NERC president urges balance of competition with regulation in electric policy

November 27, 2001 – In response to Lynne H. Church, President of EPSA, NERC President and CEO Michehl Gent said that in forming wholesale electric industry policy it would be important to strike a balance ‘between inevitably imperfect regulation and inevitably imperfect competition.’

Gent’s letter follows.

“Thank you for your letter of November 12, 2001, stating the views of the Electric Power Supply Association on how you would like to see reliability and business practice standards developed for the wholesale electric industry. I note your statement that it is ‘essential to prevent reliability standards from unduly adversely impacting markets, and vice versa.’

“I believe that Professor Alfred Kahn has captured well the challenge before those who would provide leadership to the electric industry today: We must strike the appropriate balance, from time to time, between inevitably imperfect regulation and inevitably imperfect competition.

“Posing the challenge that way enables us to focus on the specific attributes and consequences of a particular reliability standard and the specific attributes and consequences of a particular market practice, rather than engage in a polemic about reliability standards in general versus markets in general.

“On October 16, 2001, NERC’s independent Board of Trustees adopted measures designed to accomplish a number of the goals you outline in your letter, including:

* adoption of a new standards development process that is fair, open, balanced, and inclusive;

* adoption of sector voting for approving standards;

* use of a pool of all interested persons for voting on standards in place of the three standing committees;

* full participation by regional transmission organizations (initially by immediately adding two independent system operator/regional transmission organization representatives to the three standing committees 1 and longer term by including the ISOs and RTOs as a sector in the new standards development and approval process);

* achieving American National Standards Institute accreditation for the new standards development process; and

* directing that NERC take all necessary steps to become the single organization in North America to develop both reliability standards and wholesale electric business practice standards through a fair, open, balanced, and inclusive process, and to file such standards with FERC and appropriate government agencies in Canada.

“I appreciate EPSA’s continuing participation, along with representatives of other electric industry interests, in NERC’s Standing Committees Representation Task Force. As you know, that group developed the initial voting sectors and criteria model. The Board of Trustees has charged the task force with filling in the details of the model and developing an implementation plan. The Board asked the task force to complete its work by January 15, 2002, and report back to the Board at its February 2002 meeting.

“The task force will be posting for public comment on or about December 4 its proposal for a Wholesale Electric Standards Model. The continued participation of all industry segments in the work of the task force and in providing timely comments on this proposal will be critical to successful implementation of the Board’s policies and directives.

“NERC is discussing with representatives from the Gas Industry Standards Board how the electric industry and NERC could best work with GISB on wholesale electric business practice standards. In furtherance of that effort, NERC looks forward to participating in the discussions among stakeholders to take place on these issues at the Department of Energy workshop on December 7 and presenting the draft proposal of the Standing Committees Representation Task Force at that time.

“Certain of the items in your letter raise issues of law and policy that are simply beyond NERC’s, or any non-governmental organization’s, authority. You state that a “requirement that all customer load take service under the FERC pro forma tariff and under the same terms and conditions is needed.” That issue is currently pending before the United States Supreme Court and is also in various electric industry restructuring bills pending in Congress. It is not something that NERC can impose.

“You state that NERC’s funding must be disengaged from the Regional Reliability Councils, that funding must be “fair and fairly allocated to all users of the grid,” and that “each transmission owner and operator should be required to demonstrate how they will collect the charges for the organization from their native loads.” As you know, NERC and a broad coalition of electric industry and consumer representatives have been pursuing legislation since 1999 that would, among other things, create a mechanism for funding NERC that, subject to oversight by the Federal Energy Regulatory Commission, fairly allocates the costs of the organization to all users of the bulk electric system.

“That legislation would also give FERC jurisdiction over reliability matters and create a system of mandatory and enforceable reliability rules, both of which are currently lacking. I urge EPSA to rejoin us in this legislative effort.

“Finally, you suggest revisions to the market interface principles that NERC’s independent Board of Trustees adopted at its October 2001 meeting. Those market interface principles were the product of an extensive and inclusive stakeholder process and were included with the new standards development process manual that the NERC Stakeholders Committee strongly endorsed. The introductory statement to those principles recognizes the interdependent nature of electric system reliability and electricity markets:

Recognizing that bulk electric system reliability and electricity markets are inseparable and mutually interdependent, all Organization Standards shall be consistent with the Market Interface Principles. Consideration of the Market Interface Principles is intended to assure Organization Standards are written such that they achieve their reliability objective without causing undue restrictions or adverse impacts on competitive electricity markets.

“As the electric industry continues to evolve, I expect that the fair, open, balanced, and inclusive process that the Board of Trustees has put in place will revise those principles as necessary. I encourage EPSA to participate along with other industry organizations and stakeholders in that effort.

“I, too, believe that well-functioning competitive bulk power markets can contribute significantly to the reliability of the interconnected bulk electric system. I welcome your participation in the effort to make that a reality, and stand ready to meet with you and your colleagues at EPSA to discuss your concerns.”

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