Melvin H. Barnes, Jr.

The structure of today’s electrical energy industry is far removed from the structure of the industry of the 1970s and 1980s. The electrical energy industry of the past was composed of utilities that supplied electricity to a specific geographical area. The utilities of that time were called vertically integrated utilities (VIUs). The interconnection of the VIUs in North America comprised the national electrical energy grid. There were more than 3,100 electric utilities in North America (U.S. Department of Energy, 2006).

In the past, a typical VIU owned and controlled the power generation, transmission, and distribution of electricity. Consumers of electricity, whether they were industrial or residential, had one source for their electrical power needs, the VIU. This is not to say that a VIU was an island onto itself, however. In the past, neighboring utilities established interconnections among themselves and with each other to increase supply options, to augment reliability, and to share reserves economically (U.S. Department of Energy, 2001). There were three interconnections in the country: Eastern Interconnect, Western Interconnect, and Texas Interconnect. Figure 1 shows the boundaries of the interconnections.


Figure 1: Major Transmission Networks (U.S. Department of Energy, 2001)

This system did not lend itself to the transfer of electricity between the interconnections. Energy transfer between the interconnections was limited. Each grid (interconnection), therefore, operated as a single large utility and functioned with a common set of operating guidelines (U.S. Department of Energy, 2001). Yet, several commonalities existed between the interconnections, one being how their systems were controlled.

Control of the electrical generators and substations was and still is via Supervisory Control and Data Acquisition (SCADA) systems. SCADA systems were not designed with security as one of the requirements as a top priority. Instead, security was achieved by lack of access to these control systems. SCADA systems were accessed by dedicated communications lines or closed networks, thus physical security was the main concern for VIUs. Process control and SCADA systems, with their reliance on proprietary networks and hardware, were considered immune to the network attacks that have wreaked havoc on corporate information systems (Byres and Lowe, 2004). But the introduction of Internet-based information technology within the process controls industry has increased vulnerabilities to the industry’s computer systems (Falco, Stouffer, Wavering, and Proctor, 2002).

Change in the electrical energy industry began in the late 1980s and early 1990s. Industrial and commercial energy consumers lobbied the federal government to press that cheaper rates could be realized by buying energy from corporations other than the local VIU.

As a result of their lobbying effort, government regulations designed to increase competition were drafted and implemented. The first regulation that pertains to this study was Federal Energy Regulatory Commission (FERC) Order No. 888, which removed impediments to competition in the wholesale bulk power marketplace and brought more efficient, lower cost power to the nation’s electricity consumers (Federal Energy Regulatory Commission, 1996).

FERC Order No. 888 was issued on April 24, 1996. Essentially, the order was a final rule regarding electric industry restructuring. Prior to implementation of this order the electrical energy marketplace consisted of geographic monopolies that did not allow independent operators entry onto the electrical grid. Thus FERC Order No. 888:

  • Requires transmission owners who purchase transmission service to offer nondiscriminatory, comparable transmission service to others seeking such services over its own facilities. This often is referred to as the “open access” rule.
  • Has a goal to ensure that potential suppliers of electricity have equal access to the market.
  • Encourages the creation of a separate Price Exchange to reveal market-clearing prices for electricity in the new competitive market (Federal Energy Regulatory Commission, 1996).

On March 4, 1997, FERC Order No. 888-A was issued, which reaffirmed the basic determinations in the original order and clarifies certain terms (Federal Energy Regulatory Commission, 1997a). It should be noted, however, that the order did not recommend a change or upgrade to the infrastructure of the electrical grid. The national electrical grid was not designed to support the markets for the sale of electric power.

FERC Order No. 889 was also issued on March 4, 1997. In this order, the Commission addresses the requests for rehearing Order No. 889, our final rule requiring public utilities that own, control, or operate facilities used for the transmission of electric energy in interstate commerce to create or participate in an Open Access Same-Time Information System (OASIS) site (Federal Energy Regulatory Commission, 1997b). Order No. 889 requires utilities to establish electronic systems to share information about available transmission capacity, thus increasing competition in the industry.

On December 20, 1999, the FERC issued Order No. 2000-A, which solidified the formation of Regional Transmission Organizations (RTOs). The Commission’s objective in promulgating Order No. 2000-A was to have all transmission-owning entities in the nation, including non-public utility entities, place their transmission facilities under the control of appropriate RTOs in a timely manner (Federal Energy Regulatory Commission, 2000). The outcome of Order No. 2000-A was the end of the VIU. Although a VIU may still own transmission facilities, the control and governance now fall under the RTO in the geographic area.

In Order No. 2000-A, the Commission concluded that regional institutions could address the operational and reliability issues confronting the industry and eliminate undue discrimination in transmission services that can occur when the operation of the transmission system remains in the control of a VIU (Federal Energy Regulatory Commission, 2000). FERC, in conjunction with the U.S. Department of Energy (DoE), had concluded that the VIU system was not providing a fair marketplace for the sale of electrical energy. The establishment of the RTO system placed the transmission facilities into one of a number of RTOs. Figure 2 shows the existing and proposed RTO configurations.


Figure 2: Existing and Proposed RTO Configurations (EEI, 2004)

But the order was not universally accepted. Among those in disagreement with the order was the Edison Electric Institute (EEI), the trade association of shareholder-owned electric companies. EEI’s members serve roughly 90 percent of the ultimate customers in the shareholder-owned segment of the industry, nearly 70 percent of all electric utility ultimate customers in the nation, and they generate nearly 70 percent of the electricity produced in the United States.

“We commend FERC for predicating its rule on flexibility of form and voluntary participation and we also appreciate the Commission’s demonstration in Order No. 2000 that it is open to innovative transmission ratemaking,” said EEI Executive Vice President David K. Owens. “At the same time, we urge the Commission to revisit provisions of the rulemaking that we contend are without sufficient basis in fact or law,” he added (Owens, 2000).

Check out Part II of the Article >>

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