1997 IEEE-USA Technology Policy Symposium What Should Be the Role of Government in Restructuring the Electric Power Industry: A Technology Policy Perspective June 11, 1997 Washington, DC Sponsored by: IEEE-USA Technology Policy Council IEEE-USA Energy Policy Committee The Institute of Electrical and Electronics Engineers, Inc.

Contents

• Preface

• Executive Summary

• Program Overview

• Summary of Keynote Address by the Honorable Dan Schaefer (Colorado)

• Remarks by Richard E. Schuler, Cornell University: Why Are We
  Pulling the Plug? How? And For Whom?

• Panel 1: Technical Challenges Resulting From Restructuring:

• Panel 2: Research, Development and Workforce Needs
  of the Restructured Industry

• Panel 3: Areas of Power System Planning and Operations
  that Need Public Oversight and Planning

• Panel 4: How Environmental Protection Will Be Ensured
  in a Restructured Industry

• Acknowledgements

Preface

The Institute of Electrical and Electronics Engineers (IEEE)-USA Technology Policy Council and the IEEE-USA Energy Policy Committee sponsored a one-day symposium on June 11, 1997 at the Hyatt Regency Hotel in Washington, D.C. The Symposium addressed the question of what role the federal government should play in restructuring the electric power industry. The Symposium was especially interested in exploring the engineering technical issues that will occur as a result of the new rules. It was held to inform IEEE members and policy makers of the key engineering and technological issues in the debate. Leaders of industry, academia and government participated as speakers and as panel members.

For more information, please contact:

Raymond Paul
Administrator
Technology Policy Council
IEEE-USA
1828 L Street, N.W.
Suite 1202
Washington, D.C. 20036-5104

Phone: 202-785-0017, ext. 320
E-mail: r.paul@ieee.org
Web: http://www.ieee.org/usab.

[Contents]

Executive Summary

Potential Roles for the Federal Government in a Restructured Electric Power Industry

The marketplace for electricity is created by the interconnected transmission system. For prices to fall, the marketplace enabled by the transmission system must be highly competitive. For the system to function reliably, competing companies must cooperate.

• Maintaining reliability of electricity during and after the restructuring is essential. Potential economic savings from competition are secondary.

• To provide enforceable standards and methods for assuring security and reliability, a legislative basis for entities such as the voluntary North American Electric Reliability Council (NERC) is needed.

• In the restructured industry reliability will be the responsibility of an independent system operator (ISO). The ISO will need authority to assure system reliability -- once the sole responsibility of the regionally franchised local utility. How this concept will work in practice is still not clear even to the experts.

• Restructured companies will be focused on cost reduction and profits and may be smaller, and more numerous. It will be harder for the industry to continue funding of collaborative R&D, especially public benefit research.

• A successful marketplace will naturally encourage the development of efficient generation. However, if the capacity, control and operation of the transmission system are mismanaged or inadequate for supporting a competitive market, then any savings that accrue as a result of increased generation efficiency will be lost.

• Better ways to operate transmission and distribution systems, not generation, offer the major technological challenges of restructuring. New and improved transmission, communication, control and metering technologies and systems need to be developed. Information exchange and system simulation capabilities, both predictive and real-time, are essential to assure the security and reliability of the new market-based system operation.

• It is best to experiment with computational models rather than on the real systems thus impacting the customers. It is urgent that a near-term focus of our energy research be on the underlying engineering and economic science and accurate simulation of the power system as a decentralized and open marketplace.

• A new discipline combining electrical engineering with market economics is needed. All this will require a new breed of power systems engineer to accommodate the new ways of doing business and creating solutions to the new engineering and economic problems.

• The environment may be at risk with the transition to a restructured electric power system. In the long-term a competitive industry will encourage environmentally sound generation efficiency. In the short term many of the most cost efficient plants use coal. Market driven technological innovations will help meet tightening environmental regulations.

The recurring message is that technology in use today will not be adequate to meet the needs of the emerging competitive system. The pace of restructuring, with some states initiating retail access this January, is precipitous. Restructuring is a real time experiment re-designing an entire industry. An industry that represents roughly 5% of the GDP. If these experiments fail then the entire economy is at risk.

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Program Overview

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Summary of the Keynote Address of
The Honorable Dan Schaefer (Colorado)

The Honorable Dan Schaefer, Chairman of the U.S. House of Representatives Commerce Energy and Power Subcommittee, opened the symposium by remarking that Congress recognizes the need to restructure the electric utility industry. Representative Schaefer remarked that Congress recognizes that the electric power industry is the last regulated industry. It is his position that by shielding the electric power industry from competition, prices charged for electricity have been kept artificially high. He indicated that Congress is committed to restructuring the electric power industry. Based on a study by the Citizens for a Sound Economy, average homeowner savings of 25-43% are possible. The Brookings Institution and George Mason University's Market Process Center studied five industries that went through deregulation (trucking, railroad, telecommunications, airlines, and natural gas industries) and found:

1. consumer choice lowered prices;

2. savings were real, not a result of cost shifting;

3. reliability of service improved; and

4. partial competition did not achieve the benefits of full competition.

Representative Schaefer introduced legislation, H.R. 655, on 2/10/97, aimed at providing consumer choice in power providers by December 15, 2000. The bill can be seen on the web at http://www.house.gov/schaefer. It deregulates only the generation of power, not its transmission or distribution. The North American Electric Reliability Council (NERC) is currently responsible for coordinating the standards required to maintain the reliability of the power. While NERC now requires only "best efforts" to achieve reliability, the federal government must assure the reliability of the multi-state system. Compliance is voluntary, and there are occasional problems, as two major outages last summer in the western U.S. showed. Twelve states already have open competition in power markets, intrastate. (Six more have passed rules from their PSC to implement. Now over 30% will have choice by 2000.) H.R. 655 will deal with market barriers that relate to interstate commerce and clarify jurisdiction ambiguities. Related legislation has been introduced by Senators Bumpers, Craig, and by Representatives Delay and Markey. Both the executive and legislative branches are eager to get legislation in place. Despite his preference for states' rights, he recognized the need for federal roles in managing/rule-making over state systems. Both the left and right wings are uniting with common direction. The 105th Congress hopes to have a bill out of the House Commerce Subcommittee on Energy and Power by September and he predicted that comprehensive federal legislation would become law by the end of the session.

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Why are We Pulling The Plug? How? And For Whom?

Richard E. Schuler, Professor, Cornell University
Director, Cornell Institute for Public Affairs

Richard Schuler, in discussing the governments past role in deregulating other industries argued that government regulation both over-constrains and provides comfort. Deregulation generally opens up the industry and breeds innovation. Each change of rules excites folks to figure out how to make more money. While few markets satisfy the perfect competition paradigm of Adam Smith, competition will broaden the range of technology brought to the industry. However, Professor Schuler believes that comparisons between the current move to restructure the electric utility and the deregulation of other previously regulated industries are more notable for their differences than their similarities. A primary reason for these differences is the unique technical, economic and institutional characteristics among them. Therefore, a one-shoe-fits-all approach should be viewed with great skepticism.

In the future, as today, the electric industry will likely consist of generation, transmission, and distribution. Separate entities in these sectors are needed to avoid public concerns about sweetheart deals and companies favoring partner contracts at times of stress. Stranded costs, which need to be addressed lest they block the restructuring, include:

1. the cost of technological mistakes (nuclear and steam systems),

2. regulatory stranded costs (amortization over long times being impacted by restructuring), and

3. contractually stranded costs. These costs are stranded because new technologies make the resource obsolete.

An overriding technological need is for evaluation of the systems responses to (1) acts of God and (2) changes of demand. Technological concerns for the newly competitive industry should include improved information exchange and system simulations capabilities to improve reliability. It is better to experiment with computational models rather than on the real systems, impacting the customers. A NSF/Industry sponsored consortium of universities led by Cornell university is currently developing and experimenting with such models. The structure and framework must be designed to have the marketplace solve the optimization problem. While some of the needed technology exists, the increased demand and coordination of competitive suppliers will require a guarantee of reliability for both physical and communications systems.

Schuler does assert that restructured properly, there will be many benefits realized in comparison to the current system. These include improved efficiency in generation and transmission, lower prices, and new products and services. In fact, Schuler believes that opening the industry to a wider variety of businesses should unleash a broader diversity of commercial and technological innovation that will benefit all. He concluded by observing that success should be measured by the quantity and quality of the technologies and structures that emerge as a result of restructuring the industry.

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Panel 1

Technical Challenges Resulting from Restructuring

As the restructuring of the USA electric utility industry progresses, many technical challenges are emerging. These challenges primarily involve new and improved transmission, communication and control systems.

The competitive marketplace for electricity is created by the interconnected electrical transmission system. For prices to fall that marketplace must be highly competitive. For the marketplace created by the interconnection of the competing companies to function reliably, the competing companies must cooperate.

Denis Wickham notes that the most critical issue to solve in restructuring the electric utility industry is reliability. For reliability to be ensured, there must be continuous exchange of information between the networks. In addition, transmission rights must be fairly priced and allocated for network interactions to be successful. Wickham highlights some of the more difficult issues involved to achieve this exchange, including; rules for commercially sensitive information, codes of conduct, and communication/computer requirements. Also to be addressed are the issues of inconsistent policies between control areas due to differing needs for different parts of the country and increased analytical requirements necessitated by competition. Wickham also remarked on the necessity for new metering systems to replace older meters in order to allow customers the ability to respond to benefit from time sensitive market price.

Pravin Varaiya notes that in the past reliability has been achieved through redundancy not innovation. He then focuses on two approaches to restructuring; Poolco vs. Direct Access. Poolco is a centralized control concept that requires all suppliers sell to and customers buy from a central clearinghouse. This clearinghouse will also be the Independent System Operator (ISO), expanding ISO responsibility to create and operate the primary energy market and assess and manage all transmission transaction charges. This system will require large amounts of information but will involve less innovation. In a Direct Access system the marketplace is not under central control. Control is distributed and the transactions will be similar to those in open commodity markets where the seller and buyer enter into direct agreements for the production, purchase, and delivery of the product or service. ISO operations will focus on system maintenance, reliability, and mitigation of transmission congestion. Direct Access is much less information intensive and will allow for greater innovation. Varaiya believes that legislative leadership is essential since there is no consensus among the major stakeholders. This is a real challenge because the issues that need resolution are not the type readily amenable to political compromise.

Better ways to operate transmission and distribution systems, not generation, offer the major technological challenges according to Richard Tabors. He believes that the systems currently operate too conservatively and fail to employ current technology that will result in systems operating closer to the "margin." Transmission issues include updated monitoring and control for failure prevention, provisions for ancillary services, and performance based regulation. The technological hurdles for distribution include distributed generation and how or if this generation can be located closer to the load to relieve transmission demands. In addition, metering and billing is an area lacking in technology. The new system will require the ability to track hour-by-hour changes, develop improved verification and production of detailed bills, and cope with customer "churning", a term used to describe the tendency of customers to constantly shift among providers.

Ralph Masiello notes that restructuring will result in expanded networks, requiring real-time supervision and control, with increased demand for transmission congestion management and fair accurate pricing. To meet the new demands of open competition technology development will need to focus on improved network models and software, training for personnel, data exchange, metering systems, and communication systems between utilities. Masiello believes the emerging ISO will play a crucial role by overseeing and implementing a set of industry agreed upon procedures for dispute resolution of transmission management. The independent system operator will be a new element of the electricity enterprise that will need to have new powers and authority to assure system reliability - once the sole responsibility of the regionally franchised local utility. How this concept will work in practice is still not clear to the experts involved today in creating this new element of the industry.

The reoccurring message of the panelists is that technology in use today by the electric industry will not be adequate to meet the needs of the emerging competitive system. The pace of restructuring, with states initiating retail access this January, is precipitous. Restructuring is a real time experiment re-designing an entire industry. An industry which represents roughly 5% of the GDP. If these experiments fail then the entire economy is at risk.

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Panel 2

Research, Development and Workforce Needs of the Restructured Industry

Research is a spectrum of activity ranging from basic to applied. It is generally agreed that the industry as represented by the utilities (or their restructured counterparts), manufacturers, consultants, and universities will have new roles to play in the next generation electric power industry. At present, many feel that there will be inadequate attention paid to the range of research needed by the industry, especially during the transition. Also, when the industry has been restructured there will be engineering skill requirements that are different from those of past power engineers. In the past, a segment of manpower training has been accomplished through research. This panel addressed the questions of "What are the research and manpower needs?", "Who will do the necessary work?" and "Who will pay for it?". That is, who will invest in the technological and human capital necessary to ensure the industry's future?

Robert Bell described a future for research and development in a restructured electric power industry that is largely problem driven. This will occur because as the utilities move to a competitive market, R&D funds received from company earnings will have to compete with other resource needs. The structure of the industry will most likely be a holding company with unregulated ventures/energy services and regulated transmission/distribution. Restructured companies will be smaller, separate, and more numerous. This will make it harder to build coalitions for R&D. Support for R&D will probably weaken in comparison with the former vertically-integrated company structure. During the earlier period of traditional rate making, a utilities R&D costs were justified through the regulation process and put into the rate-base. After 1994, rates were frozen and R&D investments declined; public benefit vanished and system R&D reduced. In an effort to ensure continued R&D support, there are proposals being considered by regulators in several states to institute a system benefit charge. The charge will be incurred by the customer and administered by a non-utility third party to fund research. Bell therefore concludes that in a restructured world R&D activities will have to justify themselves and demonstrate a measurable return on the companies investment. He observed that risk is reduced by team-building (e.g., EPRI, ABB, universities and national laboratories). Finally, he noted that the control of intellectual property is becoming a growing concern.

Mike Delello explained that four decades of "growth accounting studies" show that technical innovations account for over half of the US economic growth. Yet, at this time there is concern that no one is taking responsibility to assure that this trend continues. The problem appears to be that in a time of shrinking budgets and increased competition for fewer dollars, R&D stands dangerously close to being left in the "dust heap". The expected decrease of federal funds is in the range of 40% over the next five years while utility expenditures over the past three year for R&D funding dropped by a third.

He made five recommendations to strengthen the R&D efforts for maintaining a viable presence in the restructured industry:

1. Leverage R&D funds through multi-party collaborations and make them more effective.

2. Utilize the existing R&D infrastructure for cost effectiveness, and use what already works well.

3. Increase market connectivity to assure usefulness of the R&D and speed the transfer of tangible results.

4. Allocate resources based on technical competency and cost effectiveness.

5. Balance near-term and long-term objectives.

Delello believes these recommendations, along with the development of an "Electricity Road Map" outlining a shared vision and agreement of R&D priorities over the next 25 years is needed. EPRI is currently facilitating the development of such a roadmap.

Dr. Gabriel supported the development of an electric R&D/innovation roadmap. She made the point that all stakeholders must fully participate. Gabriel then turned to the efforts the NSF are making in focusing on the education of engineers to produce innovators. There needs to be increased effort to elevate the profile of engineers as the people who create what has never been before, as opposed to scientists, who study to understand what is. Engineers integrate all knowledge to achieve a goal. Engineers who can innovate are needed. As information technology improves, the pace of innovation will increase. U.S. engineer training in systems integration, problem formulation, flexibility, and communication/decision-making is considered essential. Her recommendations included urging engineers to go to Washington to serve as program managers for a year or two in appropriate agencies and thereby gain real insight into ways to affect technology policy.

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Panel 3

Areas of Power System Planning and Operations That Need Public Oversight and Planning

Public oversight and government regulation of the electric utility industry is a complex of layered and overlapping jurisdictions. The Energy Policy Act of 1992 mandated changes in regulation that would lead to wholesale competition and open access to the largely private transmission system that connects power generation to customers across North America. The federal regulatory body most involved in the restructuring of the electricity industry is FERC with lead responsibility for interstate commerce. Locally the state public utility commissions have been dominant over the profitability and economic return realized by the regionally franchised electric utilities.

Although restructuring at the federal level was launched by the mandating of wholesale access, the trends at the state level is opening the regional franchises to competition down to the level of the individual consumer. To avoid unwarranted market power in retail competition, states are pursuing a path of "delaminating" the previous vertically integrated utilities. This panel's focus is on the challenge faced by regulators and utility companies alike in assuring security and reliability of electricity as the economic restructuring of the industry eliminates the obligation of the previously franchised utility to provide reliable service. This responsibility is being entrusted to the "marketplace". Currently no substantial regulatory authority exists to assure security and reliability of electricity supply in the future restructured industry.

Kevin Kelly notes that industry change means new rules must be developed to ensure fair and competitive markets and maintain a secure and reliable power system. The nature of this undertaking is so large and complex that it does not allow for a single entity to set the new and different rules or even foresee all the rules which will be needed. The situation requires cooperation and coordination between local, regional, national, and multinational authorities in order to develop a sound new structure for operating this complex industry. Kelly suggest that who sets the rules could depend on the type of rule needed (e.g., interstate, NERC might promulgate rules that assure reliability requiring cooperation among competitors while FERC oversee the rules which assure marketplace competition).

Mr. Kelly agrees with others from previous panels that maintaining reliability should be the top concern, but who should enforce and set the reliability rules is still up for question. With the states pushing forward with their own restructuring plans there is increased concern over the need for government enforcement of reliability rules as reliability is primarily an interstate or regional issue. This is where government oversight gets sticky. Reliability issues and rules are currently overseen by NERC which is a voluntary non-government organization. The legality of government enforcement of rules made by a non-government entity is an open question. Indeed, Kelly believes federal oversight is appropriate for some activities such as tariffs, regulation of ISO's and weak oversight of state-led grid planning and supply planning.

Ray Maliszewski concentrates on the reliability issue and specifically on the role of the NERC. Reliability means different things to different people or audiences. The general public takes it for granted, the politicians and regulators generally view it as an "engineering detail" left to the industry, and the utilities view it as a complex technical, operating and management challenge. However, the recent west coast outages in 1996, the separation of generation and transmission functions, the diminishing reserve margins to dangerously low levels in some regions, and the natural tension between competition (operating for profit) and reliability (requiring cooperation among the competitors) spotlights reliability as the critical issue to be faced in restructuring. The restructuring debate needs to refocus on reliability. Stranded costs are a financial and political problem. Reliability is far more complex challenge. It is unlikely that government oversight can assure the security and reliability of power supply and delivery. Instead some new approach to a voluntary, cooperative process with enforcement powers needs to be invented.

Maliszewski asserts that NERC must change to operate to its fullest potential and meet demands the new system will create. It must have full cooperation of all industry participants involved. Maliszewski sees a future NERC that issues reliability policies and standards and in order to do so must have a "legislative foundation".

David Meyer sees the federal role as one of setting standards, monitoring of performance, and ensuring compliance. He believes the goal should be to maintain industry self-regulation by inserting federal "rebar" into the current voluntary industry structure. DOE is the only federal agency with authority over reliability. But this authority is weak, at the level of requesting changes in industrial practice. Meyer believes important lessons have been learned by the public and private sector from the west coast blackouts that occurred during the summer of 1996. Using knowledge gained from the Presidential study of the blackouts, DOE is developing a draft restructuring plan, currently being reviewed by an interagency group with expected submission to the Congress this year.

The panelists clearly agree that the primary challenge for public(federal) oversight is reliability. There also appears to be general agreement that what must be done and how to assure security and reliability in a restructured industry is an unsolved problem.

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Panel 4

How Environmental Protection Will Be Ensured In A Restructured Industry

Restructuring in the electric power sector is likely to affect the environment in both good and bad ways, with net results that are hotly debated.

Susan Tierney sketches the extremes in the spectrum of viewpoints:

1. Pessimists see competition coming at the expense of the environment, as integrated resource planning, demand-side management, and renewable energy set-asides disappear, as generation at dirty but cheap coal-fired power plants increases, and as uneconomic nuclear power plants prematurely retire.

2. Optimists believe that competition is in synch with environmental protection, because new, cleaner power plants will replace older, dirtier capacity, because competition encourages efficiency, and because increased customer choice will give voice to the preferences of green consumers.

Tierney's view, based on broad experience as a state and federal policymaker, is that the optimists are right in the long run, but that many of the events that pessimists fear may come to pass in the short to medium run. Thus, some undesirable local and interregional environmental impacts are likely, and there is a great need for states to implement strategically targeted environmental remedies in conjunction with the move to competition. She observes that the states that are innovating now are the ones that have historically included environmental issues in utility regulations. None of them are talking about emission taxes, but most are pursuing other market-based environmental protection strategies, such as product labeling, NOx trading, plant performance standards, and system benefits charges to fund DSM and renewables.

Dallas Burtraw believes that the SO2 emissions trading scheme has been a success, with increasingly active trading and lower than predicted unit costs. Burtraw's current estimate of the long run marginal cost of an emissions permit is +/- $284/ton of SO2. He claims that substantial savings in administrative costs and cost-effectiveness (static efficiency) have already been realized, and that there is great future potential for innovation-related savings (dynamic efficiency) and lower social costs. Needed are revenue-neutral pollution charges to internalize social costs within the industry's operating and investment decisions.

James Turnure suggests that 1997 may be remembered as the biggest year of the decade in terms of environmental policy. Not only is electricity sector restructuring finally taking off, but climate change policies are sliding into place. These two events are putting extreme pressure on the electric power sector to start innovating, and are forcing decision makers to come to terms with the down-side of coal-fired generation. Turnure expects more aggressive climate change policies within the relatively near future.

Customer choice is gaining ground as a force for environmental protection in the restructured electric power industry, according to Elizabeth Hicks. While several states are relying on systems benefits charges to support DSM, renewables, and low income programs during the transition to a competitive marketplace, the most interesting policy experiments center on green power marketing and environmental disclosure. Retail competition pilots in New Hampshire and elsewhere show that while price is the main decision factor for most customers in choosing an electricity supplier, some residential customers are opting for "greener" suppliers even at a modest price premium. Few business customers are making that choice, however. What is "green" is an issue. Examples of products being offered include all renewable kWh, no coal or nuke kWh, kWh combined with demand-side energy efficiency, small distributed PV systems, renewables resources combined with clean gas, and many others.

Hicks notes that consumers may need help in sorting out what is green. While consumer advocates are one source of guidance, there are also policy innovations in the works to require environmental disclosure. Using the same rationale that underlies truth-in-advertising law, some states are proposing that the fuel source of an electricity supplier be disclosed to the consumer in the bill. The customer could then more easily incorporate fuel choice as part of the supplier decision. This approach is conceptually feasible, but faces many unresolved implementation issues, including "gaming" and misrepresentations by suppliers. She warns us to "stay tuned". This will play itself out in the 50 states.

In summary, a more competitive electric power industry will feel powerful long-run drivers of environmental protection-the pursuit of efficiency, the shedding of risk, and satisfying the preferences of customers. In the short run, there are likely to be some localized increases in environmental problems that will need the attention of policy makers. For both the short and long run, market-based policy tools, including information provision, are developing a good track record and should be more widely used. Continuous technological innovation appears to be necessary for this industry if it is to keep up with evolving environmental regulations as well as the rather more quickly moving goalposts of the competitive playing field.

[Contents]

Acknowledgements

1997 IEEE-USA Technology Policy Symposium

Organizing Committee

Robert J. Thomas, Chair, Energy Policy Committee
Richard Wakefield, Vice Chair, Energy Policy Committee
Ned Sauthoff, Vice Chair, Technology Policy Council
Clinton J. Andrews, Member, Energy Policy Committee
Thomas R. Schneider, Member, Energy Policy Committee

Symposium Records

Charles Lawrence, Chief Recorder/Member, Energy Policy Committee
Edith Corliss, Member, Energy Policy Committee
Marvin McCoy, Member, Energy Policy Committee
Ray Petniunas, Member, Energy Policy Committee
James Strother, Member, Energy Policy Committee

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Last Updated: Oct. 28. 1997

Staff Info Contact: Raymond Paul, r.paul@ieee.org.