Energy Policy:

Panel discusses role of organized electricity markets in push for efficiency, clean energy

How can the unique characteristics of organized electricity markets encourage the development of clean energy solutions in the United States? During today's E&ETV Event Coverage of a COMPETE Coalition-sponsored event, market experts explain how competition can help spur innovation on smart grid, efficiency and clean energy. Panelists include Bill Massey, former commissioner of the Federal Energy Regulatory Commission; Michael Moynihan, green project director at NDN; Dick Munson, senior vice president at Recycled Energy Development; and Kurt Yeager, executive director at Galvin Electricity Initiative.

Transcript

Bill Massey: We're here today to discuss the timely topic of innovation in electricity markets. We all know that as our nation moves forward we need innovation to achieve our nation's goals.

We face significant energy and environmental challenges as a nation. We need substantial investment in our energy infrastructure. We've got to reduce our dependence on foreign supplies.

There are national security concerns here. We've got to use energy more wisely and efficiently. We must limit the emissions of carbon dioxide and other greenhouse gases.

The electric power industry, which is the largest backbone industry in this country, is in a unique position to lead the way in meeting these challenges and it's against this backdrop of historic challenges that we have this conference today.

The organized competitive electricity markets operated by the regional transmission organizations and independent system operators, the so-called RTOs and ISOs, are becoming more and more relevant every day in this environment.

They all are the best way to assure efficient and adequate supply of electricity. They provide the tools that foster efficient investment, operational efficiencies and products and services that our customer members tell us every day that they want.

They help keep electricity affordable. They provide a level playing field for all resources. They foster renewable and demand response resources and they enable the innovation that we are here to speak about today.

As Mark Brownstein of the Environmental Defense Fund has said, "It's no accident that some of the more innovative strategies that we have seen, in terms of using demand response as a way of avoiding the need for nuclear generation, we were finding in the organized competitive markets."

As Judith Judson of Beacon Power has said, "Competitive markets have provided environments that nurture and facilitate innovation, allowing companies like Beacon Power to continue pushing ahead in developing critical new technologies like flywheel energy storage."

We have a very distinguished panel here today to discuss these issues. I'm going to introduce all three panelists and then each is going to speak. On my immediate left is Michael Moynihan.

He is the director of the NDN's Green Project. He was in the Clinton administration and from 1996 to 1999 he held the Internet portfolio and advised Secretaries Rubin and Summers as senior adviser for electronic commerce.

He led successful efforts to pass the Internet Tax Freedom Act, helped negotiate e-commerce agreements with the EU in Japan, and oversaw the e-commerce efforts of Treasury's 140,000 employees.

He is currently a Ph.D. candidate at Princeton University's Woodrow Wilson School of Public and International Affairs. He's been on the faculty of New York University.

He recently authored an excellent paper entitled Electricity 2.0. It's a comprehensive report released by NDN pointing to competition in our nation's electricity markets as the launching pad for innovations such as smart grid technologies and greater development of renewable resources.

Dick Munson, to his left, he is senior vice president of Recycled Energy Development. He has been a key advocate for clean energy and industrial energy efficiency.

Before joining Recycled Energy Development to lead its public affairs efforts, Dick directed the Northeast Midwest Institute and coordinated with the Northeast Midwest House and Senate coalitions, which are bipartisan caucuses that conduct policy research and draft legislation on a variety of issues.

He has served as the Secretary of the U.S. Clean Heat and Power Association, director of the Solar Lobby, and a host of other positions. He's authored several books and his articles on energy and environmental policy have appeared in numerous newspapers and journals. Welcome Dick.

Kurt Yeager, I've known Kurt for a number of years during my time as commissioner at the Federal Energy Regulatory Commission. We're really pleased to have Kurt here today.

He is executive director of the Galvin Electricity Initiative. He joined Galvin Electricity Initiative after it was launched in 2005. He works with electricity experts, innovators, and entrepreneurs to design and build perfect power system models of a smart, efficient electric power system

He also leads the initiative in driving electricity policy changes necessary for system transformation at the state and federal levels. For over 30 years he was president and chief executive officer of Electric Power Research Institute, also known as EPRI.

And, as I said, he was with EPRI for over 30 years. Before that he was director of Energy Research and Development Planning at the Environmental Protection Agency.

He has a bachelor's degree from Kenyon College, postgraduate studies from a number of universities, and the Industrial College of the Armed Forces.

He also did a stint at the University of Pennsylvania's Wharton School of Finance. So welcome to all three speakers. Michael, which you please lead this off?

Michael Moynihan: Thank you very much Bill and I'd like to thank the folks at Compete for organizing this event and for inviting me to participate in it. It's really an honor to be here.

We at NDN are a think tank in Washington, DC, that do a number of issues. I head up the Green Project and for the last couple of years we've been intimately involved with the entire enterprise, which I think it's fair to say has been, in many ways, at the center of some of the economic policies of the administration over the last year to basically convert America from the energy economy that we have been to the energy economy of tomorrow, which is to say a clean energy economy.

This is a challenge of immense importance that encompasses, first of all, addressing the very serious issue of climate change, but also, as Bill said, addresses our nation security with respect to energy independence and also is an immense economic opportunity.

So, for all these reasons, converting from the sort of traditional energy economy that we've inherited to the clean energy economy of tomorrow is one of our nation's most important challenges.

Now, as at NDN we began to study this, we increasingly came up against the fact that so many of these great clean energy ideas really come down to convincing or driving change at the level of the utility.

And, therefore, we began to focus more and more on the electricity industry. So, we began work almost a year ago on a study of the electricity industry of tomorrow, which we recently published.

Our study is called Electricity 2.0: Unlocking the Power of the Open Energy Network and this is the study. We have a few copies here today and I also encourage everybody to go to the NDN Web site to look at this paper, because, as you can see, it's got quite a lot of detail about the electricity challenge we face.

So, let me just hit some of the high points. Essentially, we've come to think of electricity purely as a utility. We use the word utility. Innovation in the electricity industry has kind of declined over a period of a hundred years, so that today we see very little innovation in the electricity industry.

Notwithstanding the great work that's taken place at EPRI on questions of reliability, and that's a joint research consortium where many of the nation's utilities work to develop technology that they share, particularly with respect to reliability, the R&D expenditure in the industry is about as low as you can get.

It's lower than the food industry. There is almost no R&D performed in the electricity industry. So, the question that we really have to ask is can we expect an industry that currently performs almost no R&D, that is subject to regulation, to lead a clean energy revolution?

And when you think about it, it's almost an oxymoron to expect a highly regulated industry to lead a clean technology revolution. So, there has been to date a great deal of focus on the barriers imposed by an outdated and antiquated grid to clean energy and the clean energy promise that most people, I think, agree exist today.

But there hasn't been, in our view, adequate attention focused on the reason that the grid is in its currently antiquated state. And the reason is simply the regulatory structure has created the grid it was designed to create.

So, at the level of national commerce and national movement of electricity we have kind of a tragedy of the comments problem in that our highly balkanized electricity system does not provide the incentives for individual utilities to invest in the long-distance transformation that's needed to create a truly national market.

And the example I sometimes use is that we can basically import fresh flowers from Ecuador, but we can't get electricity, which moves at the speed of light, from one side of the country to the other.

I'll just mention a few other things about this Electricity 2.0 opportunity. When we talk about clean energy we're talking about a large number of different types of energy, but at the center of that wider energy network is the electricity network, which really combines and links them altogether.

It's the only energy mode that allows you to convert say the energy from falling water in one time zone into light in another time zone. It really is the 21st century mode of energy, but yet we're not able to capitalize on that opportunity because of the fact that we have this very outdated regulatory system. So, what is Electricity 2.0?

Well, Electricity 2.0 is a new vision of the electricity system that instead of basically locking the electricity network behind gates that the average person or average company cannot access, it opens up the network and overlays on top of the existing electricity network new layers that enable more people to participate, that connect more people, that bring renewable power online, that allow people with new innovative technologies to bring them to market.

And one thing we uncovered in our study is that while, yes, the electricity utilities perform almost no R&D and, yes, they do that because of incentives, this problem works its way back up the value chain because not only do the utilities perform almost no R&D, but when it comes time to purchase technology developed by others the same incentives imposed by the regulatory system that discourage them from taking risks, from investing in new technologies, apply to their purchasing of technologies supplied by others, apply to the bringing of renewable electricity online.

So, this is a problem that kind of cascades all the way down the value chain. There are some exciting things going on in Silicon Valley, $5.4 billion invested in clean technology last year.

But many of these new start ups and these venture capitalists are realizing that this great new technology is not going to get implemented unless we see real change at the level of the utility because of the wrong and sort of problematic incentives that currently exist under the current system.

So, we're very anxious to work with those of you in this room, with Compete and others doing innovative work in this area to try to change that system and basically create a new, much more open electricity network that can really unlock the value of clean technology and bring renewables and these greet new technologies on stream.

So, thank you very much and I look forward to talking some more.

Dick Munson: Good afternoon, before talking about future opportunities I'm going to start with Thomas Edison because he created the electric power system and he had this one great observation.

He said, "No competition means, no innovation." And that I think is the critical lesson for us today, because if we don't have competition in electric power markets we're not going to have innovation.

And why should we care about innovation? Well, for two reasons. One is economic and that is that the current system is such that our international competitors are doing a much better job than we are of generating and delivering electricity and heat.

And our inefficiencies and our unreliability are costing American consumers and American industry billions of dollars every year. The other reason is environmental.

Since the generation of heat and power accounts for two thirds, more than two thirds of CO2 emissions in this country, if we're not able to figure out how to increase the efficiency with which we generate heat and power, we're never going to tackle climate change.

So, how inefficient is our current system? The average power plant today in the United States takes about three units of fuel to generate one unit of electricity. That's an efficiency rate of 33 percent. That is dismal.

Not only is it dismal, but it has not moved one percentage point in the last 50 years, since Dwight Eisenhower was in the White House. The problem is not utility executives.

The problem is that we have an array of policies and regulations that have been developed over the past decades that limit competition, discourage innovation, and fail to reward efficiency.

Do the laws of physics dictate that we have a 33 percent deficiency rate? Fortunately, no. And here, again, Thomas Edison had some great wisdom.

The Wizard of Menlo Park, at his core, was a businessman and he realized that he had two products to sell, both electricity and heat and the heat he could market to nearby buildings and industries.

So, put another way, Edison realized that he, with a single flame, could generate both electricity and thermal energy. And today, unfortunately, what we do is we use one flame to generate electricity, basically boil water, it spins a turbine, and the heat that's left over we just simply send off into the atmosphere or into our rivers.

And then we burn another flame somewhere else to have the heat that we need for our buildings and for our industrial processes. It's not exactly a formula for efficiency. There is good news.

The public, I think, because of examples like Stairway to the Future and others are looking at supporting efficiency and clean power, also there are a lot of modern-day Edisons. We've heard about flywheels and other technologies.

I think in your packet are a couple of examples that I wanted to talk about regarding the recovery of waste heat. One example is a silicon manufacturer in Alloy, West Virginia, which is about an hour southeast of the capitol, Charleston.

To make silicon, I'm not an engineer you'll note, but essentially you get very high temperatures and you melt quartz rock, out the bottom comes silicon. But in the process of that you've got a lot of heat that's coming off these furnaces.

And this particular manufacturer was spending millions of dollars every year trying to figure out some way to cool down the heat so it wouldn't burn up the back houses or the pollution control equipment.

Edison would look at that heat and think ... a resource. There's a place there to make a profit. So, my company's investing a lot of money to capture much of that heat, use it to boil water, and we'll be generating 65 megawatts of clean electricity.

Clean by the sense that it doesn't burn any additional fuel, doesn't emit any additional pollution. Like the sun and the wind, you either capture it or you lose it.

And not only will this project reduce greenhouse gas emissions by about 485,000 tons a year, but it's going to save the silicon manufacturer enough money that he's going to open up a sixth furnace, increase employment by 20 percent and bring silicon manufacturing back from China to the United States.

The other picture is of the massive Arsler Mittle steel smelter, it's in northwestern Indiana, just across Lake Michigan from downtown Chicago.

And here one of our competitors captures heat from what had been vented out of coke ovens and the flare gases and they're generating 220 megawatts of clean power, but the other important thing is that Arsler Mittle are saving $100 million annually over what they had faced before when they were simply venting it into the atmosphere.

Those examples, I think, suggest that the current climate debate on Capitol Hill is skewed. For those who argue that it will hurt the economy to reduce greenhouse gases, I say come to Alloy, West Virginia, come to East Chicago, Indiana and there you will see companies that are capturing their waste heat, they are increasing their efficiency.

The examples suggest that there are enormous opportunities for innovation out in the market. Unfortunately, these projects, I think, are the exceptions because there are an array of rules that discourage electricity consumers.

We can go over some of those, but we need markets if we're going to sell our clean power. At the moment most regulated monopolies refuse to buy electricity from others because they have an incentive to generate and build their own power themselves.

Even those utilities willing to buy power will purchase it at today's average rate, like $0.04 to $0.08 cents, and yet regulators turn around and give them an incentive to go out and build their own inefficient electric only power plants that will provide power at 0.12 to $0.20.

Without competition, we're going to limit ourselves to expensive and dirty power. So if we're to tackle climate change, if we're to increase the productivity and competitiveness of U.S. industries we need innovation and that, as Thomas Edison said, demands competition. Thanks.

Kurt Yeager: Well, thank you very much and I thank my colleagues here for saying all the right things. I'll try to add a couple of thoughts here. I'm here on behalf of the Galvin Electricity Initiative.

I had the privilege, when I retired from EPRI, of being approached by Bob Galvin, who's a former chairman of Motorola and really launched the cell phone revolution and much of the Internet's openness to the public in this country.

And he had been on my advisory council at EPRI and he said, "Kurt, I share your frustration with the lack of innovation in electricity, but it's basically the same as it was in telecommunications 30 years ago, a great deal of pent-up innovation in a regulated, monopoly business model that has no incentive to use that innovation."

So, what we have been doing for the last several years and will continue to do is to try to break that down and to open the door to innovation through competition and, first and foremost, through enabling consumers to have the benefits.

Much of what you see in electricity today is all you know is the plug and it comes out of the wall. But, as has been mentioned, this system today is operating at a height of unreliability that is absolutely unacceptable in a digital economy.

Today we are losing, through unreliability, $150 billion a year, over $100 billion a year in avoidable inefficiencies, just wasted energies at both ends, and, most importantly, over a trillion dollars a year in jobs.

This is real money, because the United States, which had led the world in terms of the electricity revolution in the first half of the 20th century, is now trailing almost everyone in the world.

We have a museum piece of a power system, not because utilities are bad people in any way, but because they have no incentive for innovation. The rules that guide this industry were established in the 1930s, the New Deal, when the idea was let's get this country electrified.

We want to stimulate the maximum generation of electricity and we want to get it out there and dump it at everybody's doorstep so they have lights and motors and so forth.

We completed that job 50 years ago and yet today utilities are still compensated based on how much electricity they sell. No need to innovate that. If I empower consumers to become efficient I may lose money.

If I empower consumers to produce electricity I'm going to lose money. So if you're running a utility today under these rules, there is no incentive for innovation, maintain the past as long as possible.

Now, that is not the business model for the 21st century. Today the business model must be to optimize supply and demand, to make the best use of every kilowatt hour of electricity that we produce.

We will not have renewable energy in our system without a transformation, because today's system cannot absorb any renewable energy without further undermining the reliability of the system or else building so much backup capacity that we've destroyed the environmental and any economic opportunities that may come with that.

Every building here in Washington or anywhere else should be a power plant, not a power pig. The whole idea of opening up the system is so that these buildings, whether it's in Washington or Chicago or San Francisco or anywhere, can be power producers to sell power back to the grid, not go out and build new central coal plants, but utilize the systems we have here today to maximize both the efficiency and the use of energy.

So, what we're trying to do in our initiative is to bring these realities to the public in matters that they can measure in their hip pockets and in their environment by beginning now to provide the system.

The real focus of the transformation in the system is not out building wind farms in the Dakotas, it's transforming the local distribution systems to enable them to operate as efficiently as possible and to empower consumers at all levels so that you can decide how you want to use your energy and when.

We are living today as we were 30 years ago in telecommunications in the black rotary dial phone era. We need an electronet and the technology is there to do it. The technology is sitting on the shelf.

This is not a major R&D effort. The technologies that we and others have invented over the past 40 years are being used elsewhere to far better advantage.

It is a matter of incenting those uses and allowing entrepreneurial innovators, which has always been the basis for the economic success of this country, to really flourish here.

So, the electronet, we think the advantages and all we've seen in telecommunications that have occurred through the Internet will be child's play in terms of the benefits that we'll see through the electronet opening up the same capabilities here.

I can't begin to imagine all the possibilities that will result, but they will do tremendous advantages for the quality of life and our economy.

The real irony is that both political parties, prior to the last election, said that transformation of the United States power system was fundamental to achieving a sustainable economic, environmental, and energy future for our country.

I couldn't agree more, but we need to begin to do more than simply talk about that and, regrettably, the recent Department of Energy's so-called smart grid stimulus funding, because of, again, the pressures, from a shortsighted Congress I might add, has been simply to fund shovel-ready projects, which is buying a whole lot of so-called smart meters for utilities that may improve their knowledge of how you use electricity, but it is not going to do anything for you in terms of giving you control over your destiny.

The technologies are going to make that very user-friendly; no one's going to look at meters on the wall. This all can be done absolutely automatically via the Internet with every device in your home or business managed to whatever level you want it to have.

And all you'll know like the end of the month is that your electricity bill went down, the cost of things improved dramatically and you've attracted jobs. And we are mobilizing here because we don't have the strength at the national level, at the state level and in the communities, communities making this happen.

I'm pleased that John Kelly is here. He's leading our efforts in Illinois where we're leading with communities there and universities, which have control over their infrastructure, for the purposes of demonstrating, undeniable to everyone, the economic and environmental and quality benefits that accrue from this kind of a transformation.

So thank you very much, we will look forward to moving forward with this and, as I say, we're working in several states now. I had the privilege of just signing a collaboration agreement with Governor Richardson of New Mexico, former secretary of energy, for the transformation of the power grid in New Mexico for example.

That's the one state where we have some top-down leadership, but the real key is communities and raising the consciousness of the public so you demand this change. We must demand this change. Every one of us must stand up and be counted and demand this change from our elected officials. Thank you very much.

Bill Massey: Well, these are all very dynamic speakers, obviously speaking from the heart on matters that they know a lot about and that they strongly believe in.

So let me ask each panelist, do we have the policies in place at the national level at this time to provide the platform for the innovators in electric power industry and if we don't, what changes do we need to make as a nation?

Michael Moynihan: Well, I guess I'll begin because I'm to your immediate left, but we absolutely do not have the policies in place at the national level and, in fact, the policies that we have in place work against innovation and have basically worked with the policies at the state and local level to block the sort of innovation that we need.

I think, Kurt, as you just indicated, the technology to empower people in their homes is not that complicated. I mean I have a BlackBerry, and most of you probably have something similar, that has technology in it that is vastly much more complicated than what's needed to enable people to exercise demand/pull control over the system as opposed to the supply/push type that we have today.

But it simply is not out there and the obstacle is the absence of the correct regulatory framework. I would say that it's a complex interaction between what happens at the federal or the state level, but currently the existing system is, in fact, the problem.

Dick Munson: I'd go so far as to say the current system is Byzantine at best. You've got a system that's divided between state and local regulation, federal regulation, sometimes even now regional regulation.

And all of it is focused on sort of preserving the status quo rather than trying to figure out some way to enhance markets and allow entrepreneurs and innovators out there to advance those technologies that can both increase economic development in jobs, as well as tackle climate change and reduce other pollutions.

Kurt Yeager: It's important to note that the regulation of the power system, again, at the local distribution level is all done by individual states. There is no national legislation at that level.

The only national legislation, the Federal Energy Regulatory Commission, only regulates interstate commerce, which is the long-distance transport of electricity.

That's why we hear about smart grid. Oh yeah, it's going to be wind farms in the Dakotas and new transmission lines. Well, that's trivial in terms of what the smart grid should be doing.

And the federal government is very reluctant to ever interfere with what's so-called states' rights. The closest act that I think has the right language in it, a lot of the right language, is the Energy Independence and Security Act, which was passed at the end of 2007, a bipartisan act, but it's deferential to states.

It encourages states to do things; it doesn't direct them to do it. What we need is federal leadership. We need to do effectively what President Eisenhower did in the 1950s.

He said, "We need an interstate highway system and you states are going to build it and you're going to build it the following way and you're not going to get any federal money unless you do it that way. And not only that, we'll take money away from you."

An offer that couldn't be refused and it was done. So I'm a strong believer in states' rights, but not when it's contrary to the national good and this power system we have today is even more detrimental than was the highway system we had in the 1950s.

It's horrible and it's just a tremendous - we cannot sustain this world. In fact, it is important, I think, to say that this is the children generation, the first generation in this country which is projected to have a quality of life and economic opportunities less than the preceding generations.

The first time in the history of this country and, to a large extent, this electricity system is the foundation which will determine whether or not that is true.

If we keep it the way it is, I would say, in fact, that's why Bob Galvin and I said we may not live long enough personally to see the results, but we are very concerned that our grandchildren will not have anywhere near the quality of life we had because we will not be competitive in the world with the system we have today.

Bill Massey: You've all talked about customer choice as essential. Why is that so important? Why can't regulators achieve this? Why can't government achieve this?

They're good people. They're trying to do the right thing. Why do you need competitive markets, price signals, customer choice for this to work?

Michael Moynihan: I think that's a key question and people often do say that. They say, well, these folks, whether they be the public service commission regulators or the utility executives making these decisions, have the same incentives as everybody else.

Why can't they get it right? And I think the answer is the same reason that in the army there's basically one color of clothing, its olive drab.

Basically, you can't expect a large, centralized organization to come up with the ideas and support the diversity of views and preferences that you find in a competitive market.

In a competitive market you have many ideas being created and then tested out and those ideas are going to be produced by lots of people. If you restrict access to only a handful of people often within the same company, you're simply not going to get the diversity of ideas.

Bill Massey: Other comments?

Kurt Yeager: This nation, in fact, it was initiated on the whole basis - it broke away from United Kingdom because of the basis that individuals had the right to make decisions about their future and in so doing they would do the best of creating the future.

What has set and created the United States separate from the rest of the world has not been centralized control, but decentralized opportunity. Competition creates innovation. Open markets create innovation; centralized governments will not and have not.

And you must also recognize that the existing interests, utilities and so forth, have tremendous political and financial power to control the destiny of things within their individual states.

It is a tremendous challenge to get beyond that. The only way we can get beyond it is to have the public raise its voice and to exercise its freedom and its ultimate control of its own destiny.

Dick Munson: While defending markets, I don't want to suggest that there's not a role for the government. I mean government does need to clearly set the goals as to where we're headed, but, as Kurt suggested, this country is based on this sort of spirit of competition amongst a variety of innovators who, like Thomas Edison said, he figured out a better way to do it and he made money in the process.

Open up the markets and I think you will see a flood of innovators and entrepreneurs who are out there trying to make a buck, but while they're making a buck they're doing social good in this instance because they're enhancing jobs and they're cutting down pollution.

Kurt Yeager: One quick thought there, and that is that, yeah, the role of government should set the standard, not choose the technology, not sooth the solution. Today our standards of reliability for the power system ignore outages of less than several minutes.

The average consumer in the United States is out of power four hours a year. If I go to Japan, it's less than seven minutes for example. That's just one small measure, comparison measure, for example.

But that is the issue here. We need to recognize that those fundamental inadequacies are only going to be changed by opening the market and giving people -- and setting standards.

It's for the federal government to say the standard today must be a fraction of a second, anything more than that is unacceptable and begin to hold the states accountable to raise the bar on reliability in their systems to those levels. This will not break the bank, this will fund the bank.

Michael Moynihan: To go back to the telecom analogy also, during the regulated period for telecom utilities, there was basically one product, a black phone and then they introduced a princess phone.

But you simply didn't get diversity or innovation in that regulated environment and we face the same thing today in electricity.

Bill Massey: Let me open it to the audience for questions. What are your questions?

Question: Why is it so important to target the federal level as much as starting like states like New Mexico? Why aren't we also doing it at the local level or are we already and how are those efforts going?

Kurt Yeager: Well, speaking, again, just from the Galvin Electricity Initiative, we are engaging communities and states and they are engaging us, fortunately, as well for the purposes that doing this.

But doing this state by state is a very time consuming and rather random way of making progress. My home state now of California, of course, kind of killed off so-called restructuring back in the 1990s by a fundamentally badly designed and implemented system.

Other states have done a better job, Texas, Pennsylvania, a couple of examples of states, while not perfect, have made far more progress. And their economies and their ability to attract jobs are demonstrating those advantages.

So, the state level is important and it's good to demonstrate, but ultimately we need this as a national transformation rather than 50 individual transformations or 5000 if we do it at the city level.

Dick Munson: I might just comment I think. I certainly am a supporter of viewing states as laboratories for democracy and you do get often very creative policies that then can be adopted by other states, if not nationally.

But electrons don't know state borders. They don't care. They move fast.

Michael Moynihan: One interesting wrinkle on this is that many of the smart grid developments that are taking place are basically taking place in an area that may be regulated by the FCC as opposed to - it's not strictly electricity, its information.

And there you do have a national regulatory jurisdiction to a larger degree than you have in electricity, where it's somewhat constrained to just interstate transfer of electricity.

Bill Massey: Other questions? Yes? James Dunn:

James Dunn in Restructuring Today. Chairman Wellinghoff is still getting flack for commenting quite some time ago on how there might not be a need for central power plants anymore. I was just wondering if you could comment on if he was wrong or if he was right or your views on that.

Dick Munson: My company is convinced he's right, because we're going to build the power plants. I mean think about, again, efficiency. I mean if you have a centralized power plant out in the middle of nowhere, what are you doing?

You're generating only electricity and you're throwing away the heat. We can't afford to do that in this country any longer.

We need to increase our efficiency and our productivity and that means we need to bring the power plants closer to where the thermal loads are. It's just going to happen by the market. I think he's right.

Kurt Yeager: Strategically I think he is right, but tactically we're going to need central power plants for quite some time. And I would also not damn the energy source, many of us don't like coal, many of us don't like nuclear power.

We're going to need, in this world, to power 10 billion people in this century, all of the energy sources that we can lay our hands on and to use them absolutely as efficiently as possible.

What we need to damn is the technology, because, in every case, the technology that we're using is antiquated, very, very antiquated, just like the grid is. The technology we use for coal is the same as it was in the first quarter of the 20th century.

Nuclear hasn't seen any advances in over 50 years. So, all of these sources need to be applied and, again, technology is the key, innovation and encouraging innovation. And whether we choose to use it in this country, we have a whole world out there that's going to need it.

And renewable energy today without a smart grid is fundamentally limited. I had the privilege of serving on the National Academy's study of the energy future for the country and renewable energy specifically, not because I was a renewable energy expert, but because of the grid connection.

And at the end of the day all these people say, you know, you're right, we're not going to get past single-digit applications of renewable energy in this country within the current system without totally undermining the reliability of the system or having to build so many gas-fired backup generators that it won't make any difference.

We need a smart grid that will allow us not only to have centralized winds, but to have all of these buildings everywhere able to produce electricity from clean, renewable sources.

Then ... then we can begin to look at percentages that some of the states are already passing, where we want at least 30 percent of the renewable energy by 2025. That's achievable, but not within the system we have today.

Michael Moynihan: I would agree that the spirit of Chairman Wellinghoff's comment is absolutely correct, but it will be extraordinarily difficult, probably impossible, to do that without fundamental change to the structure of the electricity industry, which is currently acting as a bar to bringing on distributed electricity.

Bill Massey: Let me ask a question about smart grid. It's come up a lot of times in this discussion today. The promise of smart grid is transforming our energy economy, transforming the behavior of consumers, and transforming the behavior of investors in the industry.

So, the question is can that happen without the clear, reliable price signals from markets? How will that happen in a heavily regulated environment?

Michael Moynihan: Well, I would say that the smart grid investments have a value in the sense that they awaken people to the opportunity provided by the smart grid.

However, I very much agree with the reservations expressed by many people that by going ahead and putting these meters out currently, meters owned by the utilities, meters that were installed very rapidly as a result of the funding that was available, we're not leveraging the full capacity of the smart grid.

So, we have a long way to go on a smart grid. This is really just the opening salvo and really the two work in tandem. The smart grid will start to decentralize and open up the network, but an open network is really needed to make the grid truly, truly smart.

Kurt Yeager: That's a great question and I would say that if you look at the system today, to create a smart grid, and I will use this word smart, but I don't like it because it is abused to justify lots of special interests.

And if you look in the dictionary the word smart has some definitions I don't think we'd don't want to apply. We don't need a smart aleck electricity system. An intelligrid makes a lot more sense.

If you look at the definition of intelligence, the ability to recognize and adapt to changing circumstances, that's the definition of intelligence and that's precisely what we want the grid to do.

And today we have the ultimate in an idiotic grid, because it cannot recognize change and it cannot adapt. It's the equivalent of having a railroad that takes 10 days to open or close a switch.

I had a friend of mine who was teaching one of my grandchildren's class and he said would you come in and talk to them. It was a third-grade class. I said, well, go and talk to a third-grade class about electricity, that's a pretty big challenge.

I said what would you all say about a railroad that took 10 days to open or close a switch. Would that be a smart railroad or a dumb railroad? Oh, that would be the dumbest thing in the world.

I said you're absolutely right, but that's exactly what we have in electricity today, because it's still an analog, electromechanically controlled system.

And even though you think that switch opens and closes quickly, it does by our standard, but at the speed of light that the energy flows, that's equivalent to a 10 day delay, so we have no control over electricity. It goes wherever it wants to go.

A building loses power here, the whole city goes down. A little line goes down in Ohio and all of Northeast United States goes down, that's still the reality of the power system that we have today.

The cost to transform this is on the order of $400 billion, the whole system, distribution and transmission. The federal government put in $4 billion to demonstrate some things which are just not going to demonstrate much of anything in terms of intelligence other than just the meters that will send their information back to utilities.

That $400 billion, when you talk about the transformation costs, every time we are doing demonstrations, the economic benefit to cost ratio is immediately $4 to $5 per one with unlimited upside potential.

So, for this country, and much of that money given that kind of cost benefit would be provided by the private sector. This does not need billions or trillions of tax money. This needs opening up so that the investment community can take part in this transformation and make money in the process, just as was the case in the Internet.

So, the benefit to cost ratio, in purely economic terms, not giving credit for carbon control or anything else, is $4 to $5 for every dollar put in immediately. And not to spend the money to make that happen is, to me, the height of idiocy. That's dumber than the grid.

Dick Munson: I might just comment on something that Kurt said in response to the previous question regarding the availability of an array of technologies.

I think we have a bipartisan habit up on Capitol Hill of trying to pick technology winners. Whether you're a liberal and you like wind turbines or you're a conservative and you like nuclear reactors, it doesn't work.

You know, set the standards for what you want. You want clean, you want efficiency, set those standards and let the market figure out how we're going to get there, because there are a ton of different ways to get there and you don't want to limit yourself at an early stage.

You want to let all the flowers bloom and get the technologies that are indeed out there into the market, because the market, if allowed to work, well do, I think, quite phenomenal things.

Bill Massey: Other questions?

Question: There was specific mention of several states they're making advancements such as Texas and Pennsylvania. Could you all speak to what exactly is distinct about the state? Is it more existing infrastructure that is friendly to these kinds of advancements? Is it more a policy going on at the state level itself? What there is happening that is allowing for this positive change?

Dick Munson: Can I try?

Bill Massey: Sure.

Dick Munson: I'd encourage you not to limit yourself to the United States. Look in Canada, look in Europe, that's where the innovation is going on, that's where regulators and legislators have decided that they're going to open up to markets.

Ontario just approved a clean energy standard offer program which will allow - they set sort of a standard that says if you can supply clean electricity at a cheaper rate than what the utilities would do by a central electric only one, you've got a long-term contract if we love you.

That's where I think the innovation is. That's not to knock what's happening in several states, but don't limit yourself there.

Kurt Yeager: I would just add that the key in the states, which I may add is the fact that they have opened up their markets to competition. They've opened up the retail market, not just the wholesale market, but they've opened up retail markets.

In Illinois as well and we're beginning to take the opportunity of that. There are some states that have that opportunity and are really showing what can be done when done properly.

Now, you can ruin everything if you work at it, but if you do it properly, these are the advantages and, as you said, around the world is much ahead of us. I can go to China, for example, which is extreme, either they have no electricity at all or they have a very advanced electricity system.

And wherever they can make money you'll find an advanced electricity system. And, again, we're operating in a world in which we've enjoyed being at the top of the heap for quite awhile and we will fall far down the line if we don't start getting busy about reestablishing our power system as the fundamental basis for our economic progress going forward.

Michael Moynihan: And I would add that one quality that really distinguishes these more innovative and advanced regulatory jurisdictions from others is the fact that they open it up and they don't envision the grid, as it's sometimes called, as a one-way distribution channel from the central station outward.

Instead, they recognize that fundamentally - I don't like the word grid, it's a network, it's an electricity network and by connecting people and making it more of a two-way transfer you basically unlock many of the capabilities that the network is capable of, increase efficiency, increase renewable energy, and achieve these other goals.

Bill Massey: Yes, there's another question

Question: Yes, I have a question about the whole deregulation point. Now, I'm pretty young myself, but I can remember long enough ago where deregulation of the electricity market caused a little problem in California.

I want to know, I mean is that a concern at all and, if so, how is that addressed?

Michael Moynihan: You're from California.

Dick Munson: We have Californian on the panel.

Kurt Yeager: Well, I won't take a full afternoon to answer that. I could really say a lot about that. Again, this is why it's so important to have an informed public who holds the system accountable. Deregulation, as it was called and intentionally so, was really passed in the Energy Act of 1992.

But, again, it was allocated states do what you want to do. Here's how we think you should do it. And it was basically - and California led the abuse.

The law they passed, you didn't have to be an expert to recognize that that was fundamentally going to fail and it was going to fail largely because all of the vested interests, in effect, wanted it to fail.

I'm not going to accuse somebody of creating Enron at the public level, but the law was written so if it hadn't been Enron it would've been somebody else, because it was written - it was like saying, you know, we're going to leave town now and we're not going to lock our door, but please don't go in.

All right, would you expect to find anything in your home when you got back? That's basically what California did. They left the electricity home and didn't even lock the door and at the end of the day, oh, it failed, oh, that's too bad.

We'll just have to go back and see, the regulator, we've got to protect the public. And today I would say that that regulator doesn't need to protect me. Hold the code, everyone accountable to certain standards, but let me utilize the technology out there.

I don't have to have my cell phone regulated on an hourly basis. Let me decide. Let me work within our power system and our economy to create the system I want.

So I could go on and on about that, but it was really a disaster and a very predictable disaster the way it worked. Fortunately, a number of states avoided those problems and moved ahead without falling into that trap.

And that's the good news, but more states than not unfortunately.

Michael Moynihan: You raise a key question, because that is often the first question that comes up. Well, are we going to have another California energy crisis?

That was a flawed deregulatory effort and, at this point, there are just so many other examples of deregulatory efforts that did not have that outcome, that although it's cautionary and shows that you have to do deregulation properly, there are just outstanding examples of where nothing of that type happened.

In the U.S. probably Texas would be a good example of a state that went fairly smoothly and now has a fairly high retail level of competition and certainly other countries.

So, I think it's an important example because it comes to mind, but it's not a typical example. It was an exception, it's not the rule.

Bill Massey: Yes, if I could just comment, I was a FERC commissioner during that disaster and I can say that the California market meltdown simply proves one thing, a poorly designed market with policies guiding it that make no sense will perform poorly.

A well structured market with a level platform, a good level playing field for all innovators and resources can perform extraordinarily well and I think we're seeing that too.

Also, those who oversee the markets have learned a lot since California about how markets ought to be structured and about how there should be constant oversight.

And if there are those with very clear rules and if there are those breaking the rules, there should be enforcement action taken against them and that's what we have now.

Kurt Yeager: It's a very good question, because I have a deep concern that the way the so-called smart grid effort is going forward today that it could very well end up under business as usual with the same kind of negative reaction from the public as just being another rip-off.

Because, again, we have to be very careful not to fall into those kinds of traps and we've got to hold the system accountable so that this intelligence is provided to consumers, it's not just intelligence going back to the central control, it is to consumers and it's to opening it up so the innovators can really come in there.

I work in the middle of Silicon Valley and every company out there is prepared to put massive amounts of money on the line, the Ciscos, the Googles, you name it, IBMs, to provide the automation and provide alternative choices for you in terms of that automation and pay you for the opportunity to do it because they can make money in the process. Not only save you money, but make money.

Question: So, in other words you're talking about not necessarily deregulation as it's commonly thought of, but really rejiggering the rules to make it more aligned with what's necessary in the 21st century.

Michael Moynihan: I like to use the term we need to modernize the architecture, because we have a very antiquated architecture that is not up to the demands of the 21st century.

We need to modernize it and certainly a component of that is deregulation properly carried out, not like occurred in California in 1999 and 2000, but more like what's been carried out successfully in Europe and some other states.

Kurt Yeager: And, as was brought out earlier, I think the idea of the government holding the private sector accountable to achieve certain standards, so the standards need to be there and they need to be held accountable with reliability, efficiency.

There's a concern now, of course, with the moving into the digital, is this going to create digital security? Are we going to have a cyber security problem on our hands?

Well, we can if it's done wrong, but the federal government has got to take the lead. NIST has been working on this now, but back in the early days of electricity, whether you went to GE, Westinghouse, whatever, everybody had their own design of socket in the wall.

They say, oh, if we have them use our socket we'll control the market. Now, a hundred years later that's where we are today. Those people found very quickly but that was simply going to limit the market, we couldn't have it.

So, everybody wants standards today, but they want their standard and what we've got to do is be sure at the end of the day that the standards which are used to control the quality and reliability and the security of the power system are, indeed, ones which everyone is held accountable to do.

And the ones that are chosen, everybody adapts to those. Right now we have nearly 300 standards that are applicable to different dimensions of the power grid. That is absolutely a barrier to progress.

So, that's going to be very important and, again, Congress, because all of these companies, somebody doesn't get their standard, they'll go run to their congressmen and say you can't let this happen because we're going to lose jobs because of that.

Michael Moynihan: This is very important at the level of distributed generation because currently there's no uniform standard for generating, adding power onto the grid.

There is a standardized plug in the wall for taking power off of the grid, but if you want to put it onto the grid there's nothing comparable to a plug-and-play standard and that's what we need.

We need to move toward something where anyone who wants to put power onto the grid just has to meet a certain standard that's secure, that is reliable and so forth and they can do that without negotiating a separate deal with a utility that could take years.

Bill Massey: And, by the way, if I could just point out that's precisely what you have any organized markets, the RTO markets, a plug-and-play system where innovators can simply hook up to the grid and sell their products and services.

My own view is that the whole concept of deregulation is a misnomer when applied to this industry. I don't think any of us are really talking about pure, frontier deregulation.

We're talking about standards, we're talking about rules, we're talking about providing platforms for innovators and we're talking about oversight once the market is established.

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