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United States

United States

The policeman's lot

Large utilities in America are forced to let their competitors use their wires. Access must be free and they may not charge competitors any more than they charge themselves. The room for conflict in this set up is huge. How much should it cost to use the wires? What happens if there is not enough capacity? Who gets preference?

The framework for the current system, the Federal Energy Regulatory Commission's Order 888, is just two years old and the rules are still being made. In the old days of vertically integrated utilities, the means of generation, high voltage transmission and low voltage distribution were all one business. These days the teachings of economists about the dangers of monopolies have been heeded and electricity supply is being turned into a competitive industry. The hitch is that the wires remain a de facto monopoly.

Unlike in Europe, where the solution has been to require the separation of transmission and generation, politicians in the US were unwilling to break up the utilities. Instead, they formulated rules ensuring that everyone has "open access" to the wires. Conflicts arose, with utilities accusing one another of blocking transactions.

A series of more complicated rules are now being discussed and experimented with across the US. One solution, promoted by the Federal Energy Regulatory Commission (FERC), is the creation of Independent System Operator (ISO) companies. These, it is said, could eliminate the incentive of utilities to unfairly manipulate the use of transmission systems.

With an ISO, control of the transmission system is taken away from the individual utility owners and given to an independent non-profit company. The ISO acts as a "traffic cop," telling competing generation companies when they can use the wires, how much and where their power can go. The utilities continue to own the wires, but only share in the operation of the system. In a sense, an ISO is a merger of different utility grids, but without a change of ownership.

Regions which have chosen not to set up an ISO have multiple individual utility transmission grids instead -- and each charges a fee to use its lines. To send power across three systems requires three fees, known as "pancaked" rates. These limit the competition for generation. An ISO reduces pancaking by expanding the size of an individual transmission system, enabling more deals to be made over a broader geographic area.

While Order 888 is a national rule, it leaves the details of implementation up to each utility. Each must file a plan with FERC for how it will comply with the order. While utilities must meet certain standards, plans can vary widely. And while FERC encourages the development of ISOs, they do not require it.

To complicate matters further, individual states are still restructuring their utility industry, with further implications for the ownership and operation of transmission systems. In some states, utilities are selling off their generation plants, becoming electricity dealers instead of manufacturers. They may still own the wires, but since their wires are run by some other company, it is thought there is no conflict in them being a retailer and a transmission owner.

The revolution in America's electricity business is ongoing and nobody knows how it will eventually work. Some say the whole country will be divided into regional ISOs. Others predict that ISOs cannot run the system without owning it, that there will be ongoing conflicts and gaming of the system -- and ISOs will have to become "transmission companies," or TRANSCOs.

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