What are the benefits and costs associated with regional transmission organizations (RTOs)? Will the use of RTOs benefit the transmission of electric power generated by renewable energy, such as wind? During today's OnPoint, former Federal Energy Regulatory Commission Commissioner Bill Massey discusses the key issues currently facing the electric power industry. Massey, now a partner at Covington & Burling and counsel to the COMPETE coalition, explains why he believes RTOs provide benefits to customers and markets and how they will help bring online more electricity produced by renewable sources. He also discusses how uncertainty about climate change regulation is affecting utilities.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining us today is former FERC Commissioner Bill Massey. Bill is a partner at Covington & Burling and counsel to the COMPETE Coalition. Bill, thanks for coming on the show.
Bill Massey: Thank you, Monica. It's my pleasure.
Monica Trauzzi: I'd like to start off by having you lay out what the key issues are facing the electricity industry and how the COMPETE Coalition sort of fits into that discussion.
Bill Massey: Sure. The way we see it, there are really four major challenges that our nation faces going forward for the electric power industry. Challenge number one is we're going to require a huge infrastructure build-out, $1.5 trillion over the next 20 years. That's an enormous amount of money. We need to do that as efficiently as possible, and we believe that competitive electricity markets can help provide the right price signals for where infrastructure investments need to go. And also in competitive electricity markets a lot of the risk of investments is placed on the shareholders of the investors rather on the customers, and we think that's a better plan and approach for all of this investment.
Number two, our nation must meet the challenges of global climate change, and we have to, again, do that in a very efficient way. Lawmakers are moving toward a market-based cap-and-trade system for emissions. We believe it makes a lot more sense to put that in place on top of a competitive electricity industry that is highly efficient rather than put it on top of a monopoly based regulated system. We believe the competitive market system will attract greater renewables; there's a lot of evidence of that. More efficiency. Generation runs much more efficiently higher capacity factors, more opportunities for conservation and new entities that are demand aggregators, demand resource providers that are flocking to the RTO competitive electricity markets.
Number three, our nation must maintain its global competitiveness, and that means that efficiency and cost and squeezing more out of existing resources will become even more important going forward in addition to innovation. And the COMPETE coalition cannot imagine that we will get the innovation that we need in the electric power industry over old-fashioned regulation. We need well-structured markets to spur that innovation. And number four, policymakers want to reduce our dependence on foreign energy sources from volatile areas. Competitive electricity markets, again, can play a role in doing that. Demand resources, conservation, greater efficiency in the use of existing resources when resources and other renewables in the competitive markets are attracting. Monica, those are all intrinsically domestic resources that the United States wants to use. So in meeting all four of these challenges, the COMPETE Coalition believes that well-structured, competitive electricity markets, and we think the RTO markets are very well structured, are the pathway moving forward.
Monica Trauzzi: And there's some disagreements within the community about how to address all of these issues.
Bill Massey: Yes.
Monica Trauzzi: We recently had Tom Lenard of the Technology Policy Institute on the show, and they had released a report saying that RTOs have failed to bring prices down. We're hearing a lot about deregulation and regulation these days in the news. Is it a good time now to sort of step back and take another look at what we're doing here with RTOs and whether it's actually the way to go?
Bill Massey: Well, the COMPETE Coalition supports the notion that we look at the benefits, the full range of benefits that the RTO markets are bringing. And I mentioned several of them in my opening remarks to you. I've read the Technology Policy Institute study and saw Mr. Lenard's interview. Let me just say that the COMPETE Coalition strongly disagrees with the results of that study. We think it's a flawed study, a flawed analysis. And as FERC has declared, the Federal Energy Regulatory Commission has declared many times the debate really isn't about prices these days. Prices are increasing in all electricity markets, whether they be RTOs, non-RTOs, restructured states, non-restructured states. Why is that? Because we live in a global energy market. And energy and input costs, the fuel costs for generation are simply rising rapidly and have been doing so over the past few years. So no region of the country, whether it's RTO, non-RTO, restructured states, non-restructured states is going to avoid those increases in prices. But we believe that given the investments we have to make, given the environmental values that our nation has to support, clearly the RTO markets are the way to go. They're providing huge value. There's a number of studies that provide that that I could cite to you.
Monica Trauzzi: There's also this idea of creating a national grid and that we'd be able to improve transmission capacity by doing that instead of having these sort of four different regions where we're divided. Do you think that there would be benefits to doing that?
Bill Massey: Well, the current grid system of the United States is highly fractured. It's fractured state by state, region by region. There are jurisdictional fissures between FERC in the states and one state to another state. If a transmission investment needs to made that covers let's say three or four states, each of those states must cite the transmission investment. Each of those states has a different rate process and different rules for recovery of cost. And so we have a highly fractured system, and many people are raising a concern that as we go forward, if we're going to meet the needs; if we're going to meet the concern of global climate change; if we're going to have a highly effective system; if we're going to attract the renewals that we need, and as you know, Monica, often the wind blows where the people aren't.
Monica Trauzzi: Right.
Bill Massey: And so we have to build transmission systems to build those wind resources to market. And we believe that the best way to do that is the RTO markets. And COMPETE Coalition itself has not taken a position on whether there ought to be a national grid approach. But I can say to you that I think we need much greater efficiencies in the use of a grid. We need to eliminate as many of these jurisdictional fractures as we possibly can. And I do think we need a very strong national policy on transmission resources.
Monica Trauzzi: So you touched on one of the big issues, which is as we try to get more renewable energy online, use more wind power, we're going to be facing transmission issues. How far away are we from actually having something that works and be able to use all of this wind power that we're talking about, like in the T. Boone Pickens plan?
Bill Massey: Well, we will need more transmission investment to, for wind resources and renewable resources, which are often remote resources. There's a general consensus about that. The question is how to get it done, how to get those resources cited, how to get the necessary investments in place for those resources. But I can say to you that the RTO markets are working quite well in attracting necessary investment. They're attracting transmission investment, generation investment. If you go to the American Wind and Energy Association website, you will see a lot of information about the benefits to wind resources that the RTO markets bring, a large footprint which allows easy dispatch of wind resources. You can move wind power across the entire RTO footprint for one transmission rate. And outside of the RTOs that is simply not true. Efficiency in pricing, a whole host of benefits that wind resources see in the RTO markets. So my view and the COMPETE Coalition's view is that the RTO structure is going to be essential in attracting wind resources in the future. We're already seeing wind disproportionately locating in the RTO regions, roughly 73 percent of new wind generation resources are locating in the RTO regions, when based upon the wind capacity in those regions you would expect about 44 percent. But the reason they're going there anyway is because they are attracted to the market structure of the RTOs. So that's going to be a key element of meeting our nation's climate change goals going forward, greater use of renewables.
Monica Trauzzi: Considering the U.S.'s current economic downturn, what impact do you think that's going to have on renewable energy investments and, in turn, the use of, say, wind energy to produce electricity and the prices we might see as a result?
Bill Massey: Yeah, my view is that the electric power industry, generation resources, transmission resources, distribution resources, have always been considered somewhat of a safe haven by investors in hard economic times. Assuming capital is available, a capital will have a number of choices about where to go, what industries to invest in.
And my view is that the electric power industry will continue to get its fair share and more because these investments are generally perceived as safe, stable investments. People are always going to need electricity. We're always going to need generation transmission and distribution, so that's number one. I think these new, more innovative resources have a lot of sizzle in the marketplace right now. There's a good deal of understanding that our nation has to attract these resources going forward, and so I believe that capital will continue to flow into these more innovative resources. And I believe these more innovative resources, when they have a choice, will often choose the RTO markets as a location because they believe those markets are very friendly to renewable resources in terms of the way they're structured.
Monica Trauzzi: Final question here. There's still a lot of uncertainty relating to what sort of climate legislation is going to pass in the U.S. We saw a debate earlier this year in the Senate of the Lieberman-Warner bill; the Dingell-Boucher draft has just been released. And those are two very different pieces of legislation. What does this mean for the utilities and the electric power industry in terms of the uncertainty that we're still sort of sitting on for the time being?
Bill Massey: Well, that is a really good question. I think the best thing that could happen for the electric power industry is for the uncertainty about what climate policy is going to be, let's get that uncertainty resolved as quickly as possible so that investments can be made so that those with money to invest will understand what the risks are of those investments. I saw some polling data recently that showed that given the financial crisis that the nation is facing there has been some declining public support for solutions to the climate change problem. I don't know whether that will continue or not.
My own view is that climate policy will impose some cost. My own view also is that it is a matter that our nation must deal with going forward. And I think we should deal with it in a responsible way, a thoughtful way. It's going to take some time to sort through the myriad of issues. It may be the most complex legislation ever to come before Congress with a lot of moving parts. I think Congress has to be thoughtful. They have to consider all the cost involved and who is going to pay for them. But I believe Congress should proceed in a responsible, thoughtful manner to resolve the uncertainty as soon as possible.
Monica Trauzzi: Okay. We're going to end it right there. Thanks for coming on the show.
Bill Massey: It's my pleasure.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
Bill Massey: Thank you.
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