2 The Electric Power System Today | Terrorism and the Electric Power Delivery System |The National Academies Press

Thus, a long and ever-more comprehensive planning process has evolved both within and external to this industry. Supplying institutions have tolerated the increasing external intervention in their own internal planning processes because without that public approbation, the legal right to site new generation facilities, and generally, transmission facilities also, could be denied.

The time and the cost of acquiring necessary regulatory approvals have become the major impediments to the siting and construction of new facilities in many regions of the country. In some instances, those approval costs can be an appreciable portion of the total project costs, including those for land and construction. “Deciding how to decide” has become an institutional art-form, involving legal, political, economic and behavioral insights on how to design efficient and fair decision processes. It also can be used to effect for parties intent on using those processes to block particular projects.

In the wake of the restructuring and deregulation of the electric power industry, firms must now determine whether or not to invest based on market-related criteria, but also must bear the risk of public-policy-type decisions concerning siting. A regulated or public firm could be reasonably assured of recovering those decision-related costs sometime in the future; the prospects are far less certain for a firm in a competitive market. While firms in other competitive capital-intensive industries also face siting approvals before they can expand their capacity, they can minimize their risk simply by waiting to construct until supply shortages have driven prices in the marketplace high enough to warrant the risk. Because modern societies have an utter dependence on real-time delivery of reliable electricity supplies, they simply may not be willing to rely on market forces alone to determine whether suppliers are willing to invest in a siting decision. Some degree of public participation and subsidy in recognition of the public nature of the decision may be warranted.

However, in the current transition to market-based wholesale electricity supply in many regions of the country, the allocation of responsibility for and the sharing of the risk of this decision making in the planning process have yet to be worked out.5 Rationalizing the private and public nature of these approval processes is particularly important for electric transmission lines where authorizations must be acquired from many political jurisdictions that might be spanned by the desired new facility. If those approvals are not granted simultaneously, there is a tremendous incentive for jurisdictions to delay their individual decisions so that they are last in line, and therefore able to extract the most favorable concessions. The private merchant builder must factor all of these considerations into a decision on whether or not to try to invest and to begin to seek the necessary approvals; they are also factors the public sector must consider if it desires a market-driven process that serves the public interest.

Problems to be resolved abound. With the traditional regulated vertically integrated industry structure, the utility would decide whether it was more efficient to build new transmission or new generation (as well as where, when, and of what fuel source) in order to minimize costs while meeting reliability standards. In this context, the entity might even consider the value in terms of the economic risk reduction of maintaining a stable of diverse generation sources, in terms of their primary fuels. In the evolving market context, a generator must decide whether and where to build based on the going market price in different locations. A competitive transmission company must base investment decisions on price differences in electricity between regions, plus any fixed delivery contracts it can assemble ahead of time from buyers and sellers. Note that decisions to invest by either type of firm are likely to reduce the original price levels or price gaps, and so each firm must take that market effect of its investment into account. Firms must also consider how the interaction between likely new generation and transmission investments will affect their revenues in the future. However, these firms have little incentive to consider the effects of their investment choices on system reliability or fuel diversity risk without public intervention. This is one reason why many jurisdictions are establishing subsidization mechanisms for bringing renewable-resource-based generation online—although in some instances the transmission requirements to bring that remote energy to the load locations are neglected.

These anomalies all suggest at least an equal need for planning under a wholesale market supply scenario. Such planning would be somewhat different in type and scope from that practiced in an environment of regulated, vertically integrated institutions. FERC has recognized this by mandating that one of the requirements for ISOs/RTOs is for each to establish a planning process to identify needs and to initiate market-driven investments that might be required first, and if these prove inadequate, to then initiate regulatory-based investments.

In many ISO/RTO jurisdictions, however, a legal semantic distinction is being made between facilities needed for reliability purposes and those that might further some economic benefit (e.g., lower wholesale electricity prices). Since both functions are served over the same transmission network, this distinction is arbitrary, in terms of both the laws of physics and economic principles. Almost any transmission line that is built to enhance reliability will most probably also reduce congestion at certain times of the year, thereby reducing wholesale costs. Similarly, any line constructed to facilitate economical transfers of power most likely will have effects on reliability somewhere on the system. It may also facilitate access to diverse sources of generation further away, thus enhancing reliability and security. In fact, FERC seems to have recognized these relationships through its recently

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