2 Organizations and Markets in the Electric Power Industry | Analytic Research Foundations for the Next-Generation Electric Grid |The National Academies Press

Some challenges related to large size and scalability have been offset by increasing computer processing capabilities. Nevertheless, to make a significant improvement in the efficiency and accuracy of the unit commitment process (the process of finding the least-cost dispatch of available generation resources to meet the electrical load) made possible by modeling and solving an ac power flow formulation, there must be either a substantial increase in processing capability or a reformulation of the problem. The ability to solve an ac unit commitment problem, compared to the linearized dc approximation solution in place today, could significantly improve the modeling and efficient dispatch of resources during the commitment, dispatching, and pricing processes.

Out-of-market actions taken by system operators have countered many of the shortcomings of the dc approximation currently in use. These actions typically are not well captured in the dc model, and the side effects create market inefficiencies, such as uplift payments and underfunded transmission rights.

Almost from their inception, electric utilities were viewed as a natural monopoly. Because of the high cost of building distribution systems and the social impacts associated with the need to use public space for the wires, it did not make sense to have multiple companies with multiple sets of wires competing to provide electric service in the same territory. Electric utilities were franchised initially by cities and later (in the United States) by state agencies. An electric utility within a franchised service territory “did it all.” This included owning the increasingly larger generators and the transmission and distribution system wires, and continued all the way to reading the customer’s meters. Customers did not have a choice of electric supplier (many still do not). Local and state regulators were charged with keeping electric service rates just and reasonable within these franchised service territories.

As electric utilities grew and expanded, holding companies formed that allowed for the rapid growth of the electric utility industry. This growth created regulatory challenges for local and state utility commissions. Many holding companies engaged in interstate commerce, which went beyond local and state commissions’ regulatory authority and capacity.

Following the crash of the stock market in 1929, the U.S. Congress passed the Public Utility Holding Company Act of 1935, which increased the regulation of electric utilities by limiting their operations to a single state or forcing divestiture so that each public utility company served only a limited geographic area (EIA, 1993).

In 1920, Congress had created the Federal Power Commission (FPC) to coordinate hydroelectric projects under federal control. The Federal Power Act of 1935 and the Natural Gas Act of 1938 gave the FPC the power to regulate the sale and transportation of electricity and natural gas. This power subsequently expanded to include the regulation, sale, and transportation of interstate electricity and natural gas.

In 1967, the FPC recommended the formation of a council on power coordination made up of representatives from each of the nation’s regional coordinating organizations to assist in resolving interregional coordination matters (FERC, 2015d).

On June 1, 1968, the electricity industry formed NERC in response to the FPC recommendation and the 1965 blackout, when 30 million people lost power in the northeastern United States and southeastern Canada.

In 1973, the utility industry formed the Electric Power Research Institute to pool research and improve reliability.

After another blackout occurred in New York City in July 1977, Congress reorganized the FPC into the Federal Energy Regulatory Commission (FERC, 2015d) and expanded the organization’s responsibilities to include the enactment of a limited liability provision in federal legislation, allowing the federal government to propose voluntary standards (NERC, 2013a).

In 1980, the North American Power Systems Interconnection Committee (known as NAPSIC) became the Operating Committee for NERC, putting the reliability of both planning and operation of the interconnected grid under one organization.