In 1997, an independent “blue ribbon” panel formed by NERC, and an Electric System Reliability Task Force established by the U.S. Department of Energy, both determined that in an increasingly competitive marketplace, reliability rules for the bulk electric system in North America had to be made mandatory and enforceable. These groups separately recommended that a single, independent self-regulatory electric reliability organization (ERO) be established to develop and enforce electric reliability rules throughout North America.

Both groups also concluded that federal legislation was needed in the United States to accomplish this.

To meet this need, NERC and a broad coalition of industry, state and consumer organizations, including the American Public Power Association (APPA), the Canadian Electricity Association (CEA), the Edison Electric Institute (EEI), the National Association of Regulatory Utility Commissioners (NARUC), the National Association of State Utility Consumer Advocates (NASUCA), the National Rural Electric Cooperative Association (NRECA), the Western Governors Association (WGA) and others have proposed the creation through legislation of an electric reliability organization, or ERO, to develop and enforce mandatory reliability rules, with oversight in the United States by the Federal Energy Regulatory Commission (FERC).

Has NERC's electric reliability legislative proposal been included in House and Senate energy bills?

Yes. NERC-supported reliability language was passed by the Senate and included in the electricity title of the energy bill under discussion in the House-Senate Conference Committee in 2002, but that bill did not make it out of conference. Similar language appeared in bills in 1999, 2000 and 2001.

Senator Craig Thomas of Wyoming introduced S. 475, the “Electric Transmission and Reliability Enhancement Act of 2003” this February. The bill includes reliability provisions that provide for the creation of an electric reliability organization, or ERO. The Thomas bill tracks the language that was agreed upon by House-Senate conferees at the end of last year, with the addition of provisions to address governance by regional advisory bodies to provide advice to the ERO.

Representative Joe Barton introduced the “Energy Policy Act of 2003,” comprehensive energy legislation that would amend the Federal Power Act to add a new Section 217, Electric Reliability. This includes the same version of the reliability language that was agreed upon by House-Senate conferees in 2002.

How does the NERC electric reliability proposal make reliability rules mandatory and enforceable?

NERC's electric reliability proposal provides for the establishment of an industry-led, self-regulatory electric reliability organization to develop and enforce compliance with the highly technical “rules of the road” needed to keep the interstate transmission system operating reliably as it accommodates the demands of competitive markets. The rules will be developed and enforced by people with the technical expertise to oversee the operation of the high-voltage interstate transmission grid and by those who use it. The resulting standards that the ERO develops would be industry rules, not government rules.

FERC would be responsible in the United States for approving the ERO, its governance and procedures, the standards it develops, and any compliance enforcement actions. FERC also would perform an appellate role where disputes cannot be resolved by the ERO itself.

Why must FERC be involved? Why can't the states oversee the ERO?

Enforcement is inherently a government function. Delegating the enforcement function to an ERO requires that there be government oversight. Legislation is needed to authorize the delegation of the enforcement function to an industry organization, and to designate an appropriate government entity in a backstop role. In the United States, FERC would play this backstop role because it already has jurisdiction and authority over many aspects of the electric industry and has an existing staff and organization focused on electricity regulation. Because the transmission grid is an interconnected system, events in one state can have dramatic effects on another part of the grid in another state. Thus, no single state is in a position to provide this oversight function.

Does FERC really need additional authority to deal with reliability?

Yes. At this time, FERC has neither the technical expertise nor clear statutory authority to enforce compliance with mandatory reliability rules. Moreover, the limited authority FERC does have regarding reliability applies to only two-thirds of the transmission facilities in the United States. Electric cooperatives, municipal utilities, the federal power marketing administrations, the Tennessee Valley Authority and ERCOT utilities are outside FERC's jurisdiction.

Doesn't the reliability proposal weaken FERC authority?

No. The principle underlying the reliability provisions is that an industry-led ERO will do a better job of developing reliability rules for North America than FERC. FERC lacks the technical expertise to do this and also lacks jurisdiction over entities in Canada and Mexico. Under the proposal, FERC will still have direct oversight authority over the ERO in the United States: over its proposed standards; its governance, rules and procedures; and its budget.

What role would the states have?

The reliability rules will apply to all bulk-power system facilities, without regard to their ownership or use for bundled or unbundled service, on a retail or wholesale basis. States will continue to be responsible for siting and certificate of need determinations for new facilities, reliability of service on local distribution systems, retail rates and service to individual end-users, safety and adequacy of transmission and generation facilities, and investigation of outages. The reliability proposal requires the ERO to consider the recommendations of the states and includes a “savings clause” that defines the roles and responsibilities of the states with respect to reliability as compared to the roles and responsibilities of the ERO. The proposal also includes a provision for groups of states to form regional advisory bodies to coordinate their input to the ERO and to other regional entities.

How does NERC's proposal affect Canada and Mexico?

The interconnected transmission system operates as a single machine without regard to international borders and it must operate under a single set of rules. Having an ERO that is international in character and scope is an effective way to achieve that necessary common set of rules. The NERC reliability proposal respects the international character of the North American electric grid by creating a truly international organization that will preclude each country from developing its own rules, avoiding the corresponding potential for inconsistent and conflicting reliability standards.

Bulk power system operators and users in the United States, Canada and Mexico would be expected to comply with reliability standards developed by the new ERO. Canadian entities already actively participate in NERC; as the Mexican grid is strengthened and becomes more interconnected with the United States, similar participation from Mexico is expected. Further, appropriate government entities in Canada and Mexico would need to recognize and “backstop” the ERO. In Canada, this will occur generally at the provincial government level, since the Canadian federal government has limited authority over electricity. Most provinces already have statutory authority in place to accommodate the NERC SRO model. NERC has held numerous discussions with Canadian industry and government representatives and there appear to be no major obstacles to making the ERO a reality in a Canadian context. However, FERC will need to work out the necessary oversight coordination arrangements with both Canada and Mexico.

How are RTOs and ITPs treated in the NERC proposal?

Regional Transmission Organizations (RTOs) and Independent Transmission Providers (ITPs) can help the industry deal with the challenges it faces, but there will still remain “seams” issues that will require a common set of mandatory and enforceable reliability rules for operating the interconnected electric grid. Under the reliability proposal, the ERO would set and enforce rules for the reliable operation of the bulk power system. The ERO would also report on the adequacy of generation capacity and transmission systems, and make recommendations for needed improvements. The RTOs envisioned under FERC Order 2000 and the ITPs proposed in FERC's Notice of Proposed Rulemaking on Standard Electricity Market Design are classified as system operators under the NERC proposal. As such, RTOs and ITPs will have to comply with mandatory reliability standards set by the ERO.

Does the reliability proposal interfere with RTOs or ITPs or prevent them from administering market mechanisms to preserve and foster reliability?

No. The reliability language provides for the creation of North America-wide reliability rules. Although it does not provide for RTOs to set their own reliability standards, the proposal gives them considerable flexibility in how to meet those standards.

Does the proposal ensure adequate transmission?

No. NERC's reliability proposal addresses the operating reliability of interconnected grids, and will require the ERO to assess and report on the adequacy of those grids to meet the needs of customers and markets. Proposals to provide incentives and other mechanisms to encourage and facilitate transmission development are not inconsistent or incompatible with the NERC proposal, but assuring an adequate grid is a broader public policy issue that is outside the scope of the proposed ERO.

Isn't the real problem the lack of generation?

As the industry becomes deregulated, the responsibility for electricity supply is largely being placed on the market. Adequate transmission facilities will be needed to move power from one part of the grid to another as needed. The supply shortages that have occurred in recent years did send signals to the market and significant merchant plant capacity is expected to be added over the next several years. However, whether generation supply is long or short, a reliable transmission grid is a critical element. Without the ability to set and enforce compliance with reliability rules, the stresses placed on the grid during times of supply surplus or shortage could lead to widespread grid failures, which will have far greater consequences for public health, safety, welfare and national security than temporary shortages of generating capacity.

Can incentive rates or performance incentives assure reliability of the interconnected grid?

Incentives can work in many places, but not for assuring the reliable operation of the bulk electric grid. The North American electric system operates as a single machine. What happens in one portion of the system affects all other portions. Thus, the consequences of actions by one operator or user of the interconnected grid affect everyone else.

Isn't NERC's reliability proposal obsolete?

No. Although the NERC reliability proposal was developed initially in 1999, it has been modified several times since then to address ongoing changes in the industry, including the addition of a state savings clause and provisions for regional state advisory bodies, and to simplify it without losing sight of the basic reason for creating an ERO.