[Senate Hearing 107-200]
[From the U.S. Government Publishing Office]
S. Hrg. 107-200
ELECTRIC TRANSMISSION INFRASTRUCTURE
AND INVESTMENT NEEDS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON WATER AND POWER
of the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
TO RECEIVE TESTIMONY ON ELECTRIC TRANSMISSION INFRASTRUCTURE AND
INVESTMENT NEEDS; POLICY AND TECHNOLOGY ISSUES
__________
AUGUST 7, 2001
Printed for the use of the
Committee on Energy and Natural Resources
______
U.S. GOVERNMENT PRINTING OFFICE
76-590 PDF WASHINGTON : 2001
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida DON NICKLES, Oklahoma
RON WYDEN, Oregon LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California CONRAD BURNS, Montana
CHARLES E. SCHUMER, New York JON KYL, Arizona
MARIA CANTWELL, Washington CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware GORDON SMITH, Oregon
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Brian P. Malnak, Republican Staff Director
James P. Beirne, Republican Chief Counsel
------
Subcommittee on Water and Power
BYRON H. DORGAN, North Dakota, Chairman
BOB GRAHAM, Florida GORDON SMITH, Oregon
RON WYDEN, Oregon JON KYL, Arizona
TIM JOHNSON, South Dakota LARRY E. CRAIG, Idaho
DIANNE FEINSTEIN, California BEN NIGHTHORSE CAMPBELL, Colorado
MARIA CANTWELL, Washington RICHARD C. SHELBY, Alabama
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
Jeff Bingaman and Frank H. Murkowski are Ex Officio Members of the
Subcommittee
Leon Lowery, Professional Staff Member
Howard Useem, Senior Professional Staff Member
C O N T E N T S
----------
STATEMENTS
Page
Anderson, Tracy, Program Manager, 3M Electrical Products
Division, St. Paul, MN......................................... 45
Caldwell, James H., Jr., Policy Director, American Wind Energy
Association.................................................... 48
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............ 1
Hacskaylo, Michael S., Administrator, Western Area Power
Administration, Department of Energy........................... 4
Humann, Ted, Senior Vice President for Transmission, Basin
Electric Power Cooperative, Bismarck, ND....................... 20
Longenecker, William G., Energy Industry Analyst, Office of
Markets, Tariffs & Rates, Federal Energy Regulatory Commission. 9
MacFarlane, John, Chairman & CEO, Otter Tail Power Company....... 19
Moler, Elizabeth A., Senior Vice President for Government Affairs
and Policy, Exelon Corporation................................. 22
Pomeroy, Hon. Earl, U.S. Representative from North Dakota........ 3
Porter, Clifford, Director, Lignite Research, Development and
Marketing Program, Lignite Energy Council, Bismarck, ND........ 54
Sparby, David, Vice President for Government and Regulatory
Affairs, Xcel Energy, Inc...................................... 32
ELECTRIC TRANSMISSION INFRASTRUCTURE AND INVESTMENT NEEDS
----------
TUESDAY, AUGUST 7, 2001
U.S. Senate,
Subcommittee on Water and Power,
Committee on Energy and Natural Resources,
Bismarck, ND.
The subcommittee met, pursuant to notice, at 10:08 a.m. in
the Judicial Room, Best Western Doublewood Inn, 1400 East
Interchange Avenue, Hon. Byron Dorgan presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. The hearing will come to order. This is a
hearing of the Subcommittee on Water and Power with the U.S.
Senate Energy Committee.
My name is Byron Dorgan. I am chairman of the subcommittee
and I am joined today by Leon Lowery, who is with the
professional staff of the Senate Energy Committee. We are also
going to be joined by my colleague, Congressman Pomeroy, who is
in the State and in town today and I have invited him to join
us and he'll be with us shortly.
I am joined by staff assistant Ladeene Freimuth, who works
with me on energy issues, and I am pleased to have her here, as
well.
Let me make a brief opening comment and then I would like
to begin hearing some testimony.
The purpose of having a hearing on transmission issues,
transmission infrastructure and investment needs today is
because we are trying to write a new energy plan. Our chairman,
Jeff Bingaman, had us working on one title, which was the
research and development title, late last week. We completed
that, but that is only the first title. When we come back in
September, we will begin the efforts to complete writing an
energy plan.
This is not an easy task. We did not understand it to be
easy when we started, but from my perspective, I am interested
nationally in a range of issues. I believe we must produce
more. That means more oil, more natural gas and more coal. We
must do it in a manner that is environmentally sensitive. And
even as we produce more, we must conserve more. We must have
more efficient appliances and efficient use of energy and we
must have renewable energy and limitless energy sources, as
well. And all of those areas are areas that we should pay
attention to in an energy bill.
But especially in North Dakota we have a need to be
concerned about the issue of transmission. Whether it is
production of wind energy or the production of additional
electric energy, it is not going to be of much value to the
region or the country if we are not able to transmit that, and
we don't have the transmission capability and infrastructure at
present to substantially increase what this State and what our
resources contribute to this country's energy needs.
Because of that, we want to make sure that we are doing on
the transmission side the right things and trying to develop
the right policies. And Senator Bingaman has agreed to host a
series of hearings. I am going to be holding a hearing this
morning, I will be holding a hearing in Seattle in a couple
days, a hearing in New Mexico. We have a series of hearings
that are being held, and the purpose is to gather information,
gather thoughts and ideas.
And let me just finally say this. North Dakota has a great
deal at stake on these issues. We produce oil, we produce coal,
we have natural gas, we produce electric energy in substantial
quantity, we have vast deposits of lignite, and so we have a
lot at stake and we have a lot to contribute to this country in
terms of energy supply and production. But the linchpin to
making this available in most cases is transmission lines,
especially with the opportunities to produce electric energy.
We have a representative of 3M today, and I am not about
giving commercials for corporate enterprises except to say that
there is a lot of really interesting, exciting work going on in
new technology. In transmission and new technology this is a
composite conductor that is produced by 3M. Other companies are
engaged in interesting research. This is, I understand, three
to four times more efficient than current transmission wires
and we can run using new technology, new approaches, new
devices, new wires across the same corridors and have
substantial new opportunities to export electricity from our
State.
I want to say one more time that when we contribute energy
to a country that needs it, I want it all to be done in a
manner that is very sensitive to our environment, with clean
coal technology and the concern that all of us have about
making certain there is significant and robust investment in
that area. And Senator Bingaman especially, with me and others,
believes very strongly in that. We can use our coal resources
in a very thoughtful, environmentally safe way, and we intend
to do that.
But I want to thank all of you for being here. We have
eight witnesses. It is my hope that we can complete this in 2
hours.
And I indicated that, Congressman Pomeroy, before you came
that I was happy to invite you to participate. You are not only
in the State, but in town, the House is in recess, as well, and
I thank you for being here. If you have a comment, I would be
happy to hear from you.
[The prepared statement of Senator Dorgan follows:]
Prepared Statement of Hon. Byron L. Dorgan, U.S. Senator
From North Dakota
Today, we will hear from our witnesses on policies and technologies
to address transmission investment and infrastructure needs for North
Dakota, the region, and the nation. I am pleased that we have as
witnesses today representatives from the FERC, the PMAs, IOUs, and
rural electric cooperatives, and from the lignite and wind industries,
as well as from 3M--the latter to represent some of the new, innovative
transmission technologies that are being developed.
I would like to thank all of our witnesses for being here today,
and especially thank those of you who have traveled long distances and
adjusted your schedules to be here today. Your input will be invaluable
to the energy debate, to me, and to the Committee's record, as we use
this information to develop national energy policy legislation.
Transmission is one of the most critical aspects of the energy
debate and the energy policy Congress will be developing in the coming
weeks. We can have vast energy supply sources, as is the case in North
Dakota with its coal and wind, among other traditional and renewable
energy resources, but if we can't move and export those resources, then
we won't be able to use the resources to power our homes, businesses,
and more. North Dakota is referred to as ``the Saudi Arabia of wind,''
because of its enormous potential for wind energy. And yet, we don't
have a single turbine built yet, because we can't move the power that
the wind would generate.
We are facing problems with transmission both here in North Dakota
and nationwide in terms of capacity constraints, siting issues,
reliability of the electricity system, to name a few. We need to figure
out the most effective structures and policies to enhance the
effectiveness of our system and facilitate transmission across state
boundaries, regions, and the nation. We need to enhance transmission to
rural as well as urban areas. I know our witnesses will shed light on
many of these issues.
And it's not just about building more transmission lines, either.
There's a lot we can do with our existing rights-of-way. New, advanced
transmission technologies, such as composite conductor material,
superconductor material, and other methods and devices can increase the
efficiency of our transmission infrastructure.
3M, for example, whom we will hear from today has developed a
composite conductor transmission line. This line replaces existing
lines and does not require new towers or new rights-of-way. As a
result, extensive environmental assessments and permit reviews are not
required, which will significantly expedite the time in which we can
expand our transmission capacity. The 230 kilovolt (kV) line is being
tested in France. 3M is hoping to test 500 and 750 kV lines in the
United States. The lines increase the efficiency over existing lines
tremendously and our witness will elaborate upon this even more.
I have passed amendments at last week's Energy Committee markup and
have inserted language in Senate appropriations bills to promote,
develop, and test such innovative, new transmission technologies.
Though not the total solution, these technologies could go a long
way toward helping solve some of the transmission capacity constraints
we are facing.
I look forward to learning more from our witnesses about the
combination of technologies and policies that Congress needs to examine
to help solve the transmission problems we are facing.
Now, I would like to invite our first panel to testify.
STATEMENT OF HON. EARL POMEROY,
U.S. REPRESENTATIVE FROM NORTH DAKOTA
Mr. Pomeroy. Very briefly, Chairman Dorgan. Let me say how
sweet it is to say Chairman Dorgan. I appreciate very much you
using your subcommittee chairmanship of the Senate committee to
advance a particular focus on the issue of transmission.
When you think about it in North Dakota, the striking
similarities that exist between the transmission issues facing
our ability to get more power produced in North Dakota to
national markets to the railcar shortages we face every year in
terms of getting the year's harvest out. We produce way more
crop than we consume. We make a very significant contribution
to our national food needs, in fact global food needs, but we
have difficulty getting it to market.
We produce more power than we consume. Our potential to
make a much greater contribution to the Nation's energy needs
are profound, and yet getting our power to the markets is
constrained presently by a power grid that no one would
maintain was constructive with an eye toward energy needs in
the 21st century.
I believe transmission is absolutely a key to North Dakota
lignite development, key to alternative and renewable fuels
development ranging from in particular wind energy when you
talk about North Dakota.
So as far as I am concerned, the House-passed energy bill
last week did not devote sufficient discussion of the
transmission issues in particular, and that is why your hearing
is so particularly timely. I am very pleased your allowing me
representing the House to participate. Thank you, Byron.
Senator Dorgan. Congressman Pomeroy, thank you. I might say
just as an editorial comment, the House energy bill, as
Congressman Pomeroy said, I think will be changed very
substantially by the Senate. It has obviously some ingredients
that will be common to both bills, but the Senate will take, in
my judgment, a substantially different approach than the House
did.
Mr. Pomeroy. It needs work.
Senator Dorgan. Then that is what we are about.
Mr. Pomeroy. Good.
Senator Dorgan. We are joined today by a representative of
FERC, the Federal Energy Regulatory Commission.
And I should mention that this morning or yesterday, I
guess, Chairman Curt Hebert of FERC announced his resignation
effective at the end of the month, so FERC will be experiencing
some changes.
William Longenecker, who is an energy industry analyst at
FERC, is with us, and we have the administrator of Western Area
Power Administration from Lakewood, Colorado, Mike Hacskaylo.
We appreciate very much your being with us. We have asked
witnesses to summarize their testimony and we will make their
full testimony a part of the record. We have asked, if we
could, for 5-minute statements so that there is room for
questions.
Why don't we begin with Mr. Hacskaylo. Why don't you
proceed.
STATEMENT OF MICHAEL S. HACSKAYLO, ADMINISTRATOR, WESTERN AREA
POWER ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Hacskaylo. Thank you, Mr. Chairman. Good morning. Good
morning, Mr. Pomeroy. I appreciate your invitation to be here
today to speak on behalf of the Western Area Power
Administration.
Western is one of the four Federal power marketing
administrations. We market and transmit 10,500 megawatts of
Federal power, power produced at Federal powerplants, to nearly
650 wholesale customers spread across 15 Central and Western
States.
For the purposes of this hearing, a significant point is
that Western owns, operates and maintains almost 17,000 miles
of high-voltage transmission system across the West. We are
part of that backbone, that high-voltage backbone to move power
between States, between markets. We have our employees based at
51 duty stations in 12 States, including here in Bismarck,
North Dakota, with our North Dakota maintenance facility.
We operate four control areas and maintain about 1,600
load-serving interconnections with other utilities inside our
control area boundaries. We schedule energy. That is, we move
energy owned by one entity being sold to another entity with at
least another hundred load-serving entities with which we do
not have a direct interconnection.
Additionally, we make unused transmission capacity on our
system available to any other buyer and seller, including power
marketers and brokers, at a cost-reimbursable basis. As a
matter of policy, Western offers transmission capacity on its
system on a first-come, first-served basis under our open
access tariff. This is in accordance with FERC Order 888 and
889.
For example, we are working with the Basin Electric Power
Cooperative on interconnections in a variety of areas,
including the Miles City DC tie. We are working with East River
Electric Cooperative in South Dakota with their proposed T
substation as they interconnect with our system in the Sioux
Falls area. That is a new substation to deal with low growth in
the area. We are also working with entities such as Basin on
new transmission lines such as the Hettinger-to-Belfield line.
Thank you, Mr. Chairman, for your efforts on that important
project. That will help move power back and forth in this part
of the country.
We also provide interconnections with merchant powerplants
seeking transmission paths to move their power to load centers;
for example, in California and in southern Arizona. We have
underway eight interconnections with these merchant plants, and
these are large plants, 500 megawatts to 700 megawatts, to move
power into and through California.
Western Area Power Administration is responsive to the
emerging generation market and we have seen strong demand on
our available transmission capacity. We now have little
capacity available to serve new generation or additional loads
beyond these projects we are presently working on, so the
system is becoming constrained.
In recent years transmission improvements, generation
additions and maintenance and rehabilitation programs have
often been deferred, I think this is a fair statement, across
the industry. At the same time load growth, deregulation and
restructuring, transmission open access, and merchant plant
interconnections are placing unprecedented demands on the
interconnected power grid.
Systemwide disturbances in the West in 1994 and 1996,
energy shortages and price spikes in the Midwest last summer
and the roller coaster ride that is going on in California have
focused attention on the reliability of the nation's power grid
and its ability to meet an ever-growing, instantaneous demand
for high-quality, reliable electric service.
There are those that say that electricity is what powers
the nation's economy, and they are right. And what the economy
demands is this high-quality, reliable service, and that is
where transmission comes into play.
Clearly, the system is much more integrated and being
operated much more closer to the margin than in the past and
its components are much more sensitive to disruptions. Minor
outages that would have been a local inconvenience a few years
ago now have the potential to take down an entire regional
system.
From the investment side, we work closely with the Congress
through our budget process to obtain funds to upgrade our
system as needed to improve reliability. We work closely with
our customers as they advance funds to some of our activities.
Merchant powerplants that interconnect with our system have to
pay a freight, they pay their share of the costs to upgrade the
system, and we are looking for more flexible ways with
appropriate Congressional and customer oversight to use these
funds to take care of emerging situations, rapid load growth
and requests for quick interconnections.
We at Western look forward to continuing to work with the
members of your committee as you seek ways to reinforce the
infrastructure and investments in the nationwide power grid.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Hacskaylo follows:]
Prepared Statement of Michael S. Hacskaylo, Administrator, Western Area
Power Administration, Department of Energy
Thank you, Mr. Chairman and members of the committee, for your
invitation to speak with you today on behalf of Western Area Power
Administration (Western).
I will focus my remarks on Western's improvements and investments
in the transmission infrastructure of the high-voltage system we own
and operate on behalf of the people of the United States. Western's
concerns are to protect public safety around our facilities and to
maintain the reliability of our high-voltage transmission system.
Western is one of the four Federal power marketing administrations.
We market and transmit Federal power to nearly 650 wholesale customers
spread across 15 Central and Western states. This power is generated at
55 hydro plants owned and operated by the U.S. Bureau of Reclamation,
the U.S. Army Corps of Engineers and the International Boundary and
Water Commission. To deliver this power to our customers--the cities
and towns, public utility and irrigation districts, rural electric
cooperatives, and Federal, state and tribal organizations we own and
operate nearly 17,000 miles of high-voltage transmission lines, 256
electrical substations, 359 communication sites and a variety of other
supporting facilities. Our employees are based at 51 duty stations in
12 states.
We deliver power to some of the most isolated communities in the
nation. Our facilities are scattered across a 1.3 million-square-mile
service territory traversing some of the most rugged terrain in the
continental United States. Our transmission system is an integral part
of the nation's high-voltage electrical grid in the West.
We operate four control areas and maintain about 1,600 load-serving
interconnections with other utilities inside our control area
boundaries. We schedule energy with another 100 load-serving entities
with which we do not have direct interconnections. Additionally, we
make unused transmission capacity on our system available to any other
buyer and seller, including power marketers and brokers, on a cost-
reimbursable basis.
Maintaining the reliability of our vast transmission system to
serve customers around the clock is our most significant operational
obligation. This requirement is buttressed by:
our contracts with customers to deliver firm power,
our commitments to the North American Electric Reliability
Council and its member councils to reliably operate the
transmission system, and
our duty to safeguard this critical infrastructure.
Today, the Nation's transmission grid is interconnected, interstate
and international. As Deputy Energy Secretary Francis Blake testified
before this committee two weeks ago, assuring this integrated
transmission system can reliably deliver bulk electricity is a core
Federal issue.
The Administration's National Energy Policy noted that our energy
infrastructure has failed to keep pace with the changing requirements
in our energy system. Nationwide, since 1989, electricity sales have
increased by 2.1 percent per year, yet transmission capacity has
increased by only 0.8 percent per year. Some experts across the
electric industry sector agree that the bulk power transmission grid
may need to be expanded to remove bottlenecks.
The National Energy Policy also directed the Secretary, by December
31, 2001, to examine the benefits of establishing a national grid,
identify transmission bottlenecks and identify measures to remove those
bottlenecks.
Recent load growth in the Western United States has greatly
impacted transmission system reserve margins. The interconnected power
grid is constrained by insufficient capacity where demand is greatest.
As a transmission system owner, Western must continue to take
prudent steps to improve grid operations and ensure the safety and
reliability of the Federal transmission system. We continue to
cooperate with new merchant powerplants requesting interconnections to
our transmission system.
As a matter of policy, Western offers transmission capacity on a
first-come, first-served basis under our Open Access Tariff. This
includes providing interconnections to merchant powerplants seeking
transmission paths to move their power to load centers. Western is
responsive to the emerging generation market, and we've seen strong
demand on our available transmission capacity. We now have little
capacity available to serve new generation or additional loads beyond
the dozen projects now in planning or under construction across our
service territory.
Before new generation is added, extensive studies are undertaken to
evaluate its effects on the transmission grid. A number of technical,
stop-gap measures address reliability in the short term. They do not,
however, resolve the long-term reliability and operational security
threats to the transmission system under the increasing stress and
burden of many more bulk power transactions moving power long distances
in response to market demands.
Western has played a key role in joint transmission planning and
construction across the West. Western conducts its own studies and
participates in studies conducted by entities including Western Systems
Coordinating Council, Western Regional Transmission Association and
Southwest Regional Transmission Association as well as local and
statewide transmission planning groups.
Results of these studies have led us to develop a description of
immediate and potential projects for grid enhancements to the Federal
transmission system as permitted within the confines of Western's
statutory authorizations and funding. A summary of these projects was
provided to the Federal Energy Regulatory Commission earlier this year
in response to the Commission's Order on Removing Obstacles to
Increased Electric Generation and Natural Gas Supply in the Western
United States (FERC Docket No. EL01-47-000). I am providing that
summary for the Committee's use.*
---------------------------------------------------------------------------
* The summary has been retained in subcommittee files.
---------------------------------------------------------------------------
At Western, our charter is different from investor- and consumer-
owned utilities. They are required to invest in generation and
transmission assets to meet load growth needs in their franchised
service territories. Our transmission system was built to provide a way
to deliver power from the Federal dams to the preference customers who
have first call on this publicly generated power. Today, Western's
high-voltage system provides a critical backbone of transmission grid
in parts of the Western United States. This system includes nearly
9,000 miles of steel pole lines and 7,900 miles of wood-pole lines.
Wood-pole structures are expected to last an average of 40 years.
Sixty-three percent, or 4,983 miles, of Western's wood-pole structures
are more than 40 years old. Another 19 percent, or 1,482 miles, of
wood-pole lines will reach the 40-year mark in this decade. Western has
a long-term strategy for maintaining and extending the life of its
aging infrastructure, particularly our wood-pole transmission lines.
Part of that strategy is an ongoing wood-pole replacement program
to reinforce and replace individual poles. The other part is rebuilding
entire line segments. This summer, we completed a rebuild of the Havre-
Shelby line in northern Montana. This 115-kV transmission line was
originally placed into service in 1951. Beginning in 1993, Western
crews began the methodical task of replacing the rotted wooden poles on
this 95-mile line, one by one, to extend the life of this vital line
bringing electricity to small, isolated rural communities such as
Chester, Rudyard and Kremlin. The project was scheduled to be completed
in 2002, but the crews devised several innovations that sped up the
work by a full year.
Last year, we began a similar life extension project in North
Dakota on a 56-mile, 115-kV transmission line between Rugby and Neal
Substation near Voltaire and Bergen. The line was originally placed
into service in April 1952. We rebuilt the first 10-mile stretch last
summer and expect to finish in 2005. Next year, we'll begin work on the
1949 vintage, 41-mile Williston-Watford City line and the 1951 vintage,
34-mile Watford City to Charlie Creek line.
We have also been able to stretch out our infrastructure
replacement activities. The Havre-Shelby rebuild project was stretched
out over nine years. It costs $7,000 in material and labor to replace
one H-frame wood-pole structure. These costs include pro-rated shares
for the heavy equipment and the often hidden costs of engineering
design, work planning and acquiring the necessary materials. These
costs also include the time and work needed to take down the old
structures and comply with environmental requirements. The materials
cost alone is about $3,500 for each structure.
When you multiply the costs across Western's entire system, the
amount is quite substantial.
The equipment in our substations is also aging. Next year, we'll
have 216 transformers and 183 circuit breakers that will have been in
service for more than 40 years. Circuit breakers have an average
service life of 30 to 35 years. The useful life of a transformer is 45
to 50 years. Like all responsible utilities, Western monitors its
electrical equipment and attempts to obtain the greatest useful life
from each component as a matter of sound fiscal policy and good
business practice. Keeping each older piece of equipment in service
must be weighed against any increased risk to reliability and
liability.
Many of our partner utilities have minimized capital outlays in the
past decade for transmission facilities in the face of uncertainty
about who will pay for system additions and upgrades. As a result,
transmission improvements, generation additions and maintenance and
rehabilitation programs have often been deferred. At the same time,
load growth, deregulation and restructuring, transmission open access
and merchant plant interconnections are placing unprecedented demands
on the interconnected power grid.
Systemwide disturbances in 1994 and 1996, energy shortages and
price spikes in the Midwest last summer and the roller coaster ride
that's going on in California have focused attention on the reliability
of the nation's power grid and its ability to meet an ever growing
instantaneous demand for high-quality, reliable electric service.
Clearly, the system is more integrated and being operated much
closer to the margin than in the past, and its components are more
sensitive to disruptions. Minor outages that would have been a local
inconvenience a few years ago now have the potential to take down an
entire regional system.
Western's construction, rehabilitation and maintenance programs
have generally kept pace with system needs for repairs, replacements
and upgrades. Interconnection projects with numerous proposed merchant
plants have pulled resources away from work on our own system the past
couple of years. This trend will continue in the near future. Given the
time frames required to construct new or upgraded facilities, Western
expects stresses on the existing transmission grid will increase before
any relief is evident. The possibility of both planned disturbances
(sometimes called rolling blackouts) and unplanned outages will remain
high in the near future.
We at Western must maintain our excellent record of power system
reliability. Today, as a WSCC member, we face sanctions and fines if a
system disturbance is traced to poor maintenance practices or not
replacing outdated equipment as required by reliability criteria. We
expect the voluntary reliability systems that operate across the rest
of the nation will soon be contractually or legislatively required as
recommended in the National Energy Policy.
Compounding these funding pressures in the Upper Great Plains
region is our requirement to meet network load requirements on the
Integrated System that we jointly own and operate with Basin Electric
Power Cooperative and Heartland Consumers Power District. Under a 1998
agreement, we and others transmit power across facilities owned by the
three entities using a single transmission rate.
Requests to interconnect with this system are forcing us to replace
aging system components that cannot continue to withstand the strains
now being placed upon them much longer. Our Congressional mandate to
sell power at the lowest possible cost consistent with sound business
principles, along with extensive customer involvement in developing our
power rates and our construction, rehabilitation and maintenance work
plans serves to cap the amount of work we can accomplish each year.
Regardless, the need to continue addressing our aging inventory of
equipment is unavoidable.
We've been able to find creative ways to leverage our appropriated
dollars with customer funding to meet our needs. Customer funding for
these activities can offset our need for appropriated dollars. But
their reluctance to provide more funding stems from their need to be
competitive in the marketplace and the uncertainty over the future
shape of the industry. Customers have no future guarantee they will
receive the benefits of system improvements they finance today.
We at Western look forward to continuing to work with the members
of this committee as you seek ways to reinforce the infrastructure and
investments in the nationwide power grid.
Thank you for the opportunity to testify before you today.
Senator Dorgan. Mr. Hacskaylo, thank you very much for
being here and we will ask some questions after we hear from
Mr. William Longenecker from FERC. Thank you for joining us.
STATEMENT OF WILLIAM G. LONGENECKER, ENERGY INDUSTRY ANALYST,
OFFICE OF MARKETS, TARIFFS & RATES,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Longenecker. Thank you. Mr. Chairman, members of the
subcommittee and Mr. Pomeroy.
Thank you for the opportunity to appear here today. I am
pleased to offer testimony on current issues affecting the
outlook of the Nation's electric transmission system. My
testimony will focus on the development of regional
transmission organizations--so-called RTOs--and how the Federal
Energy Regulatory Commission can help on transmission
infrastructure improvements and investments. The views
expressed in this testimony are my own and they do not
necessarily reflect those of the Commission or any one
Commissioner.
FERC addressed the issue of access to the transmission
lines of public utilities in Order No. 888, which was issued in
1996. Order No. 888 required all public utilities that own,
control or operate facilities used for transmitting electric
energy in interstate commerce to provide open access and
nondiscriminatory transmission tariff service and to
functionally unbundle wholesale power services.
Since Order No. 888 was issued, wholesale electricity
markets have become much more regional than local, encompassing
large multistate areas. For competition to flourish and bring
benefits to wholesale, as well as retail customers, it is
critical that there be adequate transmission to carry
electricity from sellers to buyers.
The transmission grid is the essential superhighway for
interstate electricity commerce, but it is becoming congested
due to increased demands. Transmission constraints frequently
prevent the use of lowest-cost generating facilities, and
transmission expansion has not kept pace with changes in the
electricity marketplace.
In Order No. 2000, issued in 1999, the Commission sought to
address several transmission impediments to competition in
wholesale electricity markets. There are continuing
opportunities for discriminatory treatment in access to
transmission. There are engineering and economic inefficiencies
in the operation of the transmission system and in managing
congestion. Transmission reliability problems have increased.
Pancaked transmission rates, where a separate access charge is
assessed every time the transaction contract path crosses the
boundary of another transmission owner, restrict the size of
regional power markets.
Finally, uncertainties associated with transmission
planning and expansion processes has severely limited needed
additions to the Nation's transmission system. We have found
that these transmission problems could be best addressed if the
interstate transmission grid were operated on a regional basis
in a manner which is independent of entities that are buying or
selling electricity.
Accordingly, Order No. 2000 required all public utility
transmission owners and operators to submit filings related to
the creation of regional transmission organizations. The
Commission has strongly encouraged public power and cooperative
entities which constitute such an important part of the
Nation's electric system to participate fully in RTOs.
In addition, FERC has recognized that there must be
adequate returns on transmission investments so as to encourage
such investment. Order No. 2000 specifically indicated the
Commission's receptiveness to innovative rate proposals that
would reward those making new transmission.
The Commission has aggressively acted to review pending RTO
applications and announce that it favors the development of one
RTO for the Northeast, one for the Midwest, one for the
Southeast and one for the West.
In conclusion, FERC is keenly aware of the importance to
electricity markets of full and fair access to efficient and
reliable transmission service. The Commission views the
creation of RTOs as the single best approach to addressing,
among other things, transmission congestion and facilitating
expansion of the transmission grid.
I will be pleased to answer any questions you may have.
[The prepared statement of Mr. Longenecker follows:]
Prepared Statement of William G. Longenecker, Energy Industry Analyst,
Office of Markets, Tariffs & Rates, Federal Energy Regulatory
Commission
i. overview
Mr. Chairman and Members of the Subcommittee.
Thank you for the opportunity to appear here today. I am pleased to
offer testimony on current issues affecting the outlook for the
Nation's electric transmission system. In particular, my testimony will
focus on the development of regional transmission organizations (RTOs)
and how the Federal Energy Regulatory Commission (FERC or the
Commission) can help on infrastructure improvements and investments.
The views expressed in this testimony are my own, and do not
necessarily reflect those of the Commission or any one Commissioner.
A competitive market is the best way to protect the public interest
and ensure that consumers' needs are met over the long run at
reasonable prices. For competition to flourish and bring benefits to
wholesale as well as retail customers, it is critical that there be
adequate transmission to carry electricity from sellers to buyers. It
is also critical that transmission services be provided on the
interstate grid on a fair and non-discriminatory basis.
The transmission grid is the essential superhighway for interstate
electricity commerce, but it is becoming congested due to increased
demands. The use of the interstate transmission grid has grown
dramatically, but transmission expansion has not kept pace with these
changes in the interstate electricity marketplace. Also, wholesale
electricity markets have become much more regional than local,
encompassing large multi-state areas. Thus, the existing grid is being
pushed to its operational limits, and transmission constraints
frequently prevent the use of lowest cost generating facilities. The
institutional structures used in the past for planning and expanding
the grid are not currently meeting our needs.
For a number of years, the Commission has recognized the importance
of an efficient transmission grid, and has exercised its authority to
make the transmission system operate efficiently.
ii. order no. 888
The Commission addressed the issue of access to the transmission
lines of public utilities in its Order No. 888, which was issued in
1996. There, we found that unduly discriminatory and anti-competitive
practices existed in the electric industry, and that transmission-
owning utilities had discriminated against others seeking transmission
access. Accordingly, Order No. 888 required all public utilities that
own, control or operate facilities used for transmitting electric
energy in interstate commerce to provide open access non-discriminatory
transmission tariff service and to functionally unbundle wholesale
power services from transmission services.
iii. order no. 2000
In Order No. 2000, issued in 1999, the Commission sought to address
several remaining transmission impediments to competition in wholesale
electricity markets. These impediments were identified as continuing
opportunities for discriminatory treatment in access to transmission
lines, and engineering and economic inefficiencies in the planning and
operation of the transmission system. We identified the following
specific problem areas that Order No. 2000 is intended to address: the
reliability of the nation's bulk power system is being stressed in ways
that were not experienced before; it is increasingly difficult to
accurately compute the available transmission capacity on transmission
facilities; existing transmission congestion management systems do not
optimize regional congestion relief and are cumbersome, inefficient and
disruptive to bulk power markets; the uncertainty associated with
transmission planning and expansion have resulted in a noticeable
decline in planned transmission investments; and pancaked transmission
rates (where a separate access charge is assessed every time the
transaction contract path crosses the boundary of another transmission
owner) restrict the size of regional power markets. Order No. 2000 also
recognizes that wholesale trading patterns have become increasingly
regional and multi-state in character.
Many of these transmission problems, we found, could best be
addressed if the interstate transmission grid were operated on a
regional basis, in a manner which is independent of entities that are
buying or selling electricity. Utility-by-utility management of the
interstate transmission grid is inadequate to support the efficient and
reliable operation of the bulk power market. Accordingly, Order No.
2000 requires all public utility transmission owners and operators to
submit filings related to the creation of regional transmission
organizations (RTOs). RTOs are institutions that will own and/or
operate the transmission grid on a regional basis and that will not
participate in the power sales business, i.e., they must be independent
of power market participants.
Order No. 2000 requires that RTOs address essential transmission
functions on a regional basis. These functions include operation of the
grid, maintenance of reliability, congestion management, planning and
expansion, calculation of transmission capacity, parallel path flow
management, and tariff administration. Although not all transmission
owners are public utilities subject to the Commission's general Federal
Power Act jurisdiction, the goal of Order No. 2000 is for all
transmission-owning entities, including non-public utility entities
(e.g., municipal and electric power cooperative utilities) to place
their transmission facilities under the control of independent RTOs.
Accordingly, in the future, the Commission will look to RTOs not
only to ensure non-discriminatory access over the interstate grid, but
also to manage congestion over existing regional transmission
constraints and take the lead in regional transmission planning and
expansion to remove or mitigate constraints over the long-term. RTOs
must have the authority to ensure the short-term reliability of the
regional grid and must be responsible for planning, and for directing
or arranging, necessary transmission expansions and upgrades that will
enable it to provide efficient and reliable transmission service. We
expect that the RTOs will have a process for determining the most cost-
effective transmission upgrades, and that this process would take into
consideration any technological advances in the transmission of energy
that may be available.
iv. commission efforts to establish rtos expeditiously
Recognizing the critical importance of transmission issues, FERC
established an aggressive timetable in Order No. 2000 for RTO
implementation, and we have been acting expeditiously in response to
the RTO filings. Since the beginning of 2001, the FERC has issued over
20 orders on RTO filings. The Commission has also recently ordered
mediation in an effort to create one large RTO for the Northeast U.S.
and another for the Southeast U.S. Creation of effective RTOs has been
and continues to be one of the top priorities of the Commission.
v. other commission actions
In addition to efforts to get RTOs established, we have recognized
that there must be adequate returns on transmission investments so as
to encourage such investment by the private sector. Order No. 2000
specifically recognizes the importance of transmission pricing reform,
and indicates the Commission's receptiveness to innovative rate
proposals that would reward those making new transmission investments.
FERC also believes that so-called ``merchant'' transmission
projects sponsored by entities other than traditional utilities can
play a role in expanding competitive generation alternatives for
customers, and it has taken initial action on two merchant high voltage
direct current transmission line projects: the Neptune Regional
Transmission System, LLC project consisting of several thousand miles
of undersea cable which will connect capacity rich regions in Maine,
New Brunswick and Nova Scotia with capacity constrained markets in
Boston, New York City, Long Island and Connecticut; and the
TransEnergie U.S. Ltd. 26-mile undersea cable project from Connecticut
to Long Island, New York.
In evaluating these proposals, the Commission has established
criteria to use to determine whether merchant transmission line
projects should qualify for negotiated or bid transmission rates: the
merchant project should assume full market risk; the merchant project
should create tradable transmission rights; the merchant project should
not preclude access to essential facilities by competitors; the
merchant project should be subject to market monitoring for market
power abuse; the physical energy flows on the merchant project should
be coordinated with, and subject to, reliability requirements of the
relevant RTO; and the merchant project should not impair pre-existing
property rights to use the transmission grids or inter-connected RTOs
or utilities.
Another related area where we have acted to increase efficiencies
involves interconnection of generating facilities with the transmission
system. In recent orders the Commission has stated its intent to
evaluate in the near future the importance of standardizing
interconnection policies and procedures. FERC has already taken some
steps in this direction by encouraging utilities to file their
interconnection rules. Standardizing interconnection rules and
procedures may help minimize cost and barriers to entry for new
generation.
vi. limitations on the commission's ability to resolve transmission
issues
FERC is statutorily unable to directly and completely address all
transmission problems. A significant portion of the nation's
transmission grid is owned and operated by utilities not subject to
FERC's open access requirements. For example, the Commission has
limited authority with respect to transmission facilities owned by the
Federal government, state and municipal governments, and rural electric
cooperatives or within the Electric Reliability Council of Texas
(ERCOT). Public power entities control about 30% of the nation's
electricity transmission grid. We have encouraged public power and
cooperative entities, which constitute such an important part of the
Nation's electric system, to participate fully in RTOs. In Order No.
2000, the Commission stated that a properly formed RTO should include
all transmission owners in a region, including municipals,
cooperatives, Federal power marketing agencies, Tennessee Valley
Authority and other state and local entities. Certain tax laws impede
public power and cooperatively-owned utilities from fully participating
in the development of RTOs. One such example is the Internal Revenue
Code's restrictions that may prevent transfer of operational control of
existing transmission facilities financed by tax-exempt bonds to a for-
profit transmission company.
FERC also has no authority over transmission siting decisions. Even
though public utilities must offer to expand transmission facilities to
fulfill a transmission service request, the utilities first must obtain
siting permission from relevant state and local authorities.
vii. changes that have been proposed to improve transmission efficiency
Although the Commission itself has not taken a position on what
action Congress should take with respect to transmission issues, and I
a staff member do not here make any such recommendations, I note that a
number of measures have been proposed to improve the operation of the
Nation's transmission system. Among these are:
proposals to extend the Commission's open access regulatory
authority to all transmission facilities, including those owned
by municipalities, rural cooperatives, the Tennessee Valley
Authority, and Federal power marketing administrations;
proposals for the Commission to have transmission siting
authority for transmission facilities as a backstop in limited
circumstances;
proposals providing for enforcement of transmission
reliability rules by a self-regulatory organization subject to
the Federal oversight; and
proposals for legislation to eliminate tax code and other
restrictions that impede public power entities from fully
participating in RTOs.
viii. conclusion
Full and fair access to efficient and reliable transmission service
is vitally important to competitive electricity markets. The Commission
has been diligent in exercising its authority to promote competitive
markets. Currently, in our view, the creation of RTOs is the best
approach to addressing a wide range of transmission problems, including
transmission congestion and expansion of the transmission grid, among
other things. RTO implementation is one of the Commission's top
priorities.
Senator Dorgan. Mr. Longenecker, thank you very much. Let
me ask a series of questions and then call on my colleague,
Congressman Pomeroy.
First of all, with respect to WAPA, my understanding is
that the capacity doesn't exist at this point for us to move
much additional electric energy from North Dakota. I think you
indicated that in your testimony.
Mr. Hacskaylo. Yes, sir. That is correct.
Senator Dorgan. Can you give me your perspective of why we
have not seen investment and why we have not seen substantial
improvement in the capability in the transmission system, and
not just in North Dakota, but nationally? If you look at the
miles of transmission capability available, it really has not
changed much over the last couple of decades. Why is that the
case?
Mr. Hacskaylo. I think the most significant reason is that
the rules of how the electric utility industry operates are
changing. They are in a state of flux. It used to be in the
days of regulated monopolies, regulated utilities, that
utilities could make an investment in transmission and the
State commissions or FERC would guarantee the return on
investment so there is some certainty on the fact that the
investment would in effect pay off.
Now in these days of deregulation, in these days of
companies merging, in these days of merchant plants coming into
the system, that certainty is gone. And where investors are
looking for a relatively quick return on the investment, we are
not finding that in transmission. I think transmission has to
be viewed more as a long-term, steady investment, with steady
returns. So I think the rules are changing. That is the main
reason.
Senator Dorgan. Under a mechanism in which you had
regulatory authorities providing returns that were sufficient
to justify the investment and the investor would know those
returns would be available, we had a buildout and we had
certain redundancy and we had guarantees of service at a
certain price. When we go to the marketplace and the
marketplace decides on the incentives for the buildout to
exist, would we have at the conclusion of that a redundancy in
the system that will give the consumers the same protection of
continued service that exists under the regulated system?
Mr. Hacskaylo. The economic theory underlying that premise
says yes. The facts may be very different. The facts may be
very different because redundancy by nature implies
overcapacity, capacity that might not always be used, and yet
it still has to be paid for.
Senator Dorgan. And the marketplace would not view that
overcapacity with great sympathy, would it?
Mr. Hacskaylo. It is hard to say. Certainly in California,
given the transmission problems there, I think we are beginning
to see some recognition that there does need to be redundancy
in the system, additional capacity to deal with reliability
issues. But it is a hard-fought issue and the costs are
tremendous in California of not having the reliability, not
having the extra capacity there to deal with system
emergencies.
Senator Dorgan. But I am just asking, is not the extra
capacity almost antithetical to the market system?
Mr. Hacskaylo. It is hard to make the two fit together.
Senator Dorgan. Maybe impossible?
Mr. Hacskaylo. I do not know. I do not know. Again, I think
the industry is still in a state of flux. The rules keep
changing. Directions are still different. So I think the jury
is still out on whether all of this is going to work.
Senator Dorgan. Let me ask you your view of technology. I
talked about composite conductor technology this morning. How
do you view technology as being able to address some of these
transmission issues, especially in our region, especially in
North Dakota? Are you high on technology producing substantial
progress here, or do you think we are going to have to make
progress the old-fashioned way, put more lines and more towers
and worry less about increased technology?
Mr. Hacskaylo. The new technology has very much a role to
play in the industry, and certainly within Western's system. We
have already made use of AC to DC to AC converter stations in
Miles City and in Sidney and Nebraska. We've made use of
flexible thyristor series compensation devices at various
substations that we have in the West. The technology helps
reduce losses on the system. It helps improve efficiencies on
the system. So there is definitely a role for cost-effective
technology to take its place as we rebuild transmission lines,
as we upgrade our system.
Senator Dorgan. Mr. Longenecker, FERC is going through some
rather interesting times. Would you agree with that?
Mr. Longenecker. Yes, sir.
Senator Dorgan. Especially given what is going on in
California and, of course, it has been the subject of great
controversy and its actions or lack of actions have the subject
of great controversy in Washington, D.C., recently.
You describe in your testimony pretty much what we hear
from most members of FERC, and that is that as our country has
changed, the mechanism by which we develop and transmit
electrical energy has to change, as well. Most of our structure
was built for an intrastate-regulated system, and now we are
trying to create a circumstance where we have effectively a
transmission highway to be able to move energy back and forth
across the entire country through RTOs. It is an entirely
different approach, is it not?
Mr. Longenecker. Yes, it is.
Senator Dorgan. And can you tell me, how does FERC see our
movement to the RTOs and the upgrade of the capability and the
capacity? How do you see that happening? Can you describe the
Federal involvement, State involvement, how that relates to the
competitive market system? We are not only changing from a
regulated environment to an unregulated environment in some
cases. We are also changing from an intrastate to essentially a
regional and national system. Tell me FERC's impression of
different levels of government's responsibility here.
Mr. Longenecker. Well, I think we see RTOs as taking the
lead in assessing transmission needs within a region that are
necessary to meet the evolving electricity market needs such as
generation services. We see the RTO working with the States to
decide how to best meet those transmission needs with the
technology that might be the most economical solution to fixing
appropriate in constrained areas, for example, and whether or
not transmission is the answer. It may be that a generating
station would be the better solution. We also see RTOs taking
the lead in terms of seeking siting approvals, and so forth,
for whatever projects that the RTO through a collaborative
process, has decided best fit the needs at a particular time in
a particular power market.
Senator Dorgan. Congressman Pomeroy.
Mr. Pomeroy. Thank you both for very interesting testimony.
Mr. Hacskaylo, did you in indicating the projects WAPA was
participating in reflect that basically WAPA transmission
facilities are being used to carry privately generated power?
Mr. Hacskaylo. Yes, sir.
Mr. Pomeroy. How long has that been going on?
Mr. Hacskaylo. It has been going on for as long as there
has been a Western Area Power Administration. What we do is use
our transmission system to move power from generation to load
to our preference customers, and then with the additional
capacity in the system we make that available to others to gain
revenue to help repay the cost of the Federal investment.
Mr. Pomeroy. The whole Power Administration concept is the
Federal Government builds facilities and recoups costs from
power generated over a period of time?
Mr. Hacskaylo. Yes, sir. That is correct.
Mr. Pomeroy. It also addresses neatly some of the
investment issues you speak to?
Mr. Hacskaylo. I think so.
Mr. Pomeroy. Might that be a model then for Congress to
look at as we would further invest Federal dollars in expanding
carrying capacity on existing WAPA lines or other Power
Administration facilities that could then be cost out over time
carrying the power generated by others?
Mr. Hacskaylo. That certainly is one option to be
considered, yes, sir.
Mr. Pomeroy. Mr. Longenecker, how long have these RTOs been
an essential part of load management coordination?
Mr. Longenecker. Well, the RTOs are in the process of
forming, and in many parts of the country RTOs are an extension
of the existing independent system operator that has already
been in place for a number of years as a consequence of our
Order No. 888 having been issued. In fact, many of the ISOs in
the Northeast have proposed to transform themselves into an
RTO.
Mr. Pomeroy. You have two sentences in your statement--
excuse me for interrupting--that get to the point you were
making, I think.
On page 3 of your testimony you state, ``existing
transmission congestion management systems do not optimize
regional congestion relief and are cumbersome, inefficient and
disruptive to bulk power markets; the uncertainty associated
with transmission planning and expansion have resulted in a
noticeable decline in planned transmission investments.''
So we have a bad system, it is not working very well, we
have got very little investment in terms of building a new and
better system and the hope is RTOs. Now, what leaves me a
little anxious about that is RTOs are quite new. I am concerned
about whether they have within the RTO the governing capacity
to really make it work to optimal efficiency, and, secondly,
whether because they are inherently regional, as their very
name implies, whether these regionals can hook up in a clear
national system, and FERC is obviously betting the ranch on
these RTOs at the present time. Would you please tell me just
briefly how this is going to work?
Mr. Longenecker. Well, we first determined in Order 2000
that utility-by-utility management of each transmission grid
does not work.
Mr. Pomeroy. Right.
Mr. Longenecker. We have had some ISOs--independent system
operators--formed in various parts of the country, but even
those, though they are larger and are serving subregions of
electricity markets, they are not serving the entire
marketplace, the electricity marketplace that has developed,
for example, in the Northeast, and so we have a replication of
the problem we had with individual utilities managing small
transmission grids. We have a little bit bigger organizations,
ISOs, managing bigger transmission grids, but it is not----
Mr. Pomeroy. It is not the entire coordination?
Mr. Longenecker. It is not the full coordination. They have
differing approaches to congestion management in these
subregions. They have not agreed on how to deal with a single
market transaction that might cross their seams, the borders of
the individual independent system operators.
Mr. Pomeroy. My question is, will RTOs need to assume----
Mr. Longenecker. We are looking for RTOs to be large enough
to deal with the evolving electricity marketplace, the
wholesale markets that are growing because of the interest in
nontraditional utilities becoming involved with the selling of
power.
Mr. Pomeroy. And will FERC then provide the national
overlay coordinating the RTOs?
Mr. Longenecker. Well, under Order 2000 we require the RTOs
to work with their neighbors to facilitate trade and work on
common business practices, and so forth.
Mr. Pomeroy. I am not convinced the good neighbor policy is
enough to get an optimal national framework for building the
next century's energy grid, but it remains to be seen. We look
forward to continued dialogue with you on that.
Thank you, Mr. Chairman.
Senator Dorgan. Mr. Hacskaylo, you made a comment about, in
some cases, minor problems could shut down a regional system at
the present time because of a lack of transmission capacity.
Can you expand on that?
Mr. Hacskaylo. A good example is what is called the path 15
bottleneck in central California. Due to system constraints as
far away as Idaho, and, remember, we are dealing with an
interconnected transmission system here, interstate. As a
result of some system conditions in Idaho, for example, the
flow of power from northern California to southern California
can drop from approximately 3,500 megawatts down to 900
megawatts at certain times of the year. That can cause rolling
blackouts. It did so in northern California. It can cause
system disturbances in severe cases such as we saw in 1996
coming out of the Northwest. A relatively small problem can
cause the entire Western interconnected system to break up for
a short period of time before the system operator can restore
it. So that is what all the utilities focus on, is the
reliability of the interconnected system, as well as their own
systems, to prevent that from happening. Where we see problems
like this based on studies, we try to work together to solve
them, to get the transmission upgrades in place to relieve
congestion.
Senator Dorgan. Mr. Longenecker, tell me what FERC's
position is on some sort of mandatory FERC jurisdiction over
the RTOs. What kind of jurisdiction?
Mr. Longenecker. RTOs would be public utilities, and,
hence, they would be subject to our jurisdiction. I am not sure
if your question is going to public participation in RTOs. We
certainly are encouraging public power bodies and cooperative
systems to become full participants in the RTOs.
Senator Dorgan. The reason I ask the question is, as you
know, in the development of the RTOs, the creation of the RTOs,
there is a healthy discussion going on about pricing plans and
the mechanisms by which you price transmission and we have the
license plate versus the postage stamp proposals, and the
distinction between the two can have a profound impact on
certain regions of the country. And I assume that under some
circumstances if the pricing scheme is a scheme that is not
satisfactory, you will have difficulty bringing some into the
RTO organizations. Do you agree with that?
Mr. Longenecker. I think FERC is very keenly interested in
encouraging participation by all transmission owners, and an
important factor that we realize in that regard is that each
participant feel that it is being fully compensated for its
contribution to a larger RTO effort. What has happened is that
many of the RTOs that have developed so far, they are proposing
the zonal rate approach as a transition mechanism to bring some
certainty to each of the participants that they are going to be
recovering their contribution to the system, the larger system.
Senator Dorgan. What is the progress of the development of
RTOs at this point?
Mr. Longenecker. The Commission has actually issued about
20 or so orders since this past January in regard to various
RTO proposals. The RTO West effort is very much active in
trying to form something larger than the Pacific Northwest area
where it started. It is working towards the formation of a
larger westwide RTO. The Northeast ISOs--independent system
operators--are in the process of a mediation conference right
now ordered by our Commission to look into the possibility of
forming a larger RTO for the Northeast. The same thing is
happening in the Southeast. And very recently the Midwestern
independent system operator and the Alliance RTO reached a
settlement to form a super region which would basically run, I
think, from the Dakotas all the way to Virginia, a super region
where there would be no pancaked rate in place. It would be a
systemwide rate to facilitate trade over a large region of the
country from middle America to Virginia.
Senator Dorgan. Mr. Hacskaylo, WAPA, of course, is a very
important element of our energy picture here in North Dakota
and our region. I was reading in some testimony that we
essentially do not have additional capacity at this point to
unlock opportunities for additional production of electric
energy and transmission of that energy from North Dakota. Is
that the case? Do you agree with that?
Mr. Hacskaylo. It is accurate. The system here is
constrained, yes, sir.
Senator Dorgan. And the solution to that, of course, is to
find ways either through technology or through new transmission
lines and the development of those lines connecting into RTOs
and being able to be part of a regional and national grid, that
allows us to access a whole series of new energy sources and
new energy production in North Dakota. Do you agree with that?
Mr. Hacskaylo. Yes, sir.
Senator Dorgan. And in order to do that, there are some
significant controversies on building transmission corridors. I
mean, that is not without some controversy. There is some
controversies dealing with the RTO issues. I mentioned a
couple. We will have some testimony about them in a while from
others about pricing. There are some people who think that, as
you indicate in your testimony, this is all ``theory,'' putting
together a system in which the market sends signals to replace
a system that has largely been a regulated system that has
tried to have over the years some redundant supply. I got when
you testified some skepticism, maybe I read that wrong, but
give me your assessment. Is this going to fit? Are we moving in
the right direction? Are there points that we have to be very
concerned about as we try to put this together in a new energy
policy, and, if so, what are they?
Mr. Hacskaylo. I think we are moving in the right
direction. As I indicated, we do have an industry that is in
flux, the rules keep changing. We have new direction from FERC
and from others on ways to go. But I think that a judicious
blend of the market dictating here is a good place to put
generation, whatever type, wind power, coal, whatever, because
it can be sold to this load center, we, the developers, whoever
they might be, can make money on it, and we need this
transmission and here is how we work the transmission. This can
work, but it is going to take time. It is not going to happen
overnight.
Senator Dorgan. Let me raise one additional point finally,
and that is, notwithstanding transmission or just transmission
issues, some of us would observe that in a State like North
Dakota where we have been blessed with relatively low-cost
power for a long period of time and have been well satisfied
with that, that there are others in the country that want
access to that power, and if they achieve that access, our
power will be replaced by higher-cost power. So what we are
talking about being able to transmit our energy, if you have a
so-called truly competitive system, those who have been pushing
most for restructuring, which are the largest manufacturing
companies in the country, the automobile industry and others,
would like to access cheaper power, where is that going to come
from and how is it going to be replaced? Some would say more
production, for example.
But, you know, I must say that I worry a bit about
restructuring and its ultimate goal of making power available
to be moved at a moment's notice and leaving a State like North
Dakota, which is a very heavy user of power and has a
significant need for the low-cost power that it has enjoyed for
a long while. We don't want to be in a situation where North
Dakota is left with a circumstance where that power is replaced
by higher-cost power simply because we have a national system.
Congressman Pomeroy, do you have other questions?
Mr. Pomeroy. We did not build the interstate highway system
based on the reaction of local investing interest. It is a
national system to serve national transportation needs. I
really agree when it comes to transmission, it is the critical
backbone for the Nation's energy delivery system, it needs to
be national, it needs to be coordinated, it needs to be fair to
remotely populated areas that produce the power, as well as
serve to maximum advantage the urban areas.
That is why, Mr. Chairman, I think this panel has been an
excellent panel, has shown that I am not sure, left to its own
devices, we are at all on the road we need to be on to get this
transmission system into shape for the 21st century. Thank you.
Senator Dorgan. Mr. Hacskaylo and Mr. Longenecker, thank
you very much for being with us today, and we will make your
entire statement a part of the record.
Mr. Longenecker. Thank you, sir.
Senator Dorgan. I would like next to call on Ted Humann,
senior vice president of transmission of Basin Electric Power;
Dave Sparby with Xcel Energy; and Elizabeth Moler, senior vice
president, government affairs, Exelon Corporation.
While they are coming up, let me ask that we make a part of
the record by consent testimony submitted by Otter Tail Power.
[The information referred to follows:]
Otter Tail Power Company,
August 7, 2001.
Hon. Byron Dorgan,
220 E. Rosser Ave., Room 312, Bismarck, ND.
Dear Sen. Dorgan: It's my understand you are convening a panel in
Bismarck today for the purpose of discussing ``Issues associated with
Transmission Expansion'' in North Dakota.
As you may be aware, Otter Tail Power Company has served electric
customers in North Dakota for some ninety years now, and in this
continuing capacity, I believe we have a significant stake in
discussions related to transmission expansion. Our company currently
operates some 2,700 miles of transmission lines in North Dakota, and we
serve power to 249 North Dakota communities with these lines. It's my
belief that these facts should have earned us a seat at the table for
today's discussions.
It may have been your impression that our views are represented by
the North Dakota Lignite Energy Council on this issue. While we are
members in good standing of the LEC, it should be noted that areas of
common interest and purpose are generally limited to the extraction and
sale of lignite coal in North Dakota. The electric transmission
business, on the other hand, represents a very distinct dimension of
the utility business. Issues relating to regional transmission are more
appropriately handled through MAPP and, in the future, will be handled
through the MISO.
Very Sincerely,
John MacFarlane,
Chairman & Chief Executive Officer.
Statement of Otter Tail Power Company
introduction
Otter Tail Power Company would like to thank Senator Dorgan for the
opportunity to provide testimony today on the topic of ``Issues
associated with Transmission Expansion.'' This topic is very timely and
Otter Tail Power Company looks forward to assisting in developing
policy on this issue in the future. Our comments will focus on what
Otter Tail Power Company believes are the primary issues related to
electric transmission in our region, together with what we believe are
some potential solutions to challenges faced by the transmission grid.
background
Otter Tail Power Company is an investor-owned utility based in
Fergus Falls, Minnesota, serving approximately 135,000 customers in
North Dakota, Minnesota and South Dakota. Otter Tail Power own 5,300
miles of transmission lines in those three states, of which
approximately 2,700 miles are located in North Dakota. In North Dakota,
we serve power to 249 communities; only three of these communities have
populations over 3,000. In 1999, Otter Tail Power's residential
electric rates were 24% less than the national average cost for
electricity.
challenges facing the transmission system
Since the passage of the 1992 Energy Policy Act, the electric
utility industry has been in a constant state of transition. Twenty-
five states have disaggregated the electric generation business from
the electric delivery business, leaving a confusing hodge-podge of
deregulation experiments. Changes in the electric transmission
business, on the other hand, have been driven from the federal level by
the FERC. But while central coordination of change in the transmission
sector has created at least some degree of uniformity across the
country, many issues are still unresolved and an environment of
uncertainty has resulted. This uncertainty has further slowed the
development and expansion of the transmission system, exacerbating a
trend that dates back to the late 1970's. A recent study indicates that
transmission investment throughout the United States has been declining
for the last twenty years and, in 1999, was roughly half of what it was
in 1979. Like most other areas of the country, North Dakota, South
Dakota and Minnesota are living today on yesterday's invested
transmission capital.
Running parallel to this transmission deficit trend is an ever
growing electric demand on the transmission system. By order of the
FERC, wholesale power transactions are now an efficient means of
bringing buyers and sellers together in the wholesale market. But these
transactions are causing the regional grid to be used in ways that
neither its designers nor the regulators intended or envisioned. In
addition to serving as a local conduit to carry electricity from power
plants to customers, the grid is now being relied on to do much more,
including:
Act as regional highways linking generators in one state to
customers in another;
Maintain reliability of an entire interconnected system;
Provide flexibility over a wide range of generation,
transmission and load conditions;
Facilitate an ever increasing number of economic exchanges
among market participants who are moving electricity over ever
increasing distances.
In summary, the regional transmission grid is being stretched to
its limits. These limitations have resulted in limits to the expansion
of the generation system. This is a particular problem for North
Dakota, where we have abundant supplies of coal and almost unlimited
potential for wind generation.
In addition to preventing generation expansion, transmission
``gridlock'' holds the potential for serious reliability problems in
our future. We are at a critical juncture where transmission expansion
must occur. Significant transmission reliability problems were
identified in eastern North Dakota last winter, e.g. and these were
only resolved through the cooperative efforts of GRE, Minnkota Power,
Xcel Energy, MDU, Manitoba Hydro and Otter Tail Power Company. Repeated
circumstances of this nature are not a desirable approach to dealing
with transmission challenges in the future, however. North Dakota
already has nearly twice as much generation as we require for our own
use, and we need to pay attention to our export channels if we want to
remain a significant seller of electricity--much less a bigger player
in new markets. Increasing our market share of power sales in other
states requires a remedy for the problem of inadequate transmission
capacity. We need the help of the Congress and we need the help of the
FERC in this regard.
To better understand the barriers to transmission expansion, one
must first understand the regional nature of the transmission system.
Transmission systems and electrons do not recognize state boundaries.
Rather, they are governed by the laws of physics. This is why it's a
challenge to explain to citizens and politicians alike that a
transmission line in one state can have a significant impact on
customers in another state, and that thinking in terms of state
boundaries is counter-productive.
The regional nature of the transmission system has increased the
difficulty of doing multi-state transmission expansions. While some
states like North Dakota have very workable siting laws, other states'
laws are more stringent and, in some cases, impossible. For a project
that crosses state boundaries, one state may take a year to approve the
project, while the other state may take seven years; or, the other
state may choose to ignore the project altogether. This state-by-state
approach makes it difficult, if not impossible, for utility companies
to make necessary additions to the transmission system.
A final barrier to transmission system expansions is the
uncertainty that results from disparate methods of transmission
pricing. In many cases, it is unclear who is going to pay for
transmission system expansion costs. Because of this uncertainty, it is
difficult for companies to commit to large capital investments. A
common methodology needs to be established for ``who is going to pay
the freight''.
To all of the challenges above, add the potential for negative
publicity that new electric transmission projects generally receive,
and it's not difficult to understand why utility companies choose to
exhaust all other options before going through the hassles of trying to
get a new transmission project approved and constructed.
solutions to the challenges
The top priority for developing solutions to the challenges cited
above is for the Congress to give the FERC authority to mandate
participation in Regional Transmission Organizations (RTO's). This will
facilitate the resolution of most of the other transmission issues,
including the development of regional tariffs that provide greater
certainty with respect to transmission pricing and cost recovery. At
present, participation in RTO's by transmission owners is voluntary.
Mandatory, common membership in RTO's will provide the best vehicle for
development of common rules and transmission tariffs among owners of
transmission facilities.
Regional transmission tariffs are very important for North Dakota,
as well as they are for all of the transmission-owning utilities
serving North Dakota. Certain methods of tariff pricing could result in
significant cost shifts from urban areas to rural areas and this would
be detrimental to our rural economy. Owners of both urban and rural
transmission systems will do their best to protect their interests, but
in the end, all transmission system stakeholders need to be willing to
come to the table and compromise to establish tariffs that benefit
everyone. In return, both regulators and the public must be willing to
accept compromises that may result in increased costs in the short run,
but hold the promise of improved reliability and cost savings in the
long run. Again, the best vehicle for accomplishing all of the above is
the Regional Transmission Organizations that are being formed with the
FERC's encouragement today.
A final mandate for Congress: Give FERC the authority to establish
``need'' for interstate transmission system additions. States should
retain the right to determine appropriate routes for new transmission
lines, accounting for environmental concerns, etc. But the ``need'' for
new transmission lines should not be considered on a state-by-state
basis. Rather, it should be planned on a regional basis by the RTO's,
with an eye toward achieving the greatest common good.
the private sector seeks an equal opportunity to expand
Otter Tail Power Company is very interested in being a part of
North Dakota's transmission future. In fact, we are currently a partner
in a transmission project with Xcel Energy and Manitoba Hydro that
involves the construction of 160 miles of 230 kilovolt transmission
line from Central North Dakota to central Manitoba. This is the largest
transmission expansion in North Dakota since the mid-1980's. Together
with our partners and the North Dakota Public Service Commission, we
have demonstrated what it takes to move a transmission project forward
successfully.
For any transmission project proposed by the RTO, all transmission
providers should have the opportunity to bid on ownership and
construction of that project. Entities that can construct, own and
maintain the new transmission line most efficiently while still meeting
recognized standards of performance, should be awarded the right to do
so. Competition of this sort among transmission providers would be
healthy for consumers, and it would be beneficial for all of North
Dakota.
Otter Tail Power Company would like to thank Senator Dorgan and his
staff for the opportunity to present this testimony. We look forward to
working with the Senator as we build our energy future together.
Loren Laugtug,
Director, Legislative and
Regulatory Affairs.
Tim Rogelstad,
Manager, Transmission
Planning.
Senator Dorgan. Thank you for being with us. Why don't we
begin with Elizabeth Moler. Elizabeth, thank you very much for
being here.
STATEMENT OF ELIZABETH A. MOLER, SENIOR VICE PRESIDENT FOR
GOVERNMENT AFFAIRS AND POLICY, EXELON CORPORATION
Ms. Moler. Thank you very much, Mr. Chairman and
Congressman Pomeroy. I appreciate the invitation to join you in
Bismarck today. I have not been in Bismarck in a long time. I
was overdue.
My name is Elizabeth Moler. My friends call me Betsy. I am
the senior vice president for government affairs and policy of
Exelon Corporation. Exelon Corporation is headquartered in
Chicago, Illinois. Through our subsidiaries ComEd and PECO
Energy we serve over five million customers principally in
Chicago and Philadelphia areas, so we have generator
installations in over 20 States.
Prior to joining Exelon, I served as the Deputy Secretary
of the U.S. Department of Energy and as a member and the Chair
of the Federal Energy Regulatory Commission from 1988 to 1997.
Before that I served as senior counsel to this committee.
Your letter of invitation asked me to focus today on
transmission issues. I am pleased to do so.
Our transmission capacity, as the previous witnesses and as
you, Mr. Chairman, have observed, has not expanded to keep pace
with demand. The current situation is comparable to a country
road carrying the traffic on an interstate highway. The
transmission system is facing significant increases in
congestion. Between 1999 and 2000, in one year, transmission
congestion grew by more than 200 percent. And in the first
quarter of this year transmission congestion was already three
times the level experienced during the same period in 2000. The
constraints that you see depicted on these maps, Mr. Chairman,
are replicated many times all over the country.
Annual investment in transmission is simply not enough to
ensure that we have a reliable grid, and we will not make the
needed investment through private enterprise or through
government companies unless Congress modernizes the regulatory
regime governing our transmission grid.
My testimony today provides a policy prescription to cure
the problems in our Nation's transmission infrastructure. I
should add that most of these issues, Mr. Chairman, and the
solutions are addressed in Chairman Bingaman's July 20 White
Paper. We endorse his proposal wholeheartedly with only two
minor tweaks.
Can you imagine what it would be like to have different
rules apply to individual cars using the same interstate
highway? Chaos would reign. But that is the circumstance today
along our interstate transmission grid. No wonder it does not
work very well. In order to have the transmission grid function
more efficiently, we simply must have all traffic subject to
the same rules of the road.
As Mr. Longenecker testified, the current rules of the road
were written in Order No. 888 issued in 1996 while I was Chair
of the Federal Energy Regulatory Commission. It directed all
utilities subject to FERC's jurisdiction, an important caveat,
to provide other users with access to transmission facilities.
Order 888, however, applies directly only to those who are
subject to the FERC's jurisdiction under the Federal Power Act.
Thus, the open access regime looks like a piece of Swiss
cheese. The holes in the cheese are those transmission
facilities that are not subject to the Federal jurisdiction.
They include high-voltage lines owned by cooperative utilities,
publicly owned utilities, and federally owned utilities for a
total of 27 percent of our Nation's transmission lines. In
certain parts of the country, like the West, there are really
more holes than there are cheese.
In order for the transmission system to work more
efficiently, all transmission-owning entities should be subject
to the Federal Energy Regulatory Commission's jurisdiction.
An equally confused regime applies when determining which
regulatory authority has jurisdiction over a particular
transmission line. The same set of high-voltage transmission
lines is used to serve both wholesale and retail customers.
Yet, in some circumstances the State regulatory authorities
have jurisdiction over those live wires. In other circumstances
the local co-op has jurisdiction over those wires, or the local
municipal utility has jurisdiction over those wires. In still
others FERC has jurisdiction.
The who is in charge here question is not one that is
easily answered. We have a crazy-quilt system of regulation
over the Nation's transmission grid. It is subject to
discrimination and abuse. Congress clearly has the authority,
and I would assert the duty, to establish one traffic cop for
these highways.
The only practical solution that I know of given the use of
the transmission line is to put all transmission under FERC's
jurisdiction, whether the wires are used for wholesale
transactions, whether they are used to serve bundled or
unbundled retail load, and whether they are owned by municipal
utilities or a cooperative.
With respect to transmission siting, Exelon supports
granting FERC a backstop role to site new transmission lines
when States are unwilling or unable to act on new transmission
line applications. Such an approach would give States the first
opportunity to act on transmission siting applications.
It made sense in 1935 when the Federal Power Act was
enacted to leave transmission siting with the States since
transmission lines were generally local in nature. Now,
however, our transmission system is being asked to move large
amounts of electricity across long distances and across State
lines.
The problems are not theoretical. They are real. AEP, for
example, in Ohio has been trying to site a facility across
Virginia for 10 years. They got the permit from the Virginia
commission last month. However, they still do not have their
permits from the Federal agencies. They are now talking to the
Forest Service. Regulators in Idaho have been reluctant to
build new capacity to serve California. Regulators in
Connecticut recently refused to site a line across Connecticut
because, heaven forbid, it helped serve people in New York. The
problems are real.
FERC-mandated regional transmission organizations are being
established across the country. These RTOs will have
responsibility to plan how the transmission grid should be
upgraded and where new lines are necessary. If State regulatory
authorities are unwilling or unable, and under some States'
statutes they are unable, to take into account the benefit in
another State, Federal regulators should examine the need for
the facilities and issue the required permits.
There has been a lot of loose rhetoric about the fact that
this would mean FERC would have authority to take private
property. That simply is not true. Eminent domain authority
would rest with the holder of the certificate. If necessary,
they could go to court to exercise the eminent domain
authority. This model exists for natural gas pipelines today.
It works. It should be applied to the electric transmission
grid.
Let me now turn to Federal tax issues. We also believe that
the Internal Revenue Code should be amended to allow the tax-
free restructuring of transmission ownership and to allow
municipal and cooperative utilities to participate in
competitive wholesale and retail markets without imperiling
their existing tax and financial status.
FERC Order 2000 issued last year has already been
mentioned. It requires utilities to form regional transmission
organizations.
I am in charge of Exelon's RTO formation efforts for both
ComEd and PECO. RTOs will be these large-scale organizations.
However, being in an RTO means that we will have to give up
control over transmission lines to this independent third party
who is going to be charged with running the RTO. Once that
happens, the transmission lines will no longer have any
strategic value to us as a company. We would sell our
transmission system. ComEd, for example, is on record as saying
we would be willing to sell our transmission system to the RTO,
thus, furthering FERC's pro competition policies, if it did not
mean we would have to pay a tremendous tax bill upon the sale
of that transmission asset.
Exelon endorses legislation that would enable a utility to
sell its transmission assets to the RTO, or to an independent
transmission company under the purview of an RTO, without
having to pay taxes on the gain realized by the asset transfer.
We would, however, of course, be willing to reinvest the gain
in infrastructure to serve our customers within a specified
period of time.
If this legislation were enacted, it would encourage
utilities to transfer the ownership of their transmission
systems to RTOs. The RTOs, in turn, would be able to obtain the
critical mass of assets under their ownership that would enable
them to operate more efficiently, and this further would
encourage the RTOs, the new owners, to invest in transmission
infrastructure.
When Congress restructured the telecommunications industry,
it provided a similar mechanism for telecommunications asset
divestitures. It should do so again in this instance.
I would note that the transmission tax provisions were
included in H.R. 4 passed by the House of Representatives last
week, and I would further note that this was not one of the
controversial areas of the bill.
Let me talk now about innovative pricing for transmission
assets.
Current returns on transmission are simply too low to
attract the huge amounts of capital necessary to fund
investments in transmission expansion. A comprehensive national
policy should include direction to FERC to provide innovative
transmission rates for transmission owners, not just to owners
who have made the transmission improvements and not just to RTO
operators, which is the current FERC policy today.
There are two additional statutes on the books, the Public
Utility Holding Company Act and the Public Utility Regulatory
Policies Act, which have outlived their usefulness and are a
barrier to competition.
Last, but by no means least, Congress should give FERC
specific statutory authority over the reliability of the
interstate transmission grid. The organization now charged with
the responsibility for reliability issues, the North American
Electric Reliability Council, does not have the necessary tools
to do its job. In particular, it needs significantly enhanced
authority to make its rules mandatory for all segments of the
industry.
Mr. Chairman and Congressman Pomeroy, I have given you a
rather comprehensive listing of the transmission issues that
need to be addressed by the Congress. Given the absolutely
vital importance that transmission plays in our Nation's
economy, you should be commended for focusing on this vitally
important subject. It is certainly an arcane area, but it is
vitally important.
I have spent the last decade of my professional life
focused on transmission issues, strange but true. The needs of
the Nation's electricity superhighway cannot be ignored.
Transmission should not be allowed to become the weakest link
in our industry because we cannot tell it good-bye.
I would be pleased to answer any questions you may have.
Thank you.
[The prepared statement of Ms. Moler Follows:]
Prepared Statement of Elizabeth A. Moler, Senior Vice President for
Government Affairs and Policy, Exelon Corporation
Mr. Chairman and Members of the Subcommittee:
I appreciate the invitation to join you in Bismarck today to
testify before the Subcommittee on Water and Power. My name is
Elizabeth A. (Betsy) Moler. I am the Senior Vice President for
Government Affairs and Policy of Exelon Corporation. Exelon, formed
last year by the merger of Unicom Corporation and PECO Energy, is
headquartered in Chicago, Illinois. We serve over five million
customers principally in Illinois and Pennsylvania, which have both
restructured their electricity markets. Prior to joining Exelon, I
served as the Deputy Secretary of the United States Department of
Energy (from 1997-98), and as a Member and the Chair of the Federal
Energy Regulatory Commission (from 1988-1997). Before that I served as
Senior Counsel to your Committee.
Your letter of invitation requested me to focus my testimony today
on the electric transmission infrastructure and investment needs, and
to address transmission policy and technology issues. Before I turn to
the transmission policy issues, I want to comment briefly on the
overall policy context facing our industry.
The electricity industry is in the middle of a sometimes painful
transition from an industry composed of highly regulated integrated
utilities with monopoly service territories and cost-based pricing, to
an industry with competitive power generation markets, market-based
pricing and a wide diversity of market participants. New institutions
are emerging, such as regional transmission organizations. It remains
our firm belief that market-oriented restructuring of the electric
industry remains the best opportunity we have to provide consumer
benefits and to develop reliable new sources of supply. We must work
together to make competitive markets work.
Let me turn now to the transmission policy issues.
importance of transmission infrastructure; need for new investment
Our transmission capacity has not expanded to keep pace with
demand. The current situation is comparable to a country road trying to
carry the traffic of an interstate highway. All segments of the
electricity industry are imposing tremendous demands on the
transmission system to carry more and more transactions across even
greater distances. As a result, the transmission system is facing
significant increases in congestion. Between 1999 and 2000,
transmission congestion grew by more than 200 percent. In the first
quarter of 2001, transmission congestion was already three times the
level experienced during the same period in 2000.
Annual investment in transmission has been declining by almost $120
million a year for the past 25 years. Transmission investment in 1999
was less than half of what it had been 20 years earlier. Maintaining
transmission adequacy at current levels would require about $56 billion
in investment during the present decade. The Electric Power Research
Institute (``EPRI'') estimates it will cost up to $30 billion to bring
the western regional transmission system back to a stable condition and
$1 billion to $3 billion a year after that to maintain this condition
in the face of continued growth.
How do we ensure sufficient transmission capacity to help assure
the success of competitive electricity markets? We believe the
following proposals should be included in a comprehensive national
energy policy. I should add that most of these issues--and solutions--
are addressed in Chairman Bingaman's July 24th Electricity White Paper.
We endorse his proposal wholeheartedly with only minor tweaks.
proposed policy prescription
FERC: A Single Traffic Cop
Can you imagine what it would be like to have different rules apply
to individual cars using the same interstate highway? Chaos would
reign. That's the circumstance today along our interstate transmission
grid; no wonder it doesn't work very well. In order to have the
transmission grid function more efficiently, we simply must have all
traffic subject to the same rules of the road.
In 1992, Congress passed the Energy Policy Act (EPAct). One of its
most significant provisions is a requirement that, upon request,
utilities must transmit or ``wheel'' wholesale power generated by
others. If a utility fails to wheel when requested to do so on mutually
satisfactory terms, the requesting party can petition the FERC for an
order requiring the wheeling.
In 1996, when I was the Chair of the FERC, the Commission
determined there was the opportunity for discriminatory behavior and
anti-competitive abuse in wholesale electric markets. We issued a
landmark decision, known as Order No. 888. It directed all utilities
under FERC's authority to provide other users with access to
transmission facilities on the same terms and conditions that they
themselves have. The purpose was to promote wholesale competition by
providing ways for competitive generators to move their power to
wholesale customers through open, non-discriminatory transmission
services.
Order No. 888, however, only applies directly to those utilities
that are subject to FERC's jurisdiction under the Federal Power Act.
Thus, the open access regime looks like a piece of Swiss cheese. The
holes in the cheese are those transmission facilities in the United
States that are not subject to FERC jurisdiction. They include high
voltage transmission lines owned by cooperative utilities (6%);
publicly owned utilities (8%); and federally owned utilities (13%), for
a total of 27% of our Nation's transmission lines. In certain parts of
the country, like the West, there are more holes than cheese.
In order for the transmission system to work more efficiently, all
transmission-owning entities should be subject to FERC jurisdiction.
Who's in Charge Here?
A similarly confused regime applies when determining which
regulatory authority has jurisdiction over the transmission line. The
same set of high voltage transmission wires is used to serve both
wholesale and retail customers. Yet, in some circumstances the state
regulatory authorities have jurisdiction over those wires; in other
circumstances the local cooperative or the local municipal utility has
jurisdiction over those wires; in still others the FERC has
jurisdiction.
This confusing circumstance is due to FERC's determination in Order
No. 888 that it has jurisdiction over transmission used for wholesale
transactions, as well as the transmission component of so-called
``unbundled'' retail sales (where the electricity and transmission
services are sold separately). Order No. 888 determined that state
authorities have jurisdiction over the transmission component of so-
called ``bundled'' retail sales (where the electricity and transmission
services are sold as a package). Since that decision was made in 1996,
approximately half of the states have restructured their electricity
markets. In states that have ``unbundled'' their retail sales and have
adopted customer choice, FERC has jurisdiction. In states that still
have ``bundled'' retail sales (that is, where customers do not have the
ability to choose their electricity supplied), state authorities have
jurisdiction over the transmission wires that serve retail load, while
FERC has jurisdiction over wires for wholesale transactions.
That jurisdictional call was reviewed, and upheld, by the United
States Court of Appeals for the District of Columbia Circuit. Indeed,
the DC Circuit determined that FERC has jurisdiction over all
transmission, but that it properly exercised its discretion to regulate
only certain transactions when it issued Order No. 888. The DC
Circuit's decision is now under review by the Supreme Court of the
United States.
While I supported FERC's decision at the time that Order No. 888
was issued, the jurisdictional call is proving not to be practical in
today's world. We have a crazy-quilt system of regulation over our
Nation's transmission grid. It is subject to discrimination and abuse.
The Supreme Court should not make the policy call on who has
jurisdiction and under what circumstances. Congress clearly has the
authority--and I would say the duty--to clarify this ambiguity. The
only practical solution is to put all transmission under FERC's
jurisdiction, whether the wires are used for wholesale sales, or
whether they are used to serve bundled or unbundled retail load.
Transmission Siting Authority
Exelon supports granting FERC a backstop role to help site new
transmission lines when states are unable or unwilling to act on new
transmission line applications. Such an approach would give states the
first opportunity to act on transmission siting applications.
It made sense in 1935 when the Federal Power Act was adopted to
leave transmission siting authority with the states, since transmission
lines were generally local in nature. Now, however, our transmission
system is being asked to move large amounts of energy across long
distances and across state lines. In some instances state authorities
are being asked to consider siting transmission lines whose primary
beneficiaries are electricity customers in other states. Many state
siting agencies do not have authority to consider the beneficial
effects of siting a new transmission line if those benefits accrue to
citizens in another state. Under these circumstances, it is becoming
increasingly difficult to obtain the necessary siting permits from
affected states, which may receive few direct benefits and thus have
little incentive to approve construction. As I will discuss later in my
testimony, FERC-mandated Regional Transmission Organizations (RTOs) are
being established across the country. These RTOs will have the
responsibility to plan how the transmission grid should be upgraded and
where new lines are necessary. If state regulatory authorities are
unwilling to site the lines identified by RTOs, federal regulators
should examine the need for the facilities and issue required permits.
Under several proposals pending before the Congress, FERC would be
given the authority to issue a certificate of public convenience and
necessity for a transmission line if state authorities do not act in a
timely fashion. There has been a lot of loose rhetoric that this would
mean FERC would have authority to ``take'' private property. That
simply is not true. Eminent domain authority would rest with the holder
of the certificate. If necessary, they could go to court to exercise
that authority. Electric utilities that are issued such certificates by
the states also may exercise the power of eminent domain if they are
unable to acquire the rights-of-way through other means.
Federal Tax Issues
We also believe that the Internal Revenue Code should be amended to
allow the tax-free structuring of transmission ownership and to allow
municipal and cooperative utilities to participate in competitive
wholesale and retail markets, without imperiling their existing tax and
financial status.
By way of background, the Federal Energy Regulatory Commission
(``FERC'') issued Order No. 2000 last year. The order requires
utilities to form what are known as ``regional transmission
organizations'' or RTOs. RTOs will be large-scale regional
organizations that will manage the flow of electricity over our
Nation's transmission lines. Our Nation's utilities are in the process
of forming RTOs. FERC has mandated that they begin operation no later
than December 15, 2001. These new organizations will enable utilities
to pool their transmission assets. An independent entity that is not
associated with the utilities will be charged with operating the
transmission lines in a manner that will make the transmission grid
operate much more efficiently. A well-functioning transmission grid
will spur investment.
Certainly everyone is aware of the tremendous problems with
electricity supplies and prices that have plagued California and the
Western part of our country in the past year. Prices have skyrocketed;
there have been shortages of electricity, which have resulted in
rolling brownouts and even blackouts from time to time. The Chairman of
the FERC, the Honorable Curtis Hebert, testified recently that if there
had been an RTO serving the Western region that the electricity crisis
in the West would not have been nearly as severe.
Secretary of Energy Spencer Abraham recently issued a request for
private investors to upgrade the transmission grid in California. The
transmission resources in the State are simply not adequate to meet the
State's needs. The Department of Energy is now evaluating private
investors' plans to upgrade the California grid along a critical North-
South part of the grid known as Path 15. The shortcomings of Path 15
have been known for years and years, yet neither the Federal government
(through the Western Area Power Administration) nor the private
utilities have made the infrastructure upgrades that are necessary.
Unless we do something to encourage additional investments in our
transmission infrastructure the California experience could be repeated
time and time again. Properly structured, properly designed RTOs will
meet that need.
President Bush and Vice President Cheney's National Energy Policy
Development Group Report, released on May 17, calls for the development
of a National Transmission Grid. While the specific details of the
Administration's proposal are still being written, the Administration
strongly supports further investment in our transmission infrastructure
and the FERC's Order No. 2000 initiative.
We believe that the best model for organizing RTOs is to establish
a for-profit transmission company known as a transco. A transco will
have a business orientation. It will have an economic incentive to
maximize throughput, make appropriate cost-effective transmission
upgrades, and do a good job of managing congestion on the grid.
Transcos should eventually own transmission system assets. In order to
encourage utilities to sell their transmission systems to the transco,
Congress should make changes in our tax laws.
Under current law, if a utility divests its transmission system to
one of these RTOs, it would suffer a tremendous tax burden. Exelon
endorses legislation that would enable a utility to sell its
transmission assets to the RTO, or to an independent transmission
company under the purview of an RTO, without having to pay taxes on the
gain realized by the asset transfer. In order to benefit from the
provision, the utility must reinvest the proceeds in qualified utility
property. This will encourage utilities to transfer their transmission
systems to the RTOs. The RTOs in turn will be able to obtain the
critical mass of assets under their ownership that will enable them to
operate more efficiently and will encourage investment in additional
infrastructure.
In addition, municipal owners of transmission argue they cannot
join RTOs because tax code provisions preclude the ``private use'' of
tax-exempt financed utility property. These provisions should be
modified to allow municipal transmission assets to be placed into an
RTO without violating ``private use'' rules.
When Congress restructured the telecommunications industry, it
provided a similar mechanism for telecommunications asset divestitures.
It should do so again in this instance.
I would note that the tax provisions have very broad support within
the utility industry. An unusual coalition of investor owned utilities,
and small and large municipally owned utilities--groups that are
frequently at odds with one another--developed the tax relief proposal
I just described. The essential elements of the proposal were included
in H.R. 4, the energy bill passed last week by the U.S. House of
Representatives. Unlike many of the provisions in that bill, these
provisions had broad bipartisan support. Chairman Bingaman's July 24,
2001, White Paper on Electricity Legislation, highlighted the issue as
follows:
``Certain provisions of the tax code (that) create a
disincentive for participants in the market to engage in
certain of the structural changes that are necessary. These
provisions should be repealed. The tax code should be amended
to allow utilities to spin transmission assets off into
separate corporations and to remove tax restrictions on
participation by public power utilities and cooperative
utilities. While such provisions are not jurisdictional to this
Committee, they represent an essential component of a
functional electricity policy and should be pursued through the
committees of jurisdiction.''
The Bingaman proposal should be modified to provide relief if
assets are sold rather than spun off. Sen. Murkowski has included all
of the elements of the agreement reached last year between the investor
owned utilities (through the Edison Electric Institute, or EEI), and
the municipal utilities (through the American Public Power Association,
or APPA, and the Large Public Power Council, or LPPC) in his proposed
legislation, S. 389.
Innovative Pricing
Current returns on transmission are too low to attract the huge
amounts of capital needed to fund investments in transmission
expansion. A comprehensive national energy policy should include
direction to FERC to utilize innovative transmission pricing
incentives, including rates of return more appropriate with the higher
levels of investor risk in a restructured electricity industry. These
incentives must be available to all transmission owners; not just to
owners who have made transmission improvements and not just to RTO
operators--which is the current FERC policy.
PUHCA and PURPA
The Public Utility Holding Company Act of 1935 (PUHCA) has outlined
its usefulness and is a barrier to competition. It was enacted during
the Great Depression with a goal of simplifying the existing utility
company structures and to protect investors and consumers from multi-
state utilities that had adopted abusive structures and practices.
PUHCA now applies to fewer than 20 out of the Nation's more than 200
electric and natural gas utilities. It limits their geographic scope
and product diversification, and imposes burdensome filing
requirements. It severely limits the ability of those who are subject
to it--including Exelon--to compete in today's fast evolving energy
marketplace.
PUHCA is also a barrier to RTO formation, because it effectively
limits those who can invest in RTOs. PUHCA is such a burden that none
of the major investment banking firms, and none of the major
engineering firms (to name just a couple of categories that would
logically be interested in investing in RTOs) is willing to invest in
RTOs. The Securities and Exchange Commission (SEC) has called for its
repeal, believing that they have more than adequate authority to
protect investors from abuse under other securities laws. State
regulators also support its repeal, provided that FERC is given
adequate authority to compel utilities to produce records necessary for
their regulatory purposes and to guard against captive customers being
forced to subsidize non-utility business ventures. Both provisions are
included in legislation pending in the Senate. It is long past time to
repeal this outmoded statute.
Another statute that has outlived its usefulness is the Public
Utility Regulatory Polices Act of 1978 (PURPA). It was enacted to help
alleviate the oil and natural gas shortages of the late 1970s and to
encourage the development of electricity generation by non-traditional
players and to encourage construction of generators fueled by
alternative energy resources. Certain provisions in PURPA now stand in
the way of more competitive and efficient wholesale power markets
particularly the provisions that require utilities to purchase
generation from so-called ``qualified facilities'' or QFs. Those
provisions have become both antiquated and burdensome in light of the
later enactment of EPAct. PURPA should be repealed prospectively.
However, existing contracts should be honored.
Reliability Organization
Last, but by no means least, Congress should give FERC specific
statutory authority over the reliability of the interstate transmission
grid. The organization now charged with the responsibility for
reliability issues, the North American Electric Reliability Council
(NERC), does not have the tools necessary to do its job. In particular,
it needs significantly enhanced authority to make its rules mandatory
for all segments of the industry. As NERC testified recently before the
full Energy and Natural Resources Committee, it is seeing increasing
violations of its reliability rules. A voluntary reliability regime
lacks the enforcement authority needed in a competitive electricity
market. A comprehensive national energy policy should include
provisions to establish a self-regulating reliability organization,
with FERC oversight, to develop and enforce reliability rules and
standards that are binding on all market participants. This Committee
approved and the Senate passed a similar bill last year.
Conclusion
Mr. Chairman, I have given you a comprehensive listing of the
transmission issues that need to be addressed by the Congress. Given
the absolutely vital importance that transmission plays in our Nation's
economy you should be commended for focusing on this vitally
important--but admittedly arcane--subject area. I have spent the last
decade of my life focused in large part on transmission issues. The
needs of the Nation's electricity superhighway cannot be ignored.
Transmission should not be allowed to become ``The Weakest Link'' in
our industry because we cannot simply tell it ``Goodbye''. Action is
needed to ensure our country has affordable and reliable electricity
for years to come. Congress has been debating electricity issues for
six years. In the meantime, our Nation's electricity infrastructure has
not kept pace with the growing demands of our new economy. California's
woes have clearly sounded an alarm bell that must be heeded by the
Congress. The time to act is now.
I would be pleased to answer any questions the Committee may have.
Senator Dorgan. Ms. Moler, thank you very much.
Next, we will hear from Mr. Ted Humann representing Basin
Electric Power Cooperative.
STATEMENT OF TED HUMANN, SENIOR VICE PRESIDENT FOR
TRANSMISSION, BASIN ELECTRIC POWER COOPERATIVE, BISMARCK, ND
Mr. Humann. Thank you, Senator. My name is Ted Humann. I am
the senior vice president for transmission at Basin Electric
Power Cooperative in Bismarck, North Dakota. Basin Electric
delivers approximately 1,700 megawatts of primarily coal-based
generation to its 121 member cooperatives located in North and
South Dakota, Montana, Wyoming, Nebraska, Iowa, Minnesota,
Colorado and New Mexico.
I will focus my comments today on two issues relating to
the high-voltage transmission system in this region, the
movement towards regional transmission organizations and the
transmission constraints in North Dakota.
Basin Electric owns and operates high-voltage transmission
facilities on both the eastern and western transmission grids.
For our discussion here today, I will limit my comments to the
Basin Electric facilities on the eastern grid, but the issues
are similar on the west.
Basin Electric owns approximately 1,300 miles of high-
voltage transmission facilities on the eastern grid that are
interconnected with the high-voltage facilities of the Western
Area Power Administration and Heartland Consumers Power
District and operate as a single system known as the integrated
system. This integrated system consists of approximately 9,000
miles of high-voltage transmission facilities located in six
States. In response to the reciprocity requirements of Order
888 of the Federal Energy Regulatory Commission, the non-
jurisdictional owners of the integrated system developed and
operate the system under an open access tariff. Basin
Electric's facilities on the west grid also operate under an
open access tariff.
Basin Electric and the other owners of the integrated
system have been following the development of the regional
transmission organizations and are continuing to negotiate with
existing regional transmission organizations or groups that
hope to develop an active regional transmission organization.
Talks have been held with the Midwest independent system
operator, Crescent Moon, Desert Star, Southwest Power Pool and
others, in an effort to determine if the integrated system
should be a party to a regional transmission organization.
The primary reason why Basin Electric and the other
independent system operator owners have not elected to join a
regional transmission organization is the way they are
proposing to price transmission service using ``license plate''
pricing. In general, license plate pricing is where each
transmission owner recovers the cost of owning and operating
its transmission system from the customers whose loads are
located within the area serviced by that system, known as a
zone. Customers with loads in one zone and generation in
another zone obtain transmission service in the other zones for
free. They bear none of the costs of the transmission
facilities in the other zones, even though they may be
principal beneficiaries of those transmission facilities.
The Midwest independent system operator is a good example.
In the Midwest independent system operator, the existing load
control area becomes a geographical rate zone and a customer
located in a rate zone pays the tariff only in that zone. With
only that payment, the utility can receive power from anywhere
within the Midwest independent system operator region for no
additional charge.
This methodology is similar to purchasing a license plate
for your car. If you purchase a license plate for your car in
North Dakota, you can drive your car anywhere for no additional
charge. This pricing does not work because, unlike highways,
there is no cost assessed to build the electric transmission
system. The gasoline tax pays for the interstate highway
system.
If the integrated system were to join the Midwest
independent system operator, there would be an increase of
approximately $40 million in the cost of transmission service
to the customers in the integrated system zone because of
license plate pricing. This occurs because more than one-third
of the integrated system is located in other rate zones. The
current integrated system rate is approximately four mills per
kilowatt-hour. If the integrated system is located in the
Midwest independent system operator, the transmission costs for
users of the integrated system would almost double. A typical
integrated system residential consumer could see an increase of
more than $100 per year in his bill.
Basin Electric believes that postage stamp pricing is the
only fair and equitable method for pricing transmission service
in a world of regional transmission organizations. Under this
method there is a single rate paid for the use of the
transmission system for the entire regional transmission
organization region. This would require the sharing of
transmission costs equally among all customers located in the
regional transmission organization and would encourage
construction of improvements to the transmission system for the
benefit of all consumers. Postage stamp pricing eliminates the
inequities that license plate pricing brings to rural areas and
creates a level playing field among market participants.
In recent weeks several FERC commissioners have noted the
superior benefits of postage stamp pricing and the fallacy of
using license plate pricing to avoid cost shifts.
Basin Electric supports the development of regional
transmission organizations and would even support a
congressional grant of mandatory FERC jurisdiction over
regional transmission organizations, if that grant of
jurisdiction included the following:
Number one, regional transmission organizations must
utilize postage stamp pricing;
Small systems that are operating primarily distribution
facilities should not be required to include their facilities
in the regional transmission organization;
There should be no mandatory rate unbundling requirement;
Any legislation should not materially alter the existing
roles of the rural utilities service or the Federal power
marketing agencies;
Existing contracts should be grandfathered;
And, also, standard depreciation and typical rates of
return should be used for all new facilities constructed
instead of incentive rates.
As you mentioned earlier, Senator, there are transmission
constraints in North Dakota in our inability to move additional
generation out of the State. We feel before any significant
amount of new generation can be built in North Dakota, be it
fossil fuel, wind or other alternative forms of energy,
significant additions to the transmission system will have to
be constructed.
It is my view that these transmission facilities will not
be constructed under license plate pricing because it truly
allows some parties to use portions of the transmission system
and not pay for the privilege.
The thought I would like to leave with you is that postage
stamp pricing will foster the development of an interstate
transmission grid similar to the interstate highway system.
This interstate grid will allow for the future development of
this region's abundant coal and wind energy resources and will
provide the needed infrastructure to support the National
Energy Policy.
Because of time constraints, I must conclude my remarks. I
appreciate the opportunity to speak to you and look forward to
answering any questions that you may have. Thank you.
Senator Dorgan. Mr. Humann, thank you very much.
Next we will hear from Dave Sparby.
STATEMENT OF DAVID SPARBY, VICE PRESIDENT FOR GOVERNMENT AND
REGULATORY AFFAIRS, XCEL ENERGY, INC.
Mr. Sparby. Thank you, Mr. Chairman and Representative
Pomeroy. I am Dave Sparby from Xcel Energy. Excel serves
several communities in North Dakota together with 11 other
States in the Midwest, and we move power and energy between
these communities with about 16,000 miles of transmission line.
My message today allows me to join this choir saying that
we need more transmission infrastructure, but maybe because I
am the guy that goes out to get all the regulatory permits and
government approvals, my voice is perhaps a little louder and a
little shriller than maybe others. And that is because those of
us who have done that appreciate the very long lead times
necessary for transmission improvements under today's
regulatory framework.
I know when I am asked what is that transmission system
going to look like 4 or 5 years out, I can respond, take a look
out your window, because large interstate transmission line
additions typically require at least that much time to get
permitted, to get designed, and to get built under today's
regulatory framework.
Now, this system and these improvements are going from
being needed more urgently to being an absolute necessity in a
short period of time. In the Midcontinent Area Power Pool, we
see more requests for transmission being denied every single
month than we have seen for the previous months. We are seeing
line-loading relief being called on a national basis more and
more frequently. We have seen the amount of investment in
transmission on a normalized peak-load basis declining for more
than two decades. None of this makes sense when you consider
that transmission is about 6 percent of the average consumer's
bill, and generation is about 60 percent.
Very small changes in the amount of transmission investment
can create huge savings for consumers, our local economies and
the environment when looking at the value of their total
investment.
Now, the regulatory and legislative policies that we want
to change will result in attracting more investment to the
transmission business and providing some needed structural
changes to help resolve many of these new issues the industry
is facing.
In the very briefest of words, we need some additional
incentives, and we need those incentives designed to promote
the upgrade and expansion of our current network. Traditional
cost-based, average rate-based kind of regulation provides no
incentives to expand and improve that system.
And, Mr. Chairman, I think your concerns with respect to
issues like research and development are right on. As we move
to a desegregated industry, who is going to do that, what the
level of that is going to be and how it is going to get done I
think is a very significant public policy issue.
We are one of the few industries, notwithstanding the work
of 3M and others, that still use basically 1930's level of
technology in an age of microchips. We need to move past that.
Part of our program would be to direct the Federal
Regulatory Commission, who has already undertaken some work
with incentive regulation, but to continue their efforts to
consider innovative noncost-based forms of regulation to expand
this transmission network and to get the needed improvements
operational.
Now, with respect to a comment that Mr. Pomeroy made, I
agree with the comment that RTOs perhaps standing alone may be
worth thinking about whether or not they are going to meet all
the challenges necessary to get power transmission network into
place.
We at Xcel have advocated the use of independent
transmission companies in conjunction with RTOs to help get
that transmission built. ITCs are companies that we propose
would earn returns on getting that transmission constructed and
getting those megawatts of power moved. The ITC can work within
an RTO and also be subject to incentive regulation to make sure
that issues like quality of service and the location and
geography of service get properly addressed.
We think for-profit transmission companies, together with
innovative regulation, offer a great alternative that we should
proceed along to help ensure transmission gets constructed.
Other fixes, I think Ms. Moler addressed completely, PUHCA,
some tax changes, expediting and reforming the siting process.
These changes are changes we need to make today to ensure that
the transmission network that carries our energy five years
from now is in place.
Thank you very much.
[The prepared statement of Mr. Sparby follows:]
Prepared Statement of David Sparby, Vice President for Government and
Regulatory Affairs, Xcel Energy, Inc.
Chairman Dorgan and members of the subcommittee:
Thank you for the opportunity to come to Bismarck and testify.
I am David Sparby, Vice President for Government and Regulatory
Affairs of Xcel Energy Inc. Xcel Energy was created as the result of a
merger between Minneapolis-based Northern States Power (NSP) and
Denver-based New Century Energies (NCE). The merger of those two
companies was completed on August 17 of last year, only 17 months after
it was announced. Xcel Energy serves more than 3 million electricity
and 1.5 million natural gas customers in 12 states, and 2 million
electricity customers internationally. Xcel has $1.5 billion of
existing transmission assets and over 16,000 miles of transmission
lines.
introduction
Electricity powers the U.S. economy and continues to provide the
means to improve the quality of life in our homes. Constantly evolving
electrically-powered technologies have made us more productive at work.
The expectation that electricity will be there when we need it is
fundamental to the American way of life in the 21st century. Adequate
supply of highly reliable and reasonably priced power is and will
continue to be of the highest national priority.
Over the past decade, the electricity supply industry has undergone
a profound change that--in many ways--mirrors the changes in our
economy. Consumers today demand more electricity and expect lower
prices. At the same time, the digital workplace requires greater
reliability of the electricity supply than was needed in the past.
In response, the electricity supply industry has embarked on a
quest for greater efficiency and reliability in the generation,
transmission and distribution of electric energy.
While most power is still generated and delivered today by
vertically integrated companies, the electricity supply industry is
evolving into separate generation, transmission and distribution
businesses. Independent generators selling to the burgeoning wholesale
market today build most new generating facilities, while many
traditional utilities, often directed by state legislation or
regulation, now concentrate on individual elements of the electricity
business.
The wholesale electricity market, which once handled few
transactions, now handles hundreds daily. The geographic size of these
markets is also increasing rapidly, holding out the promise of greater
competition and lower prices for consumers. The transmission grid was
designed by integrated utilities to serve their retail customers. While
transmission was interconnected to support reliability and some
economic diversity, it was never intended to support the level of
inter-company trading that is currently occurring. In addition, the
siting of new transmission is an extremely cumbersome and difficult
process due to the concerns of local communities. As a result, the
transmission system is being stretched to the limit and concerns about
the reliability of the system are increasing.
There is an urgent need to improve our electric infrastructure--the
fundamental bedrock of reliability and an economic and efficient
wholesale energy market. The federal government can help by
establishing a clearer statutory framework for the electric industry of
the future. This framework should:
Allowing for and supporting the creation of for-profit
independent transmission companies that are price regulated by
the FERC;
Encouraging non-jurisdictional utilities to join RTO's and
ITC's by providing appropriate incentives (We are trying to get
publics and co-ops into TRANSLink through the carrot rather the
stick approach);
Provide incentives for increased investment in and improved
operation of transmission facilities;
Provide innovative, non-cost-based forms of transmission
rate regulation to promote smarter management of the existing
grid to reduce congestion and increase reliability;
Remove federal barriers that block a more efficient system;
and
Establish an enforceable reliability code of conduct.
While the Federal Energy Regulatory Commission (FERC) can address a
number of these issues, there is much that only the Congress can do.
Congress should:
Support ITC's
Late last year, FERC took another large step in ensuring workable
competitive markets by issuing its Order 2000, which called upon
jurisdictional utilities to voluntarily form Regional Transmission
Organizations (RTOs). As the name suggests, RTOs will ensure that the
transmission grid is operated on a regional basis to support efficient
wholesale markets. Establishing RTOs would:
Reduce opportunities for market abuse by separating control
of transmission systems from transmission owners;
Reduce the charging of multiple transmission rates for use
of transmission within the RTO; and
Eventually level rates within the operating region.
FERC Order 2000 also envisions the creation of for-profit
Independent Transmission Companies or ITC's. As their name implies,
ITC's are companies whose sole purpose is the provision of transmission
service to the wholesale markets. ITC's are designed to work within the
regional transmission organizations and promote the efficient operation
and extension of the transmission system to support the growing need
for new investment, particularly investment that is necessary to
transfer large amounts of energy from one region to another, and
thereby promote greater efficiency and use of generation and
transmission resources.
The biggest gap in FERC's RTO authority remains its inability to
impose the same requirements on federal electric utilities, municipal
utilities and electric cooperatives. These utilities operate important
transmission facilities that are integral to RTOs throughout the
nation. FERC has invited these entities to participate in mediation
talks. However, because FERC lacks jurisdiction over these entities'
transmission systems, it cannot put the same pressure on them to join
RTOs that it has clearly demonstrated it intends to put on shareholder-
owned utilities. Support of ITC's that include these non-jurisdictional
companies is an efficient mechanism for FERC to include these companies
in regional organizations.
Remove Disincentives From the Tax Code
Ultimately, RTOs will succeed only if all transmission owners in a
region join. In some areas of the country, such as the Pacific
Northwest, the participation of all publicly-owned transmission
entities will be needed to form an effective RTO. Municipal owners of
transmission argue they cannot join RTOs because tax code provisions
preclude the ``private use'' of tax-exempt financed utility property.
These provisions should be modified to allow municipal transmission
assets to be placed into an RTO without violating ``private use''
rules.
For-profit transmission companies covering large regional areas are
ideal candidates for RTO membership. Unfortunately, it is difficult,
complex and expensive for utilities to spin-off or sell their
transmission assets without incurring large tax liabilities. This
discourages formation of transmission companies and slows needed
realignment of the utility industry. The tax code should be modified to
allow deferred recognition of any gain resulting from these types of
reorganizations.
H.R. 4, passed by the House last week, includes necessary changes
to municipal utilities' ``private use'' restrictions and the deferred
gains recognition required by IOUs.
Upgrade and Provide Necessary Incentives to Expand the Transmission
System
Generation is of little use if the power that is generated cannot
be moved to where it is needed, and when it is needed, instantaneously.
``Busy'' signals are not acceptable in our business. Our increasingly
interconnected and overloaded transmission system is what makes the
entire electric system work (or not).
All segments of the electricity industry are imposing tremendous
demands on the transmission system to carry more and more transactions
across greater distances. As a result, the transmission system is
facing significant increases in congestion.
On an interstate highway system overloaded with traffic, gridlock
often results. On a transmission system with congestion, transactions
are curtailed to ensure that the system does not become overloaded,
limiting delivery of low-cost power and potentially resulting in a loss
of reliability.
Annual investment in transmission has been declining by almost $120
million a year for the past 25 years. Transmission investment in 1999
was less than half of what it had been 20 years earlier. Maintaining
transmission adequacy at current levels would require about $56 billion
in investment during the present decade. The Electric Power Research
Institute estimates it will cost up to $30 billion to bring the western
regional transmission system back to a stable condition and $1 billion
to $3 billion a year after that to maintain this condition in the face
of continued growth.
Without change, the prospects for future investment in transmission
are not much more promising. According to the North American Electric
Reliability Council (NERC), only 8,445 miles of transmission facility
additions are planned throughout North America over the next 10
years.\1\ This represents just a 4.2 percent increase in total
installed circuit miles, at a time when the EIA projects that
electricity demand will grow by 1.8 percent per year.
---------------------------------------------------------------------------
\1\ North American Electric Reliability Council, Reliability
Assessment 2000-2009, The Reliability of Bulk Electric Systems in North
America, at 31 (October, 2000).
---------------------------------------------------------------------------
NERC has reported that:
Unless proper incentives can be developed to encourage
investment in new transmission facilities and siting problems
can be resolved, few new transmission facilities and
reinforcements will be constructed. The lack of necessary
additional transmission facilities and reinforcements will
require that either new technologies be developed to alleviate
transmission congestion or that generating facilities be
located and dispatched in a manner to minimize the use of
constrained transmission corridors.\2\
---------------------------------------------------------------------------
\2\ Id. at 5.
---------------------------------------------------------------------------
Without adequate transmission capacity to meet growing
demand, reliability will be compromised, prices will increase,
overall system efficiency will decline and the benefits of
wholesale generation competition will not be realized.
Government policies that have failed to recognize the key role of
our transmission system are partly to blame for the declining
investment in transmission. As the Department of Energy's Power Outage
Study Team noted, ``In many cases, state and federal regulatory
policies are not providing adequate incentives for utilities to
maintain and upgrade facilities to provide an acceptable level of
reliability.'' \3\
---------------------------------------------------------------------------
\3\ Department of Energy, Power Outage Study Team Interim Report at
S-2 (January 2000).
---------------------------------------------------------------------------
FERC should be directed to provide incentive returns for
investments that expand our transmission capacity.
Provide Innovative, Non-Cost-Based Rate Regulation to Enhance
Transmission Efficiency and Reliability
While progress toward deregulating generation markets continues,
transmission is, and will likely remain, a regulated business.
Traditionally, transmission owners have been allowed to recover their
prudently incurred costs, based on depreciation over many decades, plus
earn a return on their investment. No consideration was given to the
critical value of adequate transmission to the reliable, competitive
operation of electricity markets.
As a result, this cost-based form of regulation does not provide
the incentives needed to build and operate an efficient, reliable
transmission system. Nor does it encourage adoption of newer technology
that may hold great promise for increasing system efficiency and
reliability. FERC should be directed to implement innovative, non-cost-
based forms of regulation to reward investments and operations that
enhance reliability and greater system efficiency.
Without adequate transmission capacity to meet growing demand,
reliability will be compromised, prices will increase, overall system
efficiency will decline and the benefits of wholesale generation
competition will not be realized. A regulatory regime that fosters an
economic climate to encourage investment in transmission is necessary.
It is time for innovative, non-cost-based forms of regulation to reward
transmission investments and operations that enhance reliability and
greater system efficiency.
Bipartisan provisions designed to adequately incent new investment
in transmission was included in last year's House-produced electricity
bill. The same provisions were introduced as stand-alone legislation on
August 3 by Reps. Sawyer and Burr (H.R. 2814). It is our understanding
that a bipartisan group of members from the full Senate Energy
Committee is preparing to introduce similar legislation immediately
following the August break. We urge the Subcommittee's careful
consideration of this bill.
Repeal the Public Utility Holding Company Act of 1935
The Public Utility Holding Company Act of 1935 (``PUHCA''), was
enacted during the Great Depression with two primary objectives: the
integration and simplification of complex natural gas and electric
utility holding company systems which then dominated the utility
industry and protection of investors and consumers through effective
regulation of multi-state utilities operating through subsidiaries.
PUHCA long ago achieved its first objective of restructuring the
electric and natural gas industries. And consumer protection is now the
purview of other regulatory authorities, which didn't exist 65 years
ago.
PUHCA met its first objective by dismantling and simplifying the
organizational structure of the more than 200 complex electric and gas
utility holding company systems in existence in the mid 1930s. These
geographically scattered and diverse businesses were limited to the
operation of a single integrated utility system, plus such other
businesses as were closely related to an integrated utility system. By
the early 1950s, according to the Securities and Exchange Commission
(``SEC''), the agency responsible for administering PUHCA, the
reorganization of the electric and gas utility industries was
complete.\4\
---------------------------------------------------------------------------
\4\ See ``The Regulation of Public-Utility Holding Companies,'' a
report of the Division of Investment Management, Securities and
Exchange Commission, Executive Summary at viii (June 1995).
---------------------------------------------------------------------------
The second objective of PUHCA--to protect investors and consumers--
was met by authorizing the SEC to regulate certain holding companies
that remained the owner of utility subsidiaries in more than one state.
This regulation requires advance SEC approval for many business and
financial transactions, including the issuance of debt or equity,
acquiring utility or non-utility assets and entering into service
arrangements with affiliated companies.
Even the SEC has recommended PUHCA's repeal because it is no longer
needed and is largely duplicative of other investor and consumer
protection authority administered by the SEC and the states. As an SEC
report has noted, ``[a]cting under authority in the Securities Act of
1933 and the Securities Exchange Act of 1934, the SEC has, over the
past six decades, created a comprehensive system of investor protection
that obviates the need for many of the specialized provisions of the
Holding Company Act.'' \5\
---------------------------------------------------------------------------
\5\ Id. at x.
---------------------------------------------------------------------------
Not only has PUHCA outlived its usefulness, but it also is a
barrier to competition. It requires fewer than 20 out of the nation's
more than 200 electric and natural gas utilities to register and be
subject to pervasive SEC regulation. By significantly limiting
geographic and product diversification, and imposing numerous
burdensome filing requirements, PUHCA severely limits the ability of
companies to invest in transmission or other projects not immediately
within their traditional franchise areas.
North Dakota Considerations
For many of the reasons stated above, transmission in the general
geographic region around North Dakota has never been sufficiently
upgraded to address limitations imposed by large generation additions
in the 1970s in the coal fields of the state.
The state currently suffers from a severe lack of export capacity.
The technical list is long: stability-based limits due to short
circuits in the coal fields; blocks on the state's two DC lines,
thermal limits on lines out of the coal fields and short circuits in
the Twin Cities.
Because of its rich resource base and lack of problems with
environmental compliance, it is Xcel's view that rural regions like
North Dakota are likely to host a large percentage of the many new
base-load generation facilities that will be needed in the nation over
the next 20 years. Some of these plans are already on the drawing
board.
We note again, however, that much of this generation will only be
possible if incentives are put in place to ensure that associated
transmission projects make financial sense.
Following is a description of proposed transmission projects to
increase the ND export level:
Harvey-Glenboro 230 kv project. Xcel has planned this
project to meet contractual obligations to ensure our ability
to transfer 500 mw northward. In conjunction, our company is
also considering an additional 200 mw southward capability in
conjunction.
WAPA/Basin increase ND export 100 mw. WAPA has recently
identified an overbooking of its ND export allocation. The
agency has identified some equipment additions that will be
necessary to relieve stability issues but has yet to address
thermal concerns in western Minnesota.
North Dakota Lignite Council. Last fall, the Lignite Council
(of which Xcel is a member) performed a study to determine what
would be required to deliver another 500 and 1000 mw of
generation from the Coal Fields to the Twin Cities. The plan
recommended upgrade of the existing Antelope Valley-Huron Line
to 500 kv. The plan also calls for addition of a 500 kv line
from Huron to Sioux Falls and a 345 or 500 kv line from Sioux
Falls to Lakefield Junction. The plan, while comprehensive,
still needs to address Xcel-planned wind generation additions.
Red River Valley Load serving. Last year the destruction of
the McHenry-Ramsey 345 kv line revealed a major winter peak
load serving risk in North Dakota. A study is underway looking
at adding major transmission to the valley. This includes
options of a coal fields line, back feed line from Bemidji or
another line from Manitoba. Any of these could impact ND export
levels.
There are also on the drawing board a number of new proposed
generation projects that will require new transmission investment:
GRE has announced plans for a 500 MW coal field generation
unit;
MDU has teamed with Westmoreland Coal to propose a separate
50O MW unit;
WAPA is considering two sites to add 300 MW of wind
generation. The North Dakota site would be near Jamestown and
the South Dakota site near Ft. Thompson. Both sites would
require a 345 kv line across the state to Granite Falls, MN and
an additional 345 kv line from there to the Twin Cities;
OTP is proposing a 500 MW merchant plant that would require
additional transmission to the Twin Cities.
While Xcel supports all of these efforts, each raises concerns. In
general, any increase in ND export will result in the need to increase
transmission capacity through western Minnesota. With limited routes,
conflicts are already apparent in the plans described above. One big
conflict is with Xcel Energy's own wind outlet expansion plans. A
single 345 kv line likely is not sufficient to deal with all the plans.
To repeat once again, our ability to address these concerns within
our business plans depends on reforming current policies to ensure that
additions to our transmission network provide returns commensurate with
those available through other investments.
Mr. Chairman, there are three issues unrelated to investment that
Congress must also address in order to ensure the development of
wholesale markets, transmission efficiency and reliability. These are:
Provide a Federal Role in Sighting of Transmission Facilities
The transmission planning, siting and approval process is often
contentious, time-consuming, and fragmented. It is also still largely
based around the outmoded idea that transmission facilities serve only
small regional or local markets. Transmission approvals can be
difficult to obtain in a jurisdiction which does not see a direct
benefit for its citizens, even though the region as a whole may
benefit.
With today's interconnected transmission grid, congestion in one
area can have an impact across state boundaries. This illustrates the
urgent need for some level of federal involvement in the transmission
sighting process.
To begin, Congress should pass legislation that rewards the
establishment of planning mechanisms. Such legislation would allow an
RTO, a member of an RTO, including an ITC or any other applicant whose
application is consistent with a planning process approved by an RTO
(or comparable approved regional planning process) to submit a
transmission expansion planning process for the construction and
expansion of facilities to the FERC for review and approval.
Plans should then be submitted to affected states for review and
approval, much as happens under current state regulation. If, however,
states are unable or unwilling to approve projects that would affect
the efficient function of wide-scale wholesale markets, then an RTO or
other applicant should be allowed to request a certificate of public
convenience and necessity.
If a transmission expansion plan has been approved through a FERC-
approved transmission planning process--and a certificate of
convenience and necessity has been granted for the facilities by the
FERC after notice and the opportunity for comment--a right of eminent
domain would become available to the holder of the certificate. The
certificate holder should be entitled to exercise this right if unable
to acquire the necessary land by contract, or if unable to agree with
the property owner on the amount of compensation for the required
rights-of-way.
Require Federal Lands Agencies to Expedite Review of Applications for
Transmission Facilities That Would Cross Federal Lands
Transmission facilities are difficult to site for reasons such as
landowner opposition and the requirement to obtain approvals from
dozens of different jurisdictions. Federal land management agency
approvals, required when proposed facilities cross federal lands, are
often the most time-consuming and difficult approvals to obtain. The
federal government should not stand in the way of needed new
transmission. Federal land management agencies must do a better job of
streamlining and coordinating review of proposed transmission projects.
Congressional codification of this directive would help expedite review
of such projects.
Adopt an Enforceable Reliability Code of Conduct for the Bulk Power
System
The system of voluntary reliability self-regulation by the
electricity industry, which has worked well in the past, is not
adequate to meet the growing demands on the bulk power system. With the
advent of increased wholesale and retail competition, hundreds of new
companies are today involved in the generation and sale of electricity.
The existing industry reliability system, dependent upon the voluntary
cooperation of incumbent electric utilities and institutions, simply
was not designed to address this new marketplace.
An enforceable reliability code of conduct adopted by an industry
self-regulatory organization with oversight by the FERC, extending to
all market participants and all owners of transmission, should replace
the existing voluntary system designed for a different era. The means
to achieve this objective is federal legislation. Reliability
legislation alone, however, will not solve the reliability problem.
Reliability legislation can only help fairly allocate shortages of
electricity or transmission capacity. To help ensure reliability,
Congress must also deal with the federal barriers and disincentives
that plague the electric industry.
conclusion
Federal and state policies must encourage, not discourage, the
building of new transmission facilities needed to meet the power
demands of a growing economy. The federal government must help ensure
that the wholesale markets work more efficiently and reliably and that
its policies do not stand in the way of greater efficiency. The
adoption of legislation based on the recommendations outlined above
will help accomplish these objectives.
Action is needed now to ensure our country has affordable and
reliable electricity for years to come. Xcel looks forward to working
with this subcommittee to achieve these objectives.
Senator Dorgan. Mr. Sparby, thank you very much.
Your last point is certainly an appropriate point about
siting and having the plans in place and the ability to go
ahead and build the additional capacity we need. But all of you
have talked some about pricing, which I think is a key to this
issue. The decision about what additional capacity we need and
how you price the utilization of that capacity is central, it
seems to me, to what we try to do here in energy policy, and I
would like to ask some questions about that. I will start with
you, Mr. Sparby.
You indicated that the cost-based, rate-based approach to
pricing really provides no incentives. On the other hand, the
whole description of using a market-based would suggest the
market would provide incentives from the market, itself, and
yet you say using a market-based approach you need financial
incentives. Why do you need incentives if you use a market-
based approach for the buildout of a system? Would the market
not send a signal that you need additional capacity and thereby
from the market provide the incentives?
Mr. Sparby. Well, I think certainly if you were to apply
market-based incentives to transmission additions, yes, in part
with some other improvements, that does send a much better
signal to investors. However, we are going to need that market-
based incentive together with some reforms in siting and some
of the other reduction of barriers in the Tax Code, as well as
the repeal of PUHCA, to also get that investment on the ground.
Senator Dorgan. I don't think I was very clear in my
question. A market-based incentive, if the market describes
this additional capacity as necessary, the market will design
its own incentive, and, yet, I think you are talking about
rates that say, let us use a market system, but provide
incentives on top of it for the buildout. Why would the market,
if the market is a good allocator of goods and services, not
assess its own incentives?
Mr. Sparby. Well, because the marketplace cannot do that,
Mr. Chairman. Government defines every single aspect and facet
of this marketplace that we operate in. It decides where we can
spend our capital. It decides how we can raise it, decides what
we can charge for its cost, and it is going to review our
investment for its prudence and its impact on regulators.
In the electric industry government shapes our market, and
what our advice is about is working with government to reshape
that market to address the lack of capital that has been coming
into it because we have not seen investors willing to bring the
type of capital to meet the growing demands of customers.
Senator Dorgan. Mr. Humann, your assessment of that,
market-based or cost-based?
Mr. Humann. I guess I don't agree that we need incentive
rates to build transmission lines because the pricing is wrong.
Under license plate pricing, you run the risk of building a
transmission facility and then someone else using it or
upgrading it for their benefit and then you not getting paid
for that transmission investment because someone else is using
it.
Under the postage stamp pricing methodology all consumers
would be paying for that transmission investment; therefore,
you are guaranteed a payment of that investment. And,
therefore, the RTO could decide which transmission facilities
are required and go out to the lowest bidder to build those
facilities, and because you are guaranteed payment for those
facilities, you do not need incentive rates.
Senator Dorgan. Mr. Humann, I understand from your
testimony that you are in the process of talking to entities
about an RTO, but the pricing practices are very important to
making a judgment about whether you join an RTO and under what
conditions. What happens if you are not able to resolve that?
Mr. Humann. Well, because of the cost shift, we will try to
stay out of an RTO as long as possible because of the cost
shift and we will just continue to operate our grid in the
manner that we have today. We still make the sales across our
grid, but we certainly are not going to join a transmission
grid where we have a possible increase to our customers of $40
million a year in transmission costs because of license plate
pricing.
Senator Dorgan. Ms. Moler, what is wrong with that
thinking? Anything?
Ms. Moler. I understand that Mr. Humann is looking out for
his customers, but as long as that situation persists, you will
not get the transmission upgrades. It is one of the holes I
described in the Swiss cheese. There are lots of utilities
across the country that are not participating in this regime,
and you have huge increases in congestion across the country.
You are not getting the infrastructure investment, and it is
just not working very well. And until you get everybody singing
off the same page, the situation is going to continue to worsen
rather than get better.
Senator Dorgan. Let me just ask, is it not the case that
you could have buildout with a cost-based system if the cost
base provided the reimbursement that was sufficient to
accommodate the buildout?
Ms. Moler. There are ways that you could design the rates.
I mean, regulators do rate design. I used to be a regulator. I
did rate design with the help of a very able staff. There are
ways that you can design rates to enable the recovery of costs.
There are also ways that you can design rates to have proper
incentives for constructing new transmission. Right now the
situation we face is, we expect to have roughly $400 million
worth of upgrades needed on the ComEd system, for example,
there is lots going on, and no ability to recover. We have
frozen rates. We have the rate design that Mr. Humann described
in the Alliance RTO. And we do not have any ability because of
our current rate design to recover those costs. That is why the
situation has to change.
Senator Dorgan. What percent of the delivered cost of
electricity to a customer is transmission of that electricity,
roughly?
Ms. Moler. The national figures are roughly 5 to 10
percent, but they vary from system to system.
Senator Dorgan. And if I might ask all three of you, as we
construct the Senate energy bill, give me again--I think, Ms.
Moler, you outlined the several steps concisely in your
testimony, but give me again exactly the steps you believe we
ought to take at the Federal level, in Federal law dealing with
the transmission issue, capacity and reliability.
Ms. Moler. I would put Mr. Humann's system and my system
under the same regulatory regime so that we get a much better
coordinated regime. I would provide innovative incentive
pricing. There are ways that you can do it. You can give
special rates, for example, for transmission upgrades. They do
not necessarily have to go for the basic infrastructure that is
there today. You can do it for capacity expansion. I would
encourage utilities to sell their transmission assets to these
transcos, the for-profit companies that will specialize in
transmission. I would do it by changing of the tax code. And I
would have the same traffic cop on the beat for all of us. It
really will not work to have individual State regulatory
commissions doing this when you have the interstate highway
grid.
Senator Dorgan. Mr. Humann.
Mr. Humann. I guess Basin Electric would agree to come
under FERC regulation. As I have indicated in my testimony, one
of the requirements would be that we have a postage stamp rate
where all consumers are on a level playing field. That is why
RUS was organized in the first place in 1935, because all of
the customers were not on the same playing field. And we need
to put the transmission grid and all of our customers on the
same playing field, and we can only do that through the postage
stamp rate where everybody is charged the same price. And in
that type of pricing I believe we will get the interstate
transmission system built that is required.
I compare that to the telephone system. Can you imagine if
we would have deregulated the telephone system and tried to
give incentive rates to AT&T whereby as long as you paid for
your local telephone service, anybody from the country could
call you for nothing? That is basically how we are trying to
design the transmission grid, and that is not going to work
under license plate pricing.
Senator Dorgan. Mr. Sparby.
Mr. Sparby. Thank you, Mr. Chairman. First of all, we need
to take a whole new look at how we make rates to encourage
investment in the transmission network and use innovative
ratemaking not only for that purpose, but to address the R&D
questions and some other emerging issues for our industry. We
also need to encourage some innovative organizational
structures like independent transmission companies that can
work with RTOs to make sure that transmission gets built five
years down the road and we don't have a worse problem tomorrow
than we have today.
We agree that nondiscriminatory open access needs to be
extended, but with Basin a good customer and supplier of ours,
we would like to see incentives to encourage cooperatives and
other public entities to come into this type of regulatory
framework as opposed to mandates.
We argue for expediting and reforming the siting process,
reducing some of the barriers moving into this market. For many
companies that includes items like the repeal of PUHCA and also
addressing some reliability issues that I think the Congress
really needs to take a look at absolutely as soon as possible.
That is our list. Thank you.
Senator Dorgan. Congressman Pomeroy.
Mr. Pomeroy. Mr. Chairman, this is a fascinating panel,
deeply experienced with differing perspectives, and of one
accord regarding the existing system, it makes no sense, it is
going to get worse before it gets better unless we turn things
around dramatically. Betsy's comments about how the thing
doesn't have an overall coherency, Mr. Humann's comments about
how it is not economically rationalized, and Mr. Sparby's
comments about the dysfunctional regulatory overlay
discouraging new investment all create a compelling picture
that it requires fairly dramatic intervention.
I used to be the insurance commissioner, and watching the
interplay between regulation and marketplace, not just in North
Dakota, but across 50 States, has left me with a keen
appreciation of the public protection regulatory responsibility
not getting in the way of market forces.
On the other hand, I think we can see a much greater
appreciation of markets today for the value investment that
utilities represent even in a very extensively regulated
environment. Even return over long term looks pretty good today
as opposed to the go-go, hot NASDAQ market of a couple years
ago even. So when we are looking at the long-term investment,
providing the long-term return out of a nation's transmission
grid, clearly a significant regulatory role is going to be part
of the picture, but doing so in a way that does not forestall
entrepreneurial activity in getting new plant built is the
trick of it.
What do you think, Mr. Sparby, about this ``postage stamp''
versus ``license plate'' rates? It seems to me any system that
gives for free a passage over part of the line is inherently
illogical, irrational in terms of trying to capture costs in
the most realistic way under marketplace dynamics.
Mr. Sparby. It is an issue that has been vigorously debated
within the industry because our systems look so very different.
Some are so very small and compact with very minimal amounts of
transmission, and others, like Mr. Humann's, and to some extent
ours, are just so geographically dispersed and investments are
difficult to replace.
As an industry, I think we come up with a lot of solutions
that include grandfathering and revenue sharing and a lot of
other tools. And there is no, I think, just answer that
addresses everybody's needs in any particular time. What we
need to do is we need to come together to get that issue
addressed, to get it addressed in the short term because the
impacts from whether or not you have a postage stamp rate or
some other kind of rate are so small compared with the
generation costs and the costs to our communities and cost to
the public of not coming together to having regional solutions,
that there is a long ways we can go to getting those issues
addressed to get to the result we need to.
Mr. Pomeroy. Betsy, given your present private experience
and considerable public sector participation on this whole
issue, do you think there is in place yet a model that we ought
to be moving toward that puts an adequate national regulatory
framework in place on the transmission question?
Ms. Moler. Not yet. No, sir.
Mr. Pomeroy. How do we develop one?
Ms. Moler. I have tried in my prepared statement to give
some of the essential elements of it.
Mr. Pomeroy. It is one of the more substantive 15-page
testimonies I have seen. I mean, that is condensed in very good
testimony.
Ms. Moler. Thank you. That makes the ruined weekend worth
it.
[Laughter.]
Ms. Moler. There is a lot that needs to be done, and
Congress has been debating these issues for 6 years and has not
come to grips with them. There are differences among the
players. But we have really got to stop having these endless
debates and move forward. Everybody has agreed on certain
essential elements of a legislative package. We are fighting
over the last 5 or 10 percent and letting the perfect be the
enemy of the good, and it really is time to do something. And I
am very hopeful, because I am by nature an optimist, that
Congress will come to grips with this. The California crisis
could have been either just, oh, my goodness, it is too hard or
it could be a call to action, and I am hoping it will be the
latter.
Mr. Pomeroy. You can run, but you cannot hide. I mean,
California compels us to move forward no matter how intractable
these problems.
Mr. Humann, just a quick question. Would Basin view
favorably an additional Federal law upgrading the WAPA carrying
system so it might offer more access to additional power you
could generate?
Mr. Humann. I guess we could not support that because it
depends upon who has to pay for that upgrade. Again, there are
license plate pricing issues.
Mr. Pomeroy. On initial Federal investment, carrying costs
recouped over time.
Mr. Humann. Recouped by the customers? Right now it would
be the IS customers, and that is what concerns me. If it is
recouped by the IS customers, then our customers bear the brunt
of the cost to somebody else's benefit.
Mr. Pomeroy. I understand. We have got to get the rate base
fixed.
Thank you, Mr. Chairman.
Senator Dorgan. Let me just mention the California
experience. Ms. Moler, you have been previously a chairman of
FERC and you know I have been a rather aggressive critic of
FERC, suggesting that they have done their best imitation of a
potted plant for a couple of years in California. And I worry
very much. I know they have taken some action more lately. But
I worry very much that the California experience sends some
signals to us that are not very good signals. And I think it is
a call to action, but I think it also ought to be a call to all
of us to be cautious about this notion that the marketplace,
quote/unquote, by itself will resolve all of these issues,
because the marketplace has some wonderful and some grotesque
signals it sends from time to time.
I have mentioned at the Energy Committee that Judge Judy,
this cranky little judge on television, makes $7.4 million a
year in income and the Chief Justice of the Supreme Court is
paid $180,000, and so much for the market. Or a shortstop for
the Texas Rangers is paid $252 million. Again, so much for the
marketplace and its excesses. I am a big fan of the
marketplace. I think it is a wonderful allocator of goods and
services, but not perfect and it needs referees. And so we have
FERC.
We need especially in the area of energy to be careful. The
ultimate concern of all of us is to have a consumer that has
affordable energy when they need that energy.
And so this is very good testimony. Let me say that
Congressman Pomeroy is correct, I think all three of you
presented some interesting testimony for us to consider as we
put together the additional pieces of the energy bill in
September.
I have a couple of additional questions I would like to
submit to you perhaps and ask you to send responses to us for
the record. And we thank you very much for being here.
Next, we will hear from Tracy Anderson, program manager at
3M Electrical Products Division; Clifford Porter, Lignite
Energy Council in Bismarck, North Dakota; and James Caldwell,
policy director of American Wind Energy Association. If you
would come forward, please, I would appreciate it.
Why don't we begin with Mr. Anderson. Mr. Anderson, you are
representing 3M Company and, I believe, are here to talk about
the new technology issues in transmission. Thank you very much
for being here.
STATEMENT OF TRACY ANDERSON, PROGRAM MANAGER,
3M ELECTRICAL PRODUCTS DIVISION, ST. PAUL, MN
Mr. Anderson. Good morning, Mr. Chairman, Representative
Pomeroy and Mr. Lowery.
I would like to thank you again for this opportunity to
appear before you today to talk about this composite conductor
technology.
In all of the debate surrounding energy one of the
forgotten elements is the cable, itself, and, more
specifically, what materials the cables are produced from.
The composite conductors that are in development by 3M are
made with a new material, not steel like exists in our aluminum
conductor steel reinforcement conductors that are installed in
about 90 percent of the U.S. network. The composite conductors
are reinforced with a high-strength ceramic fiber. This is a
technology built on 3M's leadership in oxide fibers. Each
composite wire within the conductor in fact contains about
25,000 of these high-strength ceramic fibers. The fibers are
fully embedded in high-purity aluminum to provide some
conductivity.
The material has been developed specifically for this
application, meaning that it is resistant to UV exposure over
its lifetime. There are no galvanic material science issues
between the fibers in the aluminum. And the fact that we have
high-purity aluminum inside embedded fibers essentially gives
us some conductivity developed into the steel used today.
The conductor has been designed with the application of
ampacity increases in mind, where the idea is essentially take
down the existing conductors and install one of these composite
conductors to get more power through the existing corridor, and
in doing that because of the improved performance of the
materials, it is possible to get substantial increases in the
amount of power while still respecting the clearance
requirements and not increasing the mechanical or structural
loads in the towers.
We have done initial design studies in partnership with
leading utilities throughout the United States, and sponsored
by the Department of Energy, to take a look at what the
potential would be for this technology, and we have well-
documented ampacity gains--that is the term that is used to
measure the current--of up to 300 percent with a doubling very
typical over the conventional conductor technology. In all
cases the studies assume that towers were not modified or
reinforced. So it is a very quick solution that has a lot of
other side benefits.
Most importantly, detailed economic analyses were also
carried out as part of these studies in the composite
conductor. It was shown they could offer substantial cost
savings at the system level, even though it might cost more on
a per-unit length basis than the conventional conductors.
Key attributes of this new composite wire that has been
developed by 3M is a very high-strength weight ratio,
essentially is on a per-unit weight basis about ten times the
strength of aluminum and three times the strength of steel.
That is one very important property.
The second is the fact that at high temperature, it does
not expand very much, and that is a very important property for
materials because an overhead conductor that expands by about 1
foot in its length actually sags about 10 feet more by the time
you actually measure that, so you want materials that are very
stable in respect to thermal expansion. Then there is a range
of other properties that make it very good for this sort of
application.
We have been working on this topic for some time and we are
at a pivotal point right now where the conductor has been
tested by a European utility. It is actually a lower-
temperature version of what would be required for the U.S.
network. And we have test data on a small-diameter version of
this conductor and there has been a whole range of properties,
such as sag tension, strength, stiffness, and so forth, that
utilities need to have confidence in this conductor that has
been tested, and the results have been very promising and
matched what you would predict from the constitutive
properties.
We are at a point right now where we need to have field
trials installed to get that confidence on the part of the
utilities, in addition to having available some of the larger-
diameter versions of the conductor, and we also need a version
that operates at high temperature. DOE funding and technical
support, in our opinion, is needed to strengthen this
technology, the development and the implementation through
selected field trials. These are needed to improve and assess
the economic and technical benefits of this new conductor
technology and to demonstrate the benefits to the U.S. utility
industry.
The participation and expertise of the Department of
Energy's National Laboratories are also important to the
acceleration of this technology. Their expertise in selecting
utilities for field testing, as well as designing the
instrumentation and monitoring and documenting the performance
of the conductor is central to the rapid deployment of this
revolutionary product.
They also play an important role in assessing the national
impact of such technology. And a couple of the labs have
groundbreaking technology that could really help out here.
In closing, I would like to thank you for the opportunity
and I will look forward to answering your questions.
[The prepared statement of Mr. Anderson follows:]
Prepared Statement of Tracy Anderson, Program Manager, 3M Electrical
Products Division, St. Paul, MN
Good Morning, Mr. Chairman. Thank you for the opportunity to appear
before you today to talk about 3M's Composite Conductor Program.
As you may know, 3M is a diversified manufacturing company with
sales of just over $16 billion dollars. The company has more than 40
product divisions and is organized into six market centers: Industrial
Transportation, Graphics and Safety, Health Care, Consumer and Office,
Electro and Communications and Specialty Materials. As a result, the
broad range of products we manufacture defy efforts to categorize us.
From delivering power or communications to your home; transporting you
safely in your automobile to manage your busy schedules with the
ubiquitous Post-it Notes, it is sufficient to say we impact your lives
daily.
Generally we can be thought of as a materials company; we are good
at focusing our various technological strengths into new materials and
the products that flow from them. The lifeblood of 3M is this flow of
new products. To sustain the flow of critical technologies on which new
products are based requires substantial annual investment in research
and development. In 2000, 3M invested just over $1 billion to this end.
a new conductor
The Composite Conductors are reinforced with high strength ceramic
fibers; a technology built by 3M leadership in oxide fibers. Each
composite wire in the core of the cable contains thousands of ultra-
high strength, micrometer sized fibers. The fibers are fully embedded
within aluminum metal. The 3M composite is resistant to UV exposure
over its lifetime and there is no galvanic corrosion between the fibers
and aluminum in high humidity and wet environments. The pure aluminum
matrix enables a high conductivity in comparison with the steel cable
or ACSR in use today.
The Conductor has been designed to substantially increase ampacity
for the reconducting of existing overhead transmission lines. Initial
design studies done in partnership with leading utilities, and
sponsored by DOE, have demonstrated potential ampacity increases of up
to 300% over existing commercial conductor technology. In all cases,
the studies assumed that the towers were not modified or reinforced.
Most importantly, detailed economic analysis indicated that the
composite conductors could offer substantial cost savings at the system
level by increasing the capacity of existing transmission corridors.
The key attributes of 3M conductor are: high strength (10 times
that of aluminum) light weight (1/3 the weight of steel, low electrical
resistance (1/4 that of steel) Low thermal expansion (1/4 of aluminum),
retain properties up to 300 degrees Celsius, low creep (less than
steel), good fatigue resistance, high stiffness and it is sensitive to
the environment.
conductor qualified by european utility
3M development has reached a pivotal point where composite
conductor have been made and tested by a leading European utility for
use on the 69-230 kV network with maximum operating temperature of 150
degrees Celsius. Critical properties such as sag-tension data,
strength, stiffness, thermal expansion, resistance, creep have been
validated for this class of composite conductors, i.e., and (26/7)
ROUND 1350 AL-composite conductors.
need for field trials
DOE funding and technical support is needed to strengthen the
technology development and implementation through selected field
trials. These are needed to prove and assess the economic/technical
benefits of the new conductor technology and to demonstrate the
benefits to the utility industry.
The participation and expertise of DOE's National Laboratories are
important to accelerate this program. Their expertise for selecting the
utilities and sites for field testing, as well as designing the
instrumentation and monitoring and documenting the performance of the
composite conductor is central to the rapid evaluation and deployment
of this revolutionary product. They also plan an important role in
assessing the national impact of this new conductor on the nation as a
whole. A couple of the labs have groundbreaking technology in the
wireless instrumentation field that is needed to monitor and assess the
performance of the overhead conductor and determine such parameters as
sag. The lab would also support the standardization of this new class
of conductor and work on identifying potential regulatory and
implementation barriers.
In closing, Mr. Chairman I thank for the opportunity to present to
you today, I'll be happy to answer any questions.
Senator Dorgan. Mr. Anderson, thank you. We will include
your complete testimony in the record. And thank you.
And we ask you again to summarize in 5 minutes. Mr.
Caldwell, we will include your statement in the record in its
entirety, and we appreciate your being here on behalf of wind
energy.
STATEMENT OF JAMES H. CALDWELL JR., POLICY DIRECTOR, AMERICAN
WIND ENERGY ASSOCIATION
Mr. Caldwell. Mr. Chairman, Representative Pomeroy, Leon.
How about them Cubbies?
At this late hour in this hearing, I would like to take a
little bit of a risk and talk about a subject that we have not
broached first and then, secondly, to take a little bit
different view of the planning and regional transmission
organization discussion that has been going forward.
And the first subject I would like to talk about is the
current grid scheduling and settlement protocols and the terms
of wholesale trade and what that is doing to the grid.
Virtually 100 percent of the transactions taking place
today in wholesale transactions are confined to commodity
strips and firm blocks of power that are being traded between
and among the 150 control area operators in this country. And
that is fine as far as it goes. And it is being done because it
is easy. It is easy to trade those. It is relatively easy to
schedule them. It is easy to settle them. It is easy to worry
about credit terms.
But the problem is that all of the rules and the protocols
that are being put forward are essentially making it impossible
to do anything else but trade those. And that for those
resources that are not firm, that are not commodity strips and
are not firm blocks of power, that are so-called non-firm
resources, is today virtually impossible to settle a
transaction for physical delivery across control areas. And
this means that something upwards of 30 to 40 percent of the
available resources and the cost-effective resources on our
system are essentially excluded from wholesale trade today.
Wind happens to be one of those. And that is far and away
the largest reason why we are having trouble commercializing
wind energy today.
The problem is that these rules have been written, again,
so that only firm blocks of power can be traded. And as I say,
if it was just wind, that would be one thing, and maybe we
could deal with that in some form. But it is not.
As a matter of fact, I can make a case for saying that this
was the triggering event for the California debacle. That in
November 1999 the California ISO instituted a whole series of
tariff changes which put severe imbalance penalties on people
who deviated from their schedules. And what the result was was
that people who had been trading power amongst themselves
somewhat flexibly and settling their schedules flexibly after
the fact, all of a sudden had to make sure that each one of
those schedules was firm. And what that did is it drained two
to three thousand megawatts of reserves out of the California
system to support each individual schedule as opposed to
supporting the system as a whole. So that in April 2000 the
WSCC put out a report which said that reserves in the West
would be adequate for the summer of 2000, tight but adequate.
On May 23, right as this report hit the press, then we had
the triggering event that then ended up in the debacle that
happened from there. You can go back and you can look at the
some 20,000 megawatts of transactions through the California
system and you can detail out how 2,000 megawatts of reserves
were drained from the system simply to support the imbalance
penalty provisions that were installed in November 1999. That
is just an illustration of how some of these terms in wholesale
trade and some of these rules and protocols can really affect a
system. And wind in that environment simply gets killed. Wind
simply cannot operate under those conditions.
Now, what should we do about that? We have language in the
Bingaman bill as it exists today, and we can work to see if we
can firm that language up in any way. And what it would do is
three things.
Let us say that none of these things that I am talking
about are inconsistent with either economic theory or current
FERC policy. Current FERC policy and economic theory says that
we ought to be able to do these non-firm transactions, and
certainly Order 2000 by the FERC does contemplate these kinds
of transactions, in effect does mandate that one of the
functions of an RTO is to ensure that these type of
transactions can take place.
So the first thing we have to do is we have to facilitate
the full, complete and rapid implementation of Order 2000 in
its functions, not so much in its form that we have been
talking about today, but the functions of those RTOs. And we
need to encourage the formulation of Order 2002, which will be
the inevitable fix or the inevitable follow-on to the Order
2000. This is work in progress, and we started with Order 888,
Order 2000 built on that, and we will have to build again.
The second thing that we need to do is we need to have an
affirmative duty of the FERC to see that the rules, procedures
and protocols of RTOs and indeed each control area operator
pending the formation of RTOs allow and encourage non-firm,
intermittent, as-available transactions.
And the third thing we need to do is we need to provide for
exemptions from these kind of rigid scheduling protocols and
imbalance penalties pending the institution of the above.
Now, as to the planning and the RTO function, let me take a
little different view, and let me illustrate by looking at that
chart there and say that if we take the green region and we
drop off, I believe that is Saskatchewan and Manitoba up there,
and we look at the green that is in the United States there,
just for wind alone we have in that region somewhere around 200
to 300 thousand megawatts of cost-effective resource, that with
all due respect to my running partner here, Mr. Porter, that we
would be perfectly willing to go toe-to-toe with him on bus-bar
energy cost with lignite with this wind resource if we could
develop it at that scale.
And part of the problem that we have in terms of this
planning process and in terms of RTOs is that, first of all,
today we have no planning process. None. And we will not have
if we do it this way and if we do what the rest of the panel
has said for at least 5 years. It is going to take us 2 years
to form these RTOs, and at least the first 2 years of the
operation of these RTOs they are going to be so consumed with
the day-to-day operations and with getting the people in place,
with getting their rules down. You know, what happened in Texas
last week, the day they opened their market, and the prices
went to a thousand dollars and say, gee, we had a little
software glitch, we had these flux. And we all know what it
takes to get these kinds of systems, these kinds of
institutions, these kinds of people in place, and it is going
to be 5 years before they can ever turn their view to the long
term, before they can ever get their head out of all these
little transactions and all their computer problems, get their
head out from under the desk and look up and say, what should
we do in terms of energy policy? And so we will not have a
planning process if we depend upon just RTOs.
And I contrast the operation here and say in Texas, now in
Texas, we do not have FERC jurisdiction, but what we do have--
and let's go back to this green here for a second. In Texas,
very similar type of thing. West Texas has about 40,000
megawatts of cost-effective wind resource. Unfortunately, all
of the load or most of the load is in east Texas. And so that
there is no transmission effectively between west Texas and
east Texas.
So what has Texas done? The first thing it did is, this
year it decided to install a thousand megawatts of wind in west
Texas, essentially mining all of the available transmission
capacity from west to east. And before that is even installed,
it has already got all but one of the major permits for a
substantial upgrade that will allow another thousand megawatts
to come on line in about 18 months.
And 2 weeks ago I attended a meeting in Austin that
included representatives from 3M, included representatives from
the Texas PUC, from transmission owners, from virtually all of
the stakeholders where we were discussing the technical
alternatives for transporting 40,000 megawatts--not 300 or
3,000, but 40,000 megawatts out of west Texas.
Last Friday there was a follow-on meeting, including
members of the legislature, including people from the
Governor's office, talking about this same issue, how do we get
40,000 megawatts from west Texas to wherever it needs to go?
I think the difference that we are talking about between
Texas and what we are talking about RTOs is that in Texas the
transmission system, URCOT, is politically anchored. It is
politically anchored to the Texas legislature. And that is one
of the benefits of not having FERC jurisdiction, if you will,
that there is one political master, and that political master
made some decisions and they said that we will develop this
resource in west Texas, and as a result then the technicians
set about taking care of it.
And it is the political anchoring of these RTOs that has
been missing from the discussions so far. I despair of having a
Midwest ISO that goes all the way from Oklahoma up through this
region over into Virginia having any kind of political
anchoring. And I don't think it is going to happen at the
congressional level. It is certainly not going to happen at the
national level.
If it is not going to happen at the national level and is
not going to happen at the State level, where is it going to
be? And I think we need to consider these RTOs as being
political bodies or at least having some political legitimacy
to their outcome and to their formation and to their operation.
And unless we make those considerations we are never going to
get there from here. Thank you.
[The prepared statement of Mr. Caldwell follows:]
Prepared Statement of James H. Caldwell Jr., Policy Director,
American Wind Energy Association
My name is James H. Caldwell Jr. I am Policy Director for the
American Wind Energy Association (AWEA). AWEA is proud to represent an
industry poised to make significant contributions to the nation's
energy supply and to rural economic development. AWEA is pleased to be
in Bismarck--a place that represents a major portion of the wind
industry's future--to speak on the timely subject of electric
transmission infrastructure and investment needs.
Before discussing the wind industry's views on electric
transmission policy, a few words about the wind resource potential and
economics are in order. Table 1 below lists electric generation
capacity from wind divided geographically in the same way as the
nation's electric transmission grid.
Table 1.--ELECTRICITY GENERATION FROM WIND
(Nameplate Capacity, MW)
----------------------------------------------------------------------------------------------------------------
Economic potential
In- -------------------------
Region On-line development @$2 natural @$4 natural
gas gas
----------------------------------------------------------------------------------------------------------------
West.......................................................... 1,800 3,000 35,000 200,000
Midwest....................................................... 610 700 1,000 350,000
East.......................................................... 35 225 500 7,000
Texas......................................................... 200 900 1,000 40,000
South......................................................... 2 20 100 600
----------------------------------------------------------------------------------------------------------------
Total..................................................... 2,615 4,800 38,000 600,000
----------------------------------------------------------------------------------------------------------------
In this table, ``in development'' is defined as identified projects
with identified sites, owners, and customers who have agreed on price,
timing, and quantity. Because the physical construction of a wind
project is so quick, this broader definition is a truer measure of wind
projects that will be on-line soon rather than the conventional
designation of ``under construction.'' ``Economic potential'' is
defined as the amount of wind capacity available at today's technology
and today's costs that would yield equal or lower bus-bar energy costs
than a new natural gas fired plant at the stated gas price given
reasonable environmental and land use constraints on wind development.
The fact that almost twice the existing wind capacity is currently
under development makes wind the fastest growing electric generating
source in the country. Indeed, more wind capacity is under construction
in the United States than new coal and nuclear combined. In a growing
number of regions in the U.S., wind is the most popular fuel diversity
hedge against rising natural gas prices. The economic potential columns
in Table 1 should be read like conventional oil, gas, and coal proven
and probable reserve statistics. The basic data underlying the numbers
is several years old and the DOE will issue an update later this year.
Like oil and gas reserves, the numbers tend to grow as development
occurs. The recent rapid development of the wind resource in West Texas
has caused more ``potential reserves'' to be ``found'' and the new DOE
update will show approximately double the economic wind resource in
Texas as that in Table 1.
What these data show is that there is enough wind resource
available at today's technology and expected fossil fuel prices in the
Upper Colorado and Missouri river basins plus West Texas to satisfy all
the nation's electricity demands. Indeed it is realistic to expect that
with appropriate public policies, about 20% of the nation's electricity
could eventually be generated by the wind. Wind could be making a
significant contribution to the nation's energy supply within a decade.
Furthermore, this policy would be in the country's economic self-
interest even before environmental and economic development
considerations. The vast majority of the commercially significant wind
resource is on land now used for ranching and dry land farming, and
harvesting of the wind ``crop'' does not interfere with these
traditional uses. Royalties to the landowner for leasing space to wind
turbines generally return many times the annual income of the
agricultural crop that is displaced. Harvesting the wind for
electricity uses a renewable domestic resource and creates no emissions
of either carbon dioxide or criteria air pollutants. Thus, a multi-
billion dollar per year rural economic development program, a ``no
regrets'' global warming policy, and a significant acid rain/regional
haze mitigation measure come along naturally as added benefits to the
development of wind based solely on bus bar energy prices. Clearly,
sound energy policy should include measures to ensure wind's rightful
place in the suite of electricity supply options.
In order to fulfill this promise, the wind industry must attract
significant capital, and no public policy is more important to this
capital formation than electric transmission policy. As folks around
here know all too well, only a few hardy people live where the wind
blows hard enough and long enough to be commercially significant.
Unless the wind to electricity ``crop'' can be efficiently brought to
distant markets, capital will not be attracted to the industry, and the
economic, rural development, and environmental promise of wind energy
will not be realized.
Transmission related issues for wind fall into two general
categories: grid operation rules that promise fair treatment for
``intermittent'' and ``as-available'' resources like wind; and robust,
proactive grid expansion planning that anticipates long term needs for
transportation services. Wind is an ``intermittent'' resource, meaning
that it only produces energy when the wind blows, and its output is
``as-available'' meaning that, even with accurate forecasting, the
exact timing of its energy output cannot be precisely predicted. These
characteristics are not desirable, but they are not fatal and are
shared by many other potentially cost effective resources. Indeed, they
are shared by electricity demand itself and are routinely handled in
that context without complaint or cost by grid operators worldwide.
Grid operation rules that accommodate intermittent resources like
wind include the following technical features:
Network transmission access fees paid by load.
Flexible near real time scheduling.
Penalty free imbalance settlements in a liquid spot market.
Long term non-firm transmission rights at volumetric
pricing.
No pancaking of transmission access fees.
Robust secondary markets in transmission rights.
These features are required for efficient transport of wind energy
from its rural sources to urban load centers over the transmission
grid. It is important to point out that these same features are
required by many of the newer non-traditional resources such as as-
available cogeneration, distributed generation, run-of-the-river
hydroelectric, demand response bidding, etc. In the near future, as
much as 30% of the cost effective resources on the grid will require
these or similar features. If these features are not offered by
transmission owners and grid operators, essential reserves will be
drained from the system and cost effective resources will be ignored.
The inevitable result will be higher electricity prices and reduced
reliability.
To explain what each of these technical features means and why they
are important for efficient grid operation requires fairly detailed
technical knowledge of commodity market operations in general and
electric grid operations in particular. AWEA here simply points out
that all of the above are consistent with theoretical economic
efficiency, all comport with current Federal Energy Regulatory
Commission (FERC) policy, and none are available at most locations in
today's wholesale electricity markets. Instead, what wind sees in
today's market are the following:
Rigid scheduling protocols with strong deviation penalties.
Imbalance settlements in dysfunctional ``markets'' or
punitive non-cost based penalties.
Market balkanization with significant ``trade barriers''
between adjacent utility ``control areas.''
FERC Order 888 pro-forma tariffs that presume perfect
dispatchability.
Inflexible requirements for a ``balanced schedule.''
A persistent and uneconomic bias toward ``commodity strips''
and ``firm'' unit sales.
No short term transmission rights. No flexibility for
partial resale of long term rights.
No politically legitimate regional planning process.
The existing transmission grid was designed and built for
traditional large central station power plants that can precisely
predict, and in many cases precisely control, their output. However,
these large power plants are also subject to occasional ``forced
outages'' or ``trips'' where the electric output suddenly goes to zero
and grid reliability would be compromised if these ``contingencies''
were not anticipated and planned for. The considerable costs of
planning for these contingencies is not charged to the individual
generating unit but is shared by all users of the grid. Rules and
protocols like the above list that do not affect dispatchable resources
but that are convenient for risk-averse grid operators grew up as a
means of simplifying the difficult job of balancing supply and demand
in real time. Wind and many other non-traditional resources are not
nearly as likely to suffer sudden, complete loss of output as, for
example, nuclear plants, but cannot precisely predict or control their
output in real time. Yet the current grid operating protocols do not
value wind's resilience but unfairly punish its variability.
In 1996, when the FERC was writing the initial set of rules
governing wholesale competition in Order 888, it put forth a pro-forma
tariff designed on a natural gas model and meant to serve as a least
common denominator for grid operator behavior. Quite naturally, it
presumed traditional resources and simply ignored the commercial needs
of newer non-traditional resources. Transmission owners and grid
operators took this tariff not as a floor but a ceiling that defined
minimum acceptable behavior towards competitors and transmission owners
did not take one step beyond the bounds of that tariff no matter how
cost effective. The FERC quickly realized this limitation of Order 888
and, in late 1999, issued a sequel called Order 2000. Order 2000
carries an explicit requirement that ``Regional Transmission
Organizations'' or RTOs (the FERC preferred form of transmission
provider) offer or facilitate the offer by third parties of competitive
services much like the above list of wind's needs. Unfortunately, FERC
authority to require RTOs or their functional equivalent only extends
to less than two thirds of the grid. What has been even more
problematic is a ``passive-aggressive'' attitude by the FERC it has
been aggressive about asserting jurisdiction over the wholesale grid,
but passive about regulating grid operators or requiring compliance
with its policies once it obtained jurisdiction.
As a result, of all the areas of significant commercial wind
potential, only Texas has a set of operating protocols conducive to the
use of the grid by intermittent or as-available resources like wind.
Somewhat ironically, the East Coast ``Independent System Operators''
with only scattered wind resource potential have nevertheless spent
considerable time and effort designing rules that can accommodate
intermittent resources.
Congress is currently debating major changes to national energy
policy including clarifying and redefining the role of the FERC in
regulating wholesale commerce in electricity. This legislation should
include provisions that:
Ensure complete, rapid implementation of the principles and
commercial functions of RTOs as enumerated in FERC Order 2000.
Define an affirmative duty of the FERC to ensure that
transmission providers design operating rules and protocols
conducive to fair, economic participation in wholesale markets
by intermittent and as-available resources like wind.
Provide for exemptions from restrictive policies like
imbalance penalties for intermittent resources pending
maturation of markets and development of institutions capable
of efficiently dealing with these non-traditional resources.
Consistent, fair grid operating rules are essential to allow wind
to reach its full economic potential. So too are robust, pro-active
grid expansion policies. One of the principal advantages of wind is
that it can be developed quickly in small increments thereby reducing
risks of over-investment in generating capacity or responding quickly
to unexpected shortages. This attribute is extremely valuable as the
emerging wholesale market rewards investment flexibility and short lead
times. Many unanticipated surprises can occur in the almost ten years
it would take to plan, design, and build a new nuclear plant. Once it
begins operation, a nuclear plant's energy arrives in one large lump
that must be swallowed whole by the market. Wind does not have these
problems. Unfortunately, transmission expansion shares the undesirable
characteristics of long lead time and ``lumpy'' investment.
While the gross quantity of investment in transmission is small in
relation to investment in generation, it is essential to have adequate
transmission capacity in place before the new generation can operate.
This requires planning and at least some investment in advance of the
need for new generation. These requirements are particularly acute for
wind resources which are generally developed quickly, are remote from
load centers, and must be located in specific windy locations.
Here again, Texas serves as a model for transmission planning
processes favorable to the development of wind resources. The nearly
1,000 MW of new Texas wind development this year essentially ``mined''
all the available West to East transmission capacity in Texas, but even
before most of this new capacity is in operation, planning has begun in
earnest for the transmission expansion necessary to serve the next
large increment of wind capacity. Furthermore, mechanisms are in place
in Texas that allow for the ``lumpiness'' of these investments to be
financed by all users of the grid for eventual repayment by user fees
over time.
Texas has the distinct advantage of only one regulatory body with
political oversight only at the state level. Texas intentionally
avoided electrical connections with the rest of the country to avoid
interstate commerce and attendant Federal jurisdiction. Texas is large
enough both geographically and in electricity demand that the economic
consequences of this decision are minimized. Moreover, it is
politically and culturally compact enough that policy decisions and
regulatory philosophy can consistently and quickly be converted into
detailed tariffs, rules, and protocols. The advantages of this
political structure are maximized in times like these where shifting
technology and shifting ideas about market structure are much more
difficult to implement when regulatory jurisdiction and political
oversight of the monopoly transmission system is divided between
Federal and state governments and political consensus is difficult to
reach among diverse interests.
It is for this reason that the FERC has promoted ``RTOs'' or
regional transmission bodies as the appropriate scale for transmission
planning that neither strictly respects state boundaries nor
conveniently fits with a ``one-size-fits-all'' federal model.
Unfortunately, these new regional organizations will take years to put
in place, and then more years to achieve political legitimacy.
Experience to date graphically illustrates the fact that the early
years of these organizations will be consumed by problems of day-to-day
operations for reliability and development of short-term market
structures necessary to efficiently handle existing resources. If
wind's economic potential is to be realized in a timely way, some jump-
start to the long-term planning process will be necessary.
Fortunately, of the major wind resource areas, one, Texas, already
has that jump start and the others, the Upper Colorado and Missouri
basins, have an appropriate regionally based organization with the
charter and expertise to conduct at least the preliminary planning--the
Western Area Power Administration. Congress should require WAPA to
conduct a long range planning exercise on technical options for
bringing the vast wind resource potential in the Upper Great Plains to
the urban load centers in both the Midwest and the West. This should be
an open process which includes both resource rich but rural and
resource poor but populous states, environmental interests, existing
WAPA customers, Native American tribes, and other stakeholders in the
region. The engineers can build whatever is politically desirable and
economically attractive The difficulty is in defining the terms of
reference for these concepts. As stated earlier ``economically
attractive'' must include environmental and rural economic development
considerations in order to be politically desirable.
In summary, AWEA believes that wind resources can only reach their
true economic and environmental potential if Congress takes this unique
opportunity to formulate constructive electric transmission
infrastructure policies that accommodate a maturing wind industry, and
serve the nation's electricity consumers, rural landowners looking for
economic development, and environmental interests in a win/win
proposition.
Together with policies such as the production tax credit extension
to stimulate early capital formation, effective transmission planning
and grid operating polices will ensure timely development of the
indigenous, environmentally sustainable, and cost effective energy
resource that is blowing in the wind. Thank you for this opportunity to
express our views.
Senator Dorgan. Mr. Caldwell, thank you very much.
Mr. Porter representing the Lignite Council. Thank you.
STATEMENT OF CLIFFORD PORTER, DIRECTOR, LIGNITE
RESEARCH, DEVELOPMENT AND MARKETING PROGRAM, LIGNITE ENERGY
COUNCIL, BISMARCK, ND
Mr. Porter. Thank you, Senator Dorgan, Representative
Pomeroy, Mr. Lowery.
First, I am Clifford Porter. I am director of the Lignite
Research, Development and Marketing Program and also director
of research and development for the Lignite Energy Council.
I am here today as a designee for John Dwyer, who could not
attend the meeting. He is off on military duty. He does want me
to assure the committee that he feels that transmission is very
important to the State of North Dakota and certainly to the
lignite energy in North Dakota.
The State of North Dakota through the Industrial Commission
and the Lignite Energy Council have formed a partnership, and
the design of that partnership is to revitalize the lignite
industry. The program that we have right now is called Lignite
Vision 21. It has a vision to construct one or more 500-
megawatt base-load lignite-fired powerplant in North Dakota.
A 500-megawatt lignite-fired powerplant means an increased
production of 3 million tons of lignite annually, $140 million
of total business volume for the State, and $6 million in State
tax revenue on an annual basis. Also, a 500-megawatt powerplant
in mind would create 1,300 new jobs for North Dakota.
The Lignite Vision 21 project is a significant economic
development opportunity for the State of North Dakota. The
Industrial Commission has provided over a million dollars for
feasibility studies to support this activity. The feasibility
studies have identified transmission issues, as well as
potential routes for additional electrical output from North
Dakota and has the estimated cost for seven specific sites
within North Dakota.
A potential electrical transmission system option may exist
from North Dakota with upgrades from a site near Beulah, North
Dakota, down through Huron and Sioux Falls, South Dakota, and
then on to Lakefield Junction in Minnesota.
Electrical export from North Dakota is currently limited by
our existing transmission system. Interested parties must work
together to resolve these existing limits on export. Resolution
of these transmission challenges requires congressional,
Federal agencies, State and government agencies and industry
working together.
In addition to our over $1 million in feasibility studies,
the State of North Dakota and the Industrial Commission have
committed to provide $20 million to date or $10 million to each
of two projects, Great River Energy and Montana-Dakota
Utilities/Westmoreland joint development. Great River Energy
and Montana-Dakota Utilities/Westmoreland have initiated
studies that could lead to construction of a new base-load
lignite-fired powerplant.
The Lignite Energy Council members have developed the
following set of guiding principles to resolve transmission
issues, and these are given in more detail to the testimony
that I have provided beforehand.
But in summary, recognize that transmission business is a
regulated monopoly and that transmission owners must recover
their cost.
Encourage construction of new interstate transmission
facilities and build a national grid system under FERC
jurisdiction.
Support the NERC and North American Energy Reliability
Organization and their corresponding regional electric
liability organizations, their standards and enforcement.
Establish a regional transportation organization.
Expands research and development for transmission,
including options such as superconductivity.
In consultation with appropriate State and Federal
agencies, develop legislation to provide Federal siting
authority for rights-of-way for electrical transmission lines
similar to the authority already existing for natural gas
pipelines.
Support the $200,000 WAPA appropriation for studies and
encourage WAPA to join the regional transportation
organization.
Ensure that financial incentives exist to build new
transmission capability under FERC jurisdiction and assure that
IOUs and G&Ts are handled equitably.
Increase electrical export through expanding existing
transmission system is a key element if the State is to acquire
the economic development and jobs. Also, transmission is a key
element if the surrounding region is to have access to
additional low-cost base-load reliable electricity.
Again, I thank you for the opportunity to present these
comments and, again, I express my regrets for Mr. Dwyer that he
is not able to attend.
Thank you, Senator.
[The prepared statement of Mr. Porter follows:]
Prepared Statement of Clifford Porter, Director, Lignite Research,
Development and Marketing Program, Lignite Energy Council, Bismarck, ND
The Lignite Energy Council is a regional association whose primary
interest is the development of lignite coal as an energy source. The
membership of the association includes (1) the major producers of
lignite coal in North Dakota and Montana, (2) all investor-owned
utilities and rural electric cooperatives headquartered in North Dakota
and Minnesota who have interests in plants that generate electricity
from lignite, and (3) over 200 contractors and suppliers who provide
goods and services to the lignite industry.
The Lignite Energy Council is pleased to provide testimony to the
Subcommittee on Water and Power regarding the electric transmission
infrastructure and investment needs in North Dakota (ND).
Mr. John Dwyer, President of the Lignite Energy Council, is on a
military assignment and regrets that he is not able to be here to
provide this testimony. However, he wants the Subcommittee to know that
he feels strongly about the need to expand the transmission network in
ND.
The State of North Dakota and the Lignite Energy Council have
formed a government/industry partnership to promote the use of North
Dakota lignite and to enhance economic development. In the summer of
1999, the North Dakota Industrial Commission (Industrial Commission),
whose current members are Governor John Hoeven, Attorney General Wayne
Stenehjem and Commissioner of Agriculture Roger Johnson, and the
Lignite Energy Council initiated a partnership between the state and
industry designed to revitalize the North Dakota lignite industry. This
initiative is called the Lignite Vision 21 Project (LV21P). The LV21P
project manager is Mr. Tony Rude, who is the former Chief Executive
Officer (CEO) of United Power Association and co-CEO of Great River
Energy.
The vision of the LV 21 initiative is to construct one or more
state-of-the-art lignite-fired base-load generating stations located in
ND that utilize cost-effective generation technologies, the latest
environmental technologies and the highest efficiency to meet the
reliable low-cost electricity demands in our region.
For North Dakota, a 500 MW plant means 3 million more tons of coal
mined annually, 1,300 additional permanent jobs, $140 million more
annual business volume and $6 million more tax revenue annually.
Besides meeting our region's energy needs, the Lignite Vision 21
Project will provide much needed economic development for the citizens
of ND. The state of North Dakota through the Industrial Commission has
provided significant support to promote the project. The Industrial
Commission has provided over $1 million for feasibility studies to
address environmental, generation, and transmission issues.
Additionally, the Industrial Commission has provided up to $10 million
in matching grants for detailed feasibility and permitting assistance
for each project. To date, the Industrial Commission has approved
funding for two potential projects--Great River Energy for a site to be
selected and Montana-Dakota Utilities Company, who is involved in a
joint development with Westmoreland Coal Company for a site at
Gascoyne, ND.
Black and Veatch, who conducted the generation study, believes the
construction and operation of the plant is feasible and the project can
be competitive in the marketplace. ABB Power analyzed existing
electrical transmission system, identified system upgrades and
recommended options to increase electrical export from North Dakota. As
a part of their study, ABB recommended a proposed option for an
existing transmission route that would increase the electrical export
capability out of North Dakota to 2450 MW. This option included a
system upgrade to the Antelope Valley to Huron line to permit 500kv
operation and extending the line to Sioux Falls, South Dakota, and
constructing a 345kv line to Lakefield Junction in Minnesota.
The Industrial Commission and industry have provided $300,000 in
additional funding for subsequent transmission studies evaluating the
potential and estimated costs for additional electrical export from
seven sites in North Dakota. ABB estimated the cost for upgrading the
system from Antelope Valley to Lakefield Junction at $130,000,000 to
$160,000,000. Site-specific cost for each of the seven locations was
estimated at an additional $2,000,000 to $50,000,000.
Additional studies have been proposed to evaluate options for
eliminating restraints to the present electrical transmission system
and for providing alternatives to further increase electrical export
capability from North Dakota.
The LV21P studies have identified major challenges that need to be
solved and have identified how these challenges can be solved by the
interested parties working together, including Congress and federal
agencies, state government and agencies and industry.
In that regard, the Lignite Energy Council and its members have
developed the following guiding principles to resolve transmission
issues concerning our state. They are as follows:
1. Recognize that the transmission business is a regulated monopoly
and as such transmission owners need to have assurance from the Federal
Energy Regulatory Commission (FERC) that they can recover their cost.
2. Encourage construction of new interstate transmission facilities
to build a national grid system under FERC jurisdiction.
3. Support the National Electric Reliability Council (NERC)--North
American Electric Reliability Organization (NAERO) proposed national
electric reliability organizations and regional organizations and
standards with authority to set and enforce reliability standards
subject to FERC oversight.
4. Establish a regional transmission organization (RTO).
5. Direct the Secretary of Energy to expend research and
development on transmission superconductivity and other means to
increase transmission capacity.
6. Direct the Secretary of Energy, in consultation with the
appropriate federal agencies and state and local governments officials,
to develop legislation to provide federal siting authority and to grant
authority to obtain rights-of-way for electricity transmission lines.
Similar authority already exists for natural gas pipelines in
recognition of their role in interstate commerce.
7. Support the $200,000 federal appropriation for the Western Area
Power Administration (WAPA) enhancement studies and provide the
authority and encourage WAPA to join a RTO. In conducting transmission
studies, WAPA must be sensitive to their limited resources and their
primary mission to ensure that the reliability of the WAPA system is
maintained.
8. Ensure the financial incentives to build transmission benefit
both utilities subject to FERC jurisdiction as well as those that are
not subject to FERC jurisdiction. Investor owned utilities (IOUs) and
generation and transmission cooperatives (G&Ts) have different
regulatory, financial and corporate structures. These organizations
must be handled equitably.
The Lignite Energy Council appreciates the opportunity to provide
testimony to the Subcommittee on Water and Power regarding improvement
to the transmission network in North Dakota and the surrounding region.
Without these transmission improvements, the LV21P power plant will not
be constructed, North Dakota will lose out on all the jobs and economic
development, and the surrounding region will not have access to the
additional low-cost base-load reliable electricity.
Senator Dorgan. Mr. Porter, thank you very much.
I would ask, Mr. Anderson, you have field-tested your 230-
kV line in Europe, I understand. Have you field-tested your
line anywhere in the United States, especially the larger
capacity lines?
Mr. Anderson. No, we have not. We have actually installed
one span in Europe and also one span in the United States that
has operated under current, but we have not installed a multi-
span installation as part of our field tests.
Senator Dorgan. Do you have plans to do that?
Mr. Anderson. We would like to do that, yes.
Senator Dorgan. Mr. Porter, tell me what your impression is
of the TAG project, the Transmission America Grid project. Have
you been involved in that and, if so, what is your position on
it?
Mr. Porter. Certainly, Senator. I don't know if it is
appropriate to say we have been involved with it. We certainly
have been following it. I think the concept of looking at a
national grid, however that is developed, is something that we
think is very important and key to the export of power from
North Dakota. Whether that is the base-load reliable lignite-
fired power or whether that is the wind energy, I think those
both have the same requirements.
Senator Dorgan. You talked about one or more powerplants
when you talked about Vision 21. We have talked a great deal
about clean coal technology in conjunction with Vision 21. Can
you tell me, provided we have the transmission capability, what
your expectation might be with respect to the production of
lignite in the future for this State?
Mr. Porter. I think it is very encouraging to look at these
two Lignite Vision 21 projects that are currently moving
forward, and they are evaluating advanced technologies,
including integrated gasification combined cycle. There are
also some recent new developments in Europe looking at super
critical boilers that look at efficiencies in the neighborhood
of 42 percent. So I think there are some exciting options for
us out there in terms of new production from the lignite fields
in North Dakota.
Again, I just reiterate that getting power out of North
Dakota is key. Certainly we are an energy-rich State and we can
produce a great deal more energy than we can consume inside. I
am also encouraged to see that although we have two proposals
on the table, we have other people that are talking and we
anticipate that we will be looking at other options as we go
down the road.
Senator Dorgan. Mr. Caldwell, as you discussed your
testimony this morning with us, it occurred to me that much of
what you are talking about could be accomplished by an
aggressive FERC. Is that the case, and, if so, what remains and
must be done legislatively, in your opinion?
Mr. Caldwell. Well, first of all, I think an aggressive
FERC is probably an oxymoron. You know, in terms of the
criticism of the FERC, my criticism of the FERC in the recent
past has been that it is passive-aggressive, that it is very
aggressive about asserting its jurisdiction and very passive
once it gets it.
I think that is, first of all, genetic. It is the way it
has been for 70 years. It has been in a position of appellate
review. It has been a fairly sleepy place for a lot of years.
And to think that all of a sudden that organization can be the
traffic cop on the beat when I do not think it even knows how
to carry a gun, I do not think it has a permit currently to
carry a gun, and I do not think it has ever been trained in how
to carry a gun, and I do not see it being the cop on the beat
and I do not see it being the proactive regulatory commission.
Part of the reason is because it is not anchored
politically. It is sitting off all by itself up there at 888
First Street. It is very close to the Capitol. But I recall, my
wife was working for the EPA about 3 years ago when Order 888
came out, and the EPA had some issues with Order 888, and so
Mary Nichols, the assistant administrator for air and
radiation, went to then Vice President Gore to talk about these
issues that the EPA had with the FERC, and Vice President Gore
said, Who are those guys? Who are they? And my wife's boss
said, Well, you appointed them. He said, Well, why? What do
they do? And that it is just simply not politically anchored.
And if we expect this organization to be aggressive, if we
expect it to take all these things to talk about this vision,
and with all due respect, I would say the vision of one or two
powerplants is not a vision, it is small steps by tiny feet.
Now, it may lead to large things down the road, but we need to
have the vision. That vision must come from the political
entities, not from the regulatory people.
Senator Dorgan. I got the feeling it was therapeutic for
you to be able to answer that question.
[Laughter.]
Senator Dorgan. I almost felt I should take a microphone to
Betsy Moler because she was probably gritting her teeth through
some of that.
Congressman Pomeroy.
Mr. Pomeroy. Mr. Chairman, must be the clear air out here,
the hearings outside the Beltway, at least as evidenced by this
one this morning, are a heck of a lot more interesting than the
ones you will find in any Senate or House office building in a
given day. My commendation to all participants. This morning's
hearing has been a particularly good one. We like straight talk
out here, Mr. Caldwell, and, by God, you brought it.Who imposed
that reserving change or the certainty change that you
referenced having an impact on power available out in
California?
Mr. Caldwell. It was one of those things that had good
intentions. I mean, it was intended to correct a problem that
existed in California, and it was referred to as the under-
scheduling problem. And that problem came about because, again,
the only way that people could actually physically transact for
effect in the spot market was to deliberately unbalance their
schedules and, therefore, put them in the spot market, and that
was beginning to create reliability problems. In order to solve
that perceived problem, the ISO instituted things to make
people follow their schedules, and it had the unintended
consequence, as I say, of draining reserves.
I think that is the kind of thing that you are going to see
from these RTOs, is they struggle to come up with the rules and
the protocols to govern this thing. It is not easy to figure
out how to do all of these things and how to do all these
transactions, and especially if you start off from the
proposition that I am independent and I am outside the market,
that I am Zeus, I am not Olympus, who is going to watch all
these people down in the Plains and let them duke it out in the
marketplace, and I am up here just to ensure to keep the lights
on. And that is a very, very difficult job. And it is going to
take a long time before we ever get that right, and it is going
to be a continuing problem. And this is just an example of the
kind of thing.
So, again, I think the problem with these organizations is
more of governance and how they change and how they can adapt,
that we set them up and we say, okay, we are going to design
the perfect system, we are going to design the perfect market,
and it never works, there is always a problem.
And if there is a little problem, the one thing that
markets are good at doing is they are good at driving that
little itty-bitty wedge and driving it wide open. And that is
what people are going to do. They are going to see a slight
advantage and they are going to drive it open. These
organizations are going to have to be able to adapt, they are
going to have to be able to evolve, and the predators are going
to have to--right now only the predators can evolve, and the
prey cannot, and we tie people's hands.
We say we cannot change the rules. If we go to the FERC, it
is 18 months before we can get a tariff change. It is $400,000
and a year before we can ever get an adjudication of a
complaint. We can't operate that way with that speed, that
clock. And I think that was what the problem was in California,
and we are going to face that as we try to get our act together
in this new market rules.
Mr. Pomeroy. Mr. Chairman, I know you want to adjourn the
hearing at noon. We are at the appointed hour, so I will hold
additional questions other than just to commend Mr. Anderson
and Mr. Porter for excellent testimony. There is a couple
things I would like to pursue with you as we break up here.
Senator Dorgan. Let me again thank all of those who have
come today. I think that these issues are very important. We
are going through a period of rather profound change in an area
that is critically important to our citizens.
We need to make sure that all of these issues work for both
the producers of energy and consumers of energy, and I think
the California experience, in which I think the market was
essentially broken and the system that was being put together
was fundamentally unworkable as it was constructed, ought to
lead all of us to be cautious about this.
It is one thing to not have the capacity on a telephone
system. In that case, as they say, you get a busy signal, you
cannot get through. If you have a lack of capacity on an
electric energy system or a power grid of some type, the
problem is a blackout. I mean, that is a whole different
situation.
So I think especially those of us in our region of the
country have a healthy conservatism and caution about these
issues as we move forward. We are trying to do new things in
new ways, and in some ways it makes us very vulnerable. So we
need to have thoughtful analysis of where we are heading and
what the consequences might be, and that is the purpose of
holding hearings.
I appreciate very much the testimony that has been
submitted. We will keep the record open for 2 weeks and we
would accept testimony from others who wish on behalf of
themselves or their organization to submit additional testimony
for this hearing record.
As I indicated, in September we will reconvene, myself,
Senator Bingaman and others on the Senate Energy Committee, and
we will continue trying to write the energy bill. We finished
the research and development title and we will move to other
titles. And transmission is a very, very important component of
the construction of an energy policy so that we have one that
works for this country. We appreciate all of your being here
and your patience and your testimony, and this hearing is now
adjourned.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]