Power Grid Upgrade Serves the Common Good
World Energy Magazine, Vol. 5, No. 2, 2002

Article by
Edgar M. Roach, Jr. (Retired)
Chief Executive Officer, Dominion Delivery

These are tough times in the energy sector. Enronitis, credit downgrades, market gaming in California, questionable power trading practices, CEO resignations, and on and on.

What FERC Commissioner William Massey recently referred to as "funny business" has clearly eroded confidence in the industry - whether in the political arena, on Wall Street, or on Main Street. Calls for re-regulation of electricity markets are heard with growing frequency.

As troubling as these actions are, they remain a sideshow to the main event: the creation of well-functioning, competitive energy markets and the tremendous potential they hold for consumers and businesses.

Media hype and political posturing aside, the misdeeds of a few should not be grounds for punishing an entire industry. Efforts to impose unnecessary new regulations are short sighted. They could jeopardize much needed investment in energy infrastructure that is vital to our long-term security and economic prosperity.

One such system is the nation's electric transmission grid. The 158,000-mile electron highway that connects generating stations to local distribution companies is the industry's neglected stepchild. It's not particularly pretty or popular. It doesn't even have much of a personality. (Apologies to any engineers who might take offense).

What it is, however, is the backbone of the nation's electricity network. And it's straining mightily under the weight of growing power demand and uses above and beyond what it was designed for.

Beginning in the 1930s, the grid was created to serve individual utilities and their customers. As power stations grew in size and efficiency and were located farther from the customers they served, transmission lines had to grow larger and longer as well. A natural, new business emerged.

Taking advantage of their new "interconnections," utilities began trading power. These transactions actually increased the reliability and efficiency of the grid and lowered the cost of energy supply. Utilities could take advantage of different load requirements, time zones and more efficient outage scheduling to lend each other a hand in times of need. Consumers benefited from this added flexibility and lower cost as well.

Fast forward to more recent times. Bolstered by changes in federal law and a succession of FERC orders, non-utility merchant generators and marketers joined utilities in using the grid to buy and sell electricity in larger, regional wholesale markets. Emerging competition began to alter the transmission system in dramatic ways. The network was being used in ways it wasn't designed for. As generating capacity and trading volumes grew over the past decade, so did congestion on the grid's high-voltage lines.

For example, in the first quarter of 2001, transmission bottlenecks were three times the level experienced during the same period in 2000, according to the North American Electric Reliability Council. These bottlenecks can block the flow of power from one region to another, much like an interstate highway reduced to a two-lane road will back up traffic.

As we saw in the Midwest in the summer of 1998, in the Northeast two years later, and in California last year, congestion "hot spots" can contribute to huge price spikes or even rolling blackouts - especially at times of peak demand. Those kinds of transmission constraints slow market development and put pressure on consumers' pocketbooks.

Generators have attempted to bypass grid bottlenecks by building power stations closer to load centers. That has raised new environmental concerns and forced local communities to grapple with a trade off: Is it better to build new transmission or build more power facilities near people's backyards?

Some think the answer lies in building small-scale generating units of 50 megawatts or less. As promising as they may be, the micro-turbine and fuel cell technologies used in so-called "distributed generation" are still years away from producing enough power to replace the need for new transmission.

Consumers are also expressing a desire for more "green" power - wind, solar, hydro and other renewable sources. By their nature, these types of facilities are typically located far from the population centers that most need the power they produce. The only way to link the two is through the transmission system.

Bottom line: The nation's power grid needs to be upgraded, and new capacity must be built to handle the increased volume of transactions on the network.
Unfortunately, that's easier said than done. Investment in new transmission has dropped by more than $100 million a year for the past 25 years. Little wonder, given that on average, it takes more than 20 years to recoup transmission investments. NERC says those investments will grow a total of just 4 percent over the next decade, compared to an expected 25 percent increase in power consumption.

That kind of imbalance can only lead to further congestion and potential threats to grid reliability. Throw in the added risk of terrorism, and the vulnerabilities of this vital infrastructure system become glaring.

The FERC has taken a variety of steps to open up the grid and facilitate the free flow of megawatts. Most significantly, perhaps, was FERC Order 2000, which contained the Commission's Regional Transmission Organization (RTO) policy.

This 1999 rule was promulgated to promote independent grid management and to create a nondiscriminatory platform for competitive wholesale markets. The FERC's evolving RTO policy currently favors consolidating transmission owners into a handful of large-scale RTOs serving broad geographic areas of the country.

Three years after Order 2000 was issued, RTO formation and implementation remain daunting challenges for the industry. We need to get RTOs up and running to ensure functioning regional markets. And we need consistent RTO standards that clarify the rules of the road. Otherwise, megawatts won't be the only commodity unable to flow freely. Much needed investment capital won't either.

Energy investors are a cautious lot, more so now than ever. They need greater assurance about getting their money back. One way to encourage investment in the grid is through appropriate financial incentives - including higher rates of return, accelerated depreciation, shorter recovery periods and other innovative pricing mechanisms.

To its credit, FERC has upped allowable returns for transmission to the 11-13 percent range. That could help spur needed investment.

FERC Order 2000 does acknowledge the need for new incentive rate structures that address the changing risk profile of transmission owners and operators. But outside of a few new merchant transmission proposals authorized to receive incentive rate treatment, cost-of-service regulation remains the only game in town for virtually all transmission owners.

The problem is, the game has changed. The old regulatory approach is woefully inadequate. It fails to offer appropriate incentives for investment in new facilities and for needed research and development. It also lacks sufficient mechanisms to stimulate performance improvements in the areas of customer service and cost control.

We simply can't expect robust competitive wholesale markets - and retail markets that benefit consumers - to develop without critical transmission investments.

Insufficient financial incentives and outmoded regulatory models aren't the only obstacles standing in the way. Siting issues loom large as well. This is a multi-faceted problem rooted in regulatory red tape, political waffling and public opposition.

As a holdover from the days when the grid was used by individual utilities to serve their franchise customers, the responsibility for siting transmission lines belongs to the states. Federal laws granting states this authority were written about 70 years ago when there was little or no interstate commerce in electricity.

Worse still, the process for approving new power lines isn't uniform across state borders. In fact, it varies significantly from state to state. A host of federal, state and local agencies often review construction plans and weigh them against competing public, environmental, economic and land use interests.

Experience shows that more often than not, individual states "just say no." And just one naysayer can kill a multi-state project. Even if approvals are granted, the sheer complexity of the process creates costly delays. Years, even decades can go by - especially in cases where a proposed line crosses multiple jurisdictions and each and every one has to bless the project.

Throw in a healthy dose of "Not In My Backyard" (NIMBY) outrage from groups or individuals who love to hate public works initiatives, and you've got a proven recipe for stalemate. Activists and other opponents of these projects have learned that if you can delay a project long enough, you can kill it. They're adept at using competing jurisdictions to their strategic advantage.

That's not to say we should circumvent public hearings and debate about legitimate differences concerning land use and environmental impacts.

ransmission line construction and other large public works projects must have the support and trust of the public.

What's troubling is that somewhere along the way, a "me first" mindset supplanted the notion of serving the greater good. That kind of narrow, self-serving outlook makes siting new power lines all the more difficult - especially now that states are being asked to approve transmission projects whose primary benefits are regional in scope.

In an era when electricity markets have outgrown individual state boundaries, we need to ask ourselves this question: Does it make sense to continue allowing individual states to decide the fate of transmission projects whose benefits accrue to consumers in a multi-state region?

The current system is antiquated and needs reforming. It simply doesn't meet the needs of a restructured electric industry.

The FERC should have sole authority over all transmission siting and related services - bundled and unbundled, public and private. Not surprisingly, the states are dead set against this idea. And they've turned up the heat on politicians in Washington to oppose it.

Change never comes easy, especially when it threatens the status quo. (If Yogi Berra didn't say that, he should have).

Moving electricity from place to place is a national business. And large, multi-state transmission projects should be subject to federal eminent domain powers.

FERC administrative law judges should conduct siting hearings, with appeals only to the full Commission. FERC has a history of being more like the tortoise than the hare. The agency should be required to act on proposals within 18 months, including the appeal period.

The FERC also needs a rule establishing uniform connection standards to make sure competitive power suppliers can hook up to the grid more efficiently - without local bias or interference.

We also need to set up a self-regulating organization that's responsible for creating and enforcing binding national reliability standards. It should work in tandem with a similar organization that oversees the Business Practice Standards needed to guide a competitive energy industry.

Last, outdated tax laws that restrict infrastructure research and development should either be updated or eliminated. Technological innovation alone won't solve the capacity shortage. But it could have a meaningful impact on operations and maintenance, network integration and inter-regional coordination - all of which could potentially reduce the amount of new capacity required.

Policymakers should make electricity transmission issues a national priority, much as they did when the interstate highway system was developed. The emerging digital economy requires adequate, reliable and high quality power from the nation's electric grid. And consumers need more access to less expensive sources of power and greater choice of suppliers and service options.

Let's not waste this opportunity to fix our overburdened transmission system - and help restore America's confidence in a market-based approach for buying and selling electricity.

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