issued Order 890 that mandates economic-based planning in all jurisdictions.

If public concerns about robust resilience to possible terrorist attacks are also considered, the required public overview of the planning process becomes further complicated. Moreover, additional factors to be considered are whether a competitive wholesale marketplace for electricity is a decentralizing force for the ultimate evolving configuration of the system. If so, the system may be inherently more resilient to failures, whether due to natural or human causes. However, the first requirement is that an integrated planning process exist to guide and offer benchmarks for the future evolution of the industry.

INCENTIVES FOR TRANSMISSION AND DISTRIBUTION FACILITY INVESTMENT

Except for those areas served by public power agencies, transmission and distribution facilities in the United States are built under the expectation of earning a competitive rate of return on investment through the prices charged for using those facilities. In the case of transmission, FERC usually sets the target rate of return that is factored into the maximum allowable price, whereas in the case of distribution, the state regulatory bodies approve the allowable rates for service. Point-to-point merchant transmission might be constructed without a regulated rate set by public monitors if sufficient price-differentials exist between the end points, and if there is little likelihood that new lower-cost generation facilities might be built at the high-priced end of the line. However, in many areas of the country, the risks involved in getting the necessary simultaneous approvals by many property owners and municipal agencies to site a lengthy line are usually prohibitive to private capital investment. Even government-built facilities face prolonged political fights over siting, compounded by debates over who is to pay for the line and who is the beneficiary, if user fees do not completely cover the costs.

Because the usual practice by most state public utility commissions is to establish a uniform price for service throughout a particular company’s service territory, an increased cost incurred by a regulated entity to build a new transmission line will usually raise the rates for all its customers, even though a small subset may be the only ones to benefit from lower energy charges as a result of the new line. The disincentives to utilities regulated in this traditional manner are compounded when another utility is located between the generator and its customers and that third utility would need to add a line to connect the two. The third utility’s customers gain no immediate benefit from the new line, but they may bear the cost. As an incentive to undertake the risks, FERC may approve a price for transport over that new line that is substantially greater than what many state regulators have been offering. FERC may also authorize the line-building utility to pass those charges on only to the line's users. However, if this utility also owns substantial distribution assets that are governed solely by a state commission, it runs the risk of having the state regulators offset the higher award by FERC for its transmission venture by lowering its price for distribution services.

These equity and fairness issues associated with cost-recovery practices become even more complex when the planned transmission line spans the borders of several states. Consequently, planning for and gaining the political approval for the construction of new lines become even more difficult. Some jurisdictions like Texas have sought to reduce these contentious issues by effectively declaring all transmission a public good (like the interstate highway system) and recovering the costs over all customers in the state. In other regions like the Southeast, where the utilities have remained vertically integrated and the opposition to siting new facilities is less vehement than in older urbanized areas, costs are again “socialized” over all users and integrated with prices for all components of service. In still other regions of the country like the upper Midwest, separate transmission-only companies have been formed. Such entities do not have to worry about state regulators offsetting their FERC-approved transmission rates since they offer no state-jurisdictional services.

CONCLUSIONS

•   There are major aspects of the electric system that are common to all parts of the country, but there are also those that differ considerably by region—electrically, institutionally, economically, and in terms of regulatory oversight. Many historical factors account for these differences, and it is unlikely that this situation will change any time soon.

•   Although there is ultimately a single operator responsible for each portion of the electric system, there are many such operators around the United States, and there are many more participants in the whole electric power delivery enterprise. In many respects, this is a highly decentralized but interconnected system.

•   Power systems have always faced multiple sources of routine and persistent threats to reliable operations. Some kinds of threats are harder to deal with than others because of their diffuse nature, because they are associated with new technological developments, because they arise from regulatory incentives misaligned with investment requirements, or because they spring from new and not-well-understood sources of terrorist ingenuity and motivation.

•   The transmission system is much more stressed, and thus more vulnerable, than it was a few decades ago. This is principally the result of two factors: (1) years of underinvestment in system upgrades due in part to ambiguities and changed incentives introduced by electric power restructuring and associated changes in the regulatory environment; and (2) the growing



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