ITC's Welch says cost allocation legislation could block new construction

As the discussion on transmission cost allocation heats up in Washington, what are the impacts of legislation that would curb the Federal Energy Regulatory Commission's reach? During today's OnPoint, Joseph Welch, president and CEO of ITC, the largest independent electricity transmission company in the United States, explains how legislation recently introduced in the Senate would affect independent operators. He also discusses why he believes the legislation could block new transmission construction.


Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Joseph Welch, president and CEO of ITC, the largest independent electricity transmission company in the U.S. Joe, thanks for coming on the show.

Joseph Welch: Well, thank you for having me. I really enjoyed being here today.

Monica Trauzzi: Joe, talk on transmission cost allocation is heating up in Washington and most currently, or most recently, a bipartisan group of senators introduced legislation that would sort of curb FERC's reach on cost allocation. Do attempts like this at oversight go too far?

Joseph Welch: I really believe they do. You know, I've been working in this space for most of my career, but the last 20 years has been really focused on transmission and our inability to get it built and we keep coming back and looking at this. When you look at cost allocation, it's one of the three major impediments to getting transmission built and this particular bill really starts to put, if you will, almost an earthquake into the process, because the bill goes back to June of 2010 and any tariff that is filed there, we have to go back and look at cost-benefit studies. So what we're going to have is a backlog of litigation until there be no end if this bill goes through. And, clearly, that's not going to get a transmission project built.

Monica Trauzzi: So, if we have this backlog of litigation, then how do we get to a clean energy standard for example, 80 percent by 2035? How would those goals ever be met?

Joseph Welch: They won't be. I mean even in the best of scenarios where we could get a clean look into the future and get transmission planned, it takes three or four years to get it off the drawing board, to get it through the approval process that's currently in place today. Then there's the procurement process. You have to go through siting. Five years is really ambitious to build something like in the 30-40 mile range. You might be able to compress that some. There's not a big supply of this equipment out there, so if we really wanted to do something big, it's just not going to happen. We're not geared up as a country to even allow this to happen.

Monica Trauzzi: As an independent operator, how does the debate between FERC and Congress impact you?

Joseph Welch: On a personal basis or a corporate basis, not much. You know we really-our job as an independent transmission company is to facilitate the competitive wholesale market. And we currently own 15,000 miles of high-voltage lines and we're building lines and we're upgrading our system. And we have laid out elements that would probably be part of an interstate system and we will build those one way or the other. But the coordination that we need to move it across multiple states to really make this work for the good of the public and the good of the wholesale market, it's just not going to happen.

Monica Trauzzi: So the big question with this legislation and with FERC is the definition of benefits.

Joseph Welch: Oh, correct.

Monica Trauzzi: How much flexibility do you think FERC could or would have when it comes to defining the word benefits?

Joseph Welch: Well, the legislation, as I understand it, says that they have to be demonstrable and they have to be measured at the customer. And I just think that that's a real hand-tying event. In fact, I know it's a hand-tying event because once we get there, then we start to talk about my model and then we hire other modelers and they model them. Let me give you a quick example of how hard these benefits are and let me bring it into something that you and I are familiar with every day. We have an interstate highway system and I like to tell people that the interstate transmission system looks like the interstate highway system. And it serves a lot of the same functions. So today you go to the gasoline station and you buy some gas and, of course, there's a tax there and that tax pays for part of that interstate highway system. But what this legislation says is, wait a second, I'm not going to drive on the interstate highway system, so I don't get any benefits from this. But on your way home you go to the store and, of course, you pick up some fresh fruit, some oranges and some grapes, of which I don't think any of them grow here in Washington, D.C., and you take them on home. And you're perfectly comfortable with the fact that you got no benefit out of that interstate highway system, but yet none of that fruit would have shown up here had it not been for that. And so once you start to set commerce in play, we'll never know how far reaching the benefits are, but we have to be able to measure them right now today and for you specifically at a point in time. If you look at the interstate highway system, we built this for national security. It was never built for commerce and yet look at all the commerce that's taking place today. If we'd had the standard in place and evaluate the interstate highway system as we're trying to evaluate the interstate transmission system, it would never be built.

Monica Trauzzi: So, your bottom line is if this legislation or some type of legislation that's similar is passed, no new transmission will be built.

Joseph Welch: We will not see interstate transmission. And, regardless of what the other proponents say, that that's not their end goal, I believe it is.

Monica Trauzzi: Are there certain regions of the country that would be hurt more if legislation like this would be passed?

Joseph Welch: Ironically, the answer is yes and, ironically, some of the people who are the industrial sponsors of this are from my home state of Michigan. Michigan is in the Midwest Independent System Operator market. We're the highest cost wholesale market. We're the highest cost in the Midwest. So all the customers inside of Michigan are hurt by this because they can't get access to the lower cost power on a wholesale basis and Michigan is importing a tremendous amount. And they also export. And the ironic thing is, is they export into this market and the utilities have made, in round numbers, between 2006 and 2009, a billion dollars in transactions. And yet under this legislation, that wouldn't be called a benefit. It's only for the customer to be for the benefit. So I think it's shortsighted and I think Michigan will be hurt by it. The other states where we do business in, they'll be hurt because they don't have access to the market the way that they should either. The state of Minnesota has huge congestion problems south of the state and it's hard to get somebody in another state to do a transmission upgrade and charge it to their customers with this. And so when you get these regional voluntary, let me say this again, voluntary organizations to put these cost allocations together, it seems really, truly overreaching and unfitting for someone to come in from the outside and say, "Stop that. I'm here to tell you how you're going to behave in your voluntary organization."

Monica Trauzzi: So, how do you think things are going to shake out in Congress on this issue and as we get to FERC's deadline for this rule?

Joseph Welch: I hope that we really get serious about getting some energy security in this country, giving ourselves and my children and my grandchildren optionality in fuels. We seem to be wanting to lock in on one fuel source. With a robust transmission grid, as with a robust interstate highway system, people have options on how they're going to do commerce. They have options from where to buy to where to sell. And, in this case, we have options on fuel. We know that there could be clean air legislation. There's natural gas available. There's coal available. There's nuclear available. We can get these things sited more efficiently. We can build more efficient units. We need to quit transporting fuels via petrochemical devices, in other words, railcars. We need to start using the wire because it's more efficient, it's cleaner, and, in the end, it's going to be cheaper for everyone.

Monica Trauzzi: Okay, we'll end it right there on that note. Thank you for coming on the show.

Joseph Welch: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]



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