2


The Electric Power System Today

The electric power delivery system in North America encompasses a wide diversity of institutions, technologies, organizational structures, economic mechanisms, and regulatory oversight. Some parts of the system are provided by federal, state, or municipal governments; others are customer-owned cooperatives. Much of the power supply is from privately owned, regulated utilities. Functionally, many of those traditional utilities were vertically integrated, i.e., providing generation, transmission, and end-use sales to customers over their own distribution system—although some federal agencies, like the Tennessee Valley Authority and the Bonneville Power Administration, provide only generation and transmission services, and many rural cooperatives provide only distribution and transmission services. In areas with deregulated, market-based supplies, different entities may furnish each of the three services through marketing agents who negotiate between generators and customers for their energy purchases, and in other jurisdictions, the generators are separated from combined transmission and distribution utilities. Regulatory oversight responsibility also varies by utility and location and is divided between federal and state agencies, with franchises for placing lines along public roads being granted by local municipalities.

Many generators are now independent producers without normal rate-of-return regulation, but they are still subject to federal antitrust laws and, in many instances, the market-monitoring oversight of the Federal Energy Regulatory Commission (FERC) and the independent system operator/ regional transmission operator (ISO/RTO) that coordinates their wholesale market. These ISO/RTOs, many of which have been authorized by FERC, conduct the wholesale markets and clear transactions (that in some instances are also subject to Federal Commodities Exchange Commission oversight). They also have responsibility for operating the bulk power system reliably, dispatching power that results in flows over transmission lines that are owned by other public or private regulated entities. Six ISO/RTOs in North America are subject to FERC oversight of their wholesale markets, and 8 of 10 come under FERC's reliability oversight, with the remaining 2 being subject to Canadian regulation.

Technological differences are also widespread. Different voltages are used by different companies for their distribution and transmission systems. Also, two conceptually different physical configurations are used among utilities for their three-phase electrical systems governing how faults are grounded, the number of wires strung on poles, and therefore their relaying, control, and maintenance procedures. These different voltage standards and electrical configurations among suppliers require different equipment, which has implications for manufacturing costs and the size of inventories for spare components that are usually available. Furthermore, many systems use a radial spatial configuration of lines, whereas others, primarily in densely populated urban areas, have a network configuration with parallel interconnected paths. Each of these different system designs implies different operating and emergency response procedures.

Early electricity supply systems in the late 19th century were private, unregulated entities that competed for customers at their borders. The rapid technological advances in generation (economies of scale) and in transmission (higher voltages) quickly led to the aggregation of small companies into larger entities that had effective monopoly power over wide regions. Economic regulation or (in places) government acquisition of assets and public provision of services were natural responses.

In most of the country, adjacent suppliers interconnected their facilities with neighboring supplier facilities to provide redundancy of supply at lower cost, and to engage in occasional transfers of power if one utility had spare generating plants that had lower costs than its neighbor. Many of these exchanges were bilateral arrangements, but in some instances multilateral arrangements were formalized into power pools (e.g., the New England Power Pool). In all instances cohesive electrical zones were identified where the lines of responsibility for reliability were clearly established. In most urban centers, electric utilities were investor-owned,



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2 The Electric Power System Today The electric power delivery system in North America and 8 of 10 come under FERC's reliability oversight, with encompasses a wide diversity of institutions, technolo- the remaining 2 being subject to Canadian regulation. gies, organizational structures, economic mechanisms, and Technological differences are also widespread. Different regulatory oversight. Some parts of the system are provided voltages are used by different companies for their distribu- by federal, state, or municipal governments; others are tion and transmission systems. Also, two conceptually dif- customer-owned cooperatives. Much of the power supply is ferent physical configurations are used among utilities for from privately owned, regulated utilities. Functionally, many their three-phase electrical systems governing how faults are of those traditional utilities were vertically integrated, i.e., grounded, the number of wires strung on poles, and therefore providing generation, transmission, and end-use sales to cus- their relaying, control, and maintenance procedures. These tomers over their own distribution system--although some different voltage standards and electrical configurations federal agencies, like the Tennessee Valley Authority and among suppliers require different equipment, which has the Bonneville Power Administration, provide only genera- implications for manufacturing costs and the size of inven- tion and transmission services, and many rural cooperatives tories for spare components that are usually available. Fur- provide only distribution and transmission services. In areas thermore, many systems use a radial spatial configuration of with deregulated, market-based supplies, different entities lines, whereas others, primarily in densely populated urban may furnish each of the three services through marketing areas, have a network configuration with parallel intercon- agents who negotiate between generators and customers nected paths. Each of these different system designs implies for their energy purchases, and in other jurisdictions, the different operating and emergency response procedures. generators are separated from combined transmission and Early electricity supply systems in the late 19th century distribution utilities. Regulatory oversight responsibility also were private, unregulated entities that competed for custom- varies by utility and location and is divided between federal ers at their borders. The rapid technological advances in and state agencies, with franchises for placing lines along generation (economies of scale) and in transmission (higher public roads being granted by local municipalities. voltages) quickly led to the aggregation of small companies Many generators are now independent producers without into larger entities that had effective monopoly power over normal rate-of-return regulation, but they are still subject to wide regions. Economic regulation or (in places) government federal antitrust laws and, in many instances, the market- acquisition of assets and public provision of services were monitoring oversight of the Federal Energy Regulatory natural responses. Commission (FERC) and the independent system operator/ In most of the country, adjacent suppliers interconnected regional transmission operator (ISO/RTO) that coordinates their facilities with neighboring supplier facilities to provide their wholesale market. These ISO/RTOs, many of which redundancy of supply at lower cost, and to engage in occa- have been authorized by FERC, conduct the wholesale sional transfers of power if one utility had spare generating markets and clear transactions (that in some instances are plants that had lower costs than its neighbor. Many of these also subject to Federal Commodities Exchange Commission exchanges were bilateral arrangements, but in some instances oversight). They also have responsibility for operating the multilateral arrangements were formalized into power bulk power system reliably, dispatching power that results in pools (e.g., the New England Power Pool). In all instances flows over transmission lines that are owned by other public cohesive electrical zones were identified where the lines or private regulated entities. Six ISO/RTOs in North America of responsibility for reliability were clearly established. In are subject to FERC oversight of their wholesale markets, most urban centers, electric utilities were investor-owned, 20

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THE ELECTRIC POWER SYSTEM TODAY 21 for-profit corporations that were given legal rights to be the for distribution to consumers. U.S. transmission voltages are exclusive provider of electricity in a specified geographic typically 115, 230, 345, or 500 kV. Voltages of 765 kV and area. In exchange for these franchise rights, the utility higher are considered extra-high voltage (EHV). In most typically agreed to (1) pay franchise taxes based on assets in regions of the United States, 230-500 kV systems are the place within the area and (2) serve all customers reliably at backbone of the U.S. electricity grid, although in some areas, a reasonable cost. In most jurisdictions these franchises are lines with voltages up to 765 kV are employed. exclusive, thereby granting a monopoly status to the supplier, Prior to the 1960s, the loosely connected, cohesive electri- but in some states it is possible to grant multiple franchises cal zones offered modest reliability at a reasonable cost to to serve the same location. the nation's consumers. But following a massive blackout After World War II, the process of interconnection and in the Northeast in 1965, an increasing concern evolved integration continued--leading to extensive integrated sys- among policy makers and industry executives alike about tems and large regional interconnections between electrical the power system's reliability. In response, the electric utility zones. The combination of economies of scale in genera- industry voluntarily formed regional reliability organizations tion, achieved by building larger units that were frequently to coordinate activities related to the transmission system's grouped in larger power stations, with scale economies in performance, most notably the North American Electric transmission, gained through the use of higher transmission Reliability Council (NERC). Reliability is now administered voltages, that facilitated this integration and allowed the by over 100 control area operators in North America and delivery of large amounts of power over great distances at coordinated by regional reliability organizations (RROs) low cost. These cost reductions spurred demand and pro- as members of NERC, which has established operating and vided a ready market for the increased supply capacity, thus planning standards based on seven concepts: setting the stage for the next wave of cost-reducing innova- tion. Thus it frequently proved economical to locate large Keep generation and demand in balance continuously. generating plants close to fuel sources, rather than transport Balance reactive power supply (necessary to maintain fuel to generators located near customers. This trend was system voltage) and demand. facilitated also by the lower land costs and easier approvals Monitor flows over grid circuits. to locate power plants in rural areas. But it was the large Maintain system stability. interconnected systems that made possible these economies Operate the system so it is able to sustain stability of scale in providing both energy and reliability. Thus, over even if one component fails. time very large power markets and huge interconnected Plan, design, and maintain the system to operate regions have developed in the United States and elsewhere reliably. in North America. Prepare for emergencies. Controlling the dynamic behavior of interconnected elec- THE POWER DELIVERY SYSTEM tricity systems presents a great engineering and operational challenge. Demand for electricity is constantly changing as Overview Description millions of consumers turn on and off appliances and indus- The power delivery system includes four components: trial equipment. The generation and demand for electricity (1) the grid, or high-voltage transmission system that con- must be balanced over large regions to ensure that voltage nects the bulk power generation system with the distribution and frequency are maintained within narrow limits (usually systems; (2) the distribution system, which delivers power to 59.98 to 60.02 Hz). If not enough generation is available, consumers (or electrical "loads"); (3) the operations system, the frequency will decrease to a value less than 60 Hz; when which handles interconnections; and (4) the customers or there is too much generation, the frequency will increase to consumers. (Some large industrial consumers are connected above 60 Hz. If voltage or frequency strays too far from its directly to the grid.) In North America, the system contains prescribed level, the resulting stresses can damage power more than 200,000 miles of lines operating above 230 kV systems and users' equipment, and may cause larger system serving over 120 million customers and nearly 300 million outages. people. A variety of techniques and processes are used to keep the Electricity is generated at 13 to 25 kV from a variety of system safe--such as sensors, circuit breakers, and relays-- energy sources. Most U.S. electricity is generated from coal, to ensure that component failures and electrical faults are nuclear energy, natural gas, and hydro power; but recently quickly isolated. If protection systems are poorly designed wind generation has been growing rapidly. or do not operate properly, faults or equipment failures can Alternating current (AC) circuits predominate in the U.S. cause outages and may cascade or propagate into blackouts. power delivery system. AC circuits allow the use of trans- Once an overloaded circuit or transformer in the system formers to step up voltage to a higher level for economical either fails or is intentionally removed from service, the transmission with small losses and to step the voltage down power flows through other available circuits in proportion to

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22 TERRORISM AND THE ELECTRIC POWER DELIVERY SYSTEM the paths of least resistance. These alternative circuits may tions with the underlying regional reliability councils respon- in turn become overloaded and either fail or be taken out sible for operational coordination in the sub-areas within the of service by the protection system. This repeated, possibly interconnections. Generation and loads are constantly being uncontrolled, cycle of overload and equipment removal/fail- balanced within each interconnection. ure is a dynamic, frequently oscillating phenomenon that can The advent of competition in the wholesale electricity lead to a cascading outage. A local failure can escalate into market in North America has increased the operational a cascading failure in a matter of a few minutes, potentially complexity of the power delivery system. Power generators leading to a wide-area blackout. in one area are able to sell power in another area so long as Operationally, the electric system of the United States and adequate transmission interconnections are available. Initia- Canada is divided into four sections, known as "interconnec- tives by the U.S. Congress and FERC to unleash a competi- tions," linked mainly by direct current (DC) transmission, tive wholesale electricity market have led to an enormous with transmission within each section using largely AC increase in the number of power transactions that are carried transmission. The DC ties between interconnection areas over the electric power transmission system. allow each interconnection to operate assets independently of The existing power system, however, was designed to the other sections. Within each interconnection, electricity is handle the needs of individual integrated utilities, with produced the instant it is used and flows over the path of least transfers between utilities mainly to improve the reliabil- resistance (using virtually all transmission lines within each ity of supply. It was not originally designed for handling interconnection) from generators to loads (i.e., customers). common-carriage interconnections, which require different Figure 2.1 shows the four basic North American interconnec- controls and regulation. Merchant generators want to sell their electricity to buyers who are willing to pay the highest price. These generally are in high-priced regions, which may be distant from the generation facility. Control areas for the power system, which previously may have had a few dozen transactions between buyers and sellers before the advent of wholesale markets, now attempt to settle hundreds, if not thousands, of transactions per day. This has led to a system already under stress, even in the absence of any homeland security concerns. An additional challenge to the power delivery systems is the evolving nature of electricity demand due to digital tech- nology. Billions of microprocessors have been incorporated into industrial sensors, home appliances, and other devices. These digital devices are highly sensitive to even the slight- est disruption (an outage of a small fraction of a single cycle can disrupt performance), as well as to variations in power quality due to transients, harmonics, and voltage surges and sags. Today about 10 percent of total electrical demand in NOTE: the United States feeds or is controlled by microprocessors. ERCOT: Electric Reliability Council of Texas (RRO) By 2020 this level is expected to reach 30 percent or more FRCC: Florida Reliability Coordinating Council (RRO) (EPRI, 2003). FIGURE MRO: Midwest Reliability 2.1 (RRO) Organization The electric power system was designed to serve analog NERC: North American Electric Reliability Council electric loads--those without microprocessors--and is NPCC: Northwest Power Coordinating Council (RRO) largely unable to consistently provide the level of digital RFC: Reliability First Corporation quality power required by digital manufacturing assembly RRO: Regional Reliability Organization (regional member of lines and information systems, and, soon, even our home NERC) appliances. Achieving higher power quality places an addi- SERC: Southeastern Electric Reliability Council (RRO) tional burden on the power system even before homeland SPP: Southwest Power Pool Inc. (RRO) security issues are considered. WECC: Western Electricity Coordinating Council (RRO) A more positive aspect regarding the development of FIGURE 2.1 The NERC regions, along with the interconnection power markets and microprocessor technology derives areas. (Note that the Quebec Interconnection within Canada and from the advent of publishing widely varying prices when the Eastern U.S. Interconnection are shown here as the Eastern market or associated system capability conditions change. Interconnection.) SOURCE: NERC Interconnections, available at This provides some natural damping in the system as more http://www.nerc.com/regional/NERC_Interconnections_color.jpg, and more customers are provided with electronic sensors accessed June, 11, 2007. and real-time pricing. This natural modulation of extreme

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THE ELECTRIC POWER SYSTEM TODAY 23 operating conditions may ease some operating issues as a Such differences in system configuration, generation result of well-designed markets that vary the prices that retail and fuel mix, ownership, and so forth create complexities customers pay in real time. in the operation of the system, even though all parts of the country's electric grid operate according to industry norms and standards. Regional Differences Among Electric Power Systems in the United States Operations and Standards Notwithstanding the many technical similarities, many differences also exist in the electric system within and across In the United States, a variety of entities exercise some sub-regions. The differences stem from numerous factors, form or other of operational control or coordination over including asset ownership, operational control, indigenous parts of the grid. For example, in most regions, owners of natural resources, market development, topography, weather transmission facilities operate them according to standards conditions affecting energy production and use, regulatory set by NERC with the input of companies participating in practices and traditions, business differences (e.g., business regional reliability councils. In other regions, particularly configuration), and so forth. where market mechanisms determine wholesale power trans- For example, energy use peaks at different times of the day fers, entities such as ISOs or RTOs carry out some operating in different regions. Some regions have generation capacity functions on behalf of the transmission asset owners and surpluses, whereas others are generation constrained. Some other users of the system. regions have adequate transmission capacity to allow for eco- Real-time monitoring of the transmission system is per- nomic and reliable transfer of energy to other regions; others formed using telemetry along with other data and analytic are transmission constrained, preventing otherwise economic tools, such as state estimators, to evaluate system conditions generation to serve customer demand. Because of social and on a continuing basis. Conditions monitored include power political factors and environmental, health, and public safety flows, various physical limits on transmission and other concerns (not to mention perceived adverse impacts on prop- facilities, interchange with adjacent regions, and demand erty values), some regions have great difficulty adding new drivers such as weather. transmission capacity on new or even existing rights-of-way; The enforcement of NERC standards is still evolving. others are able to build new transmission readily. Until the passage of the Energy Policy Act of 2005, the Likewise, regions with plentiful coal have a history of electric industry's standards were entirely voluntary. 1 In reliance on coal-fired generation, whereas other regions burn the absence of federal legislation mandating compliance less coal because it must be transported great distances, or with NERC rules, programs were developed to encourage because air pollution problems have inhibited significant compliance with NERC reliability standards. These were coal use, or because there is adverse public reaction to the "enforced" by peer pressure, regulatory pressures, "enforce- use of coal because of global climate change concerns. In ment contracts," regional enforcement programs of the reli- a number of instances, different states have enacted more ability councils, and industry norms for best practices, but stringent environmental regulations than has the U.S. govern- no penalties were imposed for noncompliance with NERC ment, most notably in the area of carbon emissions, but these standards. The Energy Policy Act of 2005 led to these stan- regional differences in environmental standards can also lead dards becoming mandatory with substantial financial penal- to greater problems for systems operators in meeting their ties imposed for non-compliance. reliability objectives. Public concerns about conventional energy sources have lead to some states and communities Electric Power Industry Institutions and Organizations promoting the use of renewable-energy-based resources for generation, like wind and hydropower, but these energy The U.S. electric power industry today is composed of sources are frequently located far from the customers and a wide variety of players, entities, and institutions, all of may not be available when demand for electricity is greatest, which play different roles, and the actions of individual so their use imposes even greater complications on system asset owners and operators affect each other. It is a highly design and operation. regulated industry, and facilities need to operate according Again, some regions have large, investor-owned utili- to common standards and in coordinated operations. The ties, while others have many small publicly owned utilities "system" may behave as one large electrical machine, but its (known as cooperative utilities and municipal utilities). Some parts are owned and operated by more than 3,000 entities. regions have vertically integrated electric utilities that own Table 2.1 highlights the major industry players that own and generation, transmission, and distribution systems, while operate electric power systems. Still, there are numerous other regions have ownership patterns that focus on one part of the business or another. Some regions have regional transmission organizations (RTOs) that administer central 1Changes in reliability enforcement as a result of the Energy Policy Act wholesale markets, whereas others do not. of 2005 are discussed below in this chapter.

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24 TERRORISM AND THE ELECTRIC POWER DELIVERY SYSTEM TABLE 2.1 Major Industry Players in the U.S. Electric Industry Institutional Structures of Other Asset Operators and Government Entities and Industry Associations and Asset Owners Asset Owners Coordinators Regulatory Authorities Institutions Vertically integrated Investor-owned electric North American Electric State regulatory Electric Power Research utilities (owning utilities (IOUs) Reliability Council commissions Institute (EPRI) generation, transmission, (NERC) and distribution) Generation and Rural electric cooperatives Independent system Power marketing National Regulatory Research transmission utilities (RECs or Co-ops) operators (ISOs) authorities (PMAs) Institute (NRRI) Transmission utilities or Municipal utilities Regional transmission Federal Energy Regulatory Edison Electric Institute (EEI) companies (MUNIs) operators (RTOs) Commission (FERC) Distribution utilities Federal power agencies Regional reliability U.S. Department of Energy National Rural Electric organizations (RROs) (DOE) Cooperative Association (NRECA) Generation companies Energy Information Electric Power Supply Administration (EIA) Association (EPSA) Marketing companies Bonneville Power National Association Administration (BPA) of Regulatory Utility Commissioners (NARUC) Tennessee Valley Authority Association of State Energy (TVA) Research and Technology Transfer Institutes (ASERTTI) Western Area Power National Association of State Administration (WAPPA) Utility Consumer Advocates (NASUCA) other stakeholders who actively participate in electric power (1) set consumer prices, (2) impose penalties for noncom- industry activities. pliance with rules and regulations, and (3) require prior approval of all financing. Regulatory Activities Federal Energy Regulatory Commission Due to its technical and economic structure, the U.S. electric power industry is one of the most highly regulated Various activities of entities in the electric power industry in the nation. While other nations have adopted state-owned are also regulated by FERC, the federal agency authorized to or national utilities to provide electric service, the United implement, among other things, the Federal Power Act, the States early on adopted an approach that included a large Natural Gas Act, parts of the Energy Policy Act, and other number of private firms operating in natural monopoly set- federal statutes. FERC regulates the terms and conditions tings and whose actions (e.g., determining rates, defining of power delivery and transactions in interstate commerce terms of electric service) were overseen by public regulatory and, with the enactment of the Energy Policy Act of 2005, commissions. is responsible for ensuring enforceable reliability standards for the electric power industry. In general, users ultimately pay the electric supplier's State Regulatory Commissions cost of providing them with service. There is a longstanding Nearly all states have public utility commissions and/ tradition of cost-based rates for the parts of the industry not or energy offices that govern certain activities of regulated considered competitive, such as transmission and delivery utilities operating pursuant to laws in that state. These com- service. In many parts of the country, much generation ser- missions govern the rates, terms, and conditions of service of vice is also provided and paid for on the basis of cost, rather investor-owned utilities in the state and, in a few cases, also than market-based rates. regulate the rates of rural electric cooperatives. The scope In the 60 percent of the United States where markets are of regulatory authorities varies by state but often includes used to allocate power at the wholesale level, ISO/RTO-type approving tariffs, allowed return on investment, and service organizations act as regulatory intermediaries under the standards. In many jurisdictions, the most important powers jurisdiction of FERC and to a lesser extent state regulatory held by state public service commissions are the ability to commissions. Their objectives are to administer fair and

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THE ELECTRIC POWER SYSTEM TODAY 25 efficient markets and maintain bulk power system reliability. power producers and other electric suppliers to build and For these organizations, reliability concerns take precedence operate plants (NEPDG, 2001). over efficient market operation in periods of insufficient sup- Over the last 15 years, greater competition has been ply and/or system instability. introduced into the wholesale portion of the electric busi- ness by the addition of non-utility power plants. The Energy Policy Act of 1992 made it possible for competitive power IMPLICATIONS FOR SYSTEM RELIABILITY producers to be entitled to access and use a utility's trans- OF AN INDUSTRY IN TRANSITION mission system. In some regions, these requirements put new demands on an already stressed power system. In 1996, Structural Changes in the Industry FERC issued regulatory policies (FERC Orders 888 and 889) The electric power industry has undergone considerable that formally required transmission owners to provide open changes in the last two decades that have affected how the and nondiscriminatory access to the competitive wholesale electricity infrastructure operates. Some of the once verti- generation market, and to provide comparable terms and cally integrated electric utilities that supplied generation, conditions to all market participants, including the genera- transmission, and distribution services have undergone tion used to serve a utility's own customers.2 restructuring that separated them into distinct entities with FERC policies, in combination with technological and responsibility for only one or a few such services. In 1996, economic changes in the industry, placed extraordinary new to mandate and facilitate competition at the wholesale level, demands on transmission systems. Utilities that previously FERC required transmission-owning utilities to "unbundle" planned and operated their systems for the benefit of their their transmission and power-marketing functions and pro- own customers' requirements were now required to take vide nondiscriminatory, open access to their transmission other market interests into account. systems by other utilities and independent power produc- In the parts of the country where the traditional verti- ers. Some utilities pursued unbundling by creating separate cally integrated industry structure has been retained, there divisions within their companies, others spun off certain are really two predominant business models for ownership assets into separate but affiliated companies, and others sold of transmission: off assets to separate owners (primarily generating facili- ties). Some states required--or created powerful incentives Ownership separate from the control of transmis- for--utilities to divest their generation assets as part of a sion (whereby the control functions are handled by a restructuring effort. Others required vertically integrated third-party "system operator" and transmission assets utilities to divest their transmission assets to independent are owned by the utility or other entities), which is entities. In addition, power marketers--who often do not basically the system that exists in the Northeast, parts own generation, transmission, or distribution facilities--now of the Midwest, and in California and Texas); and buy and sell power on wholesale markets and market elec- Combined ownership of transmission assets and tricity directly to customers. All of these changes created control of the grid (whereby the functions of the even greater variations of the operational landscape within transmission service provided are combined in a the industry. single, vertically integrated entity--such as princi- Competition in the electric power industry has led to pally exists for utilities located in the Southeast). significant changes in the operation of the system. More electricity is being shipped longer distances over a transmis- In the Midwest, the committee believes that the gradual sion system that was initially designed only to provide lim- transition from the joint ownership model to the separate ited power and reserve sharing among neighboring utilities. ownership and control model will continue. However, in some regions of the country, neighboring utili- ties have long collaborated to operate, and to a lesser extent to plan and design, their combined systems as integrated power pools (e.g., PJM Interconnection in 1926, New York in 1965, and later on, New England). Centralized dispatch of generating capacity to meet demand led these utilities to 2The long-distance telephone system is sometimes used as an analogy devise mechanisms to exchange power among themselves in for the electric grid, in that a product can be generated in one place and ways that resulted in the smallest production costs (economic delivered over a network of wires to the final consumer. From a technical operating point of view, however, an electric power transmission system is dispatch). Electric utilities that were once solely responsible very different from the long-distance telephone system because power flows for ensuring that they owned adequate generation to meet cannot be directed over specific predetermined paths, nor can the loading the demand of the consumers within their own system now over any particular path be precisely limited by the system operator. There purchase a substantial amount of the power they need from are limited modulating switches that can be opened or closed like throttles the wholesale market, in some cases relying on independent for AC transmission lines, so attempts to wheel power directly from one utility to another may in fact overload the lines of a mutually interconnected neighbor, creating serious operating problems (Linke and Schuler, 1988).

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26 TERRORISM AND THE ELECTRIC POWER DELIVERY SYSTEM Industry Practice--Normal Planning and Operations Finally, disturbances can and do occur as a result of direct attack on the system. Insulators on distribution lines are a Dealing with Normal Disturbances in System Operations frequent target for vandals with guns. To date, no long-term blackouts have been caused in the United States by sabotage. The reliable operation of the power grid is complex and However, this observation is less reassuring than it sounds. demanding for two fundamental reasons. First, electricity Electric power system components have been targets of moves at close to the speed of light (186,000 miles per numerous isolated acts of sabotage in this country. Several second, or 297,600 kilometers per second) and is not eco- incidents have resulted in multimillion-dollar repair bills. In nomically storable in large quantities. Therefore, electricity several other countries, sabotage has led to extensive black- must be produced the instant it is used. Second, pending the outs and considerable economic damage in addition to the development of affordable control devices, the flow of AC cost of repair (OTA, 1990). electricity cannot be controlled like a liquid or gas by open- ing or closing a valve in a pipe, or switched like calls over a long-distance telephone network. Electricity flows freely Norms of Mutual Assistance along all available paths from the generators to the loads in The utility industry has a long history of responding accordance with the laws of physics--dividing among all to various kinds of emergencies, be they relatively small, connected flow paths in the network (U.S.-Canada Power such as an outage of a transmission circuit or a generator System Outage Task Force, 2004). unit, or more serious, due to tornado damage, hurricanes, or A defining feature of the electric power industry is that earthquakes. Most utilities have plans in place for restoring reliable operations are universally considered to be essential service after a total shutdown. These plans involve coopera- and a central design, operation, and planning challenge. The tive agreements and cultural norms in which utility crews delicate operational features of the system require that the from one company assist those in another area that need their industry explicitly plan for and operate with the expectation assistance. Such cooperation allows much faster restoration that there will be disturbances that must be addressed to of service following extensive damage from hurricanes or keep the system operating reliably. Planning for and operat- other major storms. ing around constant variations of conditions in the system is the norm. NERC's basic reliability standard requires that the bulk Reliability Coordinators power system be operated so that it can survive the single Historically, vertically integrated utilities established largest contingency--designated N1--such as the failure of "control areas" to operate their individual power systems in a major generating unit or transmission facility. Many utili- a secure and reliable manner and provide for their customers' ties actually plan their system to operate somewhere between electricity needs. The traditional control area operator has N1 (at a minimum) and N2 (meaning that the system would exclusive operational authority to balance load with genera- continue to operate reliably without two elements). tion in its own area, to implement interchange schedules with other control areas, and to ensure transmission reliability Causes of Disruptions (Functional Model Review Task Group, 2003). In sections of the country with integrated power pools, the control area There are many reasons why disruptions occur on the spans several utilities' operating centers, and the pool's electric system. These include human error, natural haz- system operator maintains control over the facilities of all ards, design flaws, and deliberate attack on the system. For member companies. example, human error can be a factor that contributes to the As utilities began to provide transmission service to other cause of a blackout. Therefore, electric industry employees competitive entities, the control area also began to perform must be highly trained to be able to tackle the complex and the function of transmission service provider through tariffs highly technical nature of power system planning and opera- or other arrangements. NERC's operating policies and stan- tions. Natural hazards with the potential to cause extended dards have reflected this traditional electric utility industry blackouts include earthquakes, hurricanes, tornados, ice structure and ascribed virtually every reliability function storms, and severe thunderstorms. Such hazards are a major to the control area (Functional Model Review Task Group, contributor to outages on the system. Various types of design 2003). flaws can occur in equipment, plans, procedures, regulations, Beginning in the early 1990s with the advent of open policy, and response. Where lines are located adjacent to transmission access and restructuring of the electric util- roads, vehicular accidents are a frequent cause of local out- ity industry to facilitate the operation of wholesale power ages, and stray animal incursions occasionally lead to short markets, the functions performed by control areas began circuits in transformers. The industry goes through routine to change to reflect the newly emerging industry struc- and episodic exercises to improve these systems to address ture. These changes occurred for several reasons. Some such flaws. utilities separated their transmission from their "merchant

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THE ELECTRIC POWER SYSTEM TODAY 27 functions" (functional unbundling) and even sold off their reconfigure transmission, or reduce load to mitigate critical generation. Some states and Canadian provinces instituted conditions in order to return the system to a reliable state. "customer choice" options for selecting energy providers. A reliability coordinator may delegate tasks to others, but The developing power markets often required wide-area it retains its responsibilities for complying with NERC and transmission reliability assessment and dispatch solutions, regional standards. Standards of conduct are necessary to which were beyond the capability of many control areas ensure that the reliability coordinator does not act in a man- to perform. In fact, even some control areas themselves ner that favors one market participant over another. unbundled some of the functions that they had traditionally NERC has a Reliability Coordinator Working Group performed (Functional Model Review Task Group, 2003). (RCWG) that provides a forum for coordinating system- As a result, the then-current NERC Operating Policies, operating procedures in all four interconnections. This which are centered on control area operations, began to lose involves the following: their focus and became more difficult to apply and enforce (Functional Model Review Task Group, 2003). Regions Coordinating implementation of reliability standards where contractually enforced compliance was the norm due to ensure consistency across the interconnections; to their previously having operated under a collaborative Assessing fuel supply adequacy; power pool arrangement were exceptions in this regard. In Reviewing operating experiences from the previous other regions, control-area protocols needed to adjust to the peak demand season and planning for the upcoming emerging market-driven changes. operating peak demand season; The NERC Operating Committee formed the Control Reviewing system disturbances and transaction cur- Area Criteria Task Force in 1999 to address these coordi- tailments for "lessons learned" and compliance with nation problems (Functional Model Review Task Group, NERC reliability standards; 2003). Realizing that there was no longer a "standard" Recommending new or revised reliability standards; reliability organization, the task force built a "functional and model" consisting of the functions that ensure reliability and Providing advice to the Operating Reliability Sub- meet the needs of the marketplace. The functions performed committee as it debates new or revised reliability by traditional, vertically integrated control areas; regional standards.3 transmission organizations; independent system operators; independent transmission companies; and so on were "rolled These reliability standards are based on calculations inde- up," and organizations registered with NERC as one or more pendent of the triggering incident. Under some conditions, of the following: other simultaneous surrounding events and risks to society that exacerbate the effect of particular power outages must Generator owners, be considered. One example might be the greater harm to Generator operators, society were an extended power outage to occur during Transmission service providers, subfreezing weather or in conjunction with widespread ter- Transmission owners, rorist attacks. Thus, in the implementation of these reliability Transmission operators, standards, specific procedural mechanisms should take into Distribution providers, account the likely particular nature of terrorist assaults, Load-serving entities, which may differ from customary triggering events. And as Purchasing-selling entities, an example, were multiple simultaneous terrorist assaults to Reliability authorities, become likely, consideration might be given to changing the Planning authorities, system's design criterion from withstanding any single insult Balancing authorities, to having the bulk power system impervious to two or even Interchange authorities, three simultaneous losses on the system. Transmission planners, Resource planners, Changes Introduced with the Enactment of the Energy Standards developers, and/or Policy Act of 2005: New Requirements for Mandatory Compliance monitors. Reliability Standards This approach enabled NERC to rewrite its reliability stan- For decades, the electric power industry operated under dards in terms of the entities that perform the reliability voluntary compliance with NERC's reliability standards. But functions (Functional Model Review Task Group, 2003). in the past few years, the restructuring changes described Reliability coordinators must have the authority, plans, above led to a consensus within the industry that new and agreements in place to be able to immediately direct (and count on the compliance of) reliability entities within 3See Reliability Coordinator Working Group (RCWG), available online their reliability coordinator areas to re-dispatch generation, at http://www.nerc.com/~oc/rcwg.html.

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28 TERRORISM AND THE ELECTRIC POWER DELIVERY SYSTEM statutory authority requiring mandatory compliance with Since the United States is interconnected electrically with national reliability standards was needed. In August 2005, Canada and Mexico, FERC expects that it and the ERO will Congress passed the Energy Policy Act (EPAct), which need to work directly with regulators and electric industry authorized FERC to issue rules governing the certification participants from these countries to ensure the successful of an electric reliability organization (ERO) and procedures implementation of mandatory reliability standards (Moot, for establishing, approving, and enforcing electric reliability 2006). standards. EPAct amended the Federal Power Act to include a new section requiring FERC to certify an ERO that would LONG-RANGE PLANNING develop, administer, and enforce reliability standards, subject to FERC oversight. Long-range planning has always been essential to provid- FERC's new regulations, finalized in February 2006, ing reliable, economic electricity service. Coordinated plan- require that the FERC-certified ERO must submit each ning is still needed, even where wholesale markets prevail proposed reliability standard to FERC for its approval. Only and investment decisions are profit-motivated. Three factors FERC-approved reliability standards are enforceable. In make coordinated planning essential: (1) the capital-intensity addition to the ERO, there are roles anticipated for regional of the electric power industry, (2) the long lead times required reliability entities, which may propose reliability standards to get new facilities online, and (3) the absolute necessity of through the ERO and then administer and enforce such having adequate facilities installed for reliability in recogni- standards if delegated to do so by the approved ERO. The tion that electricity cannot be stored. A fourth important fac- final rule applies to all users, owners, and operators of the tor for large-scale systems is the interplay between decisions bulk electric power system in the United States (other than to construct transmission and generation facilities, since both Alaska and Hawaii).4 are necessary to get power to market, or to provide supply NERC applied in April 2006 to be certified to become alternatives. the ERO, and in July 2006 that application was approved by Over time, the scope and identity of who does the plan- FERC. NERC also filed with FERC for approval of a series ning for power supplies and who identifies the requisite of proposed reliability standards in 15 categories, most of investments as societal concerns have evolved. In the emerg- which are the same as those that have already been in effect ing quasi-market-supply structure that exists for the industry for several years on a voluntary basis. As of March 31, 2007, in many sections of the country today, the very nature of and FERC had approved 83 reliability standards, and another 24 responsibility for that planning are open questions. were pending (FERC, 2007). NERC has stated to FERC that Vertically integrated electric utilities, either private- the proposed reliability standards are consistent with ensur- regulated or government-run, are, by necessity, a planned ing acceptable performance with regard to operation, plan- industry with exclusive supply rights and obligations to serve ning, and design of the North American bulk-power system. in particular areas. These have been the predominant insti- The reliability standards became effective on June 18, 2007. tutional forms for providing electricity service in the United Under Section 215, FERC must either (1) approve a pro- States since 1900, so it is not surprising that each supply posed reliability standard if it determines the standard is just, entity has engaged in careful strategic long-range planning, reasonable, not unduly discriminatory or preferential, and in given its desire to maintain and enhance service reliability the public interest, or (2) remand a proposed standard back and thereby customer satisfaction. Over the past 100 years, to the ERO for further consideration when FERC determines however, the scope of those plans has gradually expanded in that the proposed standard fails to satisfy this test. FERC a number of ways: has stated its expectation that even after an initial set of reliability standards is approved, the process of proposing, 1. Geographically, as the size of individual firms reviewing, and approving standards will be continual in order increased and voluntary power-pooling organizations to accommodate changes in the electric system and subse- were formed among firms; quent improvements in the standards. Additionally, FERC 2. Contextually, to reflect social concerns, as environ- has stated that although uniformity across the United States mental quality, then public health and safety, and is a goal, it expects a certain amount of regional variation finally regional economic well-being were recog- in standards in order to accommodate regional differences nized as being linked in consequential ways with the and unique features of specific systems in the electric power operation of electricity supply facilities; and finally, industry. This would suggest there will be both greater strin- 3. Economically, to consider the type and primary gency in the national standard and particular approaches as source of energy supply, following the oil supply appropriate given the physical characteristics of a region. shortages of the 1970s when "integrated resource planning" became the popular process for public 4Groups covered include regional transmission organizations and inde- involvement in a democratic society. pendent system operators, independent power producers, investor-owned electric utilities, public power and rural electric cooperatives, and other load-serving entities.

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THE ELECTRIC POWER SYSTEM TODAY 29 Thus, a long and ever-more comprehensive planning pro- to invest and to begin to seek the necessary approvals; they cess has evolved both within and external to this industry. are also factors the public sector must consider if it desires a Supplying institutions have tolerated the increasing external market-driven process that serves the public interest. intervention in their own internal planning processes because Problems to be resolved abound. With the traditional without that public approbation, the legal right to site new regulated vertically integrated industry structure, the utility generation facilities, and generally, transmission facilities would decide whether it was more efficient to build new also, could be denied. transmission or new generation (as well as where, when, The time and the cost of acquiring necessary regulatory and of what fuel source) in order to minimize costs while approvals have become the major impediments to the siting meeting reliability standards. In this context, the entity might and construction of new facilities in many regions of the even consider the value in terms of the economic risk reduc- country. In some instances, those approval costs can be an tion of maintaining a stable of diverse generation sources, in appreciable portion of the total project costs, including those terms of their primary fuels. In the evolving market context, for land and construction. "Deciding how to decide" has a generator must decide whether and where to build based become an institutional art-form, involving legal, political, on the going market price in different locations. A competi- economic and behavioral insights on how to design efficient tive transmission company must base investment decisions and fair decision processes. It also can be used to effect for on price differences in electricity between regions, plus any parties intent on using those processes to block particular fixed delivery contracts it can assemble ahead of time from projects. buyers and sellers. Note that decisions to invest by either In the wake of the restructuring and deregulation of the type of firm are likely to reduce the original price levels or electric power industry, firms must now determine whether price gaps, and so each firm must take that market effect of or not to invest based on market-related criteria, but also its investment into account. Firms must also consider how the must bear the risk of public-policy-type decisions concern- interaction between likely new generation and transmission ing siting. A regulated or public firm could be reasonably investments will affect their revenues in the future. However, assured of recovering those decision-related costs sometime these firms have little incentive to consider the effects of their in the future; the prospects are far less certain for a firm in a investment choices on system reliability or fuel diversity risk competitive market. While firms in other competitive capital- without public intervention. This is one reason why many intensive industries also face siting approvals before they can jurisdictions are establishing subsidization mechanisms for expand their capacity, they can minimize their risk simply bringing renewable-resource-based generation online-- by waiting to construct until supply shortages have driven although in some instances the transmission requirements to prices in the marketplace high enough to warrant the risk. bring that remote energy to the load locations are neglected. Because modern societies have an utter dependence on real- These anomalies all suggest at least an equal need for time delivery of reliable electricity supplies, they simply may planning under a wholesale market supply scenario. Such not be willing to rely on market forces alone to determine planning would be somewhat different in type and scope whether suppliers are willing to invest in a siting decision. from that practiced in an environment of regulated, vertically Some degree of public participation and subsidy in recogni- integrated institutions. FERC has recognized this by mandat- tion of the public nature of the decision may be warranted. ing that one of the requirements for ISOs/RTOs is for each to However, in the current transition to market-based whole- establish a planning process to identify needs and to initiate sale electricity supply in many regions of the country, the market-driven investments that might be required first, and allocation of responsibility for and the sharing of the risk of if these prove inadequate, to then initiate regulatory-based this decision making in the planning process have yet to be investments. worked out.5 Rationalizing the private and public nature of In many ISO/RTO jurisdictions, however, a legal semantic these approval processes is particularly important for electric distinction is being made between facilities needed for reli- transmission lines where authorizations must be acquired ability purposes and those that might further some economic from many political jurisdictions that might be spanned by benefit (e.g., lower wholesale electricity prices). Since both the desired new facility. If those approvals are not granted functions are served over the same transmission network, this simultaneously, there is a tremendous incentive for juris- distinction is arbitrary, in terms of both the laws of physics dictions to delay their individual decisions so that they are and economic principles. Almost any transmission line that last in line, and therefore able to extract the most favorable is built to enhance reliability will most probably also reduce concessions. The private merchant builder must factor all of congestion at certain times of the year, thereby reducing these considerations into a decision on whether or not to try wholesale costs. Similarly, any line constructed to facilitate economical transfers of power most likely will have effects 5As an example, in New York State, a one-stop siting law had been in on reliability somewhere on the system. It may also facili- place, requiring that all public permits be reviewed and provided through a tate access to diverse sources of generation further away, single integrated process. Since the advent of competitive wholesale mar- thus enhancing reliability and security. In fact, FERC seems kets, that law has been allowed to lapse, compounding the risk for private investment as piecemeal approvals must be sought. to have recognized these relationships through its recently

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30 TERRORISM AND THE ELECTRIC POWER DELIVERY SYSTEM issued Order 890 that mandates economic-based planning users. However, if this utility also owns substantial distribu- in all jurisdictions. tion assets that are governed solely by a state commission, it If public concerns about robust resilience to possible ter- runs the risk of having the state regulators offset the higher rorist attacks are also considered, the required public over- award by FERC for its transmission venture by lowering its view of the planning process becomes further complicated. price for distribution services. Moreover, additional factors to be considered are whether a These equity and fairness issues associated with cost- competitive wholesale marketplace for electricity is a decen- recovery practices become even more complex when the tralizing force for the ultimate evolving configuration of the planned transmission line spans the borders of several states. system. If so, the system may be inherently more resilient to Consequently, planning for and gaining the political approval failures, whether due to natural or human causes. However, for the construction of new lines become even more difficult. the first requirement is that an integrated planning process Some jurisdictions like Texas have sought to reduce these exist to guide and offer benchmarks for the future evolution contentious issues by effectively declaring all transmission a of the industry. public good (like the interstate highway system) and recover- ing the costs over all customers in the state. In other regions like the Southeast, where the utilities have remained verti- INCENTIVES FOR TRANSMISSION AND cally integrated and the opposition to siting new facilities is DISTRIBUTION FACILITY INVESTMENT less vehement than in older urbanized areas, costs are again Except for those areas served by public power agencies, "socialized" over all users and integrated with prices for all transmission and distribution facilities in the United States components of service. In still other regions of the country are built under the expectation of earning a competitive rate like the upper Midwest, separate transmission-only compa- of return on investment through the prices charged for using nies have been formed. Such entities do not have to worry those facilities. In the case of transmission, FERC usually about state regulators offsetting their FERC-approved trans- sets the target rate of return that is factored into the maximum mission rates since they offer no state-jurisdictional services. allowable price, whereas in the case of distribution, the state regulatory bodies approve the allowable rates for service. CONCLUSIONS Point-to-point merchant transmission might be constructed without a regulated rate set by public monitors if sufficient There are major aspects of the electric system that are price-differentials exist between the end points, and if there common to all parts of the country, but there are also is little likelihood that new lower-cost generation facilities those that differ considerably by region--electrically, might be built at the high-priced end of the line. However, in institutionally, economically, and in terms of regula- many areas of the country, the risks involved in getting the tory oversight. Many historical factors account for necessary simultaneous approvals by many property owners these differences, and it is unlikely that this situation and municipal agencies to site a lengthy line are usually will change any time soon. prohibitive to private capital investment. Even government- Although there is ultimately a single operator respon- built facilities face prolonged political fights over siting, sible for each portion of the electric system, there are compounded by debates over who is to pay for the line and many such operators around the United States, and who is the beneficiary, if user fees do not completely cover there are many more participants in the whole electric the costs. power delivery enterprise. In many respects, this is a Because the usual practice by most state public utility highly decentralized but interconnected system. commissions is to establish a uniform price for service Power systems have always faced multiple sources throughout a particular company's service territory, an of routine and persistent threats to reliable opera- increased cost incurred by a regulated entity to build a new tions. Some kinds of threats are harder to deal with transmission line will usually raise the rates for all its cus- than others because of their diffuse nature, because tomers, even though a small subset may be the only ones they are associated with new technological develop- to benefit from lower energy charges as a result of the new ments, because they arise from regulatory incentives line. The disincentives to utilities regulated in this traditional misaligned with investment requirements, or because manner are compounded when another utility is located they spring from new and not-well-understood between the generator and its customers and that third util- sources of terrorist ingenuity and motivation. ity would need to add a line to connect the two. The third The transmission system is much more stressed, and utility's customers gain no immediate benefit from the new thus more vulnerable, than it was a few decades ago. line, but they may bear the cost. As an incentive to undertake This is principally the result of two factors: (1) years the risks, FERC may approve a price for transport over that of underinvestment in system upgrades due in part new line that is substantially greater than what many state to ambiguities and changed incentives introduced by regulators have been offering. FERC may also authorize the electric power restructuring and associated changes line-building utility to pass those charges on only to the line's in the regulatory environment; and (2) the growing

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THE ELECTRIC POWER SYSTEM TODAY 31 amounts of power that must be moved between sell- REFERENCES ers and buyers in new competitive power markets Constable, G., and B. Somerville. 2003. A Century of Innovation: Twenty have added complexity in the operation of the bulk Engineering Achievements That Transformed Our Lives. Washington, power system. D.C.: Joseph Henry Press. Improving system reliability comes at a cost. Deci- EPRI (Electric Power Research Institute). 2003. Electricity Technology sions to reduce the level of risks--through the adop- Roadmap: Meeting the Critical Challenges of the 21st Century: 2003 Summary and Synthesis. Palo Alto, Calif.: EPRI. tion of stricter standards or through investment to FERC (Federal Energy Regulatory Commission). 2007. Electric Reliability: protect against various types of risks--have to take NERC Standards. Available at http://www.ferc.gov/industries/electric/ into account (implicitly or explicitly) the question of indus-act/reliability/standards.asp. Accessed June 2007. whether the benefits of reducing a risk is worth the Functional Model Review Task Group. 2003. NERC Reliability Functional expense. Model: Function Definitions and Responsible Entities: Version 2. Avail- able at ftp://www.nerc.com/pub/sys/all_updl/oc/fmrtg/Functional_ Typically, customers of electric service end up pay- Model_Version_2.doc. Accessed August 2007. ing the costs for reliable operations, although non- Linke, S., and R.E. Schuler. 1988. "Electrical-Energy-Transmission Tech- customers also may benefit if there are external social nology: The Key to Bulk-Power-Supply Policies." Annual Review of effects or broader macroeconomic consequences. Energy 13: 2345. These aspects of reliability concerning the public Moot, J.S. 2006. "Testimony of John S. Moot, General Counsel, Federal Energy Regulatory Commission" before the Committee on Energy and good, including increased immunity from terrorist Natural Resources of the United States Senate, May 15, 2006. Avail- attacks, cannot be properly accounted for through able at http://www.ferc.gov/EventCalendar/Files/20060515151838- market-based supplies of electricity, and standards SENR%20EPAct%2005%20Electric%20Reliability%20Provisions%20 must be set and enforced by a central authority such (Moot)%2005-15-06.pdf. Accessed August 2007. as the ERO. Once those supply standards are set, their NEPDG (National Energy Policy Development Group). 2001. "America's Energy Infrastructure: A Comprehensive Delivery System." Chapter 7 actual provision can be decentralized through mar- in National Energy Policy: Reliable, Affordable, and Environmentally kets if the proper payments are made to the providers. Sound Energy for America's Future. Washington, D.C.: U.S. Govern- As with all public goods where different individuals ment Printing Office. receive different levels of service or value reliability OTA (Office of Technology Assessment). 1990. Physical Vulnerability of differently, who pays what is a contentious issue. Electric System to Natural Disasters and Sabotage. OTA-E-453. Wash- ington, D.C.: U.S. Government Printing Office. Questions of fair cost allocations are one reason that U.S.-Canada Power System Outage Task Force. 2004. Final Report on the investments in strengthening the transmission grid August 14, 2003 Blackout in the United States and Canada: Causes and have lagged in many regions of the country. A com- Recommendations. Available at http://www.nrcan.gc.ca/media/docs/ pounding factor is the continual political pressure final/finalrep_e.htm. Accessed October 2007. to keep electricity rates low, despite the demands by some customers for higher power quality and reliability. One mandate of the ERO is to establish regional advisory boards that might coordinate the differ- ent political perspectives of federal, state, and local governments and their regulatory bodies, but how that dialog is translated into capital investment and revised operating practice has still to be worked out.