July 14, 2006 Dear Mr. Flack and Kolevar: We are pleased to submit the enclosed report The Relationship between Competitive Power Markets and Grid Reliability. This report was prepared in response to a recommendation of the U.S.-Canada Power System Outage Task Force (the Task Force). The Task Force concluded from its investigation of the August 13, 2003, blackout that restructuring of the bulk power industry was not a cause of the blackout. However, the Task Force did determine that it was appropriate to explore the concerns raised by those who identified restructuring as a contributing factor. To this end, the Task Force included the following recommendation in its report Final Report on the August 14, 2003 Blackout in the United States and Canada: Causes and Recommendations: The U.S. Department of Energy and Natural Resources Canada should commission an independent study of the relationships among industry restructuring, competition in power markets, and grid reliability, and how those relationships should be managed to best serve the public interest. The U.S. Department of Energy and Natural Resources Canada have fulfilled the Task Force’s directive by: 1) inviting ten issue papers, prepared independently, by industry leaders and technical experts to delineate and critically assess the potential impacts of competition on reliability and to recommend appropriate next steps to address these impacts and 2) seeking public comment through presentation and discussion of these papers at two public workshops and through an open public comment process. The enclosed report presents the results of this process. We would like to thank experts who contributed their knowledge and time to the development of the issue papers and to the panel presentations and discussion at the workshops. We would also like to thank the individuals and organizations who contributed to the two public workshops, as well as those that provided comments to the electronic forum created for the project. Sincerely, David Burpee David Meyer Electricity Resources Branch Office of Electricity Delivery & Natural Resources Canada Energy Reliability U.S. Department of Energy U.S.-Canada Power System Outage Task Force Report on the August 14, 2003 Blackout Recommendation 12 The Relationship between Competitive Power Markets and Grid Reliability Submitted by U.S. Department of Energy and Natural Resources Canada Submitted to U.S.-Canada Power System Outage Task Force July 2006 ii Abstract The U.S. – Canada Power System Outage Task Force concluded that restructuring was not a cause of the August 14, 2003 blackout. However, the Task Force did determine that it was appropriate to explore the concerns raised by those who identify restructuring as a contributing factor. To this end, the Task Force Final Report includes Recommendation #12: The U.S. Department of Energy and Natural Resources Canada should commission an independent study of the relationships among industry restructuring, competition in power markets, and grid reliability, and how those relationships should be managed to best serve the public interest.1 The U.S. Department of Energy and Natural Resources Canada have fulfilled the Task Force’s directive by: 1) inviting ten issue papers, prepared independently, by industry leaders and technical experts to delineate and critically assess the potential impacts of competition on reliability and to recommend appropriate next steps to address these impacts and 2) seeking public comment through presentation and discussion of these papers at two public workshops and through an open public comment process. 1 U.S. – Canada Power System Outage Task Force (2004), page 148. iii iv Acknowledgements This project was directed by David Meyer, U.S. Department of Energy, and by David Burpee, Natural Resources Canada. Staff work to coordinate preparation of the issue papers and public workshops was led by Joseph H. Eto, Consortium for Electric Reliability Technology Solutions at Lawrence Berkeley National Laboratory and Liz Herbert, formerly with Natural Resources Canada (currently with National Energy Board of Canada). The U.S. Department of Energy and Natural Resources Canada express their gratitude to the authors of the issue papers and presenters at the public workshops: Jack Casazza, Frank Delea, and George Loehr, Power Engineers Supporting Truth José Delgado, American Transmission Company Kellan Fluckiger, Alberta Department of Energy David Goulding, Independent Electricity Market Operator Phillip G. Harris, Andrew Ott, Thomas Welch, PJM Interconnection LLC John P. Hughes, The Electricity Consumers Resource Council David R. Nevius and Ellen P. Vancko, North American Electric Reliability Council Robert J. Thomas, Cornell University Scott Thon, AltaLink John Wilson, Ontario Electricity Coalition They also thank the participation and contributions of the individuals and organizations at the two public workshops, as well as those that provided comments to the electronic forum created for the project. v vi Table of Contents Abstract ................................................................................................................................... iii Acknowledgements............................................................................................................... v Table of Contents................................................................................................................... vii Acronyms................................................................................................................................ ix Executive Summary .............................................................................................................. xiii Introduction............................................................................................................................ 1 Background on Electricity Reliability, Industry Restructuring and Competition in Bulk Power Markets.............................................................................................................. 3 Issue Papers ............................................................................................................................ 15 “Contributions of the Restructuring of the Electric Power Industry to the August 14, 2003 Blackout” by Jack Casazza, Frank Delea, and George Loehr, Power Engineers Supporting Truth .................................................................................................................. 17 “The Blackout of 2003 and its Connection to Open Access” by José Delgado, American Transmission Company ..................................................................................... 43 “Competitive Electric Power Markets and Grid Reliability, Something Has Changed Over the Past Decade!” by Kellan Fluckiger, Alberta Department of Energy ............ 51 “Competitive Power Markets and Grid Reliability: Keeping the Promise” by David Goulding, Independent Electricity Market Operator ..................................................... 63 “Relationship between Competitive Power Markets and Grid Reliability PJM RTO Experience” by Phillip G. Harris, PJM Interconnection LLC ................................ 87 “Reliability Risks During the Transition to Competitive Electricity Markets” by John P. Hughes, The Electricity Consumers Resource Council .............................................109 “Ensuring a Reliable North American Electric System in a Competitive Marketplace” by David R. Nevius and Ellen P. Vancko, North American Electric Reliability Council ...........................................................................................................................................123 “Managing Relationships Between Electric Power Industry Restructuring and Grid Reliability” by Robert J. Thomas, Cornell University ....................................................137 vii “Alberta Electric Industry Restructuring, Implications for Reliability” by Scott Thon, AltaLink ................................................................................................................................161 “Sinister Synergies: How Competition for Unregulated Profit Causes Blackouts” by John Wilson, Ontario Electricity Coalition .......................................................................179 Public Workshops and Public Comment ...........................................................................207 Appendix A – Short Biographies of Issue Paper Authors and Presenters....................211 Appendix B – Washington D.C. Workshop, Sept. 15, 2005.............................................221 Appendix C – Toronto, Ontario Workshop, Sept. 28, 2005 .............................................227 Appendix D – Public Comment ..........................................................................................233 viii Acronyms AC alternating current ACE area control error AEP American Electric Power AESO Alberta Electric System Operator AFC available flowgate capability AGC automatic generation control ANSI American National Standards Institute APPA American Public Power Association ATC available transfer capability ATSI American Transmission Systems CAISO California Independent System Operator CAEM Center for the Advancement of Energy Markets CAL PX California Public Exchange CEEMI Consolidated Edison Energy Massachusetts, Inc. CEO chief executive officer CERTS Consortium for Electric Reliability Technology Solutions CMEEC Connecticut Municipal Electric Energy Cooperative CMO Central Market