Electricity:

Panel weighs challenges of creating national grid to lower prices, improve transmission

One of the key issues facing the electric power industry is transmission vulnerability. Once more renewable energy comes online, transmission issues will likely be even more apparent. Within the electric power community, there is a big push to create one cohesive national grid, as opposed to the current system of regional grids. Proponents argue that this will help lower the price of electricity and bring more electricity produced by renewable sources to consumers. During today's E&ETV Event Coverage of a Manhattan Institute-sponsored event, panelists discuss the benefits and challenges associated with creating a national grid. Participants include Ashley Brown, executive director, Harvard Electricity Policy Group, Harvard Kennedy School of Government; Nick Brown, president and chief executive officer, Southwest Power Pool; Ashok Gupta, air and energy program director, Natural Resources Defense Council; and Philip Moeller, commissioner, Federal Energy Regulatory Commission.

Transcript

Steven Hayward: We will begin with Philip Moeller, who is a commissioner with the Federal Energy Regulatory Commission, serving in that body since 2006. Prior to that, he worked in the private sector for Alliant Energy Corporation in Calpine and, with that, Philip, you're on.

Philip Moeller: Thank you and good morning. It's always a pleasure to talk about transmission, at least it's a pleasure to me and, hopefully, to you as well. I've been sworn in for a couple of years now.

And, essentially, I've been working as a top priority getting more infrastructure, energy infrastructure, constructed in the nation and the highest priority in that field is transmission. I'll get into that in a moment. To me, I see this, essentially, as a transportation issue.

What we're doing is trying to transport electrons across various distances so that they essentially end up to the consumers who want to get them. And we've had, I would say, three different examples of this kind of massive challenge to the country in our history.

The first I would go back to the 1860s and essentially Abraham Lincoln had the challenge of congestion, a growing West and people and services needing to go there. How was that going to be done?

Essentially, it was done through a transcontinental railroad that was not uncontroversial. You know, there were cost allocation issues.

There probably weren't too many siting issues involved then, but it was essentially a major transportation effort by our nation's leaders. They took leadership to make it happen.

The second, the one we hear more commonly is the reference to the Eisenhower interstate system of the 50s. And in my office we've done a little studying of the history of that and there was a lot of back-and-forth as to how the cost allocation would occur.

It was not simply waving a wand and Congress passing a massive infrastructure bill. It was politically contentious and it took leadership, but that essentially led us to transportation, a more efficient transportation system.

And, similarly, I haven't heard anyone use this analogy. Essentially, the space program that John F. Kennedy endorsed was also a transportation challenge of getting to a new realm and there were certainly some cost allocation issues, but it was really more about general fund, not so much siting issues.

But, similarly, we were in a national effort to transport human beings to another world and it took massive leadership and with the right amount of policy development it occurred.

We're facing that now with the transportation of electrons, because, as it's been stated, more transmission makes for a more efficient grid, which helps consumers in ways that are sometimes quantifiable and in many cases are not.

We have a series of energy problems; I'll stick really with electricity now, that are really based on uncertainty going forward. What's the cost of carbon going to be? How are we going to exploit location constrained resources that are renewable that people want?

How do we make wholesale markets work a little better? I see it as kind of a mathematical problem and there are all kinds of different numerators that you can put in to the problem.

But the common denominator, the one that goes across all of them as a solution is more transmission because it just makes sense. It solves our problems in terms of wholesale markets not working as well.

If we get rid of congestion it solves the problem of getting renewable resources that are location constrained to the consumers that want them. And it essentially stabilizes a system where we are essentially running out of capacity.

So, if transmission is the common denominator, what do we need? I would suggest maybe five areas, some of which I think I have been touched on already. The first is a realistic discussion of the kind of costs we're talking about.

Oftentimes, we get into such enormous debates over the cost of transmission and we truly fall into the cliché of losing the forest through the trees. Now, I'm not going to say that my electric bills are representative of all citizens in the United States, but I pay a couple of them.

I pay one here in Washington, DC, peak month August, we were gone for a few weeks, but for the most part, we had a pretty big electric bill because of cooling. We have a couple of babies at home, so the house has to stay kind of relatively moderate in terms of its temperature.

I've paid less than 3 percent, less than 3 percent for transmission on that bill and so if you were to double it up to 6 percent, how much more savings could we have gotten from the commodity price being accessed from different areas?

I'll bet it would have made up for itself instantly and so that realistic talk, now I also have a ranch in Washington state. Transmission is little higher, it's more like 10 to 15 percent, but that's because it's in a more remote location.

Transmission is going to be a little bit higher part of the bill. But, for the most part, what we're talking about here cost wise is relatively minor in the whole context of the final consumers' bill.

So a more realistic discussion of really what the costs we're talking about impacts each consumer on the bottom line. The second thing we need is to focus, frankly, on siting.

And the reality is, and it's not uncontroversial, what we're talking about is interstate commerce. And if you take a look at what FERC's authority is in terms of siting interstate natural gas pipelines, they get built.

And if you look at what happens with trying to site interstate transmission lines, you know, not a whole lot of them have been built in the last 20 years. Now, there are a number of reasons for that, but siting is probably, by far, the top one.

Now, that goes into the third area of the challenges of cost allocation. Now, I realize they're not easy and Indiana probably doesn't want to pay for transmission from North Dakota to Ohio because they feel like they've already paid enough.

But, in the grand scheme of things, we've got to get past these cost allocation debates because they keep things from getting built that benefit consumers.

All of us in the roles, whether we're in the private or the public sector, have to take a leadership role in making that happen. The fourth is we have generally barriers to entry in the transmission world.

And we just happen to have an all afternoon conference at FERC this afternoon on that subject, so you're all invited. There's no admission fee and if you want to talk some more about transmission, we are going to spend four hours talking about barriers to entry.

Obviously, some of them are siting, but financial are some of the others. We, at the commission, are trying to make sure that we're sending the right signals in terms of incentives to invest in this transmission infrastructure.

It's not uncontroversial, again, but my feeling is it's worth the investment. The fifth area, although it's rather amorphous, is we do need leadership.

We need the kind of leadership that's made the transcontinental railroad happen, the kind of leadership that made the interstate highway system happen, and the kind of leadership that got us to the moon with the space program.

It's, again, a little hard to quantify, but we need it at every level of government and every aspect of the private sector that has to do with energy delivery.

Those are my thoughts. I'll look forward to any questions later and, again, I appreciate the chance to talk about what may not be the general public's number one topic, but it is mine.

Steven Hayward: Thank you Philip. Our second speaker this morning is Ashok Gupta, who is the director of the Air and Energy Program with the Natural Resources Defense Council, where he works on that trio of issues familiar to all of us; climate, energy, and sustainability.

He works also with Mayor Bloomberg's Sustainability Advisory Board and also Governor Patterson's Renewable Energy Task Force. Mr. Gupta?

Ashok Gupta: Thank you Steven, thank you to the Manhattan Institute for organizing this. It's a pleasure to be here and of course I have to start by acknowledging Governor Pataki who I had the pleasure to work with for over 12 years.

And who really was able to bring many of these energy and environmental issues together in terms of the Regional Greenhouse Gas Initiative, the Renewable Portfolio Standard, so, again, it's a pleasure to be with the governor here as well.

And, also, Mike Morris who is a good friend and we've had a chance to work together for many years and I appreciate being here with you too. The topic at hand is an important one and a complicated one, certainly from NRDC's perspective.

We see transmission as a very important part of the solution. We know that from the climate perspective, the high energy costs, energy security, what ever the challenge we face, we need to do a better job in terms of transmission.

We know if we want to get more wind power, more solar power, central solar, into the system we're going to have to invest in transmission. This is an issue we take seriously.

We actually, last week, spent two whole days internally trying to figure out how, with our land program, water program, others, kind of get on top of this issue and help figure out how to solve this problem.

We know it's not an easy one, but there are multiple things we need to do to get ahead of this in terms of working together is kind our view. We know that with transmission we're also going to be moving -- could be moving a lot more dirtier power.

So, for us, having a clear climate policy is a very important part of solving the transmission challenge. If we don't get ahead on the climate issue, you'll still get a lot of opposition because the question will be you'll be running more coal plants, 24 hours a day, and the question is we need to do this together.

If you try to do transmission before you do climate policy I don't think one can be successful. I think the cost allocation issue is a very, very important issue we need to solve simultaneously as well.

I mean often siting becomes the big issue that everybody focuses on, but I think we need to kind of address all of these things together and not one at a time.

So I would say climate policy, the cost allocation issue, and the siting issue are where we need to kind of figure out and map out where you can build this transmission, how to build support for it, and really sell it as part of the clean energy strategy.

If you sell it as part of you need it to move the wind that people say they support, that's going to be a very important part of moving the transmission agenda forward.

We also think of the electric system as a fully integrated system where we need to focus on the end-use efficiency of the customer, the meter, the distribution system, the smart grid, transmission.

What gets put into the transmission line all need to be put together in terms of a strategy to convince the public that transmission, because of its efficiency benefits is a good thing to do and that siting, however challenging is worth engaging in because we've looked at it in an integrated way.

I think if you try to sell this as the magic bullet, the only solution and say this is going to solve all our problems, one will have a much harder time, not only with the public, but even groups like NRDC.

So, I think if you think of this in terms of how we're going to try to balance the demand and supply in the entire system and move to more plug-in electric hybrid and move into the transportation sector with electrification which, again, we think is a good thing as long as the grid is providing clean power, which we think it can.

And I think that is the approach we think we should be taking. And I think also on transportation, again, it's a multi-pronged strategy. You need to have more efficient vehicles. You need to have more transit.

And, yes, electrification can be part of the solution, but, again, not the only solution. So, an integrated approach is critical in terms of bringing these skeptics along. And we agree also that the cost of this is not, in aggregate terms, a big issue.

That you can actually, if you look at what's needed to bring 20 percent wind into the grid, you know, the studies by ENROL and AP and others, is $20 to $30 billion.

If the annual electric bill is $350,000,000 we could put it into the system and collect that cost. So the cost is not really the biggest barrier here.

It is really having an overall message about how we're going to make the supply cleaner, we're going to deal with it on the demand side, and more transmission is going to help.

And we can move into filling in the valleys, you know, because of all the idle capacity, we want to kind of deal with the issue of how transportation can be electrified and help deal with the energy security issue, as well is the challenge of addressing the CO2 pollution from the oil sector.

So, overall, I agree with the analysis that has been laid out today. I think the challenge is, as always, a more political challenge in trying to address multiple issues at the same time. It's not really a cost challenge in terms of the total cost.

It's a cost recovery challenge. I mean there have been transmission lines we have supported that haven't gotten built because if you're trying to do it on a merchant basis it doesn't work. If you haven't figured out how to deal with the cost recovery issues it won't work.

If you have to deal with the fact that people who have low-cost electricity think they're going to have higher cost electricity in order to provide New York City with cheaper power. That doesn't work politically.

So there are many reasons why it doesn't work politically and I think the challenge we all face is to address these things. And it's not easy to address multiple problems at the same time. And I would say that's kind of the challenge we face.

It's, again, the governance challenge, it's the political challenge to figure out how we can all kind of deal with these complicated sets of issues.

And I'm optimistic that given the economic challenge we face, that building infrastructure can be a very important part of our economic solution as well as an environmental solution, as long as we don't think we can do it without addressing climate and other issues.

So on that note, I'm happy to take questions and appreciate being here.

Steven Hayward: I dropped my pin cap, excuse me. Our third speaker this morning is Ashley Brown, who is the executive director of the Harvard Energy Policy Group at the Kennedy School of Government.

He previously served as a commissioner on the Public Utilities Commission of Ohio, so he has some state level background in this subject as well. Ashley?

Ashley Brown: I appreciate the sponsorship of this program, and I thank Peter in particular for sort of viewing the big picture on these questions. And I was also pleased to have Phil Moeller remind me that regulators are sworn in, because I thought after 10 years all we got was sworn at.

But what I want to talk about is what I think are some of the critical obstacles to trying to get to where Peter was talking about. Peter laid out a vision and if you put this in front of every member of Congress, most of them would probably say, yeah, this looks pretty good.

And then you start getting into the details, not that a lot of congress people spend a lot of time thinking about the details.

But I want to divide the obstacles into kind of seven categories; institutional and jurisdictional problems, the question of Balkanized ownership of the grid, the starting point where we are, vertical integration, competition issues, the dynamic nature of the grid and the difficulties in operating it, the chicken or egg problem.

And then, finally, the question of national leadership. First, and I'm going to be very quick and not do justice to these issues, but I'm happy to answer any questions.

First, on the question of jurisdictional questions and institutional questions, most of the grid in the United States is in the rate base of retail rate payers at the state level.

And when most utilities seek to build transmission, that's where they try to derive at least -- they want the residual revenue responsibility to fall on their retail customers.

Now, that may get offset by a low sale rates, but, for the most part, you're trying to squeeze costs into a group of people who may or may not be the beneficiaries of the line. And even if they be relieved of some of the cost, ultimately they bear the revenue burden.

That's a problem for two reasons. One, it's a question of fairness and economic justification, but it's also a problem because it gives the states an economic incentive to be more parochial than they might otherwise be in siting the line.

And siting is the second institutional question. Up until 2005 the federal role in siting was virtually zero. There was some marginal role, but basically zero.

Now, after 2005, it has some backstop authority in case -- I won't get into describing the details of what the 2005 act said, but there's some backup federal authority. How the feds are going to use that authority, of course, remains to be seen.

You also have the question that most of the grid was built for the benefit, and that's why they pay for it, of native load customers. And there are a lot of state regulators in particular and states that argue, wait a minute, I'm concerned about my customers having priority access.

And if other customers get the same level of access, that's a problem. We've done away with some of that issue in some parts of the country with ISOs and with other mechanisms, but the issue is still there.

And if you go to regions of the country where there is no organized market, this issue becomes a paramount one and is a major obstacle. And then of course you've got the parochial interest issue. And the parochial interests aren't necessarily about do I want this ugly transmission line in my backyard?

They may be, and you see these playing out in controversies right now in Maine and Arizona, where the real issue is states opposing new transmission, not because they don't want the transmission, but because they've got captive generation that they would like to keep and not pay for in their state.

And so there are non-transmission issues that often times prevail in these kinds of -- or at least play a major influence. Secondly, we start from a much different place than most countries in the world.

We don't start with central ownership of the grid. There never has been a national grid in the United States, unlike in many other countries, certainly unlike most of Europe. And so the result is you've got very diverse interests that own the grid.

You've got incentives that are highly confused for the owners of the grid. It's not like they're incentivized to expand transmission. In some ways they are and in some ways they're not. It's much more confused than that. And it also makes coordination complicated.

If you go back to the 1950s and you read discussions just about reliability backups, you find that there is a substantial body of public opinion in the electric utility industry that argue that's a communist plot.

Because, by centralizing the grid and interconnecting it, what you're really going to do is make us vulnerable to the Soviet Union. And for years people subscribed to that view.

The Northeast blackout was in 1965, got some people off that notion and they started seeing benefits through reliability. But the point is there's a long history of Balkanized ownership.

There are a lot of complicated reasons. I was simplifying it, but it is Balkanized and that makes it a little more difficult. And who has the responsibility to build the next line is not a simple question, particularly where you don't have organized markets.

Third, you've got the question of vertical integration. Most electric transmission in the United States, not all, but most of it is owned by vertically integrated companies and transmission is a small part of their overall investment.

And Peter pointed that out, that transmission as part of the overall cost of the overall electricity is not a high percent. And so a lot of utilities that might be building transmission aren't terribly interested in either managing it or investing a lot in it because that's not where their big investment is.

It's much more in generation and they get a lot more flak from their regulators and the public in what they do in distribution and sales than they do in transmission. So, it's not a major management focus and there are a lot of reasons why we can't disaggregate.

There is some disaggregation. We certainly have more transmission only companies than we used to, but there are a lot of tax reasons, financing reasons, and regulatory reasons why disaggregation is difficult to accomplish.

And then you've got competition issues. You know you take this issue in the example that was given of Indiana not wanting to pay for a line from the Dakotas to Ohio.

That's fortunately a hypothetical, because I don't know of a proposal like that, but it's a good example of the problem. It's not just that Indiana ratepayers don't want to pay.

How many existing utilities, say in Ohio, just hypothetically might in Ohio, how many of those utilities are really keyed up an anxious to see new competitors come into the market?

There are a lot of utilities who are going to put opposition in the way of building new transmission because they don't want it. They like bottlenecks if they protect their market. You know, there's good bottlenecks and there's and bottlenecks.

Good bottlenecks protect me from competition, bad bottlenecks open markets that I dominate. So the issue is far more complex than how the states behave, it's also how actors behave, the market participants behave.

And then of course there's another question which economists love to argue about, of course economists arguing is always sort of fun. But the question is what is transmission? Is it a highway or is it another market participant?

After all, are there alternatives to transmission? And the answer is, yes, there are. Alternatives like effective load management, like strategically located new generation, which may obviate the need for new lines.

Or for that matter distributed generation is also an alternative, so there are a lot of alternatives. There's a legitimate economic debate, sometimes I think that's an oxymoron. But there is a legitimate economic debate about is transmission really a highway or isn't it?

And sometimes that makes it kind of difficult to get to some of these issues because there are always people with alternatives that they want to sell that aren't interested in transmission because they think they're more efficient.

And also, of course, they make more money by doing what they want to do. And then you've got cost allocation issues. Who's going to pay for the new line? And then you've got the regulators that tell you, you only have two minutes to talk.

You never thought you'd be accused of being a regulator did you? It's painful. Let me quickly go through the last few reasons, the last few problems. In other words, the grid is very dynamic, especially the AC grid.

Whatever you do in one part of the grid is going to affect everybody else someplace else. And so you've got the whole series of debates we've had over years about how do you price the grid?

Do you use locational marginal cost pricing? Who should pay what? What happens if I'm forced to back down my generation because George Pataki wants to use his generator? What happens? How do we do that? Those kinds of things get complicated.

If you build transmission, do you get, from transmission rights, that is, contract rights to use the grid? And if you do, what happens if Mike Morris builds another line and now there's a lot of capacity and my FTRs are worthless?

So there are a lot of complicated issues about the dynamic nature of the AC grid. DC is different. I'm not going to get into it, but in regard to the AC grid it's complicated.

Then you've got, and in particular we see this playing out right now in California and Texas, the chicken or egg problem. Do you build the wind generators in West Texas and hope a line comes out there?

Or do you build the line and hope the generators appear? And then, if you do the latter, who pays for it? Who's on the hook for it? I mean you could argue the generators who are going to benefit ought to pay for it, although, ultimately, Peter is right.

The consumer is going to pay for it. But, what happens if it never gets used? Who pays for it? And so you do have this chicken or egg problem and then you have the ramp-up problem, which is the national leadership issue.

And let me just be very quick on that. Number one is Congress is absolutely -- and I think there's no left and right on this issue. These issues don't follow left, right, Democrat, Republican, it's much more complicated than that.

Congress is truly schizophrenic on this stuff. If you think should you have a national grid and connect wind power? Everybody says, yeah, that's a great idea! Then when you start talking about the details, the supporters start peeling off rather quickly.

Then I think FERC may have drawn some conclusions, overly broad conclusions, not Phil of course, but his colleagues, overly broad conclusions about the failure of standard market design.

I mean FERC was very aggressive in trying to come up with a standard market design that probably would have facilitated Peter's vision and it got shot down from a lot of different places.

And I think, at this point, the question is whether we're going to have national leadership either in Congress or at the regulatory agency to look at that. One final point on this and that is just on the cost allocation issue of new lines.

There are no national principles. FERC has adopted basically regional consensus from a few regions on what those principles ought to be on how you allocate the cost of new transmission. But there are no national principles.

It's difficult for somebody on a national level to want to invest, to understand what principles are going to apply. And that only deals with organized market.

Where you don't have organized markets, especially in the Southeast and the Northwest, it's a much more complicated situation. There's no coordinated planning and I think we need some broad national leadership on those. Thank you very much.

Steven Hayward: Ashley is right, I'm not normally cast in the role of a regulator and one of my axioms is neither, especially after the subprime meltdown, neither a borrower nor regulator be.

I have this hunch that the Public Utilities Commission meetings were pretty lively during the years you were there, just a hunch. Batting cleanup this morning is Nick Brown, who is the president and CEO of the Southwest Power Pool.

Before that he worked in the private sector for the Southwestern Electric Power Company. Nick?

Nick Brown: Thanks and it truly is a pleasure to be here. I could begin being the fourth person on the panel, fifth speaker to say same song, fourth or fifth verse. I'll sing the tenor line and I hope provide some interesting harmony to the story that you've heard this morning.

Certainly a case for a national electric grid is a call for significant change, a great deal of change for our industry. And if you believe the words of John Cotter, a Harvard Business School professor, "Such a large case for change requires a large sense of urgency."

Now, I can tell you from my personal perspective of working for Southwest Power Pool, a regional transmission organization, we feel a great sense of urgency.

And the pressure just continues to grow day by day with wholesale customers looking for transmission service, coming in looking for alternative suppliers to replace 20 and 30 year contracts that have been in place.

And having a situation where, well, it's really the straw that broke the camel's back with transmission constraining viable options for serving their needs going forward. I'm often asked, is the transmission system adequate?

And I have to respond by saying, well, it depends, adequate for what? If you ask is it adequate to keep the lights on? My answer is absolutely, yes. In fact, our mission statement at Southwest Power Pool is helping our members to work together to keep the lights on.

And in our footprint, I think, working with our members, we have done a very admirable job. Is it adequate to provide options for resources going forward, even particularly from renewable sources?

The answer is adamantly no, it is not. It was built to keep the lights on. It was not constructed to open up opportunities for renewables and other markets. So I'll make four very quick points. One, the current situation is just simply unmanageable.

Two, a national interstate transmission system is very much needed. The plans for such a system are already on paper. In fact, you saw a slide of such a plan on a national basis before you earlier.

And, fourth, the problem really is not what to build. It is, as has been stated a number of times, where to site it and how to pay for it. So, the current situation is completely unmanageable.

I mentioned the plethora of wholesale customers that are coming in to us today changing suppliers, often within the same balancing authority footprint or within the same footprint of a given transmission owner or provider.

And because of the way our analysis is performed to ensure reliable service going forward, we have to come back and say, no, we can't afford to provide you transmission service for these different resources even though they're within the same geographic area.

But our analysis indicates that there is a constraint, often outside the footprint of these resources, sometimes outside the state boundary of the customer that may be a municipal in central Arkansas, and yet the constraint is in Missouri.

It's very hard to explain that to folks who, quite frankly, never really looked outside the high side of the substation transformer.

But we see that repeated over and over and over again and I'm spending an increasing amount of my time trying to explain the realities of the bulk electric network and the reason why we can't afford that type of service.

Today, again, to reinforce the point that our system is unmanageable, we have 40,000 MW of wind in our generation interconnection queue with a total system peak of just over 48,000, depending on how you look at our particular footprint.

Clearly, we cannot consume that within the eight state footprint of Southwest Power Pool. So, if that national resource is to be brought to bear transportation service is clearly needed.

In a nutshell, today, and I've stated this before and I can't pass up the opportunity to state it yet again, to reinforce what you've already heard any number of times this morning. We have 10 percent of our asset base constraining 90 percent of our asset base.

National average, if you look at what's in the rate base of most utilities, 10 percent of that, on average, is the transmission infrastructure.

Yet, because it has not been designed to facilitate a national approach, a national economy we have 10 percent of our business constraining 90 percent of our business.

So, the national system is needed and the reason that I, for one, also responsible for regional electric reliability and standard setting and enforcement with those standards within our footprint, supported this is that we need all resources.

And we need them in a central station manner. I'm very much opposed to people saying that we need to take any of these resources off the table. Again, looking at it from a national perspective, we need nuclear.

We've got to remove the impediments to that. We need and continue to need coal generation. We need natural gas generation. We need large renewables, both in the form of wind and solar.

Transmission is the enabler and we can talk all day long about the whole picture and so on, but transmission is the fundamental enabler for all of these resources. And it is a very low cost, low risk, high benefit product.

I mean very little risk to be such a strong enabler of all of these other technologies. So the third point, the plans are on the paper. Southwest Power Pool is very proud to work on an initiative titled the Joint and Common System Plan that has produced plans very similar to the one that you saw on the slide earlier this morning.

We've worked with the Midwest ISO, PJM, TVA, later in the process we've added the New York ISO, ISO New England, MAP, and then, most recently, others that are participating include Southern Company and Duke.

The vision, the vision is no longer just looking 10 years into the future. The target year for this initiative as it is currently being studied is the year 2024. And then the question is, well, what demand are we trying to meet in the year 2024?

And the very conservative approach, I think, taken by our particular group was just to look at the renewable portfolio standards requirements of the 26 states that, at the beginning of this initiative, were in place.

And if you add those requirements all up the equivalent would be a 5 percent renewable portfolio standard for the Eastern interconnection. So that kind of bands the low-end of what we would expect this national electric system to accommodate.

On the high end they looked at a 20 percent renewable portfolio standard for the entire Eastern interconnection. Some would argue that's even on the conservative end. I don't know. I won't debate that.

But bottom line, here are the results in what would be needed; an investment of 57 billion for the base case, an investment of 80 billion for the 20 percent standard case. Now, again, I'll reinforce what has been said this morning.

In the grand scheme of things, those are very little dollars. But in a conservative fashion, our engineers also calculated the benefit-to-cost ratio for each of these scenarios. And for the base scenario it was 1.4 benefit-to-cost ratio.

For the 20 percent standard it was just over 1, 1.0. So, again, I'll reinforce that it's a low risk, high pay off alternative. So, what's needed? Well, again, I'll reiterate what's already been said and, well, I only have less than two minutes left now.

It is the same song, fourth verse. We need national siting. And I would propose national siting for what could be designated as national facilities.

I think there's room in the negotiation phase on the federal states rights issue for siting to say let's identify what, in fact, it is the interstate highway system and allow federal siting for that.

And those things that fall into the category of Arkansas state highways or Missouri state highways or whatever leave that in the jurisdiction of the state. I think that can be accommodated.

I believe the Federal Energy Regulatory Commission needs the siting authority for that and they need to determine the cost allocation mechanism for that.

Southwest Power Pool, working through our regional state committee has been extremely blessed with bringing seven states together on how to allocate costs for a balanced portfolio of economic upgrades. It's been filed with the commission.

I won't go into details on that, because it's still pending an order. But I believe there is merit in that particular proposal to be expanded to the national level.

And, well, again, my hat is off to the regional state committee when you can get regulators from seven states together to unanimously come up with and support a proposal on how to share costs across state boundaries.

So, that concludes my comments. I think I've stayed closely within time and I do look forward to your questions.

Steven Hayward: Well, thank you Nick. We will turn shortly to questions from the audience. Before we do, a couple of follow-up questions. On the surface, listening to the panel this morning, you would come to the conclusion that we're in heated agreement about the sense of this idea.

So, I do want to dilate just a couple of potential areas of difficulty or disagreement that were touched upon I think a bit gently since we're all so polite here in Washington in the election season.

The first question is for Ashok Gupta. You suggested that it would be important to have a climate component to any aspect of modernizing the grid.

And you raised, quite sensibly, the concern environmentalists would have that a backbone grid might mean more coal use, which right now I think, I'm not sure how you think of it, I'm not very optimistic about carbon sequestration from coal.

So that seems like a perfectly cogent concern to raise. Are there any other conditions or caveats that the environmental community might have about a backbone grid idea in addition to climate?

Ashok Gupta: I think there are two that are kind of hinted at here, certainly the issue of federal authority and how that plays out. I mean I think that is a concern and our view would be to kind of really work with the regional and the current grid system, identify the projects and build up.

So, you may want to have a national approach and identify what the national needs are, but I would also have a bottom-up approach and identify those needs at the state and regional level and start to address some of these, like I said, the cost allocation issues.

And then overlay a federal approach, rather than first start with a federal approach and then push it down. So I think it's a strategy issue in terms of how much to push from the top down and how much to build from the bottom up in terms of creating a national grid.

So I think you're going to need both and the question is how do you do the political challenge of a top-down only approach.

I don't think people are saying it's a top-down only approach, but I think that will be a big issue in terms of willing to give up local authority without knowing what the balance is between a state/local/regional approach and a national approach.

Steven Hayward: So, when you hear the phrase national siting, which we had from Nick there at the end, not quite there yet.

Ashok Gupta: Not quite there yet, but I think really it is a -- not taking it off the table, but it's saying that basically it's not where you start.

Steven Hayward: OK, a question for Phil and Nick, actually for anybody. We'll start with you two. It seems to me that the idea of a backbone grid with a national market would fundamentally end state-by-state regulation of electric utilities as we know it.

In this respect, the analogy is maybe not the interstate highway system, but welfare reform, which ended welfare as we know it with national standards, but still state latitude, but vaguely changed from the old system. Is that reading right? You're shaking your head Nick. You don't think so?

Nick Brown: No, I don't agree with that at all. Again, reinforce the numbers. Ten percent of the total asset base is transmission. So even if you took all of transmission, it clearly leaves 90 percent to the state regulatory environment.

And what I proposed was not all transmission. Now, again, some can debate go to the natural gas pipeline and say all transmission. I don't think that's needed from a national perspective.

Again, some of our transmission today clearly is only meeting state and regional needs. It cannot be called on to meet national needs. What I'm proposing in terms of national siting is that which is needed for national purposes.

And I think coming up with either a bright line at either a voltage level or a specific need would be relatively easy to do. And I don't see any reason why we couldn't start there, at least as far as the debate goes.

But, no, I don't believe it calls to a huge change in the balance of regulation between federal and state today.

Philip Moeller: Well, I don't think it has to. I guess in one sense I wish it would. First of all, on the siting issue, you know, it's important to recognize that state commissioners are not ubiquitous and universal in their opposition to federal siting.

Now, you might have a hard time getting some to go on record saying that they agree to more federal siting, but if you talk to them, there are regional differences. But if I was the state regulator I would give siting to FERC in a heartbeat!

I mean why would you want to deal with that on a state-by-state basis when, again, it's interstate commerce? You look at the record, we get interstate pipelines built, but I mean you don't want to have dead rodents put on your front doorstep because of your siting decisions. You know, leave it to us to do that.

Steven Hayward: Send them to Washington, right.

Philip Moeller: Exactly.

Steven Hayward: Send your dead rodents to him.

Philip Moeller: I didn't say that. So, on the siting I'm always kind of befuddled why there is more opposition, the amount of opposition. On the financial side, fundamentally, still states are going to be the retail regulators, as they should be, of the distribution system.

But I would argue, you know, we have fuel cost pass-through mechanisms at state levels where ii the price of a particular fuel, coal, natural gas, possibly hydro in the northwest, if it varies retail rates can change based on those costs.

Well, why can't we have something like that on transmission costs, kind of a transmission pass-through to encourage the construction of more transmission? I think some states might be looking at that. For instance, that's the way that I think it could change for the benefit of consumers.

Steven Hayward: Ashley, did you want to ...

Ashley Brown: Yeah, just on the siting point. The siting issue is actually even more complicated because first off, I think, there are only 20 states that have siting laws or 22 that have no siting laws, which either means you can't site anything anywhere or the utility gets to build anything it wants any time it wants.

And that's almost how it plays out. And how the states that have siting laws administrate it varies. In many states is not the State Public Utilities Commission, it's somebody else, or, for example, in my home state of Ohio it's run by the State Public Utilities Commission.

But there are any number of other members from other cabinet agencies. In Florida, I think it's the governor's cabinet that's the citing agency. So the jurisdiction is all over the place. It's not like this is a conversation among regulators.

But the other piece about the siting is that how the states administer it varies wildly. I did a paper on this a few years ago. Some states take a very broad regional view of it. Some by statute, some by practice, and some of them are extraordinarily parochial.

And, actually, it's interesting, at the time I did the paper of the two states that were the most parochial in large part because of statute, were Mississippi and Massachusetts. Not two states whose names would roll out of your mouth at the same time.

So there is no coherent state practice. And I think Phil is right, a lot of state regulators would probably be happy to give up the jurisdiction. But in a lot of cases, they don't have the jurisdiction anyway.

Steven Hayward: But somebody at the state does?

Ashley Brown: In 28 states.

Philip Moeller: Well, and if it's not at state level it's often at the local level.

Ashley Brown: Exactly.

Philip Moeller: Once again, going to what I hope it is my point made, which is federalizing it would be more efficient.

Steven Hayward: Ashok, do you want to get in on this food fight?

Ashok Gupta: No.

Steven Hayward: OK. I want to ask a question about Europe that's only half formed, because I really don't know anything about Europe. But I'm always a little troubled on this subject.

I'm always a little troubled by U.S. European comparisons for the simple matter of geography. It's true of transportation and energy use patterns and so forth. You have those small compact countries, so of course they'll have a national energy grid in Germany.

In the same way you have an energy grid that's probably smaller than the state energy grid for California, certainly of Texas. To what extent are there international inter-ties in Europe that we can learn from that operates similar to the backbone system that Peter is recommending and maybe Peter needs to answer this question. I'm not sure. Do any of you have any insights on that?

Philip Moeller: Well, E.U. wide there aren't. There's no FERC equivalent in the EU. And the grids that they're trying to develop a market off were built to serve national markets.

So E.U. wise, I'm not sure if they're ahead or behind us. When you talk about the national grid -- when I said that actually, I was talking about in individual countries not European wide.

Steven Hayward: Yeah, OK. Then my last question before we turn to the audience is, I'm trying to approach this from a simpleminded point of view. If we're going to have national siting or an initiative for a backbone grid, and taking as our analogy the interstate highway system, doesn't this really require presidential leadership?

I mean not just a line in a State of the Union speech, doesn't it need to be a main legislative priority for President Obama or President Palin. I want to try that because it sounds fun.

She has shown some skill at pipelines, so why not power plants? Doesn't that really need the presidential leadership if it's going to have been? I don't think it's going to happen out of Congress.

Ashley Brown: You bet you.

Steven Hayward: Well, that was easy. And, by the way, that can be wrapped in with a climate policy. This seems to me just as a real practical matter those are going to get wrapped together no matter who wins the next election.

That was an easy yes. All right, well, do any of the panelists have questions or comments for each other before I open to the floor?

Nick Brown: Well, I'll comment briefly on your question. I'm pleased that both candidates' platforms have mentioned the need for a robust transmission network.

What I find missing in the detail are the two points that were made this morning, the need for federal siting for these large national needed facilities. And also what I find missing is how to pay for it.

And so until we get to those two points, you know, we're kind of missing the specificity that's needed to really make it happen, because those are the constraints. I mean we've done regional planning an inter-regional planning for a lot of years.

I mean we know what needs to be built. The real questions are how do we site it and how do we pay for it? And until we get national policy that addresses those two constraints, we're just not going to get there.

Philip Moeller: I'll agree that the leadership is needed, as I said earlier, at just about every level of private and public sector involvement on this issue. But presidential leadership is probably the key.

We've talked the analogy to the highway trust fund is still one that I think is worth talking about. Unless you really work on transportation issues, you may not be aware, but we all pay a federal gas tax at the pump.

And then that goes into a large transportation fund that then is divvied out in a transportation bill to various states. And the big battle every five years is whether you're a donor state or a recipient state.

And they try and keep it around 90, you get at least $0.95 back on the dollar, collectively millions of dollars that each state pays. But it's manageable.

Again, I think it's a good analogy to look at and there are transmission leaders throughout this room. But, again, I do look to Nick Brown and what SPP has done without the details as showing what can be done when leadership takes a solid form.

Steven Hayward: All right, let us now open up to the audience.

Philip Moeller: Senator Grassley and Senator Baucus, Lee Anne can probably correct me if I'm wrong here, but essentially to allow any revenue that you get as a landowner to be free of federal income tax.

You know, I used to work for a company that is really into wind power, particularly in Iowa. I always say, you know, those Iowa farmers, they really like the sight of those windmills, but they really like that check that comes in every two or three months.

That's really what speaks to them. And I think why shouldn't we take a look at that? But the tax code, we didn't talk about it much, it does affect transmission policy.

Not only is it going to cost money to essentially compensate people, and why shouldn't they be compensated for hosting transmission facilities?

But also it's a discouragement of spinning off transmission resources because most of those are already paid for and they're subject to huge essentially capital gains taxes if you spin them off.

But, if you spin them off, there are advantages to the operation of that business unit, so again, complicating factors that make all of this a challenging subject.

Steven Hayward: Ashok?

Ashok Gupta: Yeah, I think one other thing on the siting issue that we're struggling with and trying to deal with is of course how to protect, really, the sensitive ecosystem.

And then how to do a mapping exercise so you can look out where the resources are, where you need transmission, and overlay the sensitive ecosystems.

And we've started to do that within NRDC because we wanted to kind of be part of the solution, identify where you could put certain resources, where you might want to do the transmission.

And this is not dealing with the specific issue of whose properties you're going to go through, but a broader environmental need to make sure that these projects are properly sited.

And so I think there is still a need to do a bottom-up approach to make sure that the opposition doesn't come from just property owners, but some environmental groups.

How you build the support for those who say we need to solve the climate problem and we need to do more renewables, we're going to need transmission, so how do you do it? Where do you do it?

And that exercise is very important and should be done and can be done in order to build a much broader coalition of support for moving in this direction.

So, I do kind of say, you know, there are multiple pieces here and along with certainly paying property owners can be part of the solution. But it's not going to solve your entire siting problem either if you're not looking at it more broadly in terms of ecosystem protection.

Steven Hayward: Yeah, Ashley, I'll let you all in on it.

Ashley Brown: Yeah, actually, there is compensation paid. I mean actually, if you've ever been involved with trying to get a line sited, you've never seen such organized bribery in your life.

New firehouses, new playgrounds, obviously, the landowners themselves get compensated, so there is a compensation system. But the issue is actually even more complicated than just compensating people.

The other question is what are the alternatives? I mean, an example, years ago, when there were proposals to build lines from the Ohio Valley into the East Coast.

A lot of the opposition in Pennsylvania, which you could argue was NIMBY, and I certainly characterize it that way. But from their standpoint, they wouldn't.

They would say, "Look, it's better from the environmental standpoint to build gas-fired generation in New Jersey than it is to build transmission lines across the Allegheny Mountains."

Now, you can argue whether that's right or wrong, but the point is that a legitimate question to raise. It really is complicated. What's the greatest environmental insult in the aggregate as opposed to in my backyard?

But how do you weigh those questions? And they're not easy, especially given that is gas-fired generation an alternative to building lines from the Ohio Valley to New Jersey?

Sure, it's an economic alternative. I mean how realistic it is you can argue about, but the point is, is it an alternative? Yes, there are a lot of alternatives. That's part of the problem.

They're not simple questions, so there is opposition that's NIMBY-ism, but I'd be reluctant to say that all the opposition is NIMBY-ism. I think it's a lot more complicated than that.

Steven Hayward: Nick?

Nick Brown: I was simply going to add in addition to the fact that landowners are compensated today for right-of-way, but it does vary by state and typically by line.

For these national facilities I would go so far as to argue that you need a national standard for how to compensate people for these properties. 765-KV requires a pretty broad amount of right-of-way, although, if you look at the capability of 765 versus 345, you get a lot more bang for the right-of-way foot, a lot more.

But it's similar to the interstate highway system issue. What about the counties whose land was taken and, for whatever reason, an exit ramp wasn't installed? How do you go through the justification for that?

Again, it gets down to national interests and the needs from a national interest perspective in terms of delivering a large central station that's more efficient, cleaner, on and on and on.

I also dare say that if you look at the footprint for a large wind farm, particularly given the size of the turbines now, if you look in Arkansas it's interesting where some of the best wind footprint is. It's in the Ozark National Forest or the Ouachita National Forest.

And I daresay people would prefer one transmission line through that particular tract of land than large wind turbines all over those mountains. I just don't see it myself. I think one is a pretty good trade-off for the other.

Steven Hayward: You had a hand up and then let me see some others.

Question: Dawn Achinasi with White & Case. My question goes to planning and implementation. Right now, as several of you have noticed, we have a dynamic grid. So when you put in a 765 KV line you're going to get loop flows.

Right now we try to resolve them through our reliability councils, maybe multilateral negotiations, phase shifters, whatever technological fixes there are to that sort of thing.

If we have this plan, even if through our RTOs and various organizations, we can come up with a plan, we're still going to have to put it in in pieces.

How are we going to get to building this super grid, get it from the planning stages into implementation unless we have some kind of centralized planning or other mechanisms? Can we get there with what we have today?

Steven Hayward: Who wants to try that one? Nick?

Nick Brown: Well, I'll take it first shot at it. Yes, I think we can and part of the Joint and Common System Plan Initiative is really a regional, ground up, and even an individual utility.

I mentioned earlier those that are participating in that initiative and it's not just the ISO RTO community, but large utilities as well. And we are all looking at the answer to those.

And in addition to just the 765 KV transmission to manage loop flow, they're also looking a significant amount of 800 KV DC lines.

Which, again, are technologically wonderful for moving large amounts of power from Point A to Point B and managing loop flows in the synchronous system. But, at the same time, you wind up with the political issue of how many off-ramps do you build if it's a DC line.

A lot of DC lines, it doesn't have to be this way, but typically you've got one converter stationed on one end and looking at our system plan today, multiple states before you have the off ramp.

Huge benefits to that, but land owners certainly can question, well, what's in it for me? And that's why I think this issue of compensation to landowners needs to be dealt with on a national basis for national designated facilities.

Ashley Brown: One of the things about the planning, the different stages of where we are with that. I mean you're right, for liability purpose there's been at least some planning in stages since the 1960s.

But for economic purposes, where you've got organized markets, as you do in most of the Northeast, much of the Midwest, and certainly California and in Texas.

And I guess I don't know, SPP sort of, there's two SPPs, there's SASPP and there's and SPP Energy is, which is another issue. But, in any event, where you've got that you do have kind of a better organized planning process.

In the regions where you don't have organized markets the monopolist tells you what's going to happen is basically -- I mean it's a little more complicated than that.

But in the end result it ain't that much more complicated than that. And one of the things, you know, I just served on a task force or a blue ribbon panel on cost allocation in planning and transmission.

And I think it's one of the reasons why it is disappointing to me that FERC has not enunciated national principles. I can understand politically why FERC is a little gun shy about the standard market design. Pat Wood and Nora Brownell and others got beat up for it and I don't want to see Phil with the same bruises.

On the other hand, there really is not much reason not to have certain principles, not in that standard market, formal standard market, but certain common principles so that we don't have regional clubs at the site of that transmission.

But you have investors, you have capital flows that understand the rules nationally and can look at what their options are. We don't have that in this country. And that's something we could get in a flash if FERC were willing to do it.

Philip Moeller: Well, actually, I agree with you. It would be certainly less complicated if we had more national standards and I think you, in your talk, you correctly analyzed it. That it was a reaction to what happened with standard market design.

Pat and Nora didn't just get beat up, they were bloodied over that. And so, as a reaction to that, I think the agency, before I got there, but to some extent still, has gone to somewhat of a deferential look.

Or at least we prefer that regions bring, through their stakeholder process, more of a consensus on how they want to allocate costs. Now, I'm on record favoring more of a postage stamp rate of roll-it-all-in because I think that's what gets things built.

And I think you'll see that in certain areas of the country, particularly one with the initials SPP. But it's still a political reality that we live in that policy in this country, electricity policy is regional, essentially, based on a variety of factors.

And I think we're moving back toward policies that are more and more uniform. But it's sure going to take some time. But your point is well taken. We need certainty for the extent of this massive investment.

And to the larger question of where we're going with a national grid, I certainly support that effort. In the meantime, we have to do the other things that kind of get us there on a step-by-step basis. And the lot of the people in this room are working on that.

I think you'll see a trend emerging in the next couple of years. We haven't talked much about it, but, as referenced earlier, FERC is now, through the 2005 act, the regulator of the national reliability of the bulk power system.

And it's been underway for a couple of years now, there's some growing pains. NERC is who we delegate the work of that to, but it's very, very serious.

And underinvestment in the transmission grid and essentially the maintenance of that grid still has a long, long way to go to get to a more reliable system.

And I think what you will see are entities building more transmission on the reliability side of the equation to avoid situations that threaten the reliability of their area.

I believe, in the next couple of years, you'll see more and more of that reliability upgrades in addition to economic upgrades.

Steven Hayward: I can see it now, national standards. It will be called the No Electron Left Behind Act. The lady back here has the last question. Did you have your hand up, right there?

Question: ... from the Manhattan Institute. Just wondering on the siting what the possibility of a couple of different -- whether it's feasible for a couple of different solutions to make it perhaps less undesirable for the right-of-way.

One is the question of underground transmission lines and the other is taking that federal interstate highway analogy out to its limits, what about running it a long those routes where you already have the right-of-way essentially?

Steven Hayward: Anyone? Jump off.

Nick Brown: Well, I'll add my two cents worth. Underground, for the voltage levels that we're talking about, would just skyrocket the costs. The engineer in me prohibits me from saying it can't be done, because, quite frankly, it's just a matter of how much you want to pay for it.

Again, it's just a matter of cost and certainly choosing rights-of-way that are already in place is an option. And for 765 KV footprint there are many right-of-ways already in existence where the voltage of existing lines could be converted to the interstate highway for the electrons.

But, boy, you know, I don't know the numbers. I really don't. Some in the room may know the numbers of what it would cost to bury 765, I don't. I just know it would be a lot more expensive.

Ashley Brown: You know, on the highway system, there was an effort a few years ago to build a transmission line along Amtrak's right-of-way and you would have thought somebody was declaring nuclear war over that.

I mean it seems eminently logical and rational, but there were no end of enemies to it and of course it never happened. But railroad rights-of-way are another logical place, but dealing with the railroads on that question, not to mention the neighbors, is not an easy issue.

Philip Moeller: I think we typically hear of transmission being undergrounded at lower voltages costing around 13 to 15 times more than aboveground. I would imagine, again, with some of these voltages, those numbers would actually be higher in terms of a factor.

Steven Hayward: Ashok, last word?

Ashok Gupta: Again, it's going to require all these different solutions. So I believe that some parts of this system will have to be undergrounded because you need to do it in terms of getting the support and making it happen.

And in the transmission projects that we've supported that was part of the mix in terms of making it happen. So I do still believe that you sell this on the basis of the greater public good from a cost, environmental, energy security perspective.

And then you get the buy-in in terms of the bottom-up approach. Yeah, eventually you will need a top-down approach too, but if you start with the top-down approach you're going to make a lot more people unhappy right away, but you won't even get a real chance to move it forward from the bottom up.

So, groups like NRDC are willing to engage this issue and work through the complicated set of facts that are involved here.

But I think one needs to be careful so as to not make the vision and the goal that we have here be unrealized because we kind of feel like we're just going to make it happen and somebody is going to come in and Congress or FERC is just going to push it down.

I just don't see it happening that way in our current system. And I think the technical challenges are part of the reason because I don't think it's going to be, you know, you need to absorb the upgrades and the improvements from the bottom up because they are pretty complicated.

Steven Hayward: OK, we're up against a hard break actually, so this needs to be very short.

Nick Brown: Real brief, just sort of a novel idea on what you're talking about. Some of you may know Dick Schuler at Cornell, former New York State Public Service Commissioner, who once proposed let's site the optimal transmission line.

And then we'll give towns or neighboring communities the ability to pay the incremental expenses of undergrounding it or bypassing areas. It was kind of a reverse way instead of paying the land owner, essentially having the land owner that would be affected paying to avoid them, which was another interesting way of looking at it.

Steven Hayward: All right, we will now take a very quick five-minute break for coffee and nature and then we will reconvene in five minutes for Governor Pataki. Please join me in thanking the panel.

[End of Audio]

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