How two FERC orders revolutionized the power utility industry

In 1996, the Federal Energy Regulatory Commission issued two orders that would revolutionize the electric utility industry. With the aim of increasing competition and lowering power costs for consumers, FERC orders 888 and 889 ushered in an era known as deregulation. Nearly 30 years later, the industry continues to see the impact of these orders play out as new energy markets take shape.

The transformative orders required public utilities to open their transmission systems to all eligible buyers and sellers, and to separate their power and transmission marketing functions.

As a federal power marketing administration, BPA is not subject to FERC's jurisdiction, but it voluntarily complied with these orders to promote consistency and fairness in the industry.

“The utility industry was drastically different before 1996," said Larry Kitchen, a former power manager at BPA. “During deregulation, the energy landscape shifted from large transmission owners having the say on which generators can interconnect to the grid to required open and transparent access."

Order 888 prevented a transmission provider from giving preference to their own generating resources over third-party generators. All power producers were to be given a level playing field for access to crucial transmission lines.

With Order 888, FERC required transmission owners to establish open access transmission tariffs to sell  transmission service on a first-come, first-served basis. An OATT, which lays out the terms and conditions for the acquisition and provision of transmission services, must be filed with and approved by FERC. Previously, terms and conditions were documented in transmission contracts with customers.

Prior to Order 888, large power companies that owned both power and transmission assets could favor their own power purchases over their competitors, which could result in an unfair advantage. These utilities would typically sell power services as one bundled product, meaning a sale of power would include transmission capacity and ancillary services.

FERC aimed to reduce those barriers to competition and bring more efficient, lower-cost power to the nation's electricity consumers. Subsequently, under the new order, utilities like BPA must separate their power and transmission services and operate them like two distinct entities and sell energy products separately from transmission products. This is element was referred to as “unbundling."

“This encouraged neighboring utilities to pool resources, reducing the need to operate independently," says Scott Wilson BPA power customer services manager. “This shift toward system-wide efficiency laid the foundation for initiatives like the Western Energy Imbalance Market and the day-ahead markets that are currently taking shape, promoting greater collaboration and resource sharing."

Wilson continues, “It introduced competition, enabling utilities and end-users to access diverse power sources and fostering the growth of independent power producers."

If Order 888 carried the vision of open access and improved competition, Order 889 created the regulatory framework to achieve that vision. FERC Order 889 required utilities to provide non-discriminatory access to transmission services through an Open Access Same-Time Information System (OASIS) and mandating standards of conduct to limit non-public information shared between power and transmission employees. This would prevent preferential treatment within a utility.

To this day, customers who wish to purchase transmission service from BPA must do so via OASIS.

The orders also impacted how BPA sold power. The agency established an energy trading floor responsible for selling surplus energy, or extra energy not needed to meet BPA's firm power sales contract obligations. The trading floor also helps balance the transmission grid by purchasing power for BPA to meet energy demands as needed.

“These orders changed the way BPA sold power and transmission products," said Kitchen. “With the change in transmission access, new entrants in the power markets standardized the types of power products sold and created fierce competition in the prices for those products. It really was an interesting time to work in energy." 

While transparency and competition throughout the region and the United States has improved, orders 888 and 889 have introduced some challenges.

“These rules added many layers of complexity that did not exist before their implementation," said Dennis Metcalf, a former BPA transmission rates manager. “Increased complexities tend to lead to inefficiencies and possibly reduced reliability to the overall transmission system."

Post deregulation, BPA saw a substantial increase in new generators interconnecting to its transmission system, primarily renewable generating sources. Intermittent renewables, such as wind and solar energy, require a higher degree of resource management as the fuel (and therefore the output) varies.

As a balancing authority, BPA must keep energy consumed equal to generation produced. Intermittent resources add to the complexity of operating a fair access transmission system.

Additionally, as more generating companies gained access to BPA's transmission network, BPA's power sales saw increased competition. Buyers could purchase power from a greater pool of power providers who often offered prices below BPA's. BPA had to cut costs to compete. This included making fewer transmission grid investments, even as the use of BPA's grid increased by about a third. The ripple effects of deregulation will be felt for years to come.

“It is helpful to understand pivotal moments like this that shaped the electric industry so that as new initiatives and technologies emerge, we are better equipped to respond," says Metcalf.

Orders 888 and 889 marked a transformative period for the energy industry, fostering transparency and competition while reshaping how utilities like BPA operate. Despite the challenges introduced, these orders laid the foundation for a more equitable and dynamic market and allowed for innovation and increased market participation.