Remarks by Mason Willrich, Senior Advisor, MIT Energy Innovation Project, to the Energy Daily Transmission Conference
September 30, 2009
Electricity Transmission Policy for America: Enabling a Smart Grid, End-to-End
I must begin with a disclaimer. In making these remarks, I am expressing my personal views and opinions, which do not necessarily reflect the views of any organization with which I am affiliated. It is a pleasure for me to have this opportunity to present my views about what I believe to be the most important issue facing America’s electric power industry – the need for changes to public policies governing our high voltage electric transmission grids or networks in order to accelerate innovation and progress towards a smart grid, end-to-end.
First, I will summarize the context in which electric transmission is embedded. Thereafter, I will discuss my proposals for policy reform.
Context
America’s electric power industry is highly fragmented. Ownership is divided among more than 3,100 separate entities. Investor owned utilities account for 7% of total entities, and they serve 73% of total customers. Publicly and cooperatively owned utilities constitute 93% of the total entities, and they serve 27% of total customers. Within the investor owned sector, consolidation has been underway.
America’s electric power industry, in the aggregate, has a stable revenue base of $250+ billion per year, and a large asset base of $800+ billion. The industry is generally not over-levered. Of the electric power industry’s total asset base, power generation accounts for 60%, distribution for 30%, and high voltage transmission for 10%.
America’s high voltage transmission system consists of more than 167,000 miles of lines, 230 kV and higher. Investor-owned utilities own 66% of this total transmission line miles, while a variety of public entities own 30%, and independent transmission companies own 4%.
Responsibility for operating America’s transmission networks is dispersed among different business models that coexist under the Federal Energy Regulatory (FERC) open access transmission regime established by Order 888 in 1996 and revised by Order 890 in 2007. Although they do not own transmission facilities, nonprofit independent system operators (ISOs), which are regulated by FERC, manage competitive wholesale power markets, provide open access transmission services, and assure compliance with mandatory transmission reliability standards for their defined control areas, or “balancing authorities.” The regions covered by independent system operators include the Northeast, mid-Atlantic, Middle West, the South Central U.S., Texas and most of California. These regions include mainly states where electric industry restructuring, including utility divestment of generation, was carried out in the 1990s and early 2000s. About 2/3 of America’s electric consumers are served by utilities which participate in wholesale power markets managed by ISO’s and in transmission planning led by ISO’s. Utilities serving the remaining 1/3 of America’s electricity consumers in the Northwest, Southwest, and Southeast avoided state restructuring. They are outside ISO coverage and lack organized wholesale markets.
As a result of uncertainties surrounding the nature and extent of utility restructuring, annual investment in transmission declined by 50%, from $6+ billion in 1980 to $3+ billion in the late 1990s. Spurred by the worst electric system failure in American history, the Northeast blackout in 2003, investment in transmission increased to almost $8 billion in 2007. Investment at high levels in transmission must be sustained to assure reliability of service is maintained or enhanced, and line losses and congestion are reduced, even as customer electric loads increase.
A major motivation for concern about America’s electric transmission grid is the need for rapid development of renewable energy resources – wind, solar, and geothermal primarily — to meet future needs for electric power in a carbon free manner. While America is rich in these resources, they are location constrained and the best locations for development are generally far from urban electric load centers. Even without a federal renewable energy standard, utilities are struggling to meet such mandatory standards in 26 states. Development and construction of high voltage transmission, AC, DC, or a combination, requires 7 to 10 years, whereas development and construction of a wind or solar resource takes 3 to 5 years.
The costs of the multi-state transmission projects necessary for America’s renewable resources to be fully developed will be very large. For example, the Green Power Express is a proposed 765 kV network that would span 3,000 miles in order to deliver 12,000 MW of wind energy from the Dakotas, Minnesota and Iowa to load centers in Chicago, Minneapolis and southeast Wisconsin. The project would cost an estimated $10-12 billion. The owner would be ITC Holdings Corp, an independent Transco. PG&E has proposed a 1,000 mile transmission line that would bring 3,000 MW of new renewable power from British Columbia to northern California. It would cost $3.2 billion. And CAISO has developed a conceptual plan for achieving California’s 33% RPS goal in 2020. The transmission required to implement the plan would cost an estimated $6 billion.
More recently, an interregional planning effort in the Eastern Interconnection has evaluated conceptual transmission plans to support access to wind resources that cross the territories of PJM, Midwest ISO, Southwest Power Pool, and other Midwestern and Southern utilities. The analysis suggests that achieving a 20 percent renewable portfolio standard with wind resources across the Eastern Interconnection would require an investment of $80 billion in transmission.
To conclude my summary of the electric transmission context, my last topic is public policy.
Public policy oversight of America’s electric power industry is a hodgepodge, rooted in the federalism concept of 50 state laboratories. Federal authority frequently overlaps the states. Nevertheless, diverse state regulatory policies dominate regarding the most important policy subjects, such as electric industry structure, generation adequacy, energy resource mix including the fraction of renewable energy, transmission siting and cost recovery, and, of primary importance, retail electricity prices. On the other hand, federal regulatory policies govern wholesale power market design and prices, and, since 2005, electric system reliability standards.
Several energy/climate bills are pending before the United States Congress which contain specific provisions affecting electric transmission. Any federal legislation focused on transmission will modify, more or less, the existing hodge podge of federal, state, and local laws and regulations affecting electric transmission, and related components of the electric power industry.
Recommendations
With the context I have summarized in mind, I will now outline my recommendations for public policy change. My recommendations generally take the form of federal legislation not because I prefer federal intrusion into what are currently state prerogatives. Rather it is because I believe strengthened guidance and coordination by the federal government is indispensable in light of the interstate and multistate character of the electric transmission issues which must be addressed. My recommendations relate to transmission planning and siting, transmission cost recovery and allocation, grid modernization, smart grid development and deployment, and independent system operator coverage.
Regarding transmission planning and siting: First, Congress should clarify that FERC’s high voltage transmission planning authority applies to all electric transmission owners, operators, and developers — whether investor or public, and to local, state, and federal agencies with transmission planning responsibilities. Second, Congress should direct that FERC’s planning authority applies to all high voltage transmission projects that are interstate or that affect interstate commerce. Third, Congress should authorize FERC to designate one or more regional transmission planning entities within both the Eastern and Western Interconnections. Fourth, Congress should empower regional planning entities, in consultation with industry, government agencies, and nongovernmental stakeholders to develop regional transmission plans. Regional plans would be based on economic and environmental analyses of alternatives including alternatives to transmission. Regional plans would assess and incorporate, as appropriate, available plans developed by state entities and independent system operators. Plans would include an approved list of specific projects, including approved routes and project cost estimates. Fifth, Congress should authorize FERC to establish defined time lines for the completion of regional transmission planning results for FERC review and approval. And sixth, Congress should provide that FERC approval of proposed projects included in regional plans has conclusive effects in other governmental agency proceedings.
In other words, regional planning entities must not become an additional layer of bureaucracy. Their processes should be inclusive, but disciplined. Regional transmission planning should be planning with consequences, the ultimate consequence being construction of necessary transmission.
Regarding transmission cost recovery and allocation, Congress should direct FERC to determine cost recovery for future high voltage interstate electric transmission projects and such projects affecting interstate commerce, and clearly direct that FERC’s cost recovery decisions take precedence over any state cost recovery determinations. In legislation, Congress may also include cost allocation guidance for high voltage transmission projects. With or without statutory guidance, however, FERC should conduct a rulemaking proceeding with the aim of developing cost allocation principles appropriate for a variety of different circumstances. In the absence of a legislative mandate, in order to meet the requirements of the 7th Circuit U.S. Court of Appeals decision in Illinois Commerce Commission v. FERC, August 6, 2009, the record of FERC’s rulemaking must include an “articulable and plausible reason,” and “substantial evidence on the record” for every cost allocation principle FERC approves. A key factor to consider during FERC rulemaking should be that a cost allocation method, if applied to an otherwise meritorious project, should result in a project that can attract financing.
Regarding transmission grid modernization, the U.S. Department of Energy (DOE) should, in cooperation with the North American Electric Reliability Corporation and the Electric Power Research Institute, develop and guide implementation of a national innovation strategy for America’s electric transmission grids. The strategy should result in specific plans for all transmission owners to incorporate, within a defined period of years, “best available, cost effective” technologies that will improve the operating performance of their existing and planned transmission facilities.
Next, regarding smart grid, led by DOE, and approved by FERC, federal smart grid standards to assure interoperability and security must be developed and implemented nationwide. In parallel with national standards development, transmission system operators should develop and demonstrate, with utilities and their customers, demonstration demand response programs, enabling utility customers to participate in wholesale power markets, selling “negawatts” during peak demand periods, and also ancillary services at other times. Demonstration projects involving distributed power generating systems and energy storage should be deployed on utility customer premises and within utility distribution networks. Transmission system operators must be full partners in these demonstrations. Such programs would, of course, be accompanied by utility implementation of advanced metering infrastructure enabling two-way interactions between customers and the grid operator. Guided by results of demonstration programs, state regulatory agencies should approve rules and rate designs, appropriate for wide-scale deployments and operations of smart grid applications throughout distribution utility service territories.
Finally, regarding independent system operator coverage, Congress should direct FERC, in consultation with transmission owners, affected utilities and state regulatory agencies, to develop and implement a plan to expand the coverage of organized wholesale power markets to cover the northwest, southwest and southeast United States, which do not already have such coverage. Congress should also mandate establishment of independent system operators for the affected transmission grids. In conjunction with developing this plan, FERC should consider whether the number of balancing authorities, which are currently more than 130, should be reduced. Legislation should provide a 3-year transition period for these changes to occur.
My recommendation to expand organized wholesale market and ISO coverage to the entire country may be strongly resisted by entrenched and politically powerful interests. One such interest group consists of investor owned utilities which have successfully maintained a regulated electric utility monopoly which integrates generation, transmission and distribution functions, even though generation is no longer a natural monopoly, if it ever was, and the largest share of America’s power generation capacity, 47%, is now owned by independent power producers. A second powerful interest group is publicly owned utilities, many of which strongly resist any erosion of their operating control over the transmission facilities they own. In response to their claim of “if it ain’t broke, don’t fix it,” I respectfully suggest my recommendation, if implemented, would have a “win-win” effect for them and for America’s consumers of electricity and for America’s capacity to play a leading role in coping with global climate change.
Why? Although America does not yet have national energy and climate policies, the way forward is clear. America’s security as a nation, and our capacity to form and lead a coalition of the willing to avoid global climate catastrophe, require successful implementation of a national strategy to replace our current reliance on green house gas emitting fossil fuels with reliance on carbon-free energy sources or fossil fuels incorporating carbon capture and sequestration technology. America’s electric power industry can and should play the leading role in implementing such a national strategy by expanding use of renewable energy, nuclear energy and coal with carbon capture and sequestration technology for power generation, and by enabling consumer’s to implement energy efficiency, distributed generation and demand response programs, and by enabling electrification of automotive transportation. Wind and solar are variable sources of renewable energy. Organized wholesale power markets which independent system operators manage can have the geographic scope and sophisticated capabilities which are required to integrate large amounts of variable energy sources into a system that balances power supplies precisely and continuously against consumer loads over large regions, 24 by 7 by 365. Such power markets and operators are also required to arm consumers with the information they need to optimize their electricity consumption, including integration with wholesale markets upstream. Therefore, if integrated electric utilities, whether investor or publicly owned, were to cede operating authority over their high voltage transmission facilities to nonprofit independent system operators, they will help America’s electric power industry as a whole move forward. Of course, such a result might be achieved voluntarily over a couple of decades. History tells me, however, that federal guidance now is critical.
America’s electric power industry can and should, through accelerating innovation, lead the transition to a secure and environmentally sustainable energy future for our nation. The high voltage transmission grid is poised to become the leading edge of that fundamental transition. The proposals I have suggested for transmission policy legislation and regulatory reform would, I believe, enable our electric transmission grid to play that strategic role. It is up to our Congress to act — soon.
These remarks are based on my paper, published with the same title by MIT’s Industrial Performance Center. The complete paper may be downloaded at URL: http://web.mit.edu/ipc/research/energy/pdf/EIP_09-003.pdf.
