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entitled 'Electricity Restructuring: 2003 Blackout Identifies Crisis 
and Opportunity for the Electricity Sector' which was released on 
November 18, 2003.

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Report to the Chairman, Senate Committee on Governmental Affairs:

United States General Accounting Office:

GAO:

November 2003:

Electricity Restructuring:

2003 Blackout Identifies Crisis and Opportunity for the Electricity 
Sector:

GAO-04-204:

Contents:

Letter:

Summary:

Appendix I: 2003 Blackout Identifies Crisis and Opportunity for the 
Electricity Sector:

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:

* 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.

* 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.

* 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:

Signed by Jim Wells: 

[End of section]

Appendix I: 2003 Blackout Identifies Crisis and Opportunity for the 
Electricity Sector:

[See PDF for images]

[End of figure]

[End of section]

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