Electric Reliability: Options for Electric Transmission Infrastructure Improvements

Publication Date: September 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

The electric utility industry is inherently capital intensive. At the same time, the industry must operate under a changing and sometimes unpredictable regulatory system at both the federal and state level. The transmission system was developed to fit the regulatory framework established in the 1920 Federal Power Act: utilities served local customers in a monopoly service territory. The transmission system was not designed to handle large power transfers between utilities and regions. Enactment of the Energy Policy Act of 1992 (P.L 102-486) created tension between the regulatory environment and existing transmission system: the competitive generation market encouraged wholesale, interstate power transfers across a system that was designed to protect local reliability, not bulk power transfers.

The Energy Policy Act of 2005 (P.L. 109-58) has set in place government activities intended to relieve congestion on the transmission system. The law creates an electric reliability organization that is to enforce mandatory reliability standards for the bulk-power system. In addition, processes are established to streamline the siting of transmission facilities.

Through 1998, electricity demand recently had been growing at 2% to 3% per year. Additions to the transmission system had been averaging about 0.7% per year. Reversing this trend, between 1999 and 2003, transmission investment increased at a 12% annual rate. This long period of insufficient transmission investment has led to transmission lines that are congested in several regions of United States.

Several factors have contributed to the lack of new transmission capacity. First, there is general consensus that siting new lines is difficult, having needed approval of all states in which the transmission line will be located. Second, some have argued that the pricing mechanism for transmission has been a deterrent for investors. Third, many contend that regulatory uncertainty has added a level of risk that investors are unwilling to assume.

The Energy Policy Act of 1992 introduced competition to wholesale electric transactions without a comprehensive plan to address reliability issues and the development of efficient wholesale markets. In addition, approximately half of the states have passed legislation or had regulatory orders to introduce retail competition, each with its own set of rules for utilities to follow. The blackout of 2003 in the Northeast, Midwest, and Canada highlighted the need for infrastructure improvements and greater standardization of operating rules. EPACT05 addresses some of the transmission issues by creating an electric reliability organization, establishing incentive-based rate-making for transmission, and allowing federal backstop authority for transmission siting. Until the electric power industry reaches a new equilibrium with more regulatory certainty, many observers predict, investment in transmission infrastructure and technology will continue to be inadequate.

This report will be updated as events warrant.