EPSA warns NERC to proceed carefully in electric policy moves

November 16, 2001 – In an open letter to Michehl Gent, President and CEO of the North American Electric Reliability Council, Lynne H. Church, President of the Electric Power Supply Association, warned that NERC would have to step carefully in its recently declared goal to become a central organizational force for the electric industry.

The Nov. 12 letter was sent to Gent in response to its Oct. 16 Board of Trustees meeting, where the board resolved to “take all necessary steps to become the single organization in North America to develop both reliability standards and wholesale electric business practice standards.”

Citing a panel discussion on standardizing business practices during FERC’s recent RTO Workshop, Church said significant concerns exist among the stakeholder community about NERC’s ability to transform itself in a way that truly reflects the ongoing changes now occurring in the electric power industry.

“As you know, the Gas Industry Standards Board (GISB) has been working for nearly two years to develop a new Energy Industry Standards Board (EISB) that provides an alternative organizational model for standard setting,” Church said.

“That effort has been well received by many in the industry. EPSA is generally encouraged by the increased awareness of the relationship between reliability and business practices (particularly the so-called market interface).

“Ultimately, EPSA and its members seek a process that, at a minimum: (1) fairly and equitably balances all stakeholder interests; and (2) provides the most effective opportunity to properly integrate reliability and business practices as described in Order 2000.

“It is essential to prevent reliability standards from unduly adversely impacting markets, and vice versa. Therefore, reliability and business practices must be harmonized. In this regard, standards development must include market solutions to certain reliability problems, particularly those resulting from transmission congestion.

“In order to assist the NERC Board in its effort to effect meaningful organizational changes responsive to the industry’s needs, we set forth below several fundamentally important aspects and considerations.

“During the RTO Workshop, the FERC commissioners indicated their preference that the industry develop a consensus for supporting either NERC or EISB. However, business and reliability standards were identified as a “core subject area” for the imminent Section 206 RTO rulemaking. Clearly, it is necessary to rethink the approach of how to balance reliability issues with more efficient and effective market designs and structures.

“Therefore, FERC must play a substantial role with any new standard setting organization in the United States. Particularly, the Commission must exercise unfettered review of new standards to ensure the compatibility of reliability and business practices. The existing relationship between FERC and the GISB should be the model. Also, FERC or the appropriate regulatory bodies in Canada and Mexico must be the source for enforcement authority by approving standards and requiring that they be integrated into RTO tariffs.

“The process for following up on the Commission’s direction that the industry “choose” a standards setting organization must be open, inclusive and collaborative, and result in a true industry consensus.

“Accordingly, the efforts of NERC’s Standing Committee Representation Task Force must be coordinated with the EISB development process to make the industry’s review and debate comprehensive and transparent. Rather than a stark “either/or” approach, we think it would be preferable to inventory the best features of both organizations and achieve consensus on how to unify them.

“All industry stakeholders and market participants, including RTOs, should be allowed to participate in NERC on an equal basis. The sectors comprising this model should be determined by a functional approach to the role of various parties. In addition, the plenary roles of RTOs for implementing commercial practices and reliability standards and planning should be acknowledged and accounted for. Sector voting should be implemented by March 2002.

“To effectuate this organizational change, NERC’s three Standing Committees should be replaced by a single committee responsible for implementing the new organization standards process. Other, non- standard setting activities should be carried on by subgroups as determined by the new single committee. This change should be made as soon as possible, but not later than March 2002.

“During FERC’s RTO Workshop conducted from October 15-19, the Commissioners observed the connection between reliability and market development and operation, and expressed the expectation that the industry should seek to achieve a consensus on a new standards setting organization. Accordingly, EPSA urges NERC to make a FERC filing by March 2002 that fully explains and describes actual and anticipated organizational changes.

“The standards setting organization should be ANSI certified (and certified by one or more equivalent Canadian standards organizations). This will help ensure that the process for the development of standards and practices is based on inclusiveness, balanced representation, and fairness. Accordingly, NERC should apply for ANSI certification as soon as possible, but no later than March 2002.

“NERC’s funding mechanism must be changed so as to disengage the Regional Reliability Councils. Funding must be reformed to be fair and fairly allocated to all users of the grid. A requirement that all customer load take service under the FERC pro forma tariff and under the same terms and conditions is needed. The costs of the new standards setting organization should be a component of the tariff. Short of this, each transmission owner and operator should be required to demonstrate how they will collect the charges for the organization from their native loads. NERC should make a formal filing with FERC by March 2002 to request FERC to amend the pro forma tariff accordingly.

“NERC’s Certificate of Incorporation, bylaws and membership structure must be amended to affirm the new organization’s mission and structure.

“It will be difficult to obtain full industry support unless the new organization’s organic documents confirm that it has removed the tension between the old “reliability only” presumption with an unqualified commitment to reconciling conflicts between reliability and market objectives. Accordingly, NERC’s Certificate and bylaws should be amended by March 2002 to unequivocally define the new organization’s mission as committed to developing reliability and business practices that enhance competitive markets.

“The ‘market interface principles’ included in the recently approved Organization Standards Process Manual are a first step in addressing the inseparability of reliability and competitive markets in the standards development process. However, they fall far short of what’s needed to change NERC’s fundamental orientation as a reliability only organization.

“Accordingly, we propose that the following, revised market interface principles be adopted by July 2002:

“- Principle 1: The planning and operation of bulk electric systems shall recognize that reliable, well-functioning competitive markets are an essential requirement of a robust North American economy.

“- Principle 2: An Organization Standard shall not provide any entity the opportunity or means to impose discriminatory requirements upon users of the bulk electric system.

“- Principle 3: An Organization Standard shall neither mandate nor prohibit any specific market structure. (Unchanged)

“- Principle 4: Organization Standards shall enable and encourage market solutions to the maximum extent possible.

“- Principle 5: An Organization Standard shall not require the public disclosure of commercially sensitive information. All market participants shall have equal opportunity to access commercially non-sensitive information necessary to comply with Organization Standards.

“- Principle 6: No Organization Standard shall be approved by the Board until conflicts between its reliability objectives and market impacts have been harmonized.”

“EPSA members, as well as the Commission’s vision for competitive markets, have a lot at stake with regard to market interface issues and business practices. The potential for well-functioning competitive markets to contribute to reliability, when properly designed in conjunction with fairly operated transmission systems, has been widely recognized.

“However, achieving that goal requires that old approaches and assumptions regarding the predominant role of reliability standards–and those who have historically controlled them– must be rethought. “The fact that NERC, as a reliability-only organization, may be developing business standards that could have a profound impact on EPSA’s members, underscores the necessity of the far-reaching, fundamental organizational changes set forth above.”

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