Kathleen Davis, Associate Editor
Some are calling it the price of NIMBY (not in my backyard): a set of regional grids, effectively disconnected and straining to push more and more power through lines that could have accurately been labeled “archaic” a decade ago.
And it’s no longer just industry insiders who are making this accusation anymore: politicians and consumers are taking up the cause as well.
An aging power infrastructure is just one focus of the Bush administration’s National Energy Policy. Photo courtesy of the National Renewable Energy Laboratory.
“In many ways this crisis-like every other crisis this country has ever faced-is going to be a test of our willingness to make tough decisions, to stick with those decisions and take responsibility for our own actions,” stated Secretary of Energy Spencer Abraham at the closing general session of Edison Electric Institute’s (EEI) annual conference in New Orleans. “We use an enormous amount of energy in this nation. And yet, we are often reluctant to do the things that need to be done to maintain a secure supply of energy.
“Everyone likes power, but no one likes power generation or delivery,” he said.
Power as policy
Chapter seven of the Bush administration’s National Energy Policy is all about delivery: pipes and power, supply and end product. It stated that “one of the greatest energy challenges facing America is the need to use 21st-century technology to improve America’s aging energy infrastructure.”
Stating specifically that the electric grid is “constrained by insufficient capacity,” the document projected that current attempts to shore it up will be inadequate for the rising demand. With the drain on power expected to increase by approximately 25 percent, the Policy estimated that more than 200,000 MW of new capacity will be required for the four grids serving North America: the Western Interconnection, Eastern Interconnection, Electric Reliability Council of Texas (ERCOT) and the Providence of Quebec.
The Policy recommended a series of fixes for the system.
- The group called for the development of a FERC sub-organization to provide reliability enforcement. (Since voluntary compliance has been standard since 1968, legislation for actual power to put a foot down is being discussed.)
- They suggested research and development on both transmission reliability and superconductivity.
- They suggested “nonfederal contributions” should be solicited to relieve Path 15 congestion. (Path 15 is the main transmission route from southern to northern California.)
- They proposed to examine the benefits of a “national grid” as well. (The four separate grids serving North America are only loosely interconnected.)
In his speech at EEI, Abraham labeled infrastructure improvement a “key element” in the energy plan.
“Our plan calls for an end to such [Path 15] bottlenecks by creating an electricity superhighway, one where power can move coast to coast as freely as the family automobile,” he added.
You are the weakest link
Jan Packwood, president and CEO of IDACORP Inc., labeled transmission the “forgotten stepchild in today’s deregulation.” He joked that many see the solution to the crisis on the horizon as a need for more generation, but that getting that extra power to the consumer is half the battle.
“Plants are being proposed on every street corner,” he said. “Pretty soon they will outnumber 7-11s, but transmission has a more key role to play. Right now, you can’t get that power from where they propose to build it to where they need it.”
“It’s not a sexy issue,” added Betsy Moler, senior vice president at Exelon (and who served as the Federal Energy Regulatory Commission chairman from 1993 to 1997). “In most companies [transmission] is not a huge part of the balance sheet.”
In fact, investment in the grid has been lax for years. Many utilities complain that the current incentives are weak at best, but with the growth of deregulation (and the requirement of a split between generation and transmission), many had high hopes that the new developing structures would be more willing to funnel coins into the infrastructure. Unfortunately, the rewards have not materialized as fast as the risks.
According to Paul Addison, managing director at Salomon Smith Barney, the grid hasn’t seen much investment traditionally because there really wasn’t a fair return possible on the investment.
“[Transmission] is a relatively small piece of the whole puzzle-roughly 10 percent of the total asset pool of the industry-so it doesn’t get a lot of attention unless there’s a problem,” Addison told EL&P. “We’ve only recently begun to see constraints on the system: New York City, significant congestion from western PJM [the Pennsylvania-New Jersey-Maryland interchange] to east-ern PJM, California’s Path 15.”
And the final straw to touch that camel’s back may be the crisis in the Golden State and the California Independent System Operator (ISO), which has shouldered a lot of the blame nearly single-handedly. While the state’s crisis had a number of contributing factors, the fallout has certainly seen a decrease in support for the non-profit transmission system. ISOs may soon be a thing of the past.
“The California ISO has been a disaster, and it’s been an expensive one,” Addison said. “The history of ISOs so far has not been all that positive.” Addison added that the New England ISO “doesn’t work well either,” while the New York ISO is also having problems.
“Even the best ISO that exists, PJM, has indicated a willingness and an interest in transmission companies,” he stated.
“The interests of transmission owners and the responsibilities of the ISO do not necessarily coincide,” stated Andersen’s report, “Energy Crisis in the Western U.S.,” when examining lessons learned in California. “Only when the operator owns assets and has profit incentives related to those assets are all the elements in place to make for effective RTOs [regional transmission organizations].”
Transcos on the horizon?
For-profit transmission companies (transcos) are now being touted as the answer to America’s gridlock.
“We [Exelon] believe a transco is likely to be a better business model than an ISO,” Moler stated simply when discussing Exelon’s shift in focus from the Midwest Independent System Operator (MISO) to the Alliance Regional Transmission Organization.
Frank Gallaher, president of fossil operations and transmission at Entergy, said he was proud that “three to four years ago, when everyone wanted ISOs, Entergy was pushing transcos.”
“I suspect that eventually all transmission will be under a transco,” he added.
“There are companies that have large transmission assets, which could be the basis for transcos,” Addison said, listing Commonwealth and AEP as possibilities.
“First Energy has indicated that it will spin its transmission assets at some point,” he stated. “Entergy is also talking about a transco, but they are talking more along the lines of a passive ownership, which may not be a very viable business proposition.”
“I see that structure as only an interim step,” he added.
But Addison does believe that transcos-rather than ISOs-will be the wave of the transmission future. While two years ago, the ISO direction was the true North on the transmission compass, it’s obvious to Addison that the needle has now swung a different direction.
“In the last year I’ve seen a major turn toward for-profit, even under existing ISO structures,” he said, pointing out that some companies under the New England ISO are examining the pros and cons of a transco. Any transco to come forth from those talks could sway quite a bit of authority away from the New England ISO, making it a major player in the market. In that scenario, the ISO would be pushed back to market “monitor.”
All speculation aside, to date the only for-profit transmission company on the books is American Transmission Company (ATC) in Wisconsin, which fired up on New Year’s Day this year. It assumed ownership, operation, planning, maintenance and monitoring of the transmission assets formerly owned by a number of Wisconsin utility companies, cooperatives and municipal utilities and was the first for-profit, stand-alone transmission company in the U.S.
At the opening, ATC president Jose Delgado stated that the company began operations “smoothly and quietly,” which was “exactly as we’d hoped.” But, five months later at Edison Electric Institute’s annual convention, Delgado admitted, “it is difficult to form a transmission company.”
“When the fox sets the rules, the chickens don’t do too well,” he joked.
However, no major roadblocks have materialized in front of ATC, a factor that Paul Addison believes may lead more utilities to spin off their transmission assets and aggregate them in the same way.
“Some of the transmission companies in some of these investor-owned utilities are quite large,” Addison stated. “And they could be the impetus for forming a transmission company of significant size.”
“I see a number of those perhaps developing,” he added. “You already have one example, ATC. Right now, they’re holding their own with an A- rating. That’s pretty good.”
FERC’s got the whole grid in its hands
However, one mitigating factor may change all those shiny transco possibilities: FERC. Right now, companies are playing a “wait and see” game with the regulatory agency, which could delay investment.
Addison gave a short list that he felt necessary to see any significant transmission investment materialize: a clear understanding of an improved rate structure, deferral of the capital gains on the sale of transmission assets (which is also supported by the Edison Electric Institute) and a waiver of Public Utility Holding Company Act (PUHCA) jurisdiction over transmission companies. Without these, Addison indicated investment-either on the transco side or the individual utility side-may be in limbo for awhile to come.
“Until people feel they will be fairly compensated, there won’t be investment,” Addison concluded. “And there is a tremendous amount of uncertainty in the industry right now. People will definitely not put any money into transmission while this uncertainty exists.”
Premium returns on new investments would also be helpful in encouraging investment, according to Addison. Accelerated depreciation may be a key as well.
“Transmission has historically been a 40-to-50-year depreciation type asset. Given today’s environment, no one will sit around and wait 40 or 50 years to get back an investment. Some are suggesting a 15-year depreciation time frame for transmission, and I think that may even be supported by FERC,” he stated.
But, in the end, tax credits and financial incentives may not blur the hurdle that transcos-and every attempt to shore up the transmission grid-will still face, namely the backyard advocates.
Betsy Moler brought the transmission argument right back to the average residential consumer when she pointed out that “all the FERC candy in the world will not buy off the NIMBY crowd.”
Paul Addison, managing director at Salomon Smith Barney, can be reached via phone (212-/816-6725) or e-mail (paul.t.addison@ssmb. com). More information on the American Transmission Company can be found at their Web site, www.atcllc.com.