Deregulation weighs on overloaded U.S. power grid

By Vibeke Laroi
03/13/2000
Reuters English News Service
© Reuters Limited 2000

SAN FRANCISCO, March 13 (Reuters) -- North America's power grid is groaning under the strain of too many electrons vying for too little space on a transmission system that was not designed to handle the demands of a deregulated power market.

As the industry swings into the era of open competition, the lines that once linked power plants to local customers are loaded with more power racing to ever more distant markets, raising serious concerns about reliable service.

"It's like taking Main Street and using it as Interstate 90 without making any changes," said Greg Rislov, a utilities analyst advising the South Dakota Public Utilities Commission.

The power grid is a vast system of high-voltage lines criss-crossing the countryside, designed, built and operated over the years by electric utilities to serve homes and factories within each utility's geographic reach.

Deregulation is breaking down those monopolies. A key feature of the new marketplace is "open access" - the right of any power company or marketer to send their power to market over whichever transmission lines are available at the same cost to outsiders as to the utility that owns the lines.

This has opened the power grid to commerce and spurred phenomenal growth in electricity trading.

Surge in power trade

The Electric Power Research Institute ( EPRI ), in announcing the start of a two-year study of recent power outages and ways to prevent them, said power transactions in parts of the U.S. have swelled by 464 percent over the past four years. EPRI , based in Palo Alto, Calif., conducts research and develops technology for the electricity industry worldwide.

Power demand has been gradually increasing in the U.S. as a result of natural population growth and a booming economy.

But the real driving force behind the huge growth in wholesale electricity trading is power marketers, a new merchant class that takes title to electricity generated by themselves or others, reselling it to the highest bidder in the spot market.

In early 1995, 11 power marketers were active in wholesale trading. By early 1999, that number had jumped to 124, according to the Edison Electric Institute (EEI), a Washington D.C.-based trade group that represents investor-owned electric utilities.

During the same four years, the amount of wholesale power sold in the U.S. by power marketers ballooned from 2.7 million megawatt hours (MWh) to 487 million MWh, the EEI said.

This flurry of commercial activity raised alarms about the power grid 's ability to handle the extra load, which competes with traditional local deliveries for space on the lines and often results - like a clogged freeway - in "line congestion."

"The transition to a more competitive electricity market has led to an upsurge in reliability problems. Power outages in the U.S. have increased significantly in recent years," EPRI said.

In the two years following the 1996 landmark open access ruling by the Federal Energy Regulatory Commission (FERC), which regulates interstate energy trade, the number of major electric power outages in the U.S. jumped from 39 to 61, or by 64 percent, EPRI said.

EPRI says that failure to satisfy grid expansion needs is resulting in an increasing frequency and duration of power disturbances and outages, resulting in a cost to the U.S. of an estimated $50 billion a year.

"The basic design of most (transmission and) distribution systems today dates back to the 1950s and before, when the level of reliability and flexibility of service were much less than those currently required," EPRI said.

Efforts to end the gridlock

To cope with the rising volume of traffic, there are plans to build about 7,000 miles of new, high-voltage lines that can carry 230 kilovolts of electricity or more.

According to the North American Electric Reliability Council (NERC), the New Jersey-based group that oversees the safety and reliability of the grid, the system will be expanded to 208,221 miles of lines by the end of 2008, up from an existing 201,243 miles in early 1999.

And while the mileage totals do not measure capacity, these numbers nevertheless represent an increase of only 3 percent.

Most of the proposed projects aim to provide internal support to local systems, but analysts say there is a more urgent need for lines linking different regions.

"The more transmission that's built, the better off we are. But unfortunately it's almost impossible to build," a NERC official said.

"It's a political nightmare. No one wants a transmission line anywhere near their house, school, children or church. And the transmission lines we're talking about are large."

The challenge of building new high-voltage lines is so daunting, in fact, that almost no new lines have been built in 25 years, according to EPRI.

Analysts say other solutions to the transmission dilemma include building power plants closer to cities, where the biggest demand is, and developing technology to more efficiently use existing lines, improve load management, or adopt new ways to compute congestion costs.

"I'm not as worried about the system going black as some are. In the short-term, there are options out there," said Chuck Waits, director of transmission transactions at Consumers Energy, a unit of Michigan-based CMS Energy Corp.

"But if you look at the latter stages of deregulation, when generators are everywhere and everyone has a choice of supplier, the transmission system has to be modified.

"If that changed world is to become a reality, then transmission will have to change to be able to accommodate the grandiose expectations of that market," Waits said.

Clearer rules needed

Market players say they need encouraging signals and financial incentives from regulatory agencies showing they are serious about building transmission, as well as clearer rules to govern the vast changes unleashed by deregulation.

FERC is encouraging electric utilities to form regional transmission organizations (RTOs), which would manage the nation's electric power lines, to help speed up competition in the $230 billion electricity sector.

But analysts say rules governing RTOs, such as who is responsible for planning, building and recovering costs for expanding the transmission grid, are still unclear.

"Any time you have uncertain rules, people will be reluctant to commit capital," said Susan Schneider, an independent energy market consultant.

So far, about half of the country's 50 states have enacted some form of electricity deregulation, creating a bewildering patchwork of rules from state to state while attempts to set rules for the entire industry at the federal level have made little progress in Congress. [San Francisco Power Desk, (415) 677-2522, fax (415) 677-2595, vibeke.laroi@reuters.com.]