    Electricity Restructuring: 2003 Blackout Identifies Crisis and
    Opportunity for the Electricity Sector (18-NOV-03, GAO-04-204).

    The August 14, 2003, electricity blackout--the largest in the
    nation's history--affected millions of people across eight
    northeastern and midwestern states as well as areas in Canada.
    The blackout intensified concerns about the overall status and
    security of the electricity industry at a time when the industry
    is undergoing major changes and Americans have a heightened
    awareness of threats to security. Because of these widespread
    concerns and the broad institutional interest of the Congress, we
    (1) highlighted information about the known causes and effects of
    the blackout, (2) summarized themes from prior GAO reports on
    electricity and security matters that provide a context for
    understanding the blackout, and (3) identified some of the
    potential options for resolving problems associated with these
    electricity and security matters.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-204
        ACCNO:   A08880
      TITLE:     Electricity Restructuring: 2003 Blackout Identifies
    Crisis and Opportunity for the Electricity Sector
         DATE:   11/18/2003
      SUBJECT:   Competition
    	     Electric power generation
    	     Electric power transmission
    	     Electric utilities
    	     Energy marketing
    	     Losses
    	     Physical security

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    GAO-04-204

    United States General Accounting Office

    GAO

    Report to the Chairman, Senate

                           Committee on Governmental Affairs

    November 2003

    ELECTRICITY RESTRUCTURING

    2003 Blackout Identifies Crisis and Opportunity for the Electricity Sector

    GAO-04-204

    Contents

           Letter                                                               1
                                             Summary                            1
         Appendix I      2003 Blackout Identifies Crisis and Opportunity for
                                      the Electricity Sector

    This is a work of the U.S. government and is not subject to copyright
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    separately.

    United States General Accounting Office Washington, DC 20548

    November 18, 2003

    The Honorable Susan M. Collins
    Chairman, Committee on Governmental Affairs
    United States Senate

    Dear Chairman Collins:

    The August 14, 2003, electricity blackout-the largest in the nation's
    history-affected millions of people across eight northeastern and
    midwestern states as well as areas in Canada. In some areas, power was
    restored in hours, while in others power was lost for several days. The
    blackout intensified concerns about the overall status and security of the
    electricity industry at a time when the industry is undergoing major
    changes and Americans have a heightened awareness of threats to
    security.

    Because of these widespread concerns and the broad institutional interest
    of the Congress, we (1) highlighted information about the known causes
    and effects of the blackout, (2) summarized themes from prior GAO
    reports on electricity and security matters that provide a context for
    understanding the blackout, and (3) identified some of the potential
    options for resolving problems associated with these electricity and
    security matters.

    Over the past several weeks, GAO staff briefed numerous congressional
    staff on its observations. In response to your request, we prepared this
    overview to accompany the slides used in these presentations. Appendix I
    presents the latest briefing slides in their entirety. Our briefing is
    based
    largely on reports we previously issued on a range of electricity issues
    along with updated information obtained from the Department of Energy
    (DOE), the North American Electric Reliability Council, and operators of
    the transmission system in the blackout region. The information presented
    is intended to place the electricity blackout in the broader context of
    long
    term issues affecting the sector. The options presented do not encompass
    a complete set of all possible options but do represent ideas that merit
    consideration as the nation moves forward to address this important issue.

    Summary While the root cause of the blackout has not yet been conclusively
    established, a recent DOE report describes a sequence of events that

    culminated with the outage. A series of power plants and transmission
    lines went offline beginning at about noon eastern daylight time because
    of instability in the transmission system in three states. The loss of
    these plants and transmission lines led to greater instability in the
    regional power transmission system, which-4 hours later-resulted in a
    rapid cascade of additional plant and transmission line outages and
    widespread power outages. The blackout affected as many as 50 million
    customers in the United States and Canada, as well as a wide range of
    vital services and commerce. Air and ground transportation systems shut
    down, trapping people far from home; drinking water systems and sewage
    processing plants stopped operating; manufacturing was disrupted; and some
    emergency communications systems stopped functioning. The lost
    productivity and revenue have been estimated in the billions of dollars. A
    joint U. S.-Canadian taskforce is seeking to identify the root cause of
    the failures and plans to issue an interim report in November 2003.

    Over the past several years, our work on the electricity sector has
    resulted in numerous findings, conclusions, observations, and
    recommendations. Based on this prior work, we highlight three themes on
    electricity and security matters in our briefing and lay out some of the
    potential options to consider in addressing problems in these areas.

    Specifically:

    o  	Electricity markets are developing, but significant challenges remain.
    Our work has shown that while the electricity sector is in transition to
    competitive markets, the full benefits of these markets will take time and
    effort to achieve. For example, we found that the separate development of
    wholesale and retail electricity markets, which is occurring as part of
    the electricity industry shifts from regulated to competitive markets,
    limits the industry's ability to achieve the benefits of competition. The
    separate development of these markets reduces or eliminates retail
    consumers' incentive or ability to respond to market signals that supplies
    are tight. Consumers do not respond because the retail prices they see are
    set by state regulators and do not reflect actual market conditions. This
    lack of consumer response becomes particularly important during periods of
    high demand for electricity, such as hot summer afternoons, when total
    electricity use approaches the total amount of available generation.
    Efforts to promote various types of demand response, such as those that
    link customers' electricity consumption with prices, may offer one option
    for improving this situation. We are exploring this issue in more depth in

         response to your request. Other issues raised by our work in this area

    are presented in slides 14 through 18 of the briefing.  o  Oversight of
    markets and reliability needs more attention. The ongoing transition to
    competitive markets, or "restructuring" of electricity markets, has
    dramatically changed how the Federal Energy Regulatory Commission (FERC)
    needs to oversee these markets and the information it needs to do so. In
    order to monitor current market conditions to ensure fair competition, for
    example, FERC needs to access market information on wholesale transactions
    and the operation of electric generating plants, among other things. Our
    work shows that FERC's oversight efforts are improving, but it continues
    to be hampered by a number of challenges. In particular, we noted that
    FERC had previously not clearly defined its role in monitoring the market,
    faced gaps in information due to limitations in its jurisdictional
    authority, relied on third-party data to perform regulatory functions, and
    had limited enforcement authority. In addition, we pointed out that FERC
    faced human capital challenges to acquire and develop the staff knowledge
    and skill it needs to effectively regulate and oversee today's electricity
    market. Because restructuring has changed the types of information
    regulators need, we have previously recommended that FERC demonstrate what
    additional information it needs, describe the limitations it faces without
    such information, and ask the Congress for authority to collect it. One
    option for congressional action in this area includes providing FERC with
    authority to gain access to needed data relating to reliability and
    markets. Other issues raised by our work in this area are presented in
    slides 19 through 26 of the briefing.

    o  	Security for critical infrastructure is of growing importance. Our
    work has shown that a reassessment of the security of the nation's
    physical infrastructure as well as that of related information technology
    and control systems should be undertaken. Often, security measures have
    been added after the infrastructure is in place, which is costly and
    creates potential conflicts between security and efficiency. Therefore, it
    may be better to integrate sufficient security measures for these critical
    systems, particularly in a post-September 11th environment, into the
    planning for new construction or the upgrading of existing infrastructure,
    rather than viewing them as later add-ons. Our work has also raised
    concerns about the increasing reliance on information technology and
    control systems, which are potentially vulnerable to cyber attack,
    including the systems used in the electricity sector. As part of our work,
    we have found that cyber attacks against these systems could be used to
    cause damage or complicate the response to a physical attack. One option
    to help address this problem would be to increase the focus on research
    and development and other related

    activities, including the use of currently available technologies and
    vulnerability assessments, aimed at enhancing national capabilities to
    respond to cyber-security issues. Other aspects of our work in this area
    are presented in slides 27 through 29 of the briefing.

    Whatever the ultimate cause of the blackout, our work has shown that a
    number of significant challenges remain for the electricity sector. We
    recognize that many issues surrounding the restructuring of the
    electricity industry are complicated and that solutions involve complex
    policy tradeoffs for the Congress that will undoubtedly take time to fully
    resolve. GAO stands ready to provide any analytical assistance the
    Congress may need in this important long-term endeavor.

    We conducted our work in accordance with generally accepted government
    auditing standards.

    We are providing copies of this report to other appropriate congressional
    committees as well as DOE and FERC. The report will be available at no
    charge on the GAO Web site at http://www.gao.gov.

    If you or your staff have any questions about this report, please contact
    me
    at (202) 512-3841. Major contributors to this report included Mary Acosta,
    Dennis Carroll, Dan Haas, Randy Jones, Mike Kaufman, Jon Ludwigson,
    and Barbara Timmerman.

    Sincerely yours,

    Jim Wells
    Director, National Resources and Environment

                             FERC             States             NERC
           Monitoring    Transmission    Distribution       None (Voluntary
            Authority  Wholesale Markets Retail Markets       Membership)
           Reliability                   Varies (23 of 40     Nationally
           Monitoring        None        states*)             (Voluntary
                                                              Compliance)

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