Energy Policy Act of 2005 Gives Transmission a Boost

By Steve Brown, editor in chief

In the relatively small amount of space devoted to it-roughly 70 pages out of 1,724-transmission received a much-needed boost from the passage of the Energy Policy Act of 2005. Among the provisions related directly to transmission is one that gives the Department of Energy (DOE) authority to identify “national interest electric transmission corridors” that need to be upgraded to improve reliability and relieve congestion. Another gives the Federal Energy Regulatory Commission (FERC) “backstop” authority to site transmission within these corridors. The bill calls for the enactment of nationwide, mandatory, enforceable reliability standards. And, hundreds of millions of dollars are made available for transmission technology research and development.

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To gauge industry reaction to the energy bill and its potential impact on transmission, Utility Automation & Engineering T&D spoke with representatives from the investor-owned utility, standalone transmission company and vendor communities. While much work remains to be done in rulemaking and defining specific points outlined in the bill, this diverse group of interview subjects agreed that the Energy Policy Act of 2005 has improved the transmission business environment.

Transmission Siting

Two provisions in the Act seem to have been included to make it easier to roll out transmission projects in areas where the need is particularly dire. (Think Path 15 in California in 2000/2001 or congested transmission lines in southwest Connecticut, for two examples.)

One of those provisions calls upon the Department of Energy (DOE) to conduct transmission adequacy studies every three years to identify “national interest electric transmission corridors” that need to be upgraded to improve reliability or maintain the economic operation of the power grid. The bill calls for DOE’s initial study to be completed within one year. Related to this provision is one that gives FERC so-called “backstop” authority to order the acquisition and permitting of right of way to site transmission within these “national interest” corridors.

While these provisions at first glance would seem to make it easier for investor-owned utilities and other transmission-owning entities to build transmission where it’s needed, not all believe it’s a panacea.

“The devil’s in the details, and we don’t know what the details are yet,” said Curt Hàƒ©bert, Entergy’s executive vice president of external affairs. Prior to joining Entergy, Hàƒ©bert served for four years at FERC, beginning in 1997, and became FERC chairman in 2001. “It will be interesting to see what areas are identified as national interest corridors.

“It’s probably an improvement on where we were,” Hàƒ©bert continued, “but I’ve been in the pipeline business long enough to know that federal transmission siting-be it for a pipe or a power line-is not a savior. It is very difficult to have pipes sited even though there is federal siting authority for them. But, I do think it is a move in the right direction.”

Nina Plaushin, director of federal and state government affairs for American Transmission Company, said she doesn’t believe FERC’s new backstop authority will have a measurable impact on the number of permits issued for transmission projects.

“Our position is that simply changing venue isn’t going to make the project any easier to do,” Plaushin said. “We think that working with the impacted community and landowners upfront and early actually makes the process go more smoothly.

“People may see this in the bill and think it means the federal government is going to be issuing permits for every project out there,” she continued. “That’s not going to happen. My guess would be that the government will limit the permits they’re looking at to very high-voltage projects. It’s hard to argue that a 69-kV line is of national importance.”

Plaushin did say ATC was supportive of provisions in the bill that call for better collaboration among federal agencies, noting that it would be particularly helpful to companies like ATC that cross federal land with their transmission projects.

Reliability Standards

Reliability provisions in the Energy Policy Act of 2005 are receiving broad support in the power industry. The bill calls for nationwide, mandatory, enforceable standards to ensure power grid reliability. It also calls for a new “Electric Reliability Organization” (ERO) to establish these standards under FERC oversight and levy penalties for those who violate the rules.

The North American Electric Reliability Council (NERC) has said it will file an application to become the ERO as soon as FERC has established requirements of the organization. The energy bill calls for FERC to finalize a rulemaking on the ERO issue by early February.

NERC has been calling for legislation to set mandatory and enforceable reliability standards for some time, and they haven’t been alone in that request.

“Anyone who would say they opposed reliability standards should be asked “Ëœwhy’ about 10 times,” said Entergy’s Hàƒ©bert. “I’ve never heard a reasonable answer from those who oppose it.”

John Howe, vice president of electric industry affairs at American Superconductor, agreed that mandatory reliability rules are essential in an electric power system that operates essentially as one machine. “When you have many market participants whose actions have highly interactive effects on every other market participant, it is essential that participants have such rules and comply with them,” Howe said.

In a paper titled “2005 Energy Act: The Impacts on Electric Transmission,” ICF Consulting noted that a “major debate” is likely to ensue as appropriate reliability standards are determined. “Once set, the implementation of these standards will be a catalyst for billions in new transmission investment, particularly in areas where the grid is currently weak or has seen under-investment.”

Transmission Investment

While a recent EEI study showed that investment in the transmission infrastructure has been on the uptick since 1999, it had been sorely lacking for two decades prior to that. Transmission investment, measured in constant dollars, declined from 1975 to 1998. In its recent “Survey of Transmission Investment: Historical and Planned Capital Expenditures (1999-2008),” EEI found that IOUs increased their annual transmission investments from 1999-2003 by 12 percent annually, and that, going forward, IOUs are planning to invest $28 billion in transmission infrastructure from 2004-2008-a 60 percent increase over the earlier five-year period.

That EEI survey was conducted before passage of the Energy Policy Act of 2005. It is widely anticipated that passage of the energy bill-with its emphasis on reliability and clarification of siting authority-will result in increased spending on the transmission side of the electric power business. But, while the outlook is positive for transmission investment, don’t expect an immediate, huge influx of cash.

“We have seen that utilities have already been investing in infrastructure at a much higher level over the last 18 to 24 months than in previous years,” said Enrique Santacana, president of ABB’s power technologies division. “I believe the energy bill will facilitate the continuation of this level of investment because of the increased certainty. There’s more clarity in siting authority. There are tax benefits through accelerated depreciation. We’ll have enforcement of mandatory reliability standards.

“Having said that I don’t expect a boom-just a continuation of what we’ve already been seeing. It will probably take two to three years for the full effects to be understood and absorbed.”

A key provision in the new energy bill grants the DOE more than $750 million in research and development money for new transmission technologies. That’s good news for utilities, but it may be even better news for the companies that supply technologies to utilities.

“There will be a lot of emphasis on technologies that allow utilities to operate the grid in a more effective and efficient way-real-time information systems, HVDC, FACTS-these are going to be areas of emphasis going forward,” Santacana said.

Howe agreed that technology should play a larger role in a post-energy bill landscape.

“Obtaining broad new corridors of land and putting up 50 miles of transmission on a virgin corridor, that’s probably become the least likely solution,” Howe said. “It still will be done in some cases, but I think the consensus in the industry is that we’ll see strategies to extract more capacity from the existing network and the existing physical rights of way.”

PUHCA Repeal

While it doesn’t relate specifically to transmission, the repeal of the Public Utility Holding Company Act of 1935 (PUHCA) has been one of the most talked-about provisions in the new energy bill, and it has the potential to be the most far-reaching. PUHCA was originally passed to prevent large interstate holding companies from monopolizing the electric utility industry during the early 20th century. The law limited mergers of electric utilities.

In the Aug. 2, 2005, issue of USA Today, Ken Hurwitz, a partner in the energy practice of the Haynes and Boone law firm, had this to say about PUHCA’s repeal: “Within the next five to 10 years, the current number of electric utilities-which numbers more than 100-could shrink to 10.”

While PUHCA’s repeal will almost certainly result in an increase in power industry merger and acquisition activity, exactly how it will play out remains a bit of a mystery.

“I’m not certain who takes advantage,” Entergy’s Hàƒ©bert said. “Is it companies like Entergy and Exelon and AEP that look around and say, “ËœThis gas LDC over here fits right with me.’ Or is it BP Amoco or ExxonMobil that say, “ËœThese utilities who have their costs under control, who understand reliability and customer service, that’s a business I can get into now.’ Or is it someone like GE? Or will there be more M&A activity between utilities? I’m not sure where this goes, but I can assure you it will be interesting and fun.”

American Superconductor’s Howe said he believes PUHCA repeal could foster the growth of a more regionalized approach to transmission ownership and control-something akin to, and perhaps even beyond, the plan FERC originally outlined in its Order 2000 to encourage transmission owners to band together in regional transmission organizations.

“PUHCA really has constrained the development of a more rational industry structure in this country,” he said.

Howe pointed to a recent report from National Grid (“Transmission: The Critical Link,” www.nationalgridus.com/non_html/transmission_critical_link.pdf) that suggests a relationship between the number of transmission-owning entities in a country and the amount of investment in the high-voltage system. To summarize part of the report: Fewer transmission owners equals higher investment.

“If you have 450 transmission-owning entities, each evaluating investments on the basis of what it means for them and their shareholders within their own territory, it doesn’t make sense to build transmission lines that cross state lines and connect to neighboring companies,” Howe said. “There’s not a clear benefit.

“But what happens when utilities start to pair up? When you have a broader perspective, a lot of transmission links that didn’t make sense from a local standpoint, make a lot of sense from a broader regional standpoint because the cost of congestion now becomes internal to your system. There’s billions of dollars of transmission investment that would pay for itself by reducing congestion,” Howe said. “The reason it hasn’t been done is not that the money wasn’t available. The problem was that the financial incentives weren’t there so that the person who spent the money could realize the return.”

The Energy Policy Act of 2005-with its PUHCA repeal, transmission siting provisions and reliability language-will no doubt have an impact on transmission. How substantial an impact will be determined in the rulemaking that the industry will embark upon over the coming months. Much will also depend on whether Congress appropriates the dollars authorized in the bill.

Now that the energy bill has finally passed, the real work begins.࢝®à¢®

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