The Future of Electric Power in the United States (2021) / Chapter Skim
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3 Legal and Regulatory Issues That Shape the Electric System
3 Legal and Regulatory Issues That Shape the Electric System
Pages 89-138
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From page 89... ...
This chapter focuses first on the influence of federal policy and regulation, and then informs that discussion with the imprint of highly varied state regulatory policies that affect the structure of the electric industry in different parts of the country. Because of the interconnected nature of the electric grid, both federal and state policies affect the degrees of freedom exercised by different players as the electric system undergoes its current transitions.
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From page 90... ...
over services utilities' long-term transmission • Rates for unbundled transmission plans service • Rates for transmission service that • Transmission planning is part of bundled retail electricity • Power marketing administrations service • Siting of transmission facilities Reliability • Operational reliability issues • Resource adequacy Local Distribution System Distribution • Rules for the participation of • Franchise considerations (e.g., demand response, storage, energy geographic footprint, obligations efficiency in wholesale markets relating to service) • Rates for retail electricity service • Planning for and siting of local distribution • Local system operational reliability • Investment recovery for distribution assets • Distributed energy resources (including demand response and storage)
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From page 91... ...
income customers; the boards of affordable power for all some publicly owned utilities have regulations similar policies • HUD assisted housing utility • State administered ratepayer allowance subsidies funding for bill assistance • USDA housing utility allowance • Subsidized housing regulations subsidies • Energy Efficiency and Conservation Loan Program (EECLP) • Year-by-year funding of LIHEAP and weatherization programs Safety • Regulation of labor standards and • Authority of utilities' safety other activities culture and other safety requirements Resilience and emergency • Analysis of resilience risk • Authority to support utilities' response • Federal emergency direct investment in resilience response (National Response Plan)
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From page 92... ...
This chapter focuses on the federal and state policies that directly affect owners and operators of the electric system itself, starting with the many publicly owned and investor-owned utilities that occupy the center of the classically "regulated electric industry."2 Electric Utilities Many observers consider the local electric distribution utility as the face of the entire industry, in part because it is the local utility that sends electric bills to consumers, dispatches the crews to restore power after an outage, and traditionally tended to own all of the physical assets associated with generating and delivering electricity to consumers. Historically, these utilities operated as monopolies, with heavy public oversight over the terms of entry and exit into the business, the obligations related to provision of electric service to consumers, and the prices that consumers pay for that service.
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From page 93... ...
In 2018, even though there are fewer than 200 investor-owned utilities (compared to approximately 2,900 publicly owned utilities4) , about three-quarters of all retail power went through the local distribution systems of these investorowned utilities (EIA, 2019a,b)
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From page 94... ...
SOURCE: National Rural Electric Cooperative Association. However, there are many players in the electric industry that are less directly affected by such policies.
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From page 95... ...
FRAMEWORK OF POLICIES AFFECTING THE BULK POWER SYSTEM AND WHOLESALE MARKETS The Influence of Federal Policy and Regulation Given the traditional and tightly held division of federal versus state authority over various functions in the electric industry, federal policy focuses on several elements of the functioning of the grid: the terms and conditions of access to transmission service; the terms and conditions of sales for resale of electricity (i.e., wholesale transactions) ; and the operational reliability of the bulk power system.7 Since the mid-1930s, the fundamental premises of such federal regulation rests on the intersection of interstate commerce with the functioning of the interconnected electric system and the need for regulation to address the potential abuse of monopoly power by utilities.8 7 For a further discussion of federal versus state authority over elements of the electric industry, see Chapter 2 of National Academies of Sciences, Engineering, and Medicine, 2017, Enhancing the Resilience of the Nation's Electricity System, Washington, DC: National Academies Press.
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From page 96... ...
Investor-Owned Utility Corporate organizational structure, with sharehold- Examples include Georgia Power Company (South ers, board of directors and management, subject to ern Company, GA) ; Public Service Company of Colo regulation by state utility regulators rado (Xcel Energy, CO)
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From page 97... ...
Unlike many other provisions of the FPA that address rate regulation only for transmission services and wholesale activities of investor-owned utilities, Section 215 applies to the reliability activities of publicly owned utilities.12 Section 215 does not reach local reliability considerations in light of the scope of NERC's responsibilities that focus on the reliability of the bulk power system. Since the establishment of this overall reliability framework, NERC has adopted standards covering a wide array of systems and activities affecting the operational reliability of the bulk power system.13 With the institutional/governance/enforcement changes introduced by EPACT 2005, NERC has become part of the regulatory process and the power industry now tends to view NERC the same as a regulator.
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From page 98... ...
. 15 The electric industry did set up the North American Transmission Forum (NATF)
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From page 99... ...
. Traditionally, states, and not the federal government, had had exclusive jurisdiction to determine whether to allow a new transmission facility to be sited within their borders.18 In light of the increasing regional scope of electricity markets as well as considerable difficulty in siting transmission facilities that cross state boundaries, Congress established a set of circumstances in which FERC would be authorized to issue approvals for certain interstate transmission facilities.19 First, the Secretary of Energy could designate certain areas experiencing transmission constraints as "national interest electric transmission corridors" (NIETCs)
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From page 100... ...
The Imprint of State Regulatory Policies Despite the dominant role of the federal government in regulating aspects of the bulk power system and wholesale markets, states have also played an important role. In the late 1990s, for example, many states with relatively high electricity prices sought to make the benefits of wholesale electric competition available to retail customers through a number of structural changes in vertically integrated utilities.
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From page 101... ...
. POWER GENERATION, WHOLESALE MARKETS, AND THE BULK POWER SYSTEM Federal/State Tensions in Wholesale Power Markets and Generation Mixes Over the past two decades, the dominant federal policy in the electric industry has been to support the reliability of the grid and the efficiency of wholesale market transactions and system operations, with regulatory 22 Traditionally, individual utilities have undertaken a variety of mechanisms (e.g., owning generation, buying power from a power plant under a long-term power purchase agreement, buying from the short-term electricity market, implementing energy efficiency programs to avoid added resources)
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From page 102... ...
, but some states' policies (e.g., relating to adoption of advanced metering of retail customers' energy use, their ability to see real-time electric energy prices, constraints on whether non-utility aggregators may offer retail customers' demand response into wholesale markets) greatly affect retail consumers' participation in demand response (FERC Staff, 2019)
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From page 103... ...
Finding 3.4: Flexible demand offers to provide opportunities for more efficient operations and prices in wholesale/bulk power segments of the electric industry. Because flexible demand can also provide resources of value to retail/distribution segments, it will be important to establish protocols and other standards about who (i.e., wholesale versus retail)
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From page 104... ...
. Federally Regulated Wholesale Markets in a Low-Carbon Electric System The substantial reduction and eventual elimination of GHG emissions from the electric sector over the next 20 to 30 years that will be required to meet some increasingly aggressive state climate policies will pose important challenges to the design and operation of regional, FERC-regulated, organized wholesale electricity markets.
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From page 105... ...
In the context of organized wholesale markets with low natural gas prices and high penetration of zero-carbon resources, the combination of energy and capacity markets arguably do not always provide revenues to cover the fixed costs of capital-intensive power plants (e.g., existing nuclear plants, solar facilities) in the absence of contracts or other means to cover such costs outside of the energy market.
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From page 106... ...
Importantly, the introduction of price-responsive demand in wholesale markets depends to a large degree on retail customers being exposed to and informed about time-varying prices with capability to respond. To a significant degree, the design of retail prices is a matter of state policy (for investor-owned distribution utilities)
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From page 107... ...
At FERC's direction, RTOs conduct regional transmission planning processes, with involvement of stakeholders, in part to inform such private-sector plans. By contrast, in places where investor-owned utilities are vertically integrated (e.g., most of the Southeast, Colorado, Arizona, and many other places)
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From page 108... ...
Such resources enter the market when either price signals in wholesale energy and forward capacity markets warrant such additions; state-sponsored competitive procurements identify approved resources; or integrated resource planning analyses point to the combination of generation and demand-side resources needed to meet anticipated future customer requirements or mandated renewable energy standards. One consequence of the decoupling of generation planning from transmission planning in many regions is that there are often chicken-and-egg problems associated with developing and siting power plants, on the one hand, and the development and siting of transmission facilities, on the other (Americans for a Clean Energy Grid, 2014; Burke et al., 2020; Zichella, 2012)
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From page 109... ...
Policies (like the unbundling of transmission service from generation) that have helped to support greater competition in wholesale power markets may have made it harder to plan for and permit transmission facilities in a multistate context.
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From page 110... ...
This creates planning and operational challenges for operators of power systems. Recommendation 3.2: Congress should build on the example it set in the electric power system when it established in the Energy Policy Act of 2005 an Electric Reliability Organization with responsibil ity to set and enforce reliability standards for the electric industry, and authorize the Federal Energy Regulatory Commission (FERC)
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From page 111... ...
The committee makes several observations about the connections between such regional planning efforts and outcomes for the transmission system, as follows. First, where anticipated changes on the grid indicate violations of reliability standards in the future, transmission companies and grid operators tend to be successful in justifying proposals to add new single-state or multistate transmission facilities and to get them approved by state regulatory agencies.
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From page 112... ...
WestConnect WestConnect Non-Enrolled Members FIGURE 3.7 Transmission planning regions under Federal Energy Regulatory Commission (FERC) Order 1000.
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From page 113... ...
Finding 3.8: Regional transmission planning and expansion is frustrated in many ways. • While transmission companies and grid operators tend to be successful in justifying proposals to add new single-state or multistate transmission facilities and in receiving approvals for them by state regulatory agencies, it is much harder to gain approvals in situations where transmission enhancements might provide net social economic benefits or support for facilities that are needed for meeting state policy objectives.
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From page 114... ...
In the future, transmission in a low-carbon electric system will need to operate in a reliable and resilient way, even in the face of cyberattacks, extreme weather events, moment-to-moment variability on both the demand and supply sides, increased distributed energy resources, need to smooth supply over wide regions with variable resources, potential switches from mainly summer-peaking to winter-peaking systems, and other 52 DOE, Smart Grid System Report: 2018 Report to Congress, November 2019, page 21, citing a 2017 forecast by Newton Evans.
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From page 115... ...
control, and substation 14.90 automation protection and control 15 12.80 2.30 3.80 "PURE" SMART GRID DEVICES/SYSTEMS 11.20 TOTAL 2.40 DA technologies, advanced metering infrastructure $13.8B 3.00 6.40 (AMI) , T&D monitoring and control devices, 9.95 10 2.50 renewables interties/inverters $10.8B 2.40 5.10 2.70 $8.3B 1.80 3.80 $6.4B 1.20 2.80 2.50 SMART GRID-RELATED ADMIN IT $4.8B 2.10 1.90 1.50 Meter data management (MDM)
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From page 116... ...
• Direct the Federal Energy Regulatory Commission (FERC) to require transmission companies and regional transmission organizations to analyze and plan for all of the following objectives: electric system reliability; efficient dispatch of the bulk power electric system, taking into account economics, environment, and equity; and economical opportunities to expand the interstate electric system to open up access to and development of renewable resources and to connect these regions with areas of high electricity demand.
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From page 117... ...
ELECTRIC DISTRIBUTION: STATE REGULATION OVER RETAIL ELECTRICITY SERVICE Electric Distribution System, Legacy Responsibilities, and Tensions Ahead In contrast with the structural changes in the generation, transmission, and commodity supply of power to retail consumers, the local distribution segment of the electric industry has seen more modest structural change. Even in the face of disruptions in local grids over time -- in technologies, consumer preferences, product innovation, and so forth -- there remains a powerful and tenacious legacy industry structure shaped by the ways that the electric industry and the electric distribution grids have evolved over the past century.
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From page 118... ...
State regulators and boards of publicly owned utilities tend to have to make decisions that take into consideration many sometimes competing goals: • Ensuring that all households have access to basic, affordable electricity service, while also allowing expanded choices for consumers. • Protecting the core regulatory compact that underlies the monopoly franchise: service obligations to help ensure the financial health for the grid operator, while also allowing for and creating incentives for customer choice and innovation in business models and technological adoption.
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From page 119... ...
This increasing focus on the local grid and business models related to it is driven by a number of factors, including growing demand for deployment of technologies like rooftop solar, microgrids, small-scale storage systems, and electric vehicles, which are interconnected to the local grid; customers who want more options for controlling their own energy generation and use; increased need for grid resiliency following large outage events; and policy makers' goals for improving environmental outcomes and economic developments. All of these exert pressure on the local utility and its business model so as to help change and enable a much-more dynamic local distribution grid.
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From page 120... ...
This would be allowed in some states1 but not in others.2 In the latter, only the local distribution utility may sell retail power supply to consumers. Many states that would allow such sales do so under a specific carve-out for entities hosting EV charging stations.
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From page 121... ...
. 5 States in which such an arrangement would not be allowed (unless the provider is only supplying power to its own vehicles or becomes a licensed retail electric supplier)
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From page 122... ...
The definitions of actions tracked include the fol lowing: Studies and Investigations ("Legislative or regulatory-led efforts to study energy storage, grid modernization, utility business model reform, or alternative rate designs, e.g., through a regulatory docket or a cost-benefit analysis") ; Planning and Market Access ("Changes to utility planning processes, including integrated resource planning, distribution system planning, and evaluation of non-wires alternatives, as well as changes to state and wholesale market regulations enabling market access")
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From page 123... ...
. • Allowing limited customer choice options in jurisdictions • Solicitation of offers from non-utility owners of distributed energy where the distribution utility is the sole provider of retail resources to supply capabilities that enable deferral of expansion of service: the distribution system (e.g., ConEd's Brooklyn-Queens Projectb in o Carve-outs for retail customer purchases of power from NY)
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From page 124... ...
As shown in Figure 3.13, there are currently 2.7 GW of operational microgrids, with another 1.4 GW in the planning stages; these microgrids tend to be concentrated in states -- like Texas, New York, Massachusetts, California, and Maryland -- with at least some degree of retail choice and where consumers can purchase power from third parties. One-third of the 242 microgrids in operation as of 2019 are hosted by military and commercial buildings.
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From page 125... ...
SOURCE: NC Clean Energy Technology Center, "The 50 States of Grid Modernization: Q4 Quarterly Report and 2019 Review -- Executive Summary," February 2020. The concept of the local franchise, where the utility is the exclusive owner and operator of wires that cross city streets or in certain specific locations, remains strong almost everywhere across the country, although the particular rules for local franchises vary by state.
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From page 126... ...
126 RANK STATE 1 California 82 LEADERS 2 Illinois 77 3 Maryland 62 4 Arizona 60 5 Oregon 58 6 Texas 57 MOVERS 7 New York 54 8 Nevada 51 8 District of Columbia 51 10 Minnesota 50 11 Michigan 48 11 Massachusetts 48 11 Georgia 48 11 Colorado 48 15 Hawaii 47 16 Delaware 46 BELIEVERS 17 Pennsylvania 45 18 Ohio 44 19 Rhode Island 43 20 Vermont 42 20 Missouri 42 22 Washington 41 23 North Carolina 40 24 New Jersey 37 25 Virginia 32 26 Maine 29 26 Oklahoma 29 26 Connecticut 29 BEGINNERS 29 Florida 27 29 Indiana 27 29 New Hampshire 27 32 Louisiana 24 32 Idaho 24 34 Arkansas 23 34 South Carolina 23 36 Mississippi 21 36 Alabama 21 0 100 38 West Virginia 19 39 Wisconsin 15 40 Kansas 14 LEADERS 41 Tennessee 13 42 Wyoming 12 MOVERS 42 Kentucky 12 44 New Mexico 11 BELIEVERS 45 Iowa 11 46 Utah 10 47 Alaska 10 BEGINNERS 48 South Dakota 9 49 Nebraska 8 50 Montana 6 51 North Dakota 3 FIGURE 3.12 States' progress in taking action on modernizing the local grids. SOURCE: GridWise Alliance, 2018 Grid Modernization Index (GMI-2018)
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From page 127... ...
. SOURCE: Business Council for Sustainable Energy and BloombergNEF, "2021 Sustainable Energy in America Factbook," p.
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From page 128... ...
To succeed in animating the demand side of the market and to encourage its interplay with local and regional systems and markets, this local electricity market will need direction and accommodation from state regulators and harmonization with day-ahead and real-time wholesale markets. Local electricity markets, much like their wholesale counterparts, will have to accommodate the associated costs of increased volatility and risks as they can lead to high congestion costs and significant reliability challenges.
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From page 129... ...
Kristov, 2015, "Distribution Systems in a High Distributed Energy Resources Future: Planning, Market Design, Operation and Oversight," October, https://emp.lbl.gov/publications/distribution-systemshigh-distributed, © 2010–2019 The Regents of the University of California, Lawrence Berkeley National Laboratory. market development.
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From page 130... ...
Either way, much work is needed the local utility ratemaking context -- state regulators and investor-owned utilities, boards and decision makers of publicly owned utilities -- to transition rates into prices and service offerings that better reflect the realities of tomorrow's grid. Finding 3.14: Retail electricity prices, including rate designs, need to reflect the changing cost structure of the electric grid, which will rely increasingly on resources (distribution resources, transmission resources, storage, on-site and central-station resources)
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From page 131... ...
For decision makers at publicly owned utilities, the American Public Power Association (APPA) and the National Rural Electric Cooperative Association (NRECA)
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From page 132... ...
TABLE 3.4 Regulatory Challenges in Transitioning Local Distribution System Business Models: Topics for Relevant Research, Analysis, Assessment, and Pilots • Which of the many electric system services/functions in a modern grid are likely to be competitive in the local grid? • Given that the current utility model ensures that all customers have access to service, how will the introduction of greater competition meet the need for more customer choice while also ensuring that there is at least a back-up service provider for electricity consumers that are poorly served (if at all)
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From page 133... ...
For publicly owned utilities, the national organizations (i.e., the National Rural Electric Cooperative Association [NRECA] , the American Public Power Association [APPA]
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From page 134... ...
Because these issues are complicated and need to take into consideration various techni cal and legal requirements for operating a dynamic system on the local grid, the governing boards of publicly owned utilities and the regulators in states that anticipate significant adoption of DER should place a high priority on exploring and stress-testing emerging approaches and making decisions that will inform market participants about the timing and character of changes in retail industry structure, prices, and market design.
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From page 135... ...
2017. "May 2017 Technical Conference on State Policies and Wholesale Markets Operated by ISO New England, Inc., New York Independent System Operator, Inc., and PJM Interconnection, L.L.C." Docket No.
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From page 136... ...
2016. "Distributed Energy Resources Rate Design and Compensation." November.
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From page 137... ...
2009. DOE transmission corridor designations and FERC backstop siting authority: Has the Energy Policy Act of 2005 succeeded in stimulating the development of new transmission facilities?
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From page 138... ...
138 THE FUTURE OF ELECTRIC POWER IN THE UNITED STATES Weiss, J., and M Castañer.
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