oversight

Electricity Restructuring: 2003 Blackout Identifies Crisis and Opportunity for the Electricity Sector

Published by the Government Accountability Office on 2003-11-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Chairman, Senate
                Committee on Governmental Affairs



November 2003
                ELECTRICITY
                RESTRUCTURING
                2003 Blackout
                Identifies Crisis and
                Opportunity for the
                Electricity Sector




GAO-04-204
Contents


Letter                                                                                                 1
             Summary                                                                                   1

Appendix I   2003 Blackout Identifies Crisis and Opportunity for
             the Electricity Sector                                                                    5




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             Page i                       GAO-04-204 Crisis and Opportunity for the Electricity Sector
United States General Accounting Office
Washington, DC 20548




                                   November 18, 2003

                                   The Honorable Susan M. Collins
                                   Chairman, Committee on Governmental Affairs
                                   United States Senate

                                   Dear Chairman Collins:

                                   The August 14, 2003, electricity blackout—the largest in the nation’s
                                   history—affected millions of people across eight northeastern and
                                   midwestern states as well as areas in Canada. In some areas, power was
                                   restored in hours, while in others power was lost for several days. The
                                   blackout intensified concerns about the overall status and security of the
                                   electricity industry at a time when the industry is undergoing major
                                   changes and Americans have a heightened awareness of threats to
                                   security.

                                   Because of these widespread concerns and the broad institutional interest
                                   of the Congress, we (1) highlighted information about the known causes
                                   and effects of the blackout, (2) summarized themes from prior GAO
                                   reports on electricity and security matters that provide a context for
                                   understanding the blackout, and (3) identified some of the potential
                                   options for resolving problems associated with these electricity and
                                   security matters.

                                   Over the past several weeks, GAO staff briefed numerous congressional
                                   staff on its observations. In response to your request, we prepared this
                                   overview to accompany the slides used in these presentations. Appendix I
                                   presents the latest briefing slides in their entirety. Our briefing is based
                                   largely on reports we previously issued on a range of electricity issues
                                   along with updated information obtained from the Department of Energy
                                   (DOE), the North American Electric Reliability Council, and operators of
                                   the transmission system in the blackout region. The information presented
                                   is intended to place the electricity blackout in the broader context of long-
                                   term issues affecting the sector. The options presented do not encompass
                                   a complete set of all possible options but do represent ideas that merit
                                   consideration as the nation moves forward to address this important issue.


                                   While the root cause of the blackout has not yet been conclusively
Summary                            established, a recent DOE report describes a sequence of events that


                                   Page 1                   GAO-04-204 Crisis and Opportunity for the Electricity Sector
culminated with the outage. A series of power plants and transmission
lines went offline beginning at about noon eastern daylight time because
of instability in the transmission system in three states. The loss of these
plants and transmission lines led to greater instability in the regional
power transmission system, which—4 hours later—resulted in a rapid
cascade of additional plant and transmission line outages and widespread
power outages. The blackout affected as many as 50 million customers in
the United States and Canada, as well as a wide range of vital services and
commerce. Air and ground transportation systems shut down, trapping
people far from home; drinking water systems and sewage processing
plants stopped operating; manufacturing was disrupted; and some
emergency communications systems stopped functioning. The lost
productivity and revenue have been estimated in the billions of dollars. A
joint U. S.-Canadian taskforce is seeking to identify the root cause of the
failures and plans to issue an interim report in November 2003.

Over the past several years, our work on the electricity sector has resulted
in numerous findings, conclusions, observations, and recommendations.
Based on this prior work, we highlight three themes on electricity and
security matters in our briefing and lay out some of the potential options
to consider in addressing problems in these areas.

Specifically:

•   Electricity markets are developing, but significant challenges remain.
    Our work has shown that while the electricity sector is in transition to
    competitive markets, the full benefits of these markets will take time
    and effort to achieve. For example, we found that the separate
    development of wholesale and retail electricity markets, which is
    occurring as part of the electricity industry shifts from regulated to
    competitive markets, limits the industry’s ability to achieve the benefits
    of competition. The separate development of these markets reduces or
    eliminates retail consumers’ incentive or ability to respond to market
    signals that supplies are tight. Consumers do not respond because the
    retail prices they see are set by state regulators and do not reflect
    actual market conditions. This lack of consumer response becomes
    particularly important during periods of high demand for electricity,
    such as hot summer afternoons, when total electricity use approaches
    the total amount of available generation. Efforts to promote various
    types of demand response, such as those that link customers’
    electricity consumption with prices, may offer one option for
    improving this situation. We are exploring this issue in more depth in




Page 2                   GAO-04-204 Crisis and Opportunity for the Electricity Sector
    response to your request. Other issues raised by our work in this area
    are presented in slides 14 through 18 of the briefing.
•   Oversight of markets and reliability needs more attention. The ongoing
    transition to competitive markets, or “restructuring” of electricity
    markets, has dramatically changed how the Federal Energy Regulatory
    Commission (FERC) needs to oversee these markets and the
    information it needs to do so. In order to monitor current market
    conditions to ensure fair competition, for example, FERC needs to
    access market information on wholesale transactions and the operation
    of electric generating plants, among other things. Our work shows that
    FERC’s oversight efforts are improving, but it continues to be
    hampered by a number of challenges. In particular, we noted that
    FERC had previously not clearly defined its role in monitoring the
    market, faced gaps in information due to limitations in its jurisdictional
    authority, relied on third-party data to perform regulatory functions,
    and had limited enforcement authority. In addition, we pointed out that
    FERC faced human capital challenges to acquire and develop the staff
    knowledge and skill it needs to effectively regulate and oversee today’s
    electricity market. Because restructuring has changed the types of
    information regulators need, we have previously recommended that
    FERC demonstrate what additional information it needs, describe the
    limitations it faces without such information, and ask the Congress for
    authority to collect it. One option for congressional action in this area
    includes providing FERC with authority to gain access to needed data
    relating to reliability and markets. Other issues raised by our work in
    this area are presented in slides 19 through 26 of the briefing.

•   Security for critical infrastructure is of growing importance. Our work
    has shown that a reassessment of the security of the nation’s physical
    infrastructure as well as that of related information technology and
    control systems should be undertaken. Often, security measures have
    been added after the infrastructure is in place, which is costly and
    creates potential conflicts between security and efficiency. Therefore,
    it may be better to integrate sufficient security measures for these
    critical systems, particularly in a post-September 11th environment,
    into the planning for new construction or the upgrading of existing
    infrastructure, rather than viewing them as later add-ons. Our work has
    also raised concerns about the increasing reliance on information
    technology and control systems, which are potentially vulnerable to
    cyber attack, including the systems used in the electricity sector. As
    part of our work, we have found that cyber attacks against these
    systems could be used to cause damage or complicate the response to
    a physical attack. One option to help address this problem would be to
    increase the focus on research and development and other related



Page 3                   GAO-04-204 Crisis and Opportunity for the Electricity Sector
   activities, including the use of currently available technologies and
   vulnerability assessments, aimed at enhancing national capabilities to
   respond to cyber-security issues. Other aspects of our work in this area
   are presented in slides 27 through 29 of the briefing.

Whatever the ultimate cause of the blackout, our work has shown that a
number of significant challenges remain for the electricity sector. We
recognize that many issues surrounding the restructuring of the electricity
industry are complicated and that solutions involve complex policy
tradeoffs for the Congress that will undoubtedly take time to fully resolve.
GAO stands ready to provide any analytical assistance the Congress may
need in this important long-term endeavor.

We conducted our work in accordance with generally accepted
government auditing standards.


We are providing copies of this report to other appropriate congressional
committees as well as DOE and FERC. The report will be available at no
charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me
at (202) 512-3841. Major contributors to this report included Mary Acosta,
Dennis Carroll, Dan Haas, Randy Jones, Mike Kaufman, Jon Ludwigson,
and Barbara Timmerman.

Sincerely yours,




Jim Wells
Director, National Resources and Environment




Page 4                  GAO-04-204 Crisis and Opportunity for the Electricity Sector
               Appendix I: 2003 Blackout Identifies Crisis
Appendix I: 2003 Blackout Identifies Crisis
               and Opportunity for the Electricity Sector



and Opportunity for the Electricity Sector




               2003 Blackout



           Crisis and Opportunity for the
                  Electricity Sector




                                           1




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                  Appendix I: 2003 Blackout Identifies Crisis
                  and Opportunity for the Electricity Sector




Contents

Information on the Blackout
Background on Electricity and Electricity Restructuring
Themes from Prior GAO Work
Potential Options




                                        2




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                      Appendix I: 2003 Blackout Identifies Crisis
                      and Opportunity for the Electricity Sector




What We Considered in Developing the
Briefing
Examined information from NERC, FERC, DOE, several ISOs
Examined prior relevant GAO work (reports, testimony, and briefings)
  covering a range of areas
       • Development of energy markets
       • Regulatory oversight of energy sector
       • Homeland security and physical security of critical infrastructure
       • Information technology and cyber security




                                            3




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                                                    Appendix I: 2003 Blackout Identifies Crisis
                                                    and Opportunity for the Electricity Sector




      Information on the Blackout
      Events Preceding the Blackout
                                                                                   Root cause not known, evaluation ongoing
                                                                                   Current analysis points to a series of line
                                                                                   and plant outages (times in Eastern Daylight
                                                                                   Time)
                                                                                          •   Midday, 3 large power plants go down
                                                                                              (Michigan, mid-Ohio, Cleveland)
                                                                                          •   2-3 PM 4 large (345 KV) transmission lines
                                                                                              tripped
                                                                                          •   Power swings noted in Canada and Eastern
                                                                                              United States
                                                                                          •   4:10 many power plants and large
                                                                                              transmission lines trip, mostly in Michigan
                                                                                              and Ohio
                                                                                          •   4:11 cascade of trips sever New York east
                                                                                              and west, PJM and New England separate
                                                                                   Grid operator (Midwest Independent System
                                                                                   Operator) experienced significant
                                                                                   communication problems during event
Note: Color coded dots depict approximate power line and power plant outage locations.
Source: GAO analysis of data provided by the Department of Energy and Platt’s PowerMAP.



                                                                                   4




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                                               Appendix I: 2003 Blackout Identifies Crisis
                                               and Opportunity for the Electricity Sector




Information on the Blackout
Largest Blackout in U.S. History
                                                                                 Significant electricity outage
                                                                                        •   8 states and 2 Canadian provinces
                                                                                        •   61,800 MW of demand
                                                                                        •   50 million customers (estimated)
                                                                                        •   About 102 plants (22 nuclear plants)
                                                                                 Wide-ranging impacts
                                                                                        •   Water systems shut down
                                                                                        •   Raw sewage dumped
                                                                                        •   Air and ground transportation halted
                                                                                        •   Gas stations and refineries closed
                                                                                        •   Cellular networks interrupted
                                                                                        •   911 communications interrupted
                                                                                        •   Manufacturers shut down
                                                                                 Investigations underway
                                                                                        •   US-Canadian team
                                                                                        •   U.S. House—Energy and Commerce
Note: Locations and boundaries are approximate.                                         •   U.S. House—Homeland Security
Source: GAO analysis of information provided by the Department of Energy.
                                                                                        •   State government investigations


                                                                            5




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                         Appendix I: 2003 Blackout Identifies Crisis
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Background
Electricity Sector
Vast infrastructure
    •   3 major U.S. systems (East, West, and Texas)
    •   Vast network (~2,100 large power plants, ~150,000 miles of electricity lines)
    •   4 key functions (generation, transmission, distribution, system operations)
Integrated and coordinated system
    •   Electricity must be produced and consumed at almost the same time
    •   A change in one area of the grid can affect other areas, almost instantaneously
    •   Infrastructure (such as power plants and transmission grid) has limited capacity
    •   Local and regional supply and demand must be balanced to avoid blackouts
    •   Overall demand increases about 2-3% per year, but can vary widely by region
Regulated sector
    •   Federally at FERC (wholesale sales, interstate transmission for “public utilities”,
        generally excludes Alaska, Hawaii, and most of Texas)
    •   States through state commissions (retail sales, intrastate transmission)
    •   Some entities largely unregulated (cooperative, municipal, and other owner-
        serving entities)


                                               6




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Background
Local Networks Became 3 Synchronized U.S. Systems




          Western Interconnect




                                                                                                  Eastern Interconnect




                                                 Texas Interconnect

Source: North American Electric Reliability Council.



                                                                       7




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Background
Vast Network of Electricity Lines and Plants




Source: GAO Analysis of Data Provided by Platt’s.



                                                                     8




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Background
Electricity Sector Has 4 Distinct Functions




                                      9




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Background
System Must be Balanced Throughout Day




Source: GAO.

                                     10




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Background
Restructuring Goal: Competition Leading to Benefits
Increase competition
    •   Increase numbers of buyers and sellers
    •   Provide information to enable consumers to make choices
    •   Enable sellers to enter and exit market in response to information
Provide benefits to consumers
    •   Lower prices
    •   Access to new services
    •   Increased efficiency
    •   More innovation
Maintain or enhance reliability




                                              11




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Background
Electricity Restructuring Is Changing the Sector
Businesses shifted from emphasizing regulation to emphasizing markets
    •   Opened generation to competition, 3 other functions remain regulated
    •   Companies now bear risks previously borne by ratepayers
Physically, opened access to transmission lines to utilities and new entrants
    •   As a result, multiple entities now interact to perform the key functions needed to
        deliver electricity to consumers
Regulators shift away from planning system and setting rates
    •   FERC is shifting from setting rates (reactive) to designing and monitoring
        markets in real-time (proactive)
    •   States are moving away from central role in planning and rate setting to leaving
        private entities to determine what to build and what to charge




                                              12




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Themes from Prior GAO Work
GAO Work Focused Around Three Key Areas
Electricity markets developing, but challenges remain
Regulatory oversight needs more attention
Security of critical infrastructure increasingly important




                                           13




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Themes from Prior GAO Work
Electricity Markets Developing, but Challenges Remain
Adequate infrastructure essential for reliability and competitive prices
Grid becoming more regional, but key authorities remain with states and
    localities
Little understanding of options during market events or emergencies
Uncertainties limit investment in new infrastructure




                                           14




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          Themes from Prior GAO Work
          Electricity Markets Developing, but Challenges Remain
                                                                                                          Adequate infrastructure essential for
                                                                                                          reliability and competitive prices
                                                                                                                •   Growing electricity demand
                                                                                                                    places pressure on grid and
                                                                                                                    supply sources
Western Interconnect                                                                                            •   Restructuring increases use of the
                                                                                                                    grid
                                                                                                                •   Numerous parts of U.S.
                                                                                                                    witnessing increasing congestion
                                                                                       Eastern Interconnect         of transmission system




                             Texas Interconnect


  Note: Arrows in this illustration show the location and direction of current transmission congestion.
 Source: North American Electric Reliability Council.



                                                                                              15




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Themes from Prior GAO Work
Electricity Markets Developing, but Challenges Remain




         State A             State B                            State C
        Source: GAO.
Grid becoming more regional, but authorities remain with states and localities
    •   Infrastructure serves regional needs
    •   Increasingly, problems in one state affect neighboring states
    •   Authority to add new infrastructure remains with states

                                              16




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                               Themes from Prior GAO Work
                               Electricity Markets Developing, but Challenges Remain
                                                                                                             Little understanding of options
                                                 2002 Load Duration Curve, NYISO                             during times of shortage or crisis
                      35,000                                                                                        •   Highest levels of demand only
                                                                                                                        reached during a small
                      30,000
                                                                                                                        percentage of the hours of the
                                                                                                                        year
Hourly NYISO Demand




                                                                                                                          • For example, the New York ISO
                      25,000
                                                                                                                            exceeds 25,000 MW during <5%
                                                                                                                            of hours
                      20,000                                                                                        •   Consumer response to scarcity,
                                                                                                                        such as when wholesale prices
                      15,000
                                                                                                                        rise, is missing due to lack of
                                                                                                                        information and incentives
                                                                                                                    •   Backup generation not
                      10,000
                               0         1,000   2,000   3,000   4,000    5,000    6,000   7,000   8,000   9,000        inventoried, limits on use
                                   389               Cumulative Number of Hours per Year                            •   Use of emergency power
                                                                                                                        generally involves environmental
                           Source: GAO analysis of New York Independent System Operator data.                           and other challenges

                                                                                                   17




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    Themes from Prior GAO Work
    Electricity Markets Developing, but Challenges Remain

       Attracting private investment requires balancing risk and profits


•Market                                                                                    •Market prices v. costs
•Business                                                                                  •Higher cost of capital
•Environmental regulation                                                                  •Shorter recovery periods
•9/11, terrorism
•Enron, investment
•Federal regulation
                                                                       Profit
•State regulation

                                       Risk

                            Source: GAO.


                                                      18




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Themes from Prior GAO Work
Regulatory Oversight Needs More Attention
Monitoring of reliability inadequate
Limited jurisdiction and varied rules hinder market development
FERC faces challenges in market oversight




                                           19




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Themes from Prior GAO Work
Regulatory Oversight Needs More Attention

                                      Monitoring of reliability inadequate


                                                    FERC                  States                NERC

                                               Transmission                                    None
                         Monitoring                                   Distribution
                         Authority              Wholesale                                    (Voluntary
                                                                     Retail Markets
                                                 Markets                                    Membership)

                                                                                             Nationally
                        Reliability                                  Varies (23 of 40
                                                    None                                     (Voluntary
                        Monitoring                                       states*)
                                                                                            Compliance)


*National Regulatory Research Institute
Source: GAO.



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Themes from Prior GAO Work
Regulatory Oversight Needs More Attention
Limited jurisdiction and varied rules hinder market development
   • FERC lacks jurisdiction over some entities resulting in patchwork of
     restructured and regulated wholesale markets
   • Varied wholesale market rules may limit development of a competitive
     market
   • Limited implementation of retail restructuring may limit development of
     wholesale markets
   • FERC protects consumers through its oversight of wholesale markets
     and through its oversight of fair access to transmission lines




                                          21




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Divided Jurisdiction
FERC Lacks Jurisdiction Over Some Entities




                                     22




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Divided Jurisdiction
FERC Lacks Jurisdiction Over Some Entities (cont.)




          Notes: Data for transmission lines reflect primary ownership--some lines have multiple owners.
          Federal entities include the Bonneville Power Administration, the Tennessee Valley Authority, the Western Area
          Power Administration, and others."


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Divided Jurisdiction
Varied Wholesale Market Rules




                                     24




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Divided Jurisdiction
Limited Implementation of Retail Restructuring




Source: GAO Analysis of Energy Information Administration data.


                                                              25




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Themes from Prior GAO Work
Regulatory Oversight Needs More Attention

               FERC faces market oversight challenges
                                  Effective
                                  Oversight



                                Enforcement
                               3rd Party Data
                           Information Gaps
                               Human Capital

                                        Role
Source: GAO.


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Themes from Prior GAO Work
Security of Critical Infrastructure Increasingly Important
Embedding homeland security principles as integral part of investment
   in infrastructure and business processes is important
Increasing reliance on information technology requires attention to
   cyber-security




                                         27




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Themes from Prior GAO Work
Security of Critical Infrastructure Increasingly Important
Embedding homeland security principles as integral part of investment in
  infrastructure and business processes is important
     •   Designing it in up-front [most cost-effective]
     •   Not bolting it on afterwards [potential conflicts between security and efficiency]



                               Homeland Security
                                           Operational
                                            Systems
                                                            Business
                          Infrastructure
                                                             Process

Source: GAO.


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Themes from Prior GAO Work
Security of Critical Infrastructure Increasingly Important
                                                   Increasing reliance on information
                                                   technology requires attention to
                                                   cyber-security
                                                          •   SCADA/control systems perform
                                                              vital functions in electric power
                                                              and other industries
                                                          •   SCADA/control systems and
                                                              networks are potentially
                                                              vulnerable to attack, by terrorists
                                                              or others
                                                          •   Electricity sector making progress
                                                              in implementing critical
                                                              infrastructure protection (CIP)
                                                              measures



Source: White House.


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Potential Options
Issues Needing Resolution and Options to Address Them
Energy markets developing, but challenges remain
    •   Minimal consumer responsiveness to market
    •   Lack of “backstop authority” for transmission siting
    •   Divided regulatory authority
    •   Lack of uniformity in market rules
    •   Uncertainty about future of restructuring
    •   Uncertainty over how to pay for transmission upgrades
Oversight and monitoring needs more attention
    •   Lack of enforceable reliability rules (NERC or federal reliability organization)
    •   Limited access to needed reliability and market data for regulators
Security of increasing importance
    •   Limited incentives for participation in federal critical infrastructure protection
        activities
    •   Homeland security concerns not fully considered
    •   Weaknesses in cybersecurity

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Potential Options for Improving
Consumer Responsiveness to Market
Issue—Minimal consumer responsiveness limits the development of markets
   and reduces reliability
    •   Infrastructure limited, resulting in scarcity during periods of high demand
    •   Consumers generally do not respond to this scarcity
    •   Lack of response increases costs, raises price volatility, and reduces reliability
What FERC has done
    •   In its standard market design, FERC has proposed to introduce one type of
        demand response
What GAO has done
    •   Identified that the lack of demand response limits the benefits of restructuring
    •   Examining the issue of demand response, release expected 2004
Options for congressional action
    •   Encourage the use of demand response tools in retail markets
    •   Promote the development of metering needed to implement demand response
    •   Educate utilities and consumers about the benefits of demand response



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Potential Options for Providing
“Backstop Authority”
Issue—Transmission serves regional needs and is essential to reliability, but
   varied approaches present challenges for upgrading system
    •   Reliability and markets depend on adequate infrastructure
    •   States and localities have regulatory authority over siting plants and lines
    •   Varied approaches to siting can result in contentious, uncertain, and time-
        consuming efforts to add infrastructure
    •   Uncertainty and delays may reduce investment in new infrastructure
What GAO has done
    •   Described FERC authorities for natural gas pipelines
    •   Described Colorado backstop statute for transmission lines
Options for congressional action
    •   Consider empowering regional entity to resolve disputes
    •   Consider FERC backstop authority (ability to grant eminent domain) if
        companies and states cannot reach agreement




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Potential Options Addressing Divided
Regulatory Authority
Issue—Divided regulatory authority limits development of market and
   reliability of the system
    •   Entire network interconnected—points on grid separated by milliseconds
    •   Lack of coordination between the development of wholesale and retail markets
        limits the potential benefits
    •   A patchwork of rules now governs electricity markets
         • Only about 75% of the wholesale market subject to FERC’s authority
         • Varied state approaches to regulating/restructuring retail markets
    •   Lack of consistency limits trade and slows development of competition
What FERC has done
    •   FERC seeking consensus through outreach with states and regions
Options for congressional action
    •   Clarify FERC’s authority over all wholesale markets and transmission lines
    •   Determine if FERC should oversee some aspects of retail markets
    •   Explore how to better link wholesale and retail markets

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Potential Options for Enhancing
Uniformity of Market Rules
Issue—Lack of uniformity in market rules limits development of market and
   places reliability at risk
    •   FERC has approved different sets of market rules for different areas
    •   Presence of different rules limits trade, and the development of competition
    •   Presence of different rules makes investment in new infrastructure more risky
What FERC has done
    •   In 2002, FERC proposed standard market design that would make all FERC
        jurisdictional wholesale markets operate under a single set of rules
Option for congressional action
    •   Make market rules regional and move toward standardization—markets cannot
        solve this problem




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                        Page 38                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                         Appendix I: 2003 Blackout Identifies Crisis
                         and Opportunity for the Electricity Sector




Potential Options for Reducing
Uncertainty About Restructuring
Issue—Lingering uncertainty over the future of restructuring is limiting needed
   investment and raises costs to consumers/investors
    •   Long-standing federal debate over future of restructuring creates uncertainty
    •   Actions on state restructuring of retail markets vary and the future is uncertain
    •   Uncertainty limits and/or delays investment and raises costs
What FERC has done
    •   Issued orders restructuring wholesale markets and proposals outlining plans
What GAO has recommended
    •   FERC should report on the performance of restructured electricity markets,
        collecting data needed to evaluate both wholesale and retail elements
    •   FERC should report annually to Congress to identify emerging issues and
        impediments to reaching goal of achieving competitive wholesale markets
Options for congressional action
    •   Reduce uncertainty about restructuring’s future—identify milestones or timeline
    •   Increase incentives for investment

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                         Page 39                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                        Appendix I: 2003 Blackout Identifies Crisis
                        and Opportunity for the Electricity Sector




Potential Options for Determining How
to Pay for Transmission Upgrades
Issue—Transmission upgrades vital for reliability and market development,
   but determining who should pay is difficult
    •   Transmission serves regional needs and promotes reliability
    •   Electricity often crosses jurisdictions and travels varied paths
    •   Determining who benefits and who should pay for additions is difficult
    •   New lines needed; infrastructure old and congestion increasing
    •   Private investment faces significant hurdles
What GAO has recommended
    •   FERC should standardize interconnection agreements to reduce uncertainty
    •   FERC should clarify how costs of transmission upgrades associated with
        interconnection should be allocated
Options for congressional action
    •   Increase regulated rate of return for investments in transmission
    •   Consider providing additional incentives, such as direct tax incentives or
        accelerated depreciation



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                        Page 40                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                        Appendix I: 2003 Blackout Identifies Crisis
                        and Opportunity for the Electricity Sector




Potential Options for Enhancing
Reliability Rules
Issue—Voluntary nature of NERC membership and provision of data leaves
   gaps in information and threatens reliability
    •   Many new electricity producers not members in NERC and do not provide
        comprehensive operations data to it
    •   Nonmembers are not required to follow NERC guidelines for maintaining
        reliability
Options for congressional action
    •   Require mandatory compliance with NERC reliability guidelines
    •   Consider the creation of a new federal reliability organization




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                        Page 41                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                        Appendix I: 2003 Blackout Identifies Crisis
                        and Opportunity for the Electricity Sector




Potential Options for Improving
Regulator Access to Needed Data
Issue—Restructuring changes what types of information regulators need
    •   FERC has shifted from approving cost-based rates to monitoring market
        performance
    •   FERC needs greater access to real-time market data to assess market
        performance and to identify abuses of market power
    •   FERC needs data on the operation of power plants to monitor reliability as well
        as assess performance of markets
What GAO has recommended
    •   FERC should demonstrate what additional information it needs
    •   FERC should describe the limitations it faces without having adequate
        information
    •   FERC should ask the Congress for authority to collect the information that it
        needs
Options for congressional action
    •   Give FERC authority to collect, or have access to, needed market data
    •   Give FERC access to reliability data

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                        Page 42                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                        Appendix I: 2003 Blackout Identifies Crisis
                        and Opportunity for the Electricity Sector




Previous GAO Recommendations
Related to CIP Participation Incentives
Issue—Participation in federal CIP efforts critical
    •   Federal policy encouraged voluntary industry participation in critical
        infrastructure protection (CIP) activities, including operation of industry
        information sharing and analysis centers (ISAC’s) and tasked lead agencies to
        assess the need for incentives for industry participation
What has been done
    •   Industry progress reported in fulfilling suggested ISAC activities
          • Establishing baseline statistics and patterns
          • Serving as clearinghouse within/among various sectors
          • Providing a library of historical data for private sector and government
What GAO has recommended
    •   DOE to assess the need for public policy tools (e.g., regulation, grants, tax
        incentives) to encourage increased industry CIP activities
    •   Identify additional actions needed to improve the quality and quantity of
        information being provided by the ISACs,


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                        Page 43                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                      Appendix I: 2003 Blackout Identifies Crisis
                      and Opportunity for the Electricity Sector




Potential Options for Addressing
Homeland Security Concerns
Issue—Changing security threat
    •   Post-9/11
    •   Who’s in charge and who pays?
    •   Measures to improve resiliency, redundancy, remote monitoring, fail-safe
        and restoration capabilities promote both greater efficiency as well as
        security
Options for congressional action
    •   Consider homeland security as integral and compatible to improving safety
        and reliability of systems when making investment decisions and designing
        improvements
    •   Consider distributed power sources, diversity in energy sources, improved
        conservation measures and remote sensing as ways to enhance both
        system safety as well as counter terrorist threats




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                      Page 44                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                         Appendix I: 2003 Blackout Identifies Crisis
                         and Opportunity for the Electricity Sector




Potential Option for Addressing
Cybersecurity Weaknesses
Issue—Electricity sector faces increasing cyber threats
    •   Supervisory control and data acquisition (SCADA)/ control systems, critical to
        the electric industry, may not have adequate security
    •   Cyber attacks against these systems could be used to cause damage or
        complicate the response to a physical attack
What has been done
    •   A number of federal and private-sector efforts are underway to study
        cybersecurity issues
         • Including developing standards and performing research and development
Options for congressional action
    •   Increase focus on research and development and related efforts to address
        cybersecurity issues




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                         Page 45                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
                                             Appendix I: 2003 Blackout Identifies Crisis
                                             and Opportunity for the Electricity Sector




            Prior Relevant GAO Work

           Natural Resources and Environment Team
                 •    Bonneville Power Administration: Long-Term Fiscal Challenges, GAO-03-918R
                 •    Energy Markets: Additional Actions Would Help Ensure That FERC's Oversight and Enforcement Capability
                      Is Comprehensive and Systematic. GAO-03-845
                 •    Electricity Markets: FERC’s Role in Protecting Consumers, GAO-03-726R
                 •    Electricity Restructuring: Action Needed to Address Emerging Gaps in Federal Information Collection, GAO-
                      03-586
                 •    Lessons Learned From Electricity Restructuring:Transition To Competitive Markets Underway, but Full
                      Benefits Will Take Time and Effort To Achieve, GAO-03-271
                 •    Restructured Electricity Markets: California Market Design Enabled Exercise of Market Power, GAO-02-828
                 •    Energy Markets: Concerted Actions Needed by FERC to Confront Challenges That Impede Effective
                      Oversight, GAO-02-656
                 •    Restructured Electricity Markets: Three States' Experiences in Adding Generating Capacity, GAO-02-427
                 •    California Electricity Market Options for 2001: Military Generation and Private Backup Possibilities, GAO-01-
                      865R
                 •    Energy Markets: Results of Studies Assessing High Electricity Prices in California, GAO-01-857
           Information Technology Team
                 •    Critical Infrastructure Protection: Challenges for Selected Agencies and Industry Sectors, GAO-03-233
                 •    Information Security: Progress Made, But Challenges Remain to Protect Federal Systems and the Nation's
                      Critical Infrastructures. GAO-03-564T
                 •    High Risk Series: Protecting Information Systems Supporting the Federal Government and the Nation’s
                      Critical Infrastructures, GAO-03-121
                 •    Combating Terrorism: Selected Challenges and Related Recommendations, GAO-01-822

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                                             Page 46                      GAO-04-204 Crisis and Opportunity for the Electricity Sector
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