Legal & Regulatory

Industry Leaders, Experts Testify on How to Keep the Lights On

Ten witnesses from federal and state regulatory agencies, a public power entity, environmental groups, and power companies today outlined a number of threats to the bulk power system’s reliability in a Senate hearing to assess whether enough was being done to keep the lights on.

General measures to address day-to-day issues affecting reliability—such as tree trimming, frequency response, reliability planning—are under way, but the Federal Energy Regulatory Commission (FERC) is now also grappling with emerging issues, including cybersecurity, geomagnetic disturbances, and physical threats to the grid, Acting FERC Chair Cheryl LaFleur told lawmakers on the Senate Committee on Energy and Natural Resources. FERC is seeking to address cybersecurity with some muscle, she said, specifically with its November 2013 approval of the Version 5 Critical Infrastructure Protection (CIP) standards. Version 5 requires all bulk power system cyber assets—for the first time—to receive some level of protection, depending on their impact on the grid.

However, she also noted that the nation was undergoing “major changes” in its power supply and associated infrastructure, which are out of “FERC’s jurisdiction.”  These include the significant growth of natural gas for power, and the growth of renewable and demand-side resources that are fostered by developments in technology and by state and federal policy initiatives. FERC was corresponding with the Environmental Protection Agency (EPA), the Energy Department,  Regional Transmission Organizations, and Independent System Operators to discuss efforts to plan the system to meet future needs, she said.

When Rules Impact Reliability

FERC Commissioner Philip Moeller, who also testified today, took a different, stronger approach. “I have long-stated that I can be ‘fuel-neutral’ but I cannot be ‘reliability-neutral,'” he said.  Moeller, who has often called for more analysis of reliability implications from environmental rules, said he remained concerns that “EPA’s analysis failed to analyze whether there was sufficient transfer capability to move power from areas of energy surplus to areas short of power. Given that public policy aspirations cannot violate the laws of physics, we need to act carefully in transforming the power grid.”

Within a year, Moeller noted, more coal plants are scheduled to be shuttered to comply with the Mercury and Air Toxics Standards, while nuclear plants are under increasing economic pressure to close as a result of record low capacity prices. “Yet the experience of this past winter indicates that the power grid is now already at the limit. Heading into the next several years, some regions of the nation will be more vulnerable to supply shortages than others,” he warned. “We can hope for mild winters and summers over the next several years, but hoping for mild weather is not a practical method of planning to meet economic growth and public safety.”

Describing his regional transmission body as a sort of “air traffic controller” of the electric grid, PJM Executive Vice President Michael Kormos said the task of incorporating environmental rules while ensuring reliability was “not easy.” He said PJM had procured adequate reserves to meet projected demand, but it was poised to see a rapid “change out” of the generation fleet with a record number of coal plant retirements: about 12 GW in 2015 and 2016 alone, and more than 19 GW by 2019. “This kind of turnover of the generation fleet usually takes over a decade—yet we are seeing this turnover occurring over the next two to three years,” he said. Coal, the reliability “cushion” that PJM had “previously enjoyed,” will still dominate PJM’s future reserves, but PJM will now rely on more demand response resources, gas generation, renewables, and imports.

Significantly, Kormos also called attention to a future marked by “more volatile wholesale prices,” especially for customers on variable rate plans. And that could be blamed on a growing dependence on natural gas, as evidenced by soaring gas prices this January that reached as high as $100 per million Btu.  “In addition, because the short-term natural gas market is not as transparent as the electric markets, we saw generators subjected to extremely onerous terms and conditions, which required us to pay for gas at times when it was not economic to run the particular generator, and we witnessed generators procuring gas for an entire weekend merely to ensure its availability to meet the increased Tuesday morning demand after the three-day Martin Luther King Day holiday.”

Faulty Capacity Markets

American Electric Power (AEP) president and CEO Nicholas Akins affirmed that 89% of the generation AEP has designated for retirement was called upon to meet power demand in January. “AEP has been sounding the alarm on long-term reliability for several years now and time is running out,” he said. The reason: Current capacity markets are not functioning as intended.

“From my perspective, the current structure of the capacity markets is not attracting a mix of new generating resources that will keep the lights on, nor providing the correct pricing signals for the existing fleet. This, coupled with the high number of base load unit retirements, jeopardizes the reliability of the grid,” he testified. “Most of the new capacity being offered is either gas or demand response. There are a host of difficulties in coordinating the gas and electric industries, and demand response continues to be paid similar capacity prices to steel-in-the-ground generation despite having rules and penalty provisions that are much less prescriptive.”

Importing power from plants in other reliability regions can also be an issue, Akins said. Last year, a Tennessee Valley Authority constraint resulted in the curtailment of more than 3.3 GW of PJM imports, including 29 MW of imports on firm transmission, he noted.

“AEP believes that capacity prices should be augmented by a reliability adder, or price floor. This would support continued operation of base load generating units and provide incentives (and penalties) to spur construction of new generation. We also believe a longer-term commitment for price certainty would help all companies with both existing and new assets to make long-term investment decisions.”

Relying on Free Markets

But for Thad Hill, president and CEO of independent power producer Calpine, which produces 95% of its power from natural gas, the key was to let competition—not government—yield the best results. “Although this market is not perfect, changes to address some of the issues are underway, and grid reliability is secure,” he said.

The January gas price spike wasn’t a “fuel supply problem,” Hill said. “It was a winter preparedness problem.” January showed industry that there needs to be a tightening between power and gas market coordination, especially in terms of daily operating decision-making, he said. The lack of alignment did not create a reliability issue, but it was responsible for price volatility and constrained how gas-fired generators could respond to changing system conditions.

One issue that lawmakers should consider is that “non-market interventions, such as the wind Production Tax Credit (PTC), may be leading to premature retirements of certain baseload resources,” he said. The current structure of the PTC subsidizes wind resources in the energy market to the point where wind generators will pay others to take power that is otherwise unneeded, in order to maximize their benefit from the PTC, he said. “So, while the wind resources cannot generally be counted on to provide energy during extreme winter or peak summer conditions, the effect of the PTC is to take revenues from resources that can supply the market. The PTC interferes with market forces and is no longer necessary.” Yet another distortion to markets comes from demand response, which is provided by customers who are paid to curtail their load, he added.

On Cyberattacks and Physical Threats

Though Gerry Cauley, president and CEO of the North American Electric Reliability Corp. (NERC) reiterated LaFleur’s concerns about cybersecurity, he also said he was as “deeply concerned” about the changing risk landscape from “conventional risks,” such as extreme weather and equipment failures.

President and CEO of the American Public Power Association Sue Kelly outlined simple risk mitigation techniques used by power producers to thwart physical attacks, including cameras and locks, but said the key to physical security is a “defense at depth” approach, which incorporates resiliency, redundancy, and the ability to recover. “Shooting at substations is, unfortunately, not an uncommon occurrence,” she said, referring to the April 2013 incident at Pacific Gas and Electric’s Metcalf substation in California. “But the sophistication of the Metcalf attack and the fact that the perpetrator has still not been apprehended is quite troubling.” However, because the industry has been prepared for physical attacks for decades, “the power stayed on in spite of the Metcalf attack—due to the cooperation and coordination with other electric utilities in the region, and redundancy the system that was planned in advance.”

On cybersecurity, Kelly noted that utilities need “no incentive” to secure their systems, but she pushed for a federal limit on potential legal repercussions to utilities when they are helping government partners or following federal requirements. “No state or federal statutes currently exist to specifically protect electric utilities, including public power entities, from lawsuits in response to a cyber incident,” she noted. 

Paying for Reliability

National Association of Regulatory Utility Commissioners (NARUC) President Colette Honorable, who also chairs the Arkansas Public Service Commission, told lawmakers state utility regulators from all states and territories share their concerns about the resilience of the electric system. Yet  “shoring up the safety and security” of the system was clearly also the responsibility of the utilities that own and operate the infrastructure themselves, she said. “The good news is that despite the grid’s many potential threats and vulnerabilities, these systems are resilient and the entities that own and operate them are quite skilled at restoration when something does go wrong.” And she added: “This industry spends billions of ratepayer dollars per year to train, educate and drill its employees and maintain physical infrastructure so that the lights come back on after an incident as quickly and safely as possible.”

States, specifically, should take their responsibility of setting rates fairly seriously, Honorable declared. “In the end, we all would like to have the safest most reliable system possible, and that is everyone’s goal. However, we all must remember that at the end of the day, it is the consumer who will be paying for every decision that is made.”

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)



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