2. Discussion of US Electricity Markets

EE5379 SPRING 2015

Vertically Integrated Electrical Utility Companies & US Electricity Market

Monopoly and Competitive Electricity Markets

POWER SYSTEM RELIABILITY, PLANNING AND

OPERATIONS IN COMPETITIVE ELECTRICITY MARKETS

Purpose

2

Look briefly at the development of the US Electricity

Markets

Competitive beginning

Transition to a fully regulated monopoly market structure

Transition to Competitive Electricity Wholesale Market

structure

FERC/NERC and Power System Security & Reliability

Promoting competition

Background - US Electricity Markets

3

Vertically Integrated Utilities Companies that provide all of the elements associated with providing electric service to end-use customers

generation of electricity,

transmission and distribution of electricity to customer delivery points and

end-use-customer services including establishing and terminating physical service, energy

accounting and billing

The early electricity market was competitive. The privately owned

electric companies (circa 1900) offered the same product (electricity)

to the market creating a marketplace that was inefficient and

redundant in the services in part because:

Separate companies provided separate services in the same municipal areas

street illumination, industrial power, residential lighting, and street car service

different equipment, voltages, and frequencies, made their systems incompatible

Frequently operated under non-exclusive franchise agreements

a right to operate granted by the municipal authority

often differed greatly from one municipality to another, for example franchise

territories might range from a single block to the entire city

A V Gopi KrishnaHighlight

Background - US Electricity Markets

4

These electric companies required high levels of capital investment to finance central

generating plants, Transmission and Distribution (T&D) systems

Fixed costs reflect the fixed amount of investment that must be paid regardless of output and includes equipment

purchase and construction costs

At the same time, the companies operating, or variable, costs were relatively low

Variable costs are those which vary with the level of electrical output and are represented by operations and

maintenance expenses including fuel expenses

Economic analysis shows that the more time an electric generation plant is in use

the higher the profit, and

the lower the average kilowatt-hour cost to the customer

The industry was heavily influenced by the inherent advantage of load diversity and

building to achieve economies of scale.

Load diversity serving multiple time-of-day loads streetcar, business and industrial and residential lighting loads

Increased efficiency via economies of scale one large, centrally-located power station could be operated more

cheaply than numerous isolated small generating units

The difficulty in establishing charges for electricity used by the end-use-customer was

solved by the development of the concepts of demand and energy billing

Demand is interpreted as representing a the customers "share" of the fixed cost required for usage

Actual energy or kilowatt-hours used

Background - US Electricity Markets

5

Because of these economic and operational issues, it was difficult to create the investor

confidence needed to attract adequate capital

Attributable, for example, to both the dubious franchise process, which made operation of the utility over the long

term an uncertain prospect, and the low returns investors received.

The idea bosomed that if the franchise granting process and the rates charged by utilities were overseen by a

nonpartisan public agency (instead of, for example, a politicized city council) financing might be easier and cheaper

to obtain.

Lead to the proposal that electric companies be regulated by a public agency which establish rates and set service

standards.

The idea became increasingly appealing to shareholder-owned companies catering to public enthusiasm for the

growth of municipal electric systems.

Privately-owned companies surmised that the public might be more supportive if their companies were

regulated so that customer interest would be protected.

By 1916, 33 States had regulatory agencies.

Proved beneficial to both the electric companies and

their customers, who got reliable, reasonably priced service without the uncertainties caused by

duplicate services and inefficient operations.

over time the concept has grown such that, today, utility regulatory agencies exist in all States and

at the Federal level.

Background - US Electricity Markets

6

Regulatory timeline at the US Federal Level

1930 The Federal Power Commission (FPC) is created to coordinate federal

hydropower development.

1935 The FPC is transformed into an independent Regulatory Agency and authorized

to regulate both hydropower and interstate electricity.

1968 The North American Electric Reliability Council is formed as a voluntary

industry organization charged with promoting the reliability and adequacy of the bulk

power systems in North America (part of the industries response to a blackout in the

Northeastern US).

1977 The FPC is reorganized by the US Congress and the Federal Energy Regulatory

Commission (FERC) is created and assigned expanded oversight responsibilities for oil,

gas and electricity, including the regulation of interstate electricity sales (part of the

US Response to the 1973 oil crises).

1978 FERC is given added responsibilities to foster and administer new cogeneration

and small power production facilities. FERC is also directed to reduce the scope of

federal price regulation to increase competition in the natural gas and electric

industries (beginnings of the formation of a competitive wholesale electricity market).

2005 FERC is given authority to require mandatory reliability standards on the bulk

transmission system, administered through a separate Electric Reliability Organization

(ERO), and to penalize entities that are found guilty of manipulating the electricity

and gas markets (response to the 2003 Blackout in the Eastern Interconnection).

2006 NERC reforms itself into the North American Electric Reliability Corporation

(still NERC) and is selected by the FERC to be the ERO for the US.

Background - NERC

7

The North American Electric Reliability Corporation (NERC) is a not-for-profit

international regulatory authority whose mission is to assure the reliability of

the bulk power system in North America.

NERCs area of responsibility spans the continental United States, Canada, and the

northern portion of Baja California, Mexico.

NERC is the Electric Reliability Organization for North America, subject to

oversight by the Federal Energy Regulatory Commission and governmental

authorities in Canada. NERCs jurisdiction includes users, owners, and

operators of the bulk power system.

NERC

develops and enforces Reliability Standards;

annually assesses seasonal and longterm reliability;

monitors the bulk power system through system awareness; and

educates, trains, and certifies industry personnel.

Pertinent to our study are

NERC Standard TPL-001-4 Transmission System Planning Performance Requirements

NERC Guidelines Reliability Assessment Guidebook

NERC Guidelines are not enforceable

Essential Facilities in the Power Grid

8

Typically FERC Regulated

In ERCOT: PUCT Regulated

Facilities may be owned by a

public or private transmission

utility

Typically Regulated by State

Commissions or Self-

Regulated utilities

Facilities owned by public

distribution utilities

Facilities may be owned

by a public or private

utility

The Regulated Monopoly Model

9

Electric utilities are granted the right to operate as a monopoly provider subject to

oversight by Regulatory Commissions by legislative action

In exchange for the right to service as a monopoly electric service provider, the utility is required to have, among its

other activities, its service territory, rates and rate structure (more on this later) and standards of service reviewed

and approved by the jurisdictional regulatory authority before their implementation.

Regulatory authorities exist at the local level (i.e. city and municipality), State and Federal

levels subject to a regulatory hierarchy that arose over time

the FERC which has authority over activities in interstate commerce

individual State Commissions, such as the Public Utility Commission of Texas, that subsumed much of the authority

of local authorities, and

cities and municipalities which maintain their franchise authority over the use of public right of ways and in some

cases over electricity rates for city owned utilities .

The simple interconnection of an electric utility to a transmission network that is part of

an interstate transmission network (such as the Eastern and Western Interconnects) is

sufficient to deem the Utility to be engaged in interstate commerce and subject to the

oversight by the FERC for purposes of generation and transmission.

As the electric utility systems grew to cover larger geographic areas, they began to interconnect

with one another to provide mutual support in meeting reliability and security requirements.

These interconnections gave rise to structures like power pools to manage the energy exchanges

and assure equitable payments between the pool participants. These power pools and

interconnections ultimately grew into todays electrical interconnects (the Eastern, Western and

ERCOT Interconnections)

10

US Federal & State Division of Regulatory Authority

Federal Energy Regulatory

Commission

FERC

State/Local Municipality

Regulatory Agencies

Electric Wholesale

Generator

(EWG)

Transmission

Owner/Operator

(ISO/RTO)

Vertically Integrated

Utility

FERC approves sale at Market Based Rates

(EWG is not required to undergo a Rate Case

or Rate Setting Proceeding)

Entity must file a pro forma Open Access Tariff

Approves Transmission Rates based on Rate Proceeding

Approves Services Rates (e.g. Balancing, Administrative Fees

Generally includes facilities that operate above 100 KV extending from the low side

of the GSU to the high side of the

distribution transformer

Entity that owns assets that supply Generation, transmission , distribution and

retail service s

Is the monopoly provider of these services in a defined service territory

FERC approves generation and transmission rates

Transmission services must meet the open access requirements specified in the FERC

pro forma Open Access Tariff.

Distribution

Owner/Operator

Wire Service only Wires Service/

Retail Sales

Vertically Integrated

Utility

Service Territory approved by the regulatory authority

Approves Distribution Rates based on Rate Proceeding

Approves Services Rates (e.g. distribution line extension, Administrative Fees , Retail

Sales)

Transmission

Owner/Operator Service Territory approved by the State/Local

municipal regulatory authority

Retail Electric

Providers

(ERCOT REP)

Approves REP License, Retail Sale at Market Based Rates Billing Rules Customer transfers in REP financial default

Subject to Regulatory Authority as a -

Transmission Owner/Operator, and Distribution Owner/Operator with Retail

Sales

National Electric Reliability Corporation

NERC

Binding Reliability Standards

EWG/IPP Transmission Operators, ISO, RTO Vertically Integrated Utilities

The Competitive Electricity Market

Model

11

Drivers to a Competitive Market Structure

Technology Simple Cycle and Combined Cycle Technology

Modular Construction techniques

Lower Initial Cost Reduced Barrier to Market Entry

Efficiency Improvements in generating and transmission

equipment

Electricity as a Commodity Concept

Wholesale Market Operator & Transmission System Operator

Genco/

Power Marketer

Genco/

Power Marketer

Genco/

Power Marketer

Genco/

Power Marketer

Genco/

Power Marketer

Typical Competitive Market Structures

12

Wholesale Market Operator & Transmission System Operator

Genco/

Power Marketer

Genco/

Power Marketer

Genco/

Power Marketer

Genco/

Power Marketer

Genco/

Power Marketer

REP

Customer

REP

Customer

REP

Customer

REP

Customer

Wholesale & Retail Competition

Typical Competitive Market Structures

13

Genco and Power Marketers

14

Generation Company (Genco) and Independent Power Producer (IPP) are generic terms often used to refer to Electric Wholesale Generators (EWG) EWG is the term used in the law for utility companies that only generate electricity

EWG companies are required to register as such with the FERC if they are connected to the Eastern or Western Interconnections (i.e. they are subject to FERC jurisdiction).

An EWG company is required to file Market Based Rate Tariffs with the FERC. These tariffs declare their intent to enter into contracts to sell electricity and ancillary services to purchasers at prices determined by the market.

Additionally, among other provisions, the tariffs require the companies to affirm that they will conduct their business in accord with the applicable federal laws and regulations governing electric energy sales (i.e. they will not engage in nefarious conduct prohibited by law or regulation).

EWGs are generally organized as Limited Liability Corporations (LLC) or Partnerships (LLP).

Power Marketers engage in wholesale electric power purchases for resell. Legally, such entitles are recognized as brokers who do not take title to the electricity but rather match sellers and buyers. As such these entities are not subject to regulatory oversight by electric utility regulators; although, they are subject to oversight by financial regulators such as the Federal Trade Commission or the Commodities and Futures Trade Commission.

Genco and Power Marketers

15

Vertically Integrated Utility Companies may organize themselves for the purpose of selling electricity either purchased for resale at wholesale or generated from company owned physical generation facilities. Typically, a separate Genco is created with the right to sell the output from the

Vertically Integrated Utilitys rate base generation assets. This Genco is restricted from making electricity sale to the Utility Company.

The Vertically Integrated Utility Company has first call on the use of its rate base generation and may only release excess generation for sale by the affiliated Genco. Consequently, the Gencos sales are frequently made as interruptible sales. If the Genco sales are for firm power, the Genco assumes the financial responsibility to provide power to the buyer if the Utility Company recalls its generation.

Revenues from the affiliated Gencos sale of rate base capacity for energy or ancillary services flow to the Utility Company and is treated as an offset to the utilitys revenue requirement for rate setting purposes. In other words the beneficiary of the sales are the public utilitys rate payers whose charges include the fixed and variable costs for the production facilities used to provide the off-system energy and services sale.

The Market Operator

16

A V Gopi KrishnaHighlight

US Electrical Interconnections and

the NERC Reliability Regions

17

18

ECAR - East Central Area Reliability Coordination Agreement

ERCOT - Electric Reliability Council of Texas

FRCC - Florida Reliability Coordinating Council

MAAC - Mid-Atlantic Area Council

MAIN - Mid-America Interconnected Network

MAPP - Mid-Continent Area Power Pool

The Main Interconnections of the U.S. Electric Power Grid and the 10 North

American Electric Reliability Regions

NPCC - Northeast Power Coordinating Council

SERC - Southeastern Electric Reliability Council

SPP - Southwest Power Pool

WSCC - Western Systems Coordinating Council

Note: The Alaska Systems Coordinating Council (ASCC) is

an affiliate NERC member.

Source: North American Electric Reliability Council.

19

Regional Entities

Florida Reliability

Coordinating Council

(FRCC)

Midwest Reliability

Organization (MRO)

Northeast Power

Coordinating Council

(NPCC)

Reliability First

Corporation (RFC)

Regional Entities

SERC Reliability

Corporation (SERC)

Southwest Power

Pool, RE (SPP)

Texas Reliability Entity

(TRE)

Western Electricity

Coordinating Council

(WECC)

20

ERCOT

21

The portion of the electric grid in the State of Texas that is subject to control by the

Electric Reliability Council of Texas (ERCOT) is an exception in that the FERC has

agreed to defer regulation of generation and transmission on the ERCOT grid to the

Public Utility Commission of Texas.

The logic in this decision stems from the fact that the ERCOT grid is wholly located within the

Texas State boundary and has only limited electrical interconnection capability with the Eastern

and Western Interconnections.

These interconnections consist of approximately 1500 MW of total interconnection capability

on seven or so Direct Current (DC) ties.

Interestingly, in the late 90s, at the direction of the State Legislature, ERCOT

conducted studies related to the synchronous interconnection of the ERCOT grid

with the Eastern Interconnection. While such a project is feasible it faces economic

(due to sizing requirements to achieve a stable interconnection) and regulatory

challenges.

The regulatory challenge relates largely to the extension of the jurisdictional authority of the

FERC to utilities wholly operating in the ERCOT region and whether FERC would continue to

defer to the PUCT.

22

The Texas State Jurisdictional Authorities

The PUCT is jurisdictional for Distribution and end use retail customers across

the entire State, subject to the caveat that, by law, retail open access does not

apply in these areas. Most of the Non-ERCOT areas are served by Electric Co-

operatives or Municipalities that set their own retail rates and regulations.

Those parts of

North and East

Texas not in the

ERCOT region

are part of SPP

(and part of the

Eastern

Interconnect).

They are subject

to FERC

Jurisdiction for

Generation and

Transmission.

The far western

portion of the

State not in

ERCOT is part of

EL Paso Electric

Company (and

part of the

Western

Interconnect).

They are subject

to FERC

Jurisdiction for

Generation and

Transmission.

Todays US Electricity Markets

23

Todays US electricity markets include a mix of both the traditional vertically

integrated utilities and utilities operating as competitive electric suppliers.

The vertically integrated utilities operate as monopoly providers subject to local,

State and Federal regulatory oversight

The competitive electric suppliers exhibit varying degrees of reduced regulation

compared to the traditional regulated monopoly structure and these markets are

often generically referred to as deregulated markets.

The differences between markets is reflected in the sharing of operation and control

responsibilities between the various market participants and the degree of command

and control actions that are or can be exercised by the entity responsible for the

electric network system operations and security

The North American Electric Reliability Corporation (NERC) Control Area

Operator (CAO), or

the Independent System Operator (ISO), or

the Regional Transmission Operator (RTO).

The Transmission System Operator

24

The Transmission System Operator

25

Transmission of electricity from various resources occurs over high-

voltage transmission networks, linked into three transmission

synchronous interconnections in the continental United States.

the Eastern Interconnection, covering east of the Rockies, excluding most of Texas, but

including adjacent Canadian provinces;

the Western Interconnection, from the Rockies to the Pacific Coast, again including adjacent

Canadian provinces;

the Electric Reliability Council of Texas (ERCOT), covering most of Texas.

Because 47 states (excluding ERCOT, Hawaii, and Alaska) have interconnected transmission

networks, FERC sets the rates and service standards for most bulk power transmission.

recently, FERC has been granted federal authority over the siting of transmission facilities in

certain areas designated under federal law as having insufficient facilities to provide reliable

service

The Transmission System Operator

26

Within the NERC regions, the entities that actually manage minute-to-

minute coordination of electricity supply with demand include:

Regional Transmission Organizations (RTOs),

Independent System Operators (ISOs), and

individual utility Control Areas.

Regional Transmission Organizations (RTO) and Independent System

Operators (ISO) are similar.

Both are voluntary organizations established to meet FERC requirements.

ISO/RTOs plan, operate, dispatch, and provide open-access transmission

service under a single tariff.

The ISO/RTO also provides balancing services for the transmission system.

To accomplish their mission, ISO/RTOs must have functional control of the

transmission system.

These entities typically do not own the transmission facilities they manage.

The Transmission System Operator

27

In 1996, FERC introduced the concept of an ISO as an extension of its

previous orders requiring open access to transmission facilities.

The concept of an ISO is to bring independently owned transmission networks

under the control of an umbrella organization.

FERC articulated 11 criteria that ISOs would need to meet in order to receive

FERC approval.

Four years later, FERC had approved (or conditionally approved) five

ISOs, but it had also concluded that further refinements were needed

to address lingering concerns about competitive neutrality and

reliability.

The Transmission System Operator

28

FERC subsequently issued Order 2000 introducing the RTO concept and establishing

non-mandatory standards for RTOs.

FERC did not mandate an obligation to form RTOs; instead, it simply laid out the 12

elements that an organization would have to satisfy to become an RTO.

Many of features mirrored the earlier ISO requirements.

As of October 2010, seven non-profit organizations had been approved as either an ISO or

an RTO.

Essentially, the difference is in name only and the ISO/RTO organizations provide the same

services.

Transmission networks within each NERC reliability planning area that are not

members of an ISO/RTO are managed by individual utilities, mostly large investor-

owned utilities, and some by the federal power marketing agencies.

These entities function as control areas or balancing authorities.

For example, In the Western interconnection, there is no region-wide RTO or ISO (only

California has an ISO), and the individual control-area operators must coordinate with each

other to ensure region-wide reliability of service.

29

California ISO (CISO)

ERCOT ISO

Midwest ISO/RTO (MISO)

New England ISO (NEISO)

New York ISO (NYISO)

Pennsylvania, New Jersey & Maryland (PJM) Interconnection

Southwest Power Pool RTO (SPP RTO)

ISO versus RTO

30

In summary, an ISO operates a region's electricity grid, administers the region's wholesale electricity markets, and provides reliability planning for the region's bulk electricity system.

Today's RTO's do the same thing with an added component of greater responsibility for the transmission network as established by the FERC.

The filing party selects the designation (ISO/RTO) under which it desires to operate. The ISO designation predates the FERCs origination of the RTO concept; however, in either designation the intent is to enforce open access to the

transmission grid by all applicants.

ISO/RTO as Market Operators

31

The FERCs orders concerning ISOs and RTOs focus on 2 areas

Assuring open access to the transmission network, and

Centralized Operation of a transmission network with multiple owners

The ability to operate the transmission network in real time requires the ISO/RTO to have functional control of the transmission network and to operate a real time balancing market.

This lead naturally to the assumption of the Market Operator role by the ISO/RTO organizations

Existing power pools

The Transmission System Owner

32

Most transmission facilities in the U.S. are owned by individual Vertically Integrated utilities,

including the federal power-marketing agencies.

Some are jointly owned by multi-utility groups.

Some transmission lines are owned by independent entities, other than utilities, and receive payment

from all users of the lines.

Interconnection and transmission system expansion generally are the

responsibility of the Transmission facility owners; however, these owners may

assign such responsibility to other entitles such as an ISO or RTO, subject to FERC

approval, while retaining physical ownership of the facilities.

Changes to Federal and State law in the last 5 to 10 years now allow Independent Transmission

Owners (ITO) to build and operate transmission facilities without regard to service territory

footprints.

Right-of-way condemnation proceedings still remain subject to State and Federal Regulatory authorities

and practically, this requires joint participation in transmission projects by both the public utility and the

ITO when the right-of-way crosses public territories.

Notwithstanding this limitation, the ITO may be fully responsible for the financial cost of the facilities and

must file for a tariff rate at the FERC to recover such costs upon the commercial operation of the

facilities.

The Transmission System Owner

33

A mixture of local, state, and federal government agencies holds jurisdiction over who can

build public transmission facilities, where they can build it, when they can build it and who

pays for it.

In those States and areas that have competitive wholesale electric markets, transmission

service may be provided by independent Transmission Service Companies referred to as a

Transcos.

Transco remain monopoly providers and, as such, are subject to traditional cost of service regulation.

In general, a Transco is prohibited from owning generation facilities; however, Transcos may be part a

corporate entity that owns an affiliated Genco.

By Law, the Transco must operate independent of the affiliated Genco.

In areas characterized for example as power pools with a mix of Vertically Integrated Utilities and

competitive Gencos, the transmission system may remain owned by the Vertically Integrated Utility

but must comply with open access requirements.

In all cases, the Transmission System Owner is required by federal law to provide open access

to all entities seeking to interconnect with its system and to operated the system in an

independent manner from all interconnected generation and consuming entities.

Distribution Companies and Retail

Electric Service

35

Distribution & Customer Service

Regulation in Deregulated Markets

36

In Retail electricity competitive areas:

In some competitive areas the DSP are limited to only providing

delivery and interconnection services, including services to

support retail activities. In these areas, separate entities, often

referred to as Retail Electric Providers (REP), are responsible

for the sale of electricity at retail.

Typically, the DSP is restricted from owning a REP. Usually, the

DSP continues to be responsible for providing metering, for

reading these meters and for furnishing meter reading to the

REP serving customers in its service territory.

This is the retail competitive model used n ERCOT.

The ERCOT Market

37

ERCOT is divided into Competitive Areas (Zones) These Areas are subject to provisions of the governing State law referred to as

the Public Utility Regulatory Act (PURA) which, among other things, allow municipalities, electric cooperatives , and certain river to opt in to competition.

Within the areas designated as Competitive by PURA, all vertically integrated publish utilities were required to separate their operations into 3 distinct non-overlapping areas: Generation, Transmission and Distribution, Retail Electric end-use-customer service. Of these three areas only Transmission and Distribution(referred to as wires services) remained regulated. The remaining services are deregulated to varying degree (meaning that the PUCT retains certain authorities over these entities).

Non-of the individual entities, Generation, T & D, or Retail Electric Providers (REP) are allowed to own or control facilities inherent to the other two.

In order to conduct non-FERC jurisdictional transactions in the ERCOT region, the Generation, T&D, and REP companies are required by Texas State law to register with the PUCT.