
U.S.EnergyInformationAdministration,AnnualEnergyOutlook2013(May2013).
Traditionaldemandsidemanagementhasbeenpracticedbyutilitiesformanyyears,withandwithoutload
controltechnology.Utilitieshavelongusedinterruptibleratesthatprovidelargecustomerspricebreaksin
exchangeforallowingtheutilitytointerruptserviceorrequestloadreductionsonalimitedbasis.Theserates
oftenrequiretheutilitytocontactthecustomerinadvanceandseekthecustomerspermissiontocurtailload.
TechnologicaladvanceshavemadeDSMamuchmorereliableandresponsiveresourceforutilitiesandgrid
operators.LargeblocksofDSM,oftenassembledbyacurtailmentserviceprovider,arenowbeingofferedona
largerscaleinseveralenergymarketsasanalternativetocapacityand/orenergy.
233
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Centralizedmarketmodelregionsaregraduallyimplementingmarketrulesthatseektoplacesupply
anddemandsideoptionsonequalfootingwithrespecttobiddingintocapacityandenergymarkets.
Forinstance,PJMallowsenergyefficiencyanddemandresponse(atypeofDSM)tobidintoitscapacity
market,thuscompetingwithgenerationtoensurecapacityisavailabletomeetfuturedemandneeds.
Traditionallyregulatedmodelregionsseektomaintainequalfootingforthesetwotypesofoptions
throughintegratedresourceplansvettedbystateregulators.Instateswithtraditionalregulation,
agreementstoprovidedemandresponseotherthaninarrangementsdirectlywiththeutilitymaybe
viewedastheimpermissibleequivalentofexercisingretailelectricsupplierchoice.
Similarly,trendsinenergyefficiencyhavecontributedtopredictionsofmuchlowerelectricitydemand
growthinthefuturethanwerehistoricallyobserved.235Thefederalgovernmenthasmandatedor
incentivizedenergyefficiencyimprovementsinlighting,residentialboilers,clotheswashers,
dishwashers,dehumidifiers,electricmotors,walkinrefrigeratorsandfreezers,andexternalpower
suppliesamongothers,withtheresultthattheseitemsusefarlessenergyascomparedtoearliermodels.
Inaddition,20stateshavesetutilityEnergyEfficiencyResourceStandards(EERS)forelectric(and
sometimesnaturalgas)consumption,mandatingspecificreductionsinfuturedemandordemand
growth,whileanadditional7stateshavenonbindinggoalsforsuchreductions.236Additionally,federal,
state,andlocalgovernmentsareencouragingenergyefficiencythroughappliancestandards,building
codes,andenergyefficiencystandardsforpublicbuildings.Again,thetraditionalparadigminwhich
verticallyintegratedutilitiesobtainearningsthroughthecapitalinvestedtoinstalltheinfrastructureto
supplyelectricityischallengedbythesetrends.Butsomealsoarguethatcurrenttrendstowardlower
growtharemorearesultofcurrenteconomicconditionsratherthanalongtermtrend.
9.3 SmartGrid
Inthelastdecade,orless,SmartGridhasbecomeahottopicinpoliticalandacademiccirclesaswell
asothergroupsnottraditionallyinvolvedintheregularprocessesoftheelectricsector.Theterm
generallyreferstoamoreintegrated,informationbased,andadaptiveelectricsystem,usuallyinvolving
communicationflowsamongusers,operators,devices,andsystems.IntegrationoftheSmartGridis
growing,asSmartGridtechnologiescontinuetobedeveloped,promisingbettergridmanagementand
improvementstoDSM.TheexpectationisthatSmartGridimplementationwillgeneratepotential
savingstocustomersbyprovidingthemthetoolstomanagetheirenergyconsumptionhabitsandcosts,
aswellasprovidingpotentialsavingstoutilitiesandtheircustomersthroughoperatingefficiencies.
Theutilitysavingswouldinuretothebenefitofutilitiesinbothtypesofmarkets.Similarly,customers
canbenefitfromsmartmetersandusageinformationunderbothmodels.TimeofUsepricing,including
peakandoffpeakpricing,wouldenhancethepotentialforsavings.Totheextentthatunbundled
pricingisgenerallyonlyavailableintheretailchoicestructure,customersmayhavegreater
opportunitiestogeneratesavingsbasedonenergypricingoptions.
U.S.EnergyInformationAdministration,AnnualEnergyOutlook2013(May2013).
EERSstates:Arkansas,Connecticut,Delaware,Florida,Hawaii,Illinois,Indiana,Iowa,Maine,Maryland,
Massachusetts,Michigan,Missouri,NewYork,Ohio,Pennsylvania,RhodeIsland,Texas,Vermont,Virginia,
Wisconsin.
235
236

October 8, 2013
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TheimplementationofSmartGrid,andparticularlyadvancedmeteringinfrastructure(AMI),also
createsthepossibleneedforthesecompaniestooutsourceatleastaportionoftheassociateddata
managementwithnoadditiontoratebaseforexpandedsystemcosts.Theserisksarethesameinboth
marketmodels.SinceSmartGridtechnologiesarestillrelativelynew,thereisarisktocompaniesthat
implementSmartGridthatpressuretoincorporatefullexpectationsofpromisedbenefitswillexpose
utilitiestounrecoverablecostsifbenefitsdonotmaterialize.Finally,butperhapsmostsubstantially,
SmartGridtechnologieshavethepotentialtoopenuptheelectricsystemtogreaterriskofcyberattacks.
Again,theserisksarethesameunderbothmarketmodels,withthedifferencebeingthatawiresonly
company,ascomparedtoaverticallyintegratedutility,mayhaveasmallercushionwithwhichto
absorbtheseriskswithoutseekingraterelief.
Fromatraditionalregulatedversuscentralizedmarketsmodelperspective,themostimportantimpact
ofasmartergridisthepotentialabilityformarketpricesforgenerationtobereflectedatthesmart
meter.Theincreasedpricetransparencyandthepotentialresponsebycustomersmustbemanaged
directlybythetraditionallyregulatedutility,orthroughmarketinteractionsinthecentralizedmarkets.
9.4 ResearchandDevelopmentInvestment
AforecastbyBattelleestimatesthatindustrialR&Dintheenergysectorasawhole(notjusttheelectric
sector)was$6.7billionin2012.237TheBattelledocumentalsostatesthatR&Dinvestmentbyelectric
utilities(includingtheircontributionstotheElectricPowerResearchInstitute[EPRI])issmallwhen
comparedtootherindustrialsectorsandwhenobservedinthecontextoftheroleelectricityplaysinour
nationaleconomyandsociety.Thesefindingsarebasedonestimates,asmanyelectricutilitiesmaynot
berequiredtodisclosethedetailoftheirR&Dactivities.Sinceitsformationin1965,EPRIhasprovideda
vehiclethatallowselectricutilitiestopooltheirresourcesonR&D.Accordingtoitswebsite,EPRIs
membershiprepresentsapproximately90percentofallelectricitygeneratedintheUnitedStates.
However,historically,electricequipmentmanufacturershaveprovidedthemajorityoftheR&Dinthe
sector;thisisprimarilybecauseutilitiescannotnecessarilyinternalizethebenefitsoftheinnovations
developedthroughR&D.238
SeveralstudieshavenotedadeclineinR&Dinvestmentinsomeareasandconcludedthatutility
restructuringisthelikelycause.239Fortheperiodbetween1993and2000,R&Dinvestmentdropped
amongthefourentitiesinvolvedintheelectricsector:R&Dspendingfromutilitiesdroppedbynearly74
percent,R&DspendingbyEPRIdroppedbyapproximately71percent,governmentspendingdropped
by30percent(state)and3percent(federal),andspendingbyelectricequipmentmanufacturersdeclined
Battelle,2012GlobalR&DFundingForecast(December2011).
SanyalandCohen,PoweringProgress:Restructuring,CompetitionandR&DintheU.S.ElectricUtility
Industry,TheEnergyJournal,30(2)(2009).
239SeeBurtrawetal.ElectricityRestructuring:ConsequencesandOpportunitiesfortheEnvironment.Resourcesforthe
Future,DiscussionPaper0039(September2000);JamasbandPollitt,LiberalisationandR&Dinnetwork
industries:Thecaseoftheelectricityindustry,ResearchPolicy,37(67)(July2008);SanyalandCohen,Powering
Progress:Restructuring,CompetitionandR&DintheU.S.ElectricUtilityIndustry,TheEnergyJournal,30(2)(2009);
Kimetal.,R&Dinvestmentofelectricitygeneratingfirmsfollowingindustryrestructuring,EnergyPolicy,48
(September2012);SanyalandGhosh,ProductMarketCompetitionandUpstreamInnovation:Evidencefromthe
U.S.ElectricityMarketDeregulation,TheReviewofEconomicsandStatistics,MITPress,95(1)(March2013).
237
238

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(thoughbyhowmuchisunknown).240OfparticularinterestisthatoverallenergyR&Dspending(public
andprivate,andnotexclusivetotheelectricitysector)decreasedfrom$5.8billionin1994to$4.5billion
in2003.241However,therearealsostudiesthathavecometotheconclusionthatthecentralizedmarket
modelencouragesmoreinnovationthanthetraditionallyregulatedmodel.242
SanyalandCohen,2009.
SeeJanMartinWitte,StateandTrendsofPublicEnergyandElectricityR&D:ATransatlanticPerspective,Global
PublicPolicyInstitute(2009).Additionally,SanyalandCohenfoundthatamongtheaspectsofrestructuring,the
introductionofcompetitiontotheelectricsectorhadthegreatestnegativeeffectonR&Dinvestment.SeeSanyaland
Cohen,2009.Additionally,Burtrawetal.(2000)foundthatmanyanalystsattributeanincreaseintheavailability
factor,ofgeneratorstocompetitionandthatfundinglevelsatmajorresearchinstitutions,particularlytheEPRI,are
down.SeeBurtrawetal.,2000.JamasbandPollitt(2008)agreedthatreformsintheelectricitysectorcoincidedwith
asignificantdeclineinR&Dinvestment,butalsonotesthattheproductivityandinnovationoutputofR&Dinthe
sectorappeartohaveimprovedatthesametime.SeeJamasbandPollitt,2008.Kimetal.(2012)lookedatthe
impactofderegulationat70electriccompaniesin15OrganizationforEconomicCooperationandDevelopment
(OECD)countriesandfoundthatderegulationwasassociatedwithadeclineinR&Dandthattheexistenceof
wholesalemarketsappearstobethebiggestdriverofthatdecline.SeeKimetal.,2012.TheOECDmember
countriesare:Australia,Austria,Belgium,Canada,Chile,CzechRepublic,Denmark,Estonia,Finland,France,
Germany,Greece,Hungary,Iceland,Ireland,Israel,Italy,Japan,Korea,Luxembourg,Mexico,Netherlands,New
Zealand,Norway,Poland,Portugal,SlovakRepublic,Slovenia,Spain,Sweden,Switzerland,Turkey,United
Kingdom,UnitedStates.SanyalandGhosh(2013)lookedcloselyattheimpactsderegulationhaveonupstream
suppliers,andfoundthatderegulationintheelectricitysectorledtoadeclineininnovationinupstreamelectric
equipmentmanufacturers.SeeSanyalandGhosh,2013.
242JoskowandKahn,amongothereconomists,wroteanopenlettertopolicymakersin2006inwhichtheystated
thatamongeconomists,itisalmostuniversallyacceptedthatwellfunctioningcompetitiveelectricitymarketsyield
thegreatestbenefitstoconsumersintermsofprice,investmentandinnovationespeciallywhenregulatedalternatives
arenolongerwarranted.SeeJoskowandKahn,OpenLettertoPolicymakers,June26,2006(emphasisadded).
SchmittandKucseraobservedthatderegulationofEuropeanutilitiesleadtoadeclineinR&D,butthatoncethe
competitivestructureswereestablished,increasedcompetitionhadapositiveimpactonR&D.SeeSchmittand
Kucsera,TheImpactoftheRegulatoryReformProcessonR&DInvestmentofEuropeanElectricityUtilities,
ViennaUniversityofEconomicsandBusiness:ResearchInstituteforRegulatoryEconomicsWorkingPaper:October
2012.OnereportfoundevidenceoftheoppositeinTexas.Regulationofrateofreturndidnotgointoeffectin
Texasuntil1975,andFrank(2003)foundthattechnologicalprogresstodecreasecostswasmoreprevalentpriorto
regulationanddeclinedsignificantlyafterwards.SeeFrank,MarkW.,AnEmpiricalAnalysisofElectricity
RegulationonTechnicalChangeinTexas,ReviewofIndustrialOrganization,22(4):June2003.
240
241

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PublicfundingofenergyR&Dincreasedsignificantlyforthefirsttimeindecadesbetween2006and
2007,andagainsawboostsin2009and2010duetotheAmericanRecoveryandReinvestmentActand
otherpoliciespushedbytheObamaadministration.243EPRIs2014R&Dplanshowsaslightlyhigher
levelofinvestment($297.7million)overthatof2013($288.12million);ageneralbreakdownofthat
spendingbytopicisgiveninTable6.
Table6.EPRIPlannedR&DFundingfor2013and2014
2013 R&D Funding ($million)
2014 R&D Funding ($million)
Environment
$40.87
$45.00
Generation
$49.75
$54.30
Nuclear
$136.00
$135.80
Power Delivery & Utilization
$61.50
$62.60
Source:EPRI2014R&DPortfolio
Witte,JanMartin,StateandTrendsofPublicEnergyandElectricityR&D:ATransatlanticPerspective,GlobalPublic
PolicyInstitute:2009.
243

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10. StateandFederalGovernment
ThetopicofFederalandStategovernmentjurisdictionisdiscussedothertimesinthispaper,for
instance,Sections3and4addressratesettingandmarketsjurisdiction,Section5discussesjurisdiction
overelectricreliabilityandSection8addressesjurisdictionoverresourceadequacyandtransmission
securityplanningaswellastransmissionsiting.Thissectioncoversthoseaspectsofjurisdictionnot
discussedelsewhereinthispaper.Furthermore,therearenumerousarticlesandothertextsthatprovide
detailedhistoriesofthedevelopmentofthecurrentbifurcatedregulatorystructure.244Thefocusofthis
sectionisnotonhowtheindustrygottothispoint,butratherwhatitmeansforthetraditionally
regulatedandcentralizedmarketmodelparticipants.
TheelectricutilityindustryintheUnitedStatesisregulatedatthestateandfederallevel.State
regulationextendstomostareasofutilityoperations,rates,andenduserissues.Federalregulation,
foundedoninterstatecommerceimpacts,generallyrelatestothewholesalesideoftheutilitybusiness,
includinginterstatetransmissionandsalesofelectricityforresale.
Investorownedutilitiesaresubjecttostateregulationastotheirdutiestocustomers,system
requirements,financingarrangements,andretailrates.Statelaworregulationdetermineswhether
retailaccessispermitted(orrequired).Governmentownedutilitiesarenotgenerallysubjectto
regulationunderstateutilitylaws,butmustfollowtherequirementsoftheordinanceorlawestablishing
them.Thestateregulator(forinvestorownedutilities)orthegoverningauthorityforapublicpower
entityisresponsibleforapprovingtheultimaterateschargedtoretailcustomers.
Underboththetraditionallyregulatedmodelandthecentralizedmarketmodel,unbundled
transmissionserviceratesareapprovedbyFERC.FERCregulatestheinterstatetransmissionand
generationactivitiesofpublicutilities.Theterminologycanbeconfusing,sinceutilitiescanbe
publiclyheldinthesenseofhavingaclassofsecuritiesownedbyalargegroupofinvestors,or
publicinthesensethattheyaregovernmentownedorownedbycustomers.ForFERCpurposes,
publicutilityincludesanypersonwhoownsoroperatesfacilitiessubjecttothejurisdictionofthe
Commission,i.e.,facilitiesforthetransmissionofelectricenergyininterstatecommerceorthesale
ofelectricenergyatwholesaleininterstatecommerce.245
Despitethisbroadlanguage,however,therearenumerousexclusions,withtheeffectthatFERCdoesnot
regulategovernmentownedutilitiesormostcooperatives,whichareoftenreferredtoasnon
jurisdictionalentities.Totheextentgovernmentownedutilitiesparticipateinmarkettransactionsthat
areregulatedbyFERC,theyaresubjecttothesamerulesasotherutilities,buttheydonotbecome
subjecttogeneralFERCjurisdiction.246Asaresult,thepublicutilitiesFERCregulatesfortransmission
See,e.g.,AppendixA,HistoryoftheU.S.ElectricPowerIndustry,18821991andAppendixB,Historical
ChronologyofEnergyRelatedMilestones,18001994,TheChangingStructureoftheElectricPowerIndustry:An
Update,U.S.EnergyInformationAdministration(December1996).
24516USC824(e).
246FPA201(f),UnitedStates,State,politicalsubdivisionofaState,oragencyorinstrumentalitythereofexempt,but
see,FPA215(b),JurisdictionandApplicability.
244

October 8, 2013
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purposesconsistprimarilyofinvestorownedutilitiesandentitiessuchasRTOsandISOs.Inaddition,
becausemostoftheTexastransmissiongridisnotinterconnectedwiththerestoftheinterstate
transmissiongridexceptbylimitedDCinterties,transmissioninmostareasofTexasisnotsubjectto
FERCregulation.
InTexas,thestateregulatorisresponsibleforapprovingtransmissionrates(becausemostofTexas
transmissionisintrastate)aswellasregulatingallotheraspectsoftheelectricutilitybusinessinTexas.
Texashasadoptedfullretailchoiceformostofthestate247andhasseparatedownershipofwiresfrom
generation,withthewirescompaniescontinuingtobesubjecttofullstateregulation.Transmissionfor
mostofthestateisoperatedbyastatecreatedtransmissionorganization,ERCOT,andcostsofnew
transmissionfacilitiesaresocializedacrosstheentireERCOTfootprint.Thisisadifferentapproachfrom
thatusedinotherareasofthecountry,whereeachutilitysshareofcostsisdeterminedaccordingto
variousfactors,whichmayincludeadeterminationofthespecificbenefitstotheutilityscustomersora
combinationofsocializingsomecostswhileallocatingothersspecifically.
Thus,FERCsauthorityoverthetransmissiongridisfarfromcomplete.TheEIAcalculatedin2000that
investorownedutilitiesownapproximately73%ofthetransmissionintheUnitedStates,withthe
remainderdividedbetweenfederalutilities(13%)andotherpublicpowerentities,including
governmentownedutilitiesandcooperativeutilities(14%).248
However,FERChaseffectivelyextendedmanyofitsregulationstononjurisdictionalutilitiesthrough
reciprocitycarrotsandsticks.Thus,forexample,ifanonjurisdictionalutilitywantstotakeadvantage
ofthetermsofapublicutilitysOATT,thenitmustitselfhaveanOATTthedifferencebeingthatthe
transmissionrateswillnotbesetbyFERC.However,theothertermsofservice,includinguseofan
OASIS,mustcomplywithFERCrequirements.Similarly,underOrderNo.1000,FERCdidnotattempt
tocompelnonjurisdictionalutilitiestoparticipateinregionalplanningorcostallocation.However,in
ordertobepartoftheplanningprocessandtotakeadvantageofproposedcostallocationmechanisms,
thesenonjurisdictionalentitieshadtoagreetoparticipate.
247RetailcompetitionhasbeenimplementedforIOUswithintheERCOTzoneofTexas.Municipallyownedutilities
andelectriccooperativesinERCOTweregiventhechoicetooptintoretailcompetitionbutinthepast11yearsonly
onecooperativehaselectedtodoso.TheseentitiesareknownasnonoptinentitiesorNOIEs.Mostofthe
NOIESthatownedgenerationdidnotdivesttheirgenerationassetsandsomehavebuiltadditionalgeneration
duringthistimeframe.Mostoftheseentitiesstilloperateundertheverticallyintegratedutilitiesbusinessmodel.
IOUsinERCOTunbundledtheirbusinessesintogeneratingcompanies(eitherstructurallyorthroughdivestingof
assets),TransmissionandDistributionServiceProviders(TDSPs),andRetailElectricProviders(REPs).Energy
FutureHoldingsandCenterPointaregoodexamplesofthis,withsubsidiariesparticipatingineachofthose
segments.RetailchoicehasnotbeeninstitutedintheTexasareasoutsideofERCOT.
248TheChangingStructureoftheElectricPowerIndustry2000:AnUpdate,EnergyInformationAgency(October
2000),http://www.eia.gov/FTPROOT/electricity/056200.pdf.Therehavebeenmanychangesinthestructureof
theelectricindustryininterveningyears,andthesenumbersmayhavechangedslightlyasnewtransmissionhas
beenadded;however,thefundamentalpropositionthatFERCdoesnotregulatealloftheownersofthe
interconnectedtransmissiongridisthesame.

October 8, 2013
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Vertically Integrated Utility

Centralized Wholesale Market

Bilateral Wholesale Market

AR*, CA, IA*, IN, KS, KY*, LA*,

AK, AL, AZ, CO, FL, GA, HI, ID,

CT, DE, IL, MA, MD, ME, MI, NH,

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California ISO (CAISO)

Midcontinent ISO (MISO)

ISO New England (ISO-NE)

New York ISO (NYISO)

PJM Interconnection (PJM)

Southwest Power Pool (SPP)

Market participants trade physical electricity bilaterally, either directly or through

Administers the Texas competitive retail market

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CPUC established resource adequacy obligations applicable to all Load-Serving

Reliability Pricing Model that has a locational (subregional) capacity mechanism

Has a forward reserves market

Annual resource adequacy requirements (reserve margin is 11.3% in 2012) and

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AR, CA, IA, IN, KS, KY, LA,