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                 

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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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