ELECTRICITY:

Obama's bold energy agenda spurs push to overhaul grid

President-elect Barack Obama's ambitious energy initiatives emphasize electric-powered vehicles, wind turbines and solar panels -- all of which hinge on building a transmission grid capable of delivering renewable power generated in remote places to distant cities.

"One of ... the most important infrastructure projects that we need is a whole new electricity grid," the Illinois Democrat said last month on MSNBC's "The Rachel Maddow Show." "Because if we're going to be serious about renewable energy, I want to be able to get wind power from North Dakota to population centers like Chicago. And we're going to have to have a smart grid if we want to use plug-in hybrids."

But getting that grid built will be very complicated and very expensive. Grid developers face uncertainty in cost allocations and returns on investments, environmental concerns, landowner objections and a patchwork quilt of regulations for every state crossed by the power lines.

"There is an infrastructure need associated with renewables that is pretty profound, especially when it is crossing state lines," said Philip Moeller, a member of the Federal Energy Regulatory Commission. "That is where it is of the national interest, and there should be an appropriate equivalent role for the federal government."

The grid should be treated as a multi-state resource, comparable to interstate highways, he said. "If anyone doubts the interstate nature of our grid, look what a tree falling in Ohio did in August of 2003," Moeller said, referring to a blackout that cut power for 50 million people in eight states and parts of New York City and Ontario, Canada.

Joseph Kelliher, FERC's chairman, said a grid under his agency's authority would create a unified, coherent regulatory framework that could balance local, regional and national needs for transmission lines, comparable to FERC authority over interstate natural gas pipelines.

"Without that authority, we are actually not going to develop a grid that this country needs to ensure reliability, to support wholesale competitive markets, but also to meet the climate change challenge," Kelliher said.

The price for transmission infrastructure that Kelliher says is needed over the next two decades: about $233 billion.

Peter Huber, a senior fellow at the Manhattan Institute, said that while the up-front costs are significant, the investment could lower electricity prices overall and provide long-term payoffs. Huber is the author of a recent report arguing that a national grid would give all markets access to the cheapest power regardless of location. This, the report says, would lower price volatility and guarantee more efficiency in power plants that would otherwise stand idle to be used solely to provide electricity during periods of peak demand.

"Somewhere in America, some community is always paying significantly more for power -- 20 to 50 percent more -- than the market is selling it for elsewhere," Huber's report says. "Several hours later, many of the cheap sellers and expensive buyers will have traded places."

Chuck Gray, executive director of the National Association of Regulatory Utility Commissioners, said policymakers should tread carefully before imposing a "draconian measure" giving FERC siting authority. Few details have been worked out about how local and environmental interests would be considered, what lines would fall under federal jurisdiction and if FERC could properly weigh alternative solutions to new transmission, he said.

It is possible, Gray said, alternatives -- such as distributed generation, more effective load management and strategically located power plants -- could lessen the need for additional transmission infrastructure in some places.

A more "holistic approach" to transmission might be handled more effectively at a regional or state level, Gray said. Current efforts in those areas should proceed "until it is proven that the current system is inadequate to the challenge, and that is not a conclusion that we are prepared to make at this point," he said.

Fierce regional politics

Battles over a national grid will pit the potential for lower electric bills on average and more renewable power sources against national grid foes -- state regulators, environmental groups, local utilities and even regional interests.

"The politics of this stuff is really complicated," said Ashley Brown, executive director of the Harvard Electricity Policy Group and a former commissioner of the Public Utilities Commission of Ohio. "It's not like Democrat versus Republican. Inherent forces are lined up to make sure there is a lot of parochial interest being protected."

The national grid idea not only is opposed by landowners who do not want unsightly power lines or environmentalists worried about damage to natural resources, Brown said, but also is unpopular with vertically integrated utilities that do not want to compete with other utilities and with leaders in regions that have abundant power generation and low electricity prices, who worry that prices will rise if extra electricity is sent elsewhere.

That opposition prevailed against a previous effort by FERC to standardize transmission policy early in the Bush administration. While the "standard market design" that FERC proposed did not include a national grid, it would have created a national regime for pricing transmission to allow "broader areas of competition."

State utility regulatory agencies, consumer groups, public utilities and 22 states -- particularly those located in the Northwest and South that have excess power generation -- decried the provision, saying FERC was overreaching its authority. The ranking Republican on the Senate Energy and Natural Resources Committee, Pete Domenici (N.M.), introduced an amendment to block the FERC proposal, although he later withdrew it.

FERC also came under fire after the 2005 energy law gave the agency backstop authority to site transmission lines in "national interest electric transmission corridors" designated by the Energy Department in congested areas. DOE has made two designations -- in the mid-Atlantic and the Southwest. Both have been challenged in court, and lawmakers from affected states have introduced legislation to cancel FERC's authority.

So far, only one utility has moved to take advantage of FERC's backstop authority. Southern California Edison is in the pre-application process to request FERC siting authority for a transmission line linking Arizona and Southern California in the wake of Arizona regulators' rejection of the project (E&ENews PM, Aug. 14).

The failure of the transmission pricing proposal and continued opposition to FERC backstop authority have scared proponents of national transmission policy, Brown said.

"What you have is a patchwork of regional policies," Brown said. "Right now, there is no national leadership."

FERC has the option of doing more to standardize transmission policy -- and thus create certainty for investors -- without national siting authority, Brown said. But "sophisticated leadership" would be needed, he said, to survive certain opposition and political backlash.

But Ashok Gupta, senior energy economist at the National Resources Defense Council, said a top-down approach will always run into trouble. Instead, he recommends a bottom-up effort, with coordination and discussion including all stakeholders, that would treat transmission as part of an overall clean energy plan.

"An integrated approach is critical in terms of bringing skeptics along," said Gupta at a Manhattan Institute forum in Washington last month. Federal siting authority "is not where you start," he said.

Recognizing the conflicting environmental goals of promoting renewable energy, which needs more transmission, and preserving natural resources, Gupta said NRDC is analyzing tracts where power lines can be "properly sited."

Gupta added that building a national grid before climate change policies are in place could also increase the amount of greenhouse gas emissions from power plants. As the current cheapest provider of electricity generation, coal-fired plants would probably run -- and pollute -- more if all markets could draw from that generation source.

'We're going to have to be involved'

But FERC's Moeller said establishing a national grid cannot wait for climate policies.

"It takes a long time, and it is a very difficult process to get transmission built," he said.

FERC has been encouraging transmission investment using the rate-incentive authority Congress gave the agency in the 2005 energy law and by approving regional cost-allocation strategies. But such plans vary by region and even by facility.

Besides, Moeller said, while the call for a national grid has grown stronger recently -- especially with the endorsement of the American Wind Energy Association -- he does not expect FERC to have national siting authority soon.

"We are just at the beginning of this process," Moeller said, adding that he hopes the legislation is crafted and introduced next year.

A few transmission bills -- including some by Senate Majority Leader Harry Reid (D-Nev.) and Rep. Jay Inslee (D-Wash.) -- have been introduced, but there are many details left to be worked out -- notably, who will pay for the transmission. Companies don't want to build power plants without transmission, and transmission owners don't want to build lines extending to nowhere.

Moeller said a possible solution is to follow the model of the Highway Trust Fund, which is funded by gasoline taxes and is used to pay for highway construction. It is possible, he said, such a fund could be created for transmission and funded by transmission taxes on electric bills.

"The point is that it is a user fee, and everybody benefits," Moeller said. "Somebody in Rhode Island benefits from goods coming through Pennsylvania from Ohio."

The $75 billion investment to build the "backbone" high-voltage lines (see map above) to connect all major electric resources in the United States would probably increase a electric customer's bill by a third of 1 cent per kilowatt-hour, but it could save 2 cents per kilowatt-hour on the cost of the electricity overall, according to Huber's calculations.

Also under consideration are tax incentives for landowners who allow transmission facilities on their properties and a role for states in the process, Moeller said.

The expanded Democratic majority in the House and Senate could accelerate the discussion if lawmakers renew their efforts to create a national renewable portfolio standard, which would require that a certain percentage of the nation's electricity be drawn from renewable energy. Meeting that mandate would require transmission to link the Southeast, for example, to wind farms in Texas.

"Transmission is the fundamental enabler for all of these resources," said Nicholas Brown, president of the Southwest Power Pool, a regional transmission operator for Kansas, Oklahoma and parts of surrounding states.

While Obama has taken no position on a national grid, his advisers say, he does believe government must play a major role in getting electric transmission built.

"It's huge projects that, generally speaking, you're not going to have private enterprise ... want to take all those risks," Obama said of the grid on the Maddow show. "And we're going to have to be involved in that process."