Terminology: Capacity vs. power Watt, KW, MW, GW Kwh, mwh Voltage, Transformer Transmission vs. distribution

1. Terminology: • Capacity vs. power • Watt, KW, MW, GW • Kwh, mwh • Voltage, Transformer • Transmission vs. distribution • ELECTRICITY: • History • Central stations

2. GENERATION TRANSMISSION DISTRIBUTION End Users Power Plant LDC Transmission lines Distribution lines Few kV or less 000s kV <10 kV 240V most plants (home)

3. Interconnections of the North American Electric Reliability Council in the Contiguous United States

4. Utility owned generator Federal Power Project Residential users Pre-PURPA Municipal Utility Commercial users Industrial users Distribution System Residential users Commercial users Industrial users

5. Wholesale Restructuring: Initial steps • 1978: PURPA • 1980s-present: Rate experiments • 1992: Energy Policy Act • 1996: Order 888 • 2000: Order 2000 • 2000-present: fundamental changes and restructuring of wholesale market and transmission system underway.

6. Wholesale Restructuring: Initial steps • What is “wheeling”? What is it analogous to in the natural gas market? • Otter Tail case (1973) • BuRec Dam + OT Generators OT lines  Municipality

7. Antitrust laws prohibit use of monopoly power to stifle competition. • Otter Tail argued that if it couldn’t refuse to wheel power, “more municipalities will turn to public power and Otter Tail will go downhill.” • Court said that Otter Tail’s proper response to competition from federal agencies is to provide “superior service, lower costs and improved efficiency,” not to deny wheeling services. • Can only refuse to wheel when wheeling would impair its ability to serve own customers. • But there is a “regulated industries” exception to antitrust rules: • where government has adopted a regulatory system that displaces competition, antitrust rules don’t apply. • this exception applies to the provision of retail service in most states, since states regulate in a way that displaces competition.

8. Wholesale Restructuring: Initial steps • What is “wheeling”? What is it analogous to in the natural gas market? • Otter Tail case (1973) • BuRec Dam + OT Generators OT lines  Municipality • PURPA  Generation competition  price competition • Did PURPA help new sellers get their product to market?

9. Utility owned generator Federal Power Project QF IPP Residential users Post-PURPA Municipal Utility Commercial users Industrial users Distribution System Residential users Commercial users Industrial users

10. PURPA authorized FERC to order third party wheeling, but only if: • No “uncompensated economic loss” or “undue burden” would result, • It would not impair the provision of reliable electric service, or • It would “reasonably preserve existing competitive relationships” • Why would these be impediments to FERC-ordered third party wheeling?

11. Wholesale Restructuring • PURPA • Market based wholesale rates • 1980s: FERC made this option available to QFs/IPPs who lacked market power over buyers. • 1980s/90s: state moves toward competitive bidding and least cost generation procurement • Why did QFs and IPPs need or want market based rates?

12. Wholesale Restructuring • PURPA • Market based wholesale rates • Energy Policy Act of 1992 • Clarified power to order third party wheeling and to specify that service be offered nondiscriminatorily (“comparability”). • Ad hoc orders: FP&L case • PUHCA: EWGs and ownership issues

13. Utility owned generator EWG Federal Power Project QF IPP Residential users Post-EPAct of 1992 Municipal Utility Commercial users Industrial users Distribution System Residential users Commercial users Industrial users

14. Toward Competition in Wholesale Markets Late 1990s-present 1980s and Early 1990s Wholesale generators began to enter market with exemption from FPA requirements, even without PURPA benefits. Didn’t need QF status to thrive. FERC nudged transmission line owners to wheel power, and … Number of cross-service area wholesale transactions increased. Transmission line owners began filing transmission service tariffs. 1996: FERC Order 888: Mandating Open-Access Transmission

15. Order 888 • Purpose:to “ensure that all wholesale buyers and sellers of electric energy can obtain non-discriminatory transmission access . . .” • How?By creating a continuous open system and eliminating use of monopoly power to discriminate

16. Order 888 • All transmission line owners must: • file “open access non-discriminatory transmission tariffs” • provide transmission service for own wholesale sales on the same terms as provided in tariffs • provide real time information system for purchasing transmission service non-discriminatorily (OASIS-Order 889) • transmission line owners may recover stranded costs through tariffs

17. Order 888 (cont’d) • Encouraged formation of ISOs • Sidestepped divestiture issue:required utility owners of lines not to treat in-house purchasers of transmission services differently from outside buyers. But didn’t require formation of separate business units. • Contemplates continued need for FERC to monitor for ”generation dominance”

18. OASIS • What is the purpose of this electronic system? • Why does it merit its own separate FERC rule? (Order 889) • OASIS “standards of conduct” for transmission service providers • How does functional unbundling actually work in practice?

19. Order 888/889 and Grid Management • Some IOUs transmission services controlled by power pools • IOUs required to authorize power pools to submit tariffs and to operate consistent with Order • No more bundled wholesale sales; must show separate product and service costs • Growing wholesale markets increase need for technical grid management expertise (e.g. loop flows, safety, etc.)

20. Order 888/889 and ISOs • What is an ISO? What is a “transco”? What’s the difference? • How, if at all do ISOs and transcos differ from the old power pools? • What services do ISOs and transcos provide? • How are ISOs run?

21. Major Wholesale Electricity Trading Hubs

22. Post-Order 888/889 • Drastic increase in wholesale sales • Rise of power marketers • Increases in new IPP generation • Yet no corresponding increase in investment in transmission facilities

23. FERC Order 2000 (Jan. 2000) • Require owners of transmission to explain plans to join/form RTO or explain why they are not doing so • Does not mandate formation of RTO • What is an RTO? How does it differ from an ISO? • Management and organization of RTOs

24. Order 2000 • What requirements does FERC impose on RTOs? • Congestion management function by December 15, 2002 • Parallel path flow coordination function by December 15, 2004 • Transmission planning and expansion function by December 15, 2004 • Other minimum functions will be implemented by startup

25. Order 2000 • If you owned transmission facilities, how would you respond to this notice? • Will the RTO idea increase in investment in new transmission capacity?

26. Originally Proposed RTOs

28. Status Report • 10 years ago only a few companies were authorized (by FERC) to sell wholesale power at market-based rates • Now about 860 companies are eligible to sell wholesale power at market-based rates • 1998 Midwest price spikes • 2000-01 California price spikes • Now: FERC pushing for 4 regional RTOs

29. Increased competition in power sales should trigger fall in wholesale price. • Transmission bottlenecks and resulting price spikes have not triggered sufficient investment in transmission. • Why? • What is the solution to this problem? • Who should control transmission siting decisions, in your view?