Industry 101 | Regulation in the Electricity Industry: Regulatory Authorities
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4.2 REGULATORY AUTHORITIES
In 1920, Congress established the Federal Power Commission (FPC) to coordinate hydroelectric projects under federal control. At first, FPC could only employ an executive secretary and borrow all other personnel from different administrating executive departments. The organizational structure caused conflicting interests among different departments, making it difficult to produce consistent energy policies. As a result, Congress voted to grant funds to permanently hire staff for FPC. After years of expansion and consolidation among regulating agencies, FPC was renamed the Federal Energy Regulatory Commission (FERC).
The Federal Energy Regulatory Commission (FERC) is an independent regulatory agency within the United States Department of Energy with five members appointed by the President and confirmed by the Senate. Congress granted FERC power under the Federal Power Act, the Natural Gas Act, and the Interstate Commerce Act to regulate the interstate transmission of electricity, natural gas and oil. FERC’s responsibilities also include review of proposals to build interstate natural gas pipelines, natural gas storage facilities, liquefied natural gas terminals and licensing of non-federal hydropower dams. Within the electricity industry, FERC regulates wholesale sales of electricity and transmission of electricity in interstate commerce, oversees mandatory reliability standards for the bulk power system, promotes strong national energy infrastructure, regulates jurisdictional issuance of stock and debt securities, assumptions of obligations, and liabilities and mergers.
For many years, policy makers have been trying to foster competition in wholesale power markets. Over the last few decades, Congress has acted to open up the wholesale electric power market by supporting the entry of new generators to compete with traditional utilities. In 1992, the President signed the Energy Policy Act of 1992 into law to encourage competition in the wholesale energy markets through open access to transmission facilities. The core responsibility FERC has on the wholesale market is to protect consumers from electricity monopolies and ensure customers are charged a reasonable and sustainable rate.
Besides introducing competition into wholesale power markets, FERC also grants market-based rate authorization for wholesale sales of electricity, capacity, and other services to better regulate the electricity market. Wholesale, market-based rate authorizations are granted to sellers that can demonstrate they lack or have mitigated horizontal and vertical market power. Order No. 697 sets the basis in market-based rate consideration. Horizontal and vertical market power analyses are defined under Order No. 697.
Horizontal Market Power Analysis
In order to evaluate horizontal market power, FERC applies two screenings: the market share screening and the pivotal supplier screening. If an applicant passes both screenings, the applicant is considered not to have significant horizontal market power. Failure to pass either of the two screenings will lead to further screening to determine a ruling on the application.
Vertical Market Power Analysis
While evaluating vertical market power, FERC has specified any concern regarding vertical market power should be addressed in an open access transmission tariff proceeding, not a market-based rate proceeding. The approval of an open access transmission tariff by FERC adequately mitigates vertical market power. If a violation of the open access transmission tariff is found and the violation is related to market-based rate authorization, FERC will revoke the authorized market-based rate from the responsible entity.
In addition to these tasks, FERC is also responsible for facilitating demand responses, overseeing the reliability of electricity providers, promoting transmission investment, and evaluating mergers and corporate transactions.
While Congress created FERC for the utility industry, the industry created its own regulating organization back in 1968 – the North American Electric Reliability Corporation (NERC). NERC is a not-for-profit corporation formed by representatives in the electric utility industry and is considered self-regulatory. The term self-regulatory is used when a government has given a non-governmental agency the power to make decisions in regulation, while reserving the right and power to oversee any proposals and changes. The general approach to such organizational partnerships often works well as the industry experts can provide more direct, in-depth knowledge of the matter at hand. In the case of NERC and FERC, the utility experts in NERC can provide insight into operational and technical needs of the electric industry that drive new standards and programs. Meanwhile, FERC can continue to ensure that federal regulations are met.
NERC serves very similar purposes as FERC, but specifically for bulk power and electricity systems. The bulk power system is defined by NERC as “the electricity power generation facilities combined with the high-voltage transmission system.” That is, NERC looks to improve the reliability and security of the creation and transmission of electricity on a high infrastructural level, outside of local electricity facilities that may be placed in cities and towns.
With the introduction of the Energy Policy Act of 2005, FERC assigned NERC to be the Electric Reliability Organization of the USA, and henceforth NERC has the authority to create mandatory standards in the industry.
NERC’s methodology addresses different issues to achieve its goals in the bulk power system:
- Develop and enforce new standards for reliability
- Provide assurance to all parties in the electric industry, including private and public entities
- Promote education and propagate industry knowledge across regions in various levels of industry personnel
- Prioritize new initiatives and attention in the industry by analyzing the risk and forecasting the reliability of the bulk power system
As suggested by the name, NERC provides coverage in North America – including the USA, Canada, and parts of Mexico. The governing body in the USA is FERC; provincial governments oversee the regions in Canada. More recently, in July of 2016, NERC has expanded its involvement to Europe by signing an administrative agreement with the European Commission’s Directorate General (DG) for Energy. The agreement holds the common reliability interests of NERC and DG energy and encourages collaboration between the organizations as similar challenges emerge throughout the industry.
On a smaller scale, the NERC coverage in North America can be categorized into 8 regional entities:
- Florida Reliability Coordinating Council (FRCC)
- Midwest Reliability Organization (MRO)
- Northeast Power Coordinating Council (NPCC)
- Reliability First (RF)
- SERC Reliability Corporation (SERC)
- Southwest Power Pool, RE (SPP RE)
- Texas Reliability Entity (Texas RE)
- Western Electricity Coordinating Council (WECC)
The regional entities above provide virtually all electricity to North America. Each entity shares a common theme in that NERC delegates authority and responsibility to their region. We will discuss one of the regions, Western Electricity Coordinating Council below.
The Western Interconnection is an electricity grid on the western side of the Americas stretching from Canada, through United States, and to the northern parts of Mexico. NERC has delegated authority to the Western Electricity Coordinating Council (WECC) to create, monitor, and enforce reliability for the Western Interconnection; it is the largest regional entity under NERC.
WECC serves similar purposes as NERC. Its mission statement is to “promote and foster a reliable and efficient Bulk Electric System.” WECC is also a non-profit corporation.
WECC currently has 5 major program areas:
- Compliance and Monitoring and Enforcement Program – this program monitors and enforces compliance and is separated by smaller regions, as they need to be approved by different governing bodies in Canada, the USA, and Mexico.
- Reliability Planning and Performance Analysis – WECC performs a number of studies and assessments in the Western Interconnection for the bulk power system. These studies include identifying future requirements for the generation and transmission system, load research on the network, and addresses the possible concerns through long-term planning.
- Development of Standards – On a high level, WECC participates in the NERC Reliability Standards Development process. On its regional level, WECC develops and proposes WECC Regional Criteria for the Western Interconnection. In the development of its regional standards, WECC brings in subject-matter experts on the local grid.
- Training, Education and Operator Certification Program Area – WECC is involved in organizing lectures that provide information on WECC’s products, services, and processes. WECC also provides technical and industrial training to various industry roles.
Western Renewable Energy Generation Information System (WREGIS) – this is an independent system that operates in regions under WECC. WREGIS is used to keep track of renewable energy generation as part of the green energy initiative.
4.2.4 STATE REGULATION
State regulations in the electric industry are governed by entities known as state public service commissions, and each state commissioner is a member of the National Association of Regulatory Utility Commissioners (NARUC). NARUC is a non-profit organization that represents the common interests of state commissioners, such as providing safe, reliable utility services at reasonable rates. The existence of NARUC ensures that certain standards must be followed by members so that public utility regulations meet the requirements to serve consumers fairly and reasonably.
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