[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                         KEEPING THE LIGHTS ON:
                    REMOVING BARRIERS TO TECHNOLOGY
                          TO PREVENT BLACKOUTS

=======================================================================

                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON ENERGY

                          COMMITTEE ON SCIENCE

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 25, 2003

                               __________

                           Serial No. 108-23

                               __________

            Printed for the use of the Committee on Science


     Available via the World Wide Web: http://www.house.gov/science






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                             ______

                        COMMITTEE ON SCIENCE

             HON. SHERWOOD L. BOEHLERT, New York, Chairman
LAMAR S. SMITH, Texas                RALPH M. HALL, Texas
CURT WELDON, Pennsylvania            BART GORDON, Tennessee
DANA ROHRABACHER, California         JERRY F. COSTELLO, Illinois
JOE BARTON, Texas                    EDDIE BERNICE JOHNSON, Texas
KEN CALVERT, California              LYNN C. WOOLSEY, California
NICK SMITH, Michigan                 NICK LAMPSON, Texas
ROSCOE G. BARTLETT, Maryland         JOHN B. LARSON, Connecticut
VERNON J. EHLERS, Michigan           MARK UDALL, Colorado
GIL GUTKNECHT, Minnesota             DAVID WU, Oregon
GEORGE R. NETHERCUTT, JR.,           MICHAEL M. HONDA, California
    Washington                       CHRIS BELL, Texas
FRANK D. LUCAS, Oklahoma             BRAD MILLER, North Carolina
JUDY BIGGERT, Illinois               LINCOLN DAVIS, Tennessee
WAYNE T. GILCHREST, Maryland         SHEILA JACKSON LEE, Texas
W. TODD AKIN, Missouri               ZOE LOFGREN, California
TIMOTHY V. JOHNSON, Illinois         BRAD SHERMAN, California
MELISSA A. HART, Pennsylvania        BRIAN BAIRD, Washington
JOHN SULLIVAN, Oklahoma              DENNIS MOORE, Kansas
J. RANDY FORBES, Virginia            ANTHONY D. WEINER, New York
PHIL GINGREY, Georgia                JIM MATHESON, Utah
ROB BISHOP, Utah                     DENNIS A. CARDOZA, California
MICHAEL C. BURGESS, Texas            VACANCY
JO BONNER, Alabama
TOM FEENEY, Florida
RANDY NEUGEBAUER, Texas
                                 ------                                

                         Subcommittee on Energy

                     JUDY BIGGERT, Illinois, Chair
CURT WELDON, Pennsylvania            NICK LAMPSON, Texas
ROSCOE G. BARTLETT, Maryland         JERRY F. COSTELLO, Illinois
VERNON J. EHLERS, Michigan           LYNN C. WOOLSEY, California
GEORGE R. NETHERCUTT, JR.,           DAVID WU, Oregon
    Washington                       MICHAEL M. HONDA, California
W. TODD AKIN, Missouri               BRAD MILLER, North Carolina
MELISSA A. HART, Pennsylvania        LINCOLN DAVIS, Tennessee
PHIL GINGREY, Georgia                RALPH M. HALL, Texas
JO BONNER, Alabama
SHERWOOD L. BOEHLERT, New York
               KEVIN CARROLL Subcommittee Staff Director
         TINA M. KAARSBERG Republican Professional Staff Member
           CHARLES COOKE Democratic Professional Staff Member
                    JENNIFER BARKER Staff Assistant
                   KATHRYN CLAY Chairwoman's Designee



                            C O N T E N T S

                           September 25, 2003

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Judy Biggert, Chairman, Subcommittee 
  on Energy, Committee on Science, U.S. House of Representatives.     8
    Written Statement............................................     9

Statement by Representative Nick Lampson, Minority Ranking 
  Member, Subcommittee on Energy, Committee on Science, U.S. 
  House of Representatives.......................................    10
    Written Statement............................................    11

Prepared Statement by Representative Jerry F. Costello, Member, 
  Subcommittee on Energy, Committee on Science, U.S. House of 
  Representatives................................................    11

                               Witnesses:

Mr. James W. Glotfelty, Director, Office of Electric Transmission 
  and Distribution, U.S. DOE
    Oral Statement...............................................    12
    Written Statement............................................    14
    Biography....................................................    28

Mr. T.J. Glauthier, President and CEO, Electricity Innovation 
  Institute, Palo Alto, CA
    Oral Statement...............................................    28
    Written Statement............................................    30
    Biography....................................................    36

Dr. Vernon L. Smith, Nobel Laureate, Professor at George Mason 
  University
    Oral Statement...............................................    37
    Written Statement............................................    40
    Biography....................................................    44

Mr. Thomas R. Casten, CEO, Private Power, LLC, Oak Brook, IL; 
  Chairman, World Alliance for Decentralized Energy
    Oral Statement...............................................    45
    Written Statement............................................    48
    Biography....................................................    50

Discussion.......................................................    59

             Appendix 1: Answers to Post-Hearing Questions

Mr. James W. Glotfelty, Director, Office of Electric Transmission 
  and Distribution, U.S. DOE.....................................    78

Mr. T.J. Glauthier, President and CEO, Electricity Innovation 
  Institute, Palo Alto, CA.......................................    80

Mr. Thomas R. Casten, CEO, Private Power, LLC, Oak Brook, IL; 
  Chairman, World Alliance for Decentralized Energy..............    86

             Appendix 2: Additional Material for the Record

Assessment Methods and Operating Tools for Grid Reliability, An 
  Executive Report on the Transmission Program of EPRI's Power 
  Delivery Reliability Initiative, February 2001, EPRI...........    90


   KEEPING THE LIGHTS ON: REMOVING BARRIERS TO TECHNOLOGY TO PREVENT 
                               BLACKOUTS

                              ----------                              


                      THURSDAY, SEPTEMBER 25, 2003

                  House of Representatives,
                            Subcommittee on Energy,
                                      Committee on Science,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:06 a.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Judy 
Biggert [Chairwoman of the Subcommittee] presiding.


                            hearing charter

                         SUBCOMMITTEE ON ENERGY

                          COMMITTEE ON SCIENCE

                     U.S. HOUSE OF REPRESENTATIVES

                         Keeping the Lights On:

                    Removing Barriers to Technology

                          to Prevent Blackouts

                      thursday, september 25, 2003
                         10:00 a.m.-12:00 p.m.
                   2318 rayburn house office building

1. Purpose

    On Thursday, September 25, 2003 at 10:00 a.m., the Energy 
Subcommittee of the House Committee on Science will hold a hearing to 
examine the role of technology in preventing future blackouts and the 
current economic, regulatory and technical barriers to improved 
reliability. The hearing will also examine the role of the Department 
of Energy's (DOE) newly established Office of Electric Transmission and 
Distribution in enhancing the power grid's performance and reliability.

2. Witnesses

    The following witnesses will testify at the hearing:

Mr. James W. Glotfelty is the Director of the U.S. Department of 
Energy's Office of Electric Transmission and Distribution. Previously, 
Mr. Glotfelty served as a senior advisor to the Secretary of Energy, 
where he was a co-leader in the Department's contribution to the 
National Energy Plan. Mr. Glotfelty also served as an advisor on 
electricity to then-Governor Bush.

Mr. T.J. Glauthier is the President and Chief Executive Officer of the 
Electricity Innovation Institute, a new non-profit affiliate of the 
utility industry's research consortium (Electric Power Research 
Institute or EPRI). Prior to joining the Institute, Mr. Glauthier was 
the Deputy Secretary and Chief Operating Officer of the Department of 
Energy and he served for five years at the Office of Management and 
Budget as the Associate Director for Natural Resources, Energy and 
Science.

Mr. Thomas R. Casten is the founding Chairman and CEO of Private Power 
LLC, an independent power company in Oak Brook, IL, which focuses on 
developing power plants that utilize waste heat and waste fuel. Mr. 
Casten also serves on the board of the American Council for an Energy-
Efficient Economy (ACEEE), the board of the Center for Inquiry, and the 
Fuel Cell Energy Board. He is also the Chairman of the World Alliance 
for Decentralized Energy (WADE), an alliance of national and regional 
combined heat and power associations, wind, photovoltaic and biomass 
organizations and various foundations and government agencies seeking 
to mitigate climate change by increasing the fossil efficiency of heat 
and power generation. Prior to Private Power LLC, Mr. Casten served as 
President of the International District Energy Association and he 
received the Norman R. Taylor Award for distinguished achievement and 
contributions to the industry.

Dr. Vernon L. Smith is a Professor of Economics and Law and the 
Director of the Interdisciplinary Center for Economic Science at George 
Mason University. Dr. Smith, who won the Nobel Prize in economics in 
2002, is widely recognized as the `father of experimental economics' 
and his current research focuses on the design and testing of markets 
for electric power, water, spectrum licenses and public goods as well 
as continuing behavioral and evolutionary research on trust and 
reciprocity.

3. Overarching Questions

    The hearing will focus on several overarching questions:

          Which technologies have the greatest potential to 
        increase the reliability and the efficiency of the U.S. 
        electrical system both now and in the future? How do the costs 
        and benefits of these different technologies compare?

          What technologies are the DOE's Office of Electric 
        Transmission and Distribution developing? Do technologies to 
        increase reliability exist and are they ready to be deployed 
        today?

          What is the state of R&D funding for our electrical 
        systems? Where should federal R&D funding be focused to ensure 
        maximum benefit and future flexibility?

          What are the current and future barriers to the 
        commercial application of emerging technologies? What steps 
        have been taken to address these obstacles?
        
        

4. Brief Overview

          On August 14, 2003, a major power outage occurred 
        across the northeastern and upper mid-western part of the 
        United States and portions of Canada, affecting nearly 50 
        million customers.

          A joint U.S.-Canada task force has been established 
        to determine the causes of the blackout.

          A contributing factor of the recent blackout--and 
        others--was the deregulation of the utility industry, where 
        companies no longer own their own transmission lines. As a 
        result, investment in the infrastructure has remained flat, 
        despite increases in electricity.

          Several solutions, including demand response, 
        advanced transmission monitoring, communications and controls, 
        advanced conductors, and distributed generation, have been 
        proposed, but barriers remain. New technologies are not widely 
        used, great variability in rules, regulations and technical 
        specifications exist at the local level, and the cost to 
        upgrade systems is high.

          Earlier this year (prior to the August blackout), the 
        Administration established a new Office of Electric 
        Transmission and Distribution at the Department of Energy in 
        order to better address electric reliability concerns.

5. Background

    On Thursday, August 14, a little after four o'clock in the 
afternoon, the power went out for 50 million Americans. While the 
precise sequence of events is not yet known, overloading of a portion 
of the Nation's transmission system clearly played an important role 
that was possibly compounded by human error and unclear lines of 
responsibility. Although this was the largest blackout ever in the 
U.S., several other serious blackouts have occurred in recent years, 
most notably in the Northwest in 1996, but also in San Francisco, 
Texas, New York State and Memphis, Tennessee.
    To investigate the causes of the blackout, Energy Secretary Spencer 
Abraham is co-chairing a U.S.-Canadian task force, and Mr. James 
Glotfelty, Director of DOE's Office of Electric Transmission and 
Distribution, is coordinating DOE's participation in the task force's 
activities. One contributing factor in the most recent blackout and 
several of the others was the changing structure of the utility 
industry. As a result of deregulation, companies that generate 
electricity often no longer own the transmission lines they use for 
distribution. In addition, the companies that distribute the 
electricity buy power from a variety of generators, meaning that 
transmission lines move power in more directions than was originally 
contemplated. Worse, uncertainty over the future of deregulation has 
held investment in transmission lines relatively flat as potential 
investors have been unsure of how they would reap a profit. As a 
result, few additional transmission lines have been built and few have 
been upgraded relative to the increase in demand.
Technology Solutions
    Building new transmission lines would ease pressure on the system, 
but other options may be less expensive and create less controversy. 
Several of the options are discussed below.

1) Demand Response

    The demand for electricity varies widely over the course of a day, 
a month, and even a season. Highest usage, or so-called ``peak load,'' 
typically occurs in the afternoons on hot summer days when air 
conditioners are on full power. This peak load fills the transmission 
grid and strains the electrical system. It is therefore no surprise 
that blackouts often occur during these peak times of demand.
    At times of peak demand, utilities bring on-line older and more 
inefficient electric generators for the sole purpose of generating peak 
power. This, combined with the fact that lines are hot from overloading 
electricity, results in higher costs and less efficiency. Despite these 
increased costs--as much as ten times more--the price to the average 
consumer does not change throughout the day, so the customer has no 
incentive to change their demand.
    Fortunately, new technologies coupled with pricing systems that 
charge more during peak periods can lead to significant reductions in 
demand. With so-called ``demand response technologies,'' a utility can 
send a signal to a home or business when prices are peaking, and 
electrical equipment in the house can be programmed to shut off 
specific appliances at a particular price level. For example, one 
program in Florida is saving consumers an average of 15 percent off 
their energy bills by providing time-variant pricing and demand 
response technologies, for a fee. In turn, this has reduced the average 
household demand during peak periods by about 50 percent.

2) Advanced Transmission Monitoring, Communications and Controls

    Advanced transmission control systems--sometimes called ``smart 
grid'' technologies--can increase the ability of utilities to control 
power flows on transmission lines. This emerging technology could 
prevent blackouts by enabling utilities to better monitor power flows 
and to limit current in dangerous situations without shutting it off 
completely. It could also more quickly and automatically direct the 
flow of current away from overloaded lines. (There is mounting evidence 
that during the August blackout controllers had little or no idea of 
the extent of the grid problems.) New technologies can also help 
utilities better model the grid so they can make informed decisions 
about how to handle problems.

3) Advanced Conductors

    New technologies, including advanced wires made from ceramic 
composites and superconductors, could enable utilities to carry more 
electricity on fewer wires. Although more expensive, composites now 
being tested can carry two to three times the power on the same 
diameter as regular wires. Superconducting wires, which are also just 
starting to be tested, must be cooled below ^300+F, but they 
can carry far more current with only negligible losses in power. 
Superconducting wires are likely to be first used in generators and 
transformers where they can dramatically increase efficiency, and then 
in short, constrained segments in urban settings, where they can be 
placed in existing conduits to significantly increase the flow of 
electricity. Other technology includes devices for electricity storage. 
Although currently expensive, storage could help reduce peak loads by 
storing off-peak power for use when demand is high.

4) Distributed Generation

    Distributed generation--the use of multiple, small generators close 
to the users of the electricity--can ease demand by providing 
electricity that does not have to move over the transmission system. 
Distributed generation technologies include fuel cells, micro-turbines, 
reciprocating and Stirling engines, photovoltaics (solar energy), wind 
turbines, and a variety of other technologies. Distributed generation 
also offers security benefits, especially reduced vulnerability to 
catastrophic damage, whether from natural or man-made disasters.
Barriers
    Despite a large federal investment--DOE has funded more than $1.2 
billion in research and development since 1980 for electricity 
transmission and distribution research, and at least as much for 
various distributed generation technologies--these technologies are not 
in widespread use. Significant regulatory barriers, particularly in the 
areas of interconnection standards and market structure, impede the 
adoption of new technology. Interconnection standards--rules, 
regulations, and technical specifications that determine how electrical 
devices connect with local distribution grids--vary widely among 
different localities. The lack of uniform national standards and the 
existence of sometimes arcane local rules and regulations often make it 
prohibitively expensive to connect a distributed generation power unit 
to a distribution grid. A national consensus interconnection standard 
would reduce the cost of hardware, and significantly reduce the need 
for installation inspections and on-site certifications. Market 
structures currently in place also vary significantly by region, but 
very few of them are designed to convey accurate price signals to 
consumers indicating the true costs of electricity usage at times of 
peak demand.
    As is often the case, the cost of installing upgraded technology 
can be a barrier. Some have estimated that transmission grid 
modernization could cost $50 billion or more over the next ten years. 
This translates to about one- or two-tenths of a cent per kilowatt-hour 
(a dollar or two per month for the average customer). But the costs of 
an unreliable electric system are even higher, with costs from the 
August blackout alone estimated to be between $4 and $6 billion. As 
many local victims of hurricane Isabel's wrath will attest, extended 
blackouts can result in spoiled food, lost work and other economic 
costs.
Office of Electric Transmission and Distribution
    Secretary Abraham created the DOE Office of Electric Transmission 
and Distribution (OETD) earlier this year to address two primary 
functions: research and development (R&D) on electricity transmission 
and distribution technologies, and systems operation research and 
policy analysis related to the electric system. The programs run by the 
Office are not new; they come from various parts of DOE, primarily from 
the Office of Energy Efficiency and Renewable Energy (EERE).
    The Department created the new office in response to 
recommendations from a series of reports. The National Energy Policy, 
released in 2001, which directed the Secretary to ``examine the 
benefits of establishing a national grid, identify transmission 
bottlenecks, and identify measures to remove transmission 
bottlenecks.'' The Department then commissioned The National 
Transmission Grid Study, which was released in May 2002, which warned 
of the increasing likelihood of significant blackouts. The Grid Study 
provided several recommendations to improve the operation of the 
system, including the elimination of transmission bottlenecks and the 
creation of a new electricity office within DOE. Private sector groups 
such as the Electric Power Research Institute (EPRI) have also 
recommended a significant investment in the power system. Its recent 
study, The Electricity Framework for the Future, recommend increased 
federal investment in advanced electrical generation, transmission and 
distribution technologies such as those discussed earlier in this 
charter.
    OETD's fiscal year 2003 R&D budget of $80 million includes research 
on high temperature superconductivity technologies, transmission 
systems, distribution and electricity storage technologies conducted 
through contracts and cost-shared agreements with universities, 
national laboratories, and industry. The operations and analysis 
subprogram includes policy modeling, analysis and technical assistance.

6. Questions for the Witnesses:

    The witnesses were asked to address the following questions in 
their testimony before the Subcommittee:
Questions for Mr. Glotfelty

          Briefly describe the responsibilities and reporting 
        structure of the Office of Transmission and Distribution.

          Briefly describe and rank the key vulnerabilities of 
        the electrical grid as it is built and managed today. Are there 
        technological solutions that could contribute to the reduction 
        of these key vulnerabilities?

          What barriers currently prevent wider adoption of 
        these commercially available technologies? What policy choices 
        would be most conducive to greater adoption of these 
        technologies?

          What was DOE's decision process in identifying the 
        technologies it is supporting/has supported through the Office 
        of Electricity and Distribution?
Questions for Mr. Glauthier

          What technologies are commercially available or under 
        development to improve the efficiency and reliability of our 
        electrical system? Which technologies would you suggest receive 
        the highest priority for targeted DOE research and development 
        funding?

          What barriers currently prevent wider adoption of 
        these commercially available technologies? What policy choices 
        would be most conducive to greater adoption of these 
        technologies?

          What is the current level of investment by the 
        private sector in improvements to the grid that enhance its 
        reliability? How can the private sector and the Federal 
        Government best share responsibility for ensuring the 
        reliability of the Nation's electrical grid?

          What level of federal funding would be necessary and 
        appropriate for research, development, demonstration and 
        deployment of smart grid technology? What should the private 
        share be?
Questions for Dr. Smith

          Briefly describe the market structure for the 
        electricity sector as it existed 15 years ago and contrast it 
        with the structure today.

          What barriers currently prevent wider adoption of 
        commercially available energy technologies? What policy choices 
        would be most conducive to greater adoption of these 
        technologies?

          How is uncertainty affecting the economics of 
        investment in the electricity sector? How can we structure a 
        market to ensure reliable electricity at the lowest cost?

          What are the incentives for utilities to invest in 
        transmission research and development? How can we encourage 
        investment in research and development in a highly competitive 
        electricity sector?
Questions for Mr. Casten

          Please give a brief description of your current 
        business ventures designed to capture waste heat.

          How can distributed generation improve the 
        reliability of the overall electrical system? What other 
        benefits does distributed generation provide?

          What barriers currently prevent wider adoption of 
        commercially available energy technologies? What policy choices 
        would be most conducive to greater adoption of these 
        technologies?

          Do some states or regions of the country do a better 
        job at encouraging the dissemination of distributed generation 
        technologies? What specifically makes them different?
    Chairwoman Biggert. The hearing will come to order.
    I want to welcome everyone to this hearing of the Energy 
Subcommittee. Our purpose here is to identify current and 
emerging technologies and the barriers to their deployment that 
will help improve the reliability of our nation's increasingly 
complex electrical system.
    The blackout that occurred on August 14 leaving 50 million 
Americans without power was a startling reminder of the 
vulnerability of our current antiquated system and the enormous 
costs associated with such an unreliable system. Many 
communities in my District, thankful that the blackout stopped 
short of Chicago, watched and learned that the blackout meant 
so much more than no electricity. They came to realize that a 
blackout could mean no public transportation, no stoplights, no 
security lights, no heat or air conditioning, and in some 
cases, no water.
    While a national joint task force is still investigating 
the exact causes of the August 14 blackout, it is clear that 
overloading of a portion of the Nation's transmission system 
played an important role. But regardless of what the exact 
cause of the blackout was, the bottom line is this: we simply 
can not meet today's energy needs with yesterday's energy 
infrastructure. No pun intended, but we are virtually in the 
dark ages when it comes to energy infrastructure. This is 
especially true with respect to the electric grid.
    But the answer isn't necessarily more lines or even 
necessarily new and better ones. We must consider other, better 
ways to obviate the need for more lines, such as greater use of 
distributed generation and reducing peak demand for electricity 
through technologies that improve efficiency, communications, 
and controls. And we must make better use of whatever lines we 
do have, which is where advanced technology could have the 
greatest impact. Improved monitors of controls could prevent 
and isolate transmission failures and other new technologies 
promised to enable the transmission system to sustain far 
greater loads.
    Americans want affordable and reliable energy, and yet, 
because we have ignored technology, we act as though the two 
are mutually exclusive. The only way to have both at the same 
time is first to take our head out of the sand and second by 
putting technology to work and cutting some of the 1930's style 
government red tape that has stifled the development of new 
technology and infrastructure.
    Our witnesses today will discuss currently available 
emerging technologies and the regulatory and economic barriers 
that impede their adoption. Their testimony also will provide 
an opportunity to learn more about the Department of Energy's 
newly formed Office of Electric Transmission and Distribution 
and its work on these issues.
    As Congress works to eliminate barriers that discourage 
investment in new grid technologies and distributed generation, 
and consequently, as the competitive market begins to function 
properly, this committee and this subcommittee, in particular, 
must do two things: first we must ensure that whatever 
regulations remain do not limit or impede technological 
solutions; and secondly, we must ensure that the best and most 
promising technology is ready and available for deployment. I 
hope our witnesses today can help shed some light on how we can 
be successful on both fronts.
    As the recent blackout demonstrated, the cost of continued 
inaction far exceeds the cost of action. Some estimate that the 
cost--total cost of upgrading our electrical grid will be $50 
billion or more over the next 10 years, but the cost of an 
unreliable electric system are even higher with costs of the 
August 14 blackout alone estimated to be between $4 billion and 
$6 billion. By investing in new technologies to improve our 
electrical system, we are investing in an infrastructure that 
supports virtually every component of our economy. That is why 
a robust, resilient, and reliable electrical system is 
unquestionably in our nation's interest. We must work together 
to determine the best way to get there. I think we can all 
agree that advanced technologies can be a major part of the 
solution as long as the barriers to their deployment and use 
are removed.
    I look forward to hearing today's testimony and pursuing 
those subjects in greater detail.
    [The prepared statement of Mrs. Biggert follows:]
              Prepared Statement of Chairman Judy Biggert
    The hearing will come to order.
    I want to welcome everyone to this hearing of the Energy 
Subcommittee. Our purpose here is to identify current and emerging 
technologies--and the barriers to their deployment--that will help 
improve the reliability of our nation's increasingly complex electrical 
system.
    The blackout that occurred on August 14th, leaving 50 million 
Americans without power, was a startling reminder of the vulnerability 
of our current, antiquated system, and the enormous costs associated 
with such an unreliable system. Many communities in my district, 
thankful that the blackout stopped short of Chicago, watched and 
learned that the blackout meant so much more than no electricity. They 
came to realize that a blackout could mean no public transportation, no 
stoplights, no security lights, no heat or air conditioning, and in 
some cases, no water.
    While a bi-national task force is still investigating the exact 
causes of the August 14th blackout, it is clear that overloading of a 
portion of the Nation's transmission system played an important role. 
But regardless of what the exact cause of the blackout was, the bottom 
line is this: we simply cannot meet today's energy needs with 
yesterday's energy infrastructure. No pun intended, but we're virtually 
in the dark ages when it comes to energy infrastructure. This is 
especially true with respect to the electric grid.
    But the answer isn't just more lines, or even necessarily new and 
better lines. We must consider other, better ways to obviate the need 
for more lines, such as greater use of distributed generation, and 
reducing peak demand for electricity through technologies that improve 
efficiency, communications, and controls.
    And we must make better use of whatever lines we do have, which is 
where advanced technology could have the greatest impact. Improved 
monitors and controls could prevent and isolate transmission failures, 
and other new technologies promise to enable the transmission system to 
sustain far greater loads.
    Americans want affordable and reliable energy, and yet, because 
we've ignored technology, we act as though the two are mutually 
exclusive. The only way to have both at the same time is: first, to 
take our head out of the sand; and second, by putting technology to 
work and cutting some of the 1930's-style government red tape that has 
stifled the development of new technology and infrastructure.
    Our witnesses today will discuss currently available and emerging 
technologies, and the regulatory and economic barriers that impede 
their adoption. Their testimony also will provide an opportunity to 
learn more about the Department of Energy's newly formed Office of 
Electric Transmission and Distribution, and its work on these issues.
    As Congress works to eliminate barriers that discourage investment 
in new grid technologies and distributed generation, and consequently 
as the competitive market begins to function properly, this committee, 
and this subcommittee, in particular, must do two things. First, we 
must ensure that whatever regulations remain do not limit or impede 
technological solutions. And secondly, we must ensure that the best and 
most promising technology is ready and available for deployment. I hope 
our witnesses today can help shed some light on how we can be 
successful on both fronts.
    As the recent blackout demonstrated, the cost of continued inaction 
far exceeds the cost of action. Some estimate that the total cost of 
upgrading our electrical grid will be $50 billion or more over the next 
ten years. But the costs of an unreliable electric system are even 
higher, with costs of the August 14th blackout alone estimated to be 
between $4 and $6 billion. By investing in new technologies to improve 
our electrical system, we are investing in an infrastructure that 
supports virtually every component of our economy.
    That's why a robust, resilient, and reliable electrical system is 
unquestionably in our national interest. We must work together to 
determine the best way to get there. I think we can all agree that 
advanced technologies can be a major part of the solution, as long as 
the barriers to their deployment and use are removed.
    I look forward to listening to today's testimony and pursuing these 
subjects in greater detail.

    Chairwoman Biggert. The Chair now recognizes the Ranking 
Minority Member on the Energy Subcommittee for his only--his 
opening statement.
    Mr. Lampson. Thank you, Chairwoman Biggert. I want to thank 
you for calling this very important hearing this morning. And 
certainly I want to thank our witnesses for joining us here 
today. We appreciate having all of you.
    The recent blackout suffered by 50 million Americans in the 
Midwest and the Northeast on August the 14th has indeed brought 
the issue of electricity generation and transmission into 
clearer focus. The blackout was the largest ever in the United 
States. And the cost in the United States has been estimated to 
be somewhere between $4 billion and $6 billion.
    This incident spurred the creation of a joint United 
States-Canadian task force on the factors that contributed to 
this event. As the Administration, Congress, and the joint task 
force continue to examine the factors behind the incident, I 
believe that it's imperative that we consider the role 
technology can play in preventing future blackouts. We need to 
ensure that our power transmission services are reliable and 
secure while we continue to prevent future disruptions across 
the country. Technological advances will play a very key role 
in this endeavor.
    While I understand that many have called for the 
construction of new transmission lines, I look forward to 
hearing from our witnesses about how smart grid and demand 
response technologies might also help utility companies handle 
these problems in the future. Advanced conductors made from 
ceramic composites and superconducting wires could also 
dramatically increase efficiency. And I am also interested to 
hear about the role that reactive power may have played in this 
incident and whether we have technological advances to help us 
understand this phenomenon.
    My congressional district has the distinction of being 
serviced by two electricity grids. My Houston-Galveston area 
constituents are served by Electric Reliability Council of 
Texas, ERCOT, while my Beaumont, Port Arthur, and Chambers 
County constituents are under the Southeastern Electric 
Reliability Council, SERC. I have reached out to the utility 
companies in my area for their thoughts and their ideas on how 
we can improve the electricity grids. And while it was the 
Midwest and Northeast on August the 14th, other parts of the 
country have experienced blackouts in recent years, and I am 
sure that other regions will also experience them in the 
future.
    So I am committed to working with our power companies, 
federal, State, and local officials to utilize available 
technologies and to ensure that we minimize future disruptions. 
As a nation, we must be proactive about these problems rather 
than reactive as we respond to these challenges, and I look 
forward to hearing from our witnesses.
    Thank you, Madame Chairman.
    [The prepared statement of Mr. Lampson follows:]
           Prepared Statement of Representative Nick Lampson
    I would like to thank Chairwoman Biggert for calling this very 
important hearing. And I would also like to thank all of our witnesses 
for joining us here today.
    The recent blackout suffered by 50 million Americans in the Midwest 
and Northeast on August 14th has brought the issue of electricity 
generation and transmission into a clear focus.
    The blackout was the largest ever in the United States and the cost 
to the U.S. has been estimated at between $4 and $6 billion.
    This incident spurred the creation of a joint United States-
Canadian task force on the factors that contributed to this event.
    As the Administration, Congress and the joint task force continue 
to examine the factors behind this incident, I believe it is imperative 
that we consider the role technology can play in preventing future 
blackouts.
    We need to ensure that our power transmission services are reliable 
and secure while we continue to prevent future disruptions across the 
country. Technological advances will play a key role in this endeavor.
    While I understand that many have called for the construction of 
new transmission lines, I look forward to hearing from our witnesses 
about how ``smart grid'' and ``demand response'' technologies might 
also help utility companies handle these problems in the future.
    Advanced conductors made from ceramic composites and 
superconducting wires could also dramatically increase efficiency.
    I am also interested to hear about the role that reactive power may 
have played in this incident and whether we have technological advances 
to help us understand this phenomenon.
    My congressional district has the distinction of being serviced by 
two electricity grids. My Houston and Galveston area constituents are 
served by the Electric Reliability Council of Texas (ERCOT), while my 
Beaumont, Port Arthur and Chambers County constituents are under the 
Southeastern Electric Reliability Council (SERC).
    I have reached out to the utility companies in my area for their 
thought and ideas on how we can improve the electricity grids.
    And while it was the Midwest and Northeast on August 14th, other 
parts of the country have experienced blackouts in recent years and I 
am sure other regions will also experience them in the future.
    I am committed to working with power companies, federal, State and 
local officials to utilize available technologies and ensure that we 
minimize future disruptions.
    As a nation we must be proactive about these problems rather than 
reactive as we respond to these challenges.

    Chairwoman Biggert. Thank you. I would like to ask at this 
time for a unanimous consent that all Members who wish to do so 
have their opening statements entered into the record. Without 
objection, so ordered.
    [The prepared statement of Mr. Costello follows:]
         Prepared Statement of Representative Jerry F. Costello
    Good morning. I want to thank our witnesses for appearing before 
this committee to discuss removing barriers to technology to prevent 
blackouts. On August 14 and 15, 2003, the northeastern U.S. and 
southern Canada suffered the worst power blackout in history. Areas 
affected extended from New York, Massachusetts, and New Jersey west to 
Michigan, and from Ohio north to Toronto and Ottawa, Ontario. 
Approximately 50 million customers were impacted, and the economic 
costs will be staggering.
    Getting to the bottom of things will not be easy, given the 
complexity of the electrical system, but will require answers to three 
simple questions. What exactly happened? Why did it happen? And how can 
it be prevented in the future? In answering the last question, 
continued research and development in our electric system will help us 
improve our grid system and hopefully prevent another blackout from 
occurring.
    If future blackouts are to be avoided, we must fix these problems 
quickly and decisively and continue to promote research and development 
that will address the reliability and security of the electric energy 
transmission system. Southern Illinois University (SIU) in my 
congressional district has been continuously working on research on a 
variety of electric transmission issues. SIU was among the first to 
receive research contracts from the Electric Power Research Institute 
(EPRI) in launching the Flexible AC Transmission Initiative. In 
addition, SIU has received grants from the National Science Foundation, 
the Department of Energy and Electric Utilities for electric 
transmission research. Further, the university is currently working on 
Broad Band over Power Lines which is an emerging technology utilizing 
the backbone of the power distribution network for the transmission of 
high-speed data.
    SIU is one example of promising work in improving our electric 
system; however, more is needed. EPRI estimates that research and 
demonstration programs will require increased federal funding of 
approximately $1 billion, spread out over five years, with the private 
sector contributing a significant amount of matching funding. I am 
interested in hearing from our witnesses about a public/private 
institutional role for research and development.
    I welcome our panel of witnesses and look forward to their 
testimony.

    Chairwoman Biggert. It is my pleasure to welcome our 
witnesses for today's hearing and to introduce them to you. 
They are: Mr. James Glotfelty, Director of the Office of 
Electric Transmission and Distribution, U.S. Department of 
Energy; Mr. T.J. Glauthier, President and CEO, Electricity 
Innovation Institute; Dr. Vernon Smith, Nobel Laureate and 
Professor of Economics, George Mason University; and Mr. Tom 
Casten, CEO, Private Power, LLC. I would like to extend a 
special welcome to Mr. Casten, a constituent of my District and 
to congratulate him on his impressive work he has done for more 
than 25 years in developing and operating combined heat and 
power plants as a way to save money, increase efficiency, and 
lower emissions. Welcome to all of you.
    As the witnesses know, spoken testimony will be limited to 
five minutes each, after which Members will have five minutes 
each to ask questions. So we will begin with Mr. Glotfelty.

   STATEMENT OF MR. JAMES W. GLOTFELTY, DIRECTOR, OFFICE OF 
        ELECTRIC TRANSMISSION AND DISTRIBUTION, U.S. DOE

    Mr. Glotfelty. Thank you very much.
    Good morning, Chairman Biggert and Members of the 
Subcommittee. My name is Jimmy Glotfelty. I'm the Director of 
the newly created Office of Electric Transmission and 
Distribution at the Department of Energy. Thank you for the 
opportunity to testify before you today on the role that 
technology can play in the development of a more robust and 
reliable electric system.
    America's electric system is facing serious problems: aging 
equipment, uncertain regulations at both the federal and State 
level, and difficulty attracting investment capital, all in the 
face of rising demand. As you may know, the National Academy of 
Sciences called America's electric system ``the supreme 
engineering achievement of the 20th century.'' However, as 
currently configured, there are serious questions about the 
ability of this system to satisfy the complex needs necessary 
to power the economy in the 21st century.
    The U.S. Department of Energy is leading an effort to help 
facilitate the modernization of our nation's aging electric 
grid. DOE, in collaboration with industry and other partners, 
developed Grid 2030, a national vision for tomorrow's electric 
system, and a road map that outlines the key challenges for 
modernizing the grid and suggested paths and--suggested paths 
to get there. The vision and road map called for government and 
industry to work today in a collaborative manner. They 
implement a five-part action agenda to modernize the grid and 
achieve the Grid 2030 vision. This agenda includes: study the 
feasibility of a national transmission backbone; continue the 
development of critical technologies that make the future grid 
more stable, more efficient, and more reliable; accelerate 
technology acceptance; strengthen market operations and allow 
the marketplace to promote new technologies that strengthen our 
grid; and finally, build multi-year public/private partnerships 
with industry, states, reliability councils to ensure that this 
vision becomes a reality.
    Transmission, distribution, researching efforts at DOE have 
been in existence for many years. Many commercialized 
technologies that enhanced the reliability of the electric grid 
today began with DOE research many years ago. However, there 
are many more technologies that require further research, 
development, and demonstration to ensure their effective 
performance in the field. This is critical to acceptance in the 
marketplace. For example, DOE is working with industry to test 
high-capacity transmission lines made of new materials that 
will carry more electrical current, reduce losses, and are 
lighter weight and lower in cost. Testing these lines at our 
Oak Ridge National Lab Transmission Testing Center will help 
industry reduce barriers that lead to commercial viability of 
these products. New communication and control technologies are 
necessary to promote an electricity grid with embedded 
intelligence that will process vast amounts of information in 
less than a second and help operators make more accurate 
reliability and economic decisions.
    Advances in power electronics today already allow more 
power to flow through existing systems. Improvements will 
better control the flow of AC power flows and allow operators 
to isolate problems that could cause larger regional 
disruptions. In the future, high-temperature superconductors 
have the potential to revolutionize electric power delivery in 
America. The prospect of transmitting large amounts of power 
through compact underground corridors over long distances with 
minimal losses could significantly enhance the overall 
efficiency and reliability of the electric system, all while 
reducing fuel use and emissions. Superconducting technologies 
will be used in generators, cables, transformers, storage 
devices, and motors: equipment that crosscuts the entire 
electric power center.
    While these technologies are still being developed, there 
are still major stumbling blocks in their widespread deployment 
on the grid. The primary reason is uncertainty: regulatory 
uncertainty and financial uncertainty. The lack of investment 
in grid modernization has been caused by uncertainty in 
electric utility regulations at the federal and State level. 
The jurisdictional boundaries are not clear, and the difficult 
transition from a tightly regulated industry to one where 
competition and market forces play a greater role has taken 
years too long. Regulatory uncertainty has lasted almost a 
decade, and its consequences are beginning to be felt across 
the Nation.
    Investment uncertainty is directly tied to the state of 
regulation. If markets see clear signals as to a return on 
investment, they will invest. If not, the capital will flow to 
a more stable industry. During this time of uncertainty, both 
investment in the transmission system and R&D funding by the 
industry has declined. In fact, transmission reliability 
research at the Department of Energy was zeroed out for three 
years in the 1990's: '96, '97, and '98. These private/public 
cutbacks have slowed the push for new technologies and tools 
into the marketplace.
    While this regulatory rethinking proceeds, several states 
have implemented price caps as a way to protect consumers from 
price shocks while the markets adjust to make policy--allow 
policy-makers to identify next steps. While attractive to the 
regulator, price caps could very well hinder investment, 
because they raise the uncertainty of cost recovery for new 
equipment.
    As you know, there are many things that must be done to 
bring our electrical infrastructure up to a 21st century 
standard. August--the August 14 blackout is an example of what 
could happen again in the future if we do not begin to focus on 
the improvement of our grid today. The U.S. economy's reliance 
on a secure, reliable infrastructure has never been greater. 
Modernizing the grid will involve time, resources, and 
unprecedented levels of cooperation among electric power 
industries, many and diverse stakeholders. Neither government 
nor industry can shoulder these responsibilities alone. We must 
act now or risk greater problems in the future.
    I thank you for the opportunity to testify before you today 
and look forward to addressing your questions.
    [The prepared statement of Mr. Glotfelty follows:]
                Prepared Statement of James W. Glotfelty

Introduction

    Chairman Biggert and Members of the Subcommittee, thank you for the 
opportunity to testify today on the role of new technologies in 
developing a more robust electric system.
    America's electric system is facing serious problems: aging 
equipment and infrastructure, uncertain regulations and policies, 
difficulties attracting investment capital, and constrained supplies 
failing to meet rising demand. The National Academy of Sciences called 
America's electric system ``. . .the supreme engineering achievement of 
the 20th century.'' However, as currently configured, there are serious 
questions about the ability of this system to satisfy the increasingly 
complex electricity needs of the 21st century.
    The President is well aware of this problem. For example, on 
February 6th 2003, President Bush reiterated the Administration's 
policy to modernize the electric grid, ``It is a plan to modernize our 
electricity delivery system. It is a plan which is needed now. It is 
needed for economic security. It is needed for national security.'' The 
August blackout highlighted the economy's reliance on a secure and 
reliable electric system. Billions of dollars in goods and services, in 
productivity and food, were lost.
    Implementing the President's plans for modernizing America's 
electricity infrastructure is one of the U.S. Department of Energy's 
top priorities. The President's National Energy Policy directed 
preparation of a detailed assessment of the major bottlenecks in our 
nation's transmission system, and in May 2002, Secretary Abraham issued 
The National Transmission Grid Study. This report made clear that 
without dramatic improvements and upgrades over the next decade our 
nation's transmission system will fall short of the reliability 
standards our economy requires, and will result in higher costs to 
consumers. The Department immediately began taking steps to implement 
the improvements that are needed to ensure continued growth and 
prosperity, working with Congress, States, and other stakeholders to 
promote innovation and enable entrepreneurs to develop a more advanced 
and robust transmission system. The mission of DOE's newly created 
Office of Electric Transmission and Distribution is focused on 
achieving this end.

Opportunities for Modernizing America's Electric System

    Modernization includes the application of new and existing 
technologies to enhance the reliability and efficiency of the entire 
electric system. Electric reliability and efficiency are affected by 
all four segments of the electricity value chain: generation, 
transmission, distribution, and end-use. Investing in only one area 
will not necessarily stimulate performance improvements across other 
segments of the integrated system. Increasing supply without improving 
transmission and distribution infrastructure, for example, may actually 
lead to more serious reliability concerns. Thus, to improve the 
reliability and efficiency of electric power in America--as called for 
in the President's energy plan--equipment upgrades as well as new 
technologies are needed throughout the electric system.
    With electric generation, reliability is enhanced when additional 
supplies are added to ensure that peak demands are met. Reliability is 
also enhanced when sufficient reserve capacity is available for 
scheduled and unscheduled maintenance, and for emergency situations. 
Additional supplies can come from expansion of both central and 
distributed assets, representing a variety of technologies and fuel 
choices. Efficiency is enhanced when more fuel-efficient generation 
technologies are used, such as combined cycle combustion turbines and 
combined heat and power units. However, expanding supplies without 
balancing investment in transmission and distribution infrastructure 
will place additional cost burdens on consumers, both in terms of 
congestion and reliability. A reliable system requires balanced 
investment in supply, delivery, and demand management.
    With respect to electric transmission, reliability is enhanced when 
additional lines are added to the grid, proper maintenance occurs in a 
timely manner, and when grid operators are able to make adjustments, in 
real-time, to address fluctuations in system conditions, particularly 
during periods of peak demand. Efficiency is enhanced when new 
transmission technologies are used that have reduced line losses, and 
that have the capability to carry more current for a given size of 
conductor. The Department is partnering today with industry to develop 
cost-effective transmission solutions, including advanced composite 
conductors, high temperature superconductors, and wide area measurement 
systems.
    With respect to electric distribution, reliability is enhanced when 
additional lines are added, substation capabilities are expanded, 
proper maintenance occurs in a timely manner, communications and 
interconnections systems facilitate distributed energy development, and 
systems are protected better from natural disturbances. Efficiency is 
enhanced when new distribution technologies are deployed that reduce 
line losses, and information technologies optimize existing resources. 
The Department is working with States and industry to develop 
transformers, fault current limiters, cables, and power electronics 
that will revolutionize the distribution system.
    With respect to electric end-use, reliability is enhanced when 
demand response programs manage electricity consumption in ways that 
result in lower overall peak demand and a better balance between on- 
and off-peak usages. Actions can include use of such technologies as 
real-time (or time-of-use) meters, and advanced energy storage. 
Efficiency is enhanced when new appliances and equipment require less 
electricity to produce equal (or greater) levels of service, such as 
advanced lighting, heating, cooling, refrigeration, and motor drive 
devices. Although peak load management offers significant benefits to 
utilities, electric consumption is controlled by the end-users. Their 
participation in a fully integrated energy system requires price 
transparency.

Barriers to Electric Grid Modernization

    For more than two decades, America has been under-investing in the 
modernization of the electric system. The primary reason is 
uncertainty: technical uncertainty; regulatory uncertainty; and 
financial uncertainty. The consequences of this have been significant: 
greater numbers of congested transmission corridors, a higher 
likelihood of brownouts and blackouts, and more economic losses from 
outages when they do occur. Annual estimates of losses from outages and 
power quality disturbances range from $25 to $180 billion annually. 
Standard and Poor's estimates the economic losses from the August 14th 
blackout to be about $6 billion. Although some estimate it will take 
$100 billion to modernize the electric system, this should be compared 
against the scale of the existing electric industry: infrastructure 
worth approximately $800 billion (including generation), and revenues 
approaching $250 billion annually.
    There are electricity technologies that are ready today to be used 
for grid modernization projects. However, electric assets are capital-
intensive and long-lived, so the stock turnover process is relatively 
slow. Much of the Nation's electric infrastructure of power lines, 
substations, switchyards, and transformers has been in service for 25 
years, or longer.
    The primary reason for the lack of investment in grid modernization 
is the financial uncertainty caused by the uneven process of 
restructuring of electric utility regulation, at both the federal and 
state levels. The electric power business currently is in and has for 
the last few years been in the midst of a difficult transition from a 
tightly regulated industry to one where competition and market forces 
play a greater role.
    This transition has been slow and there have been missteps. For 
example, the unfortunate experience in California cost citizens 
billions of dollars, and has caused other states to re-think their 
approach to electric power regulation.
    Regulatory uncertainty has affected other aspects of grid 
modernization. For example, there seems to have been a substantial 
decline in the level of spending recently by the electric power 
industry in research and development. The Electric Power Research 
Institute reports that its R&D funding from member utilities has fallen 
from about $600 million annually in 1994 to about $300 million annually 
in 2001. Federal spending on electric system research and development 
during that same time period did not rise to fill the gap. For example, 
for fiscal years 1996, 1997, and 1998, the funding for DOE's 
Transmission Reliability research and development program was zeroed 
out. This significant reduction in R&D investments has limited the flow 
of new technologies, tools, and techniques into the marketplace.
    There are other barriers to the acceptance of new electric delivery 
technologies in the marketplace. Equipment must be introduced into the 
electric system in a manner that will ensure safe, reliable, and 
efficient operation. The electric industry is reluctant to use new 
technologies unless their functionality, and especially durability, is 
ensured. This slows down the process of moving technologies from the 
laboratory and into the ``tool-kit'' of electric system planners and 
operators. Some of the difficulties stem from problems in managing the 
risks associated with using new technologies, risks common to all 
industries. These technology transfer difficulties are exacerbated in 
the electric power sector by a regulatory framework that favors the 
status quo and does not typically reward managers for innovation, risk 
taking, or entrepreneurial activities. There is a need to work with 
State commissions to familiarize them with the new technologies and the 
extent to which their reliability has been demonstrated.
    While this ``re-thinking'' proceeds, several states have 
implemented ``price caps'' as a way to protect consumers from price 
shocks while the markets adjust and policy makers identify next steps. 
While attractive to the regulator, price caps tend to hinder investment 
because they raise the uncertainty of cost recovery for new plant and 
equipment. For example, utilities subject to price caps cannot seek 
rate increases to recover reliability investment costs; they have to 
identify offsets from other aspects of their operation to maintain 
profitability.
    Finally, public concern about the environmental, public health, and 
safety consequences of electric power has resulted in local or state 
siting and permitting processes that in many cases have impacted 
additional capacity. There are numerous instances over the past decade 
where projects to modernize the electric grid were stymied by siting 
and permitting delays caused by bureaucratic requirements or 
jurisdictional disputes among states and the Federal Government. This 
has greatly hindered new investment despite the existence of a 
guaranteed rate of return for investors. However, technologies such as 
advanced composite conductors that utilize existing transmission 
facilities may have a potential advantage over technologies that would 
require new rights-of-way.

Administration Action to Address Barriers

    The Bush Administration, from the outset, has highlighted the 
importance of modernizing America's electric system. It is one of the 
most important policy objectives discussed in the President's National 
Energy Policy, which was issued in May 2001. One year later, the 
Department issued The National Transmission Grid Study, which contains 
51 specific recommendations for modernizing the grid and increasing the 
reliability of America's transmission system. In September 2002, the 
Secretary's Energy Advisory Board issued the Transmission Grid Solution 
Report which outlines steps to streamline transmission siting and 
permitting and increase the level of investment in electric 
transmission facilities. In April 2003, the President's Council of 
Advisors on Science and Technology issued a report calling for expanded 
federal investment in electric grid modernization technologies.
    Also in April 2003, the Department held the National Electric 
System Vision meeting, which resulted in Grid 2030--a National Vision 
for Electricity's Second 100 Years, a document that presents industry 
and DOE's views on the future of electric power in America. In July 
2003, the Department followed up the ``Grid 2030'' vision with the 
National Electric Delivery Technologies Roadmap meeting, which will 
soon result in a document outlining the research, development, and 
technology transfer steps that government, industry, and others need to 
take to make the national vision for the future of the electric system 
into reality. The U.S. Department of Energy's website, www.energy.gov, 
provides access for downloading copies of these documents and reports.

``Grid 2030''--A National Vision for Electricity's Second 100 Years

    The national vision calls for ``Grid 2030'' to energize a 
competitive North American marketplace for electricity. It will connect 
everyone to abundant, affordable, clean, efficient, and reliable 
electric power anytime, anywhere. It will provide the best and most 
secure electric services available in the world. Imagine the 
possibilities: electricity and information flowing together in real 
time, near-zero economic losses from outages and power quality 
disturbances, a wider array of customized energy choices, suppliers 
competing in open markets to provide the world's best electric 
services, and all of this supported by a new energy infrastructure 
built on superconductivity, distributed intelligence and resources, 
clean power, and the hydrogen economy.
    Although the precise architecture of America's future electric 
system has yet to be designed, the ``Grid 2030'' concept has been 
envisioned to consist of three major elements:

          A national electricity ``backbone''

          Regional interconnections which include Canada and 
        Mexico

          Local distribution, mini- and micro-grids providing 
        services to customers from generation resources anywhere on the 
        continent.

    The backbone system will involve a variety of technologies. These 
include controllable, very-low-impedance superconducting cables and 
modular transformers operating within the synchronous AC environment; 
high voltage direct current devices forming connections between 
regions; and other types of advanced electricity conductors, as well as 
information, communications, and controls technologies for supporting 
real-time operations and national electricity transactions. 
Superconducting systems will be able to reduce line losses, assure 
stable voltage, and expand current carrying capacities in dense 
urbanized areas. They will be seamlessly integrated with high voltage 
direct current systems and other advanced conductors for transporting 
electric power over long distances.
    Power from the backbone system will be distributed over regional 
networks. Long-distance transmission within these regions will be 
accomplished using upgraded, controllable AC facilities and, in some 
cases, expanded DC links. High-capacity DC inter-ties will be employed 
far more extensively than they are today to link adjacent, asynchronous 
regions. Regional system planning and operations will benefit from 
real-time information on the status of power generation facilities 
(central-station and distributed) and loads. Expanded use of advanced 
electricity storage devices will address supply-demand imbalances 
caused by weather conditions and other factors. In this grid of the 
future, markets for bulk power exchanges will be able to operate more 
efficiently with oversight provided through mandatory reliability 
standards, multi-state entities, and voluntary industry entities.
    In the ``Grid 2030'' distribution system, it is envisioned that 
customers will have the ability to tailor electricity supplies to suit 
their individual needs for power, including costs, environmental 
impacts, and levels of reliability and power quality. Sensors and 
control systems will be able to link appliances and equipment from 
inside buildings and factories to the electricity distribution system. 
Advances in distributed power generation systems and hydrogen energy 
technologies could enable the dual use of transportation vehicles for 
stationary power generation. For example, hydrogen fuel cell powered 
vehicles could be able to provide electricity to the local distribution 
system when in the garage at home or parking lot at work.

National Electric Delivery Technologies Roadmap

    The Roadmap, which is still being finalized by DOE, will call for 
the collaborative implementation by government and industry of a five-
part ``action agenda'' to modernize the grid and achieve the ``Grid 
2030'' vision. The action agenda includes:

          Designing the ``Grid 2030'' Architecture--Conceptual 
        framework that guides development of the electric system from 
        the generation busbar to the customer's meter

          Developing the Critical Technologies--Advanced 
        conductors, electric storage, high-temperature superconductors, 
        distributed intelligence/smart controls, and power electronics 
        that become the building blocks for the ``Grid 2030'' concept

          Accelerating Technology Acceptance--Field testing and 
        demonstrations that move the advanced technologies from the 
        laboratory and into the ``tool kit'' of transmission and 
        distribution system planners and operators

          Strengthening Market Operations--Assessing markets, 
        planning, and operations; improving siting and permitting; and 
        addressing regulatory barriers bring greater certainty and 
        lower financial risks to electric transactions and investment

          Building Partnerships--Leveraging stakeholder 
        involvement through multi-year, public-private partnerships; 
        working with States, FERC, and NERC to address shared concerns

Technologies for Modernizing the Electric Grid

    There is a portfolio of technologies that have the capabilities to 
enhance the reliability and efficiency of the electric grid. Many of 
these will require further research, development, field testing, and 
demonstration to lower costs, improve reliability and durability, and 
demonstrate effective performance. The Appendix, taken from the 
National Transmission Grid Study, provides additional details on a wide 
range of grid modernization technologies.
    Advanced Conductors and New Materials. Desirable properties of new 
material for electricity conductors include greater current-carrying 
capacity, lower electrical resistance, lighter weight, greater 
durability, greater controllability, and lower cost. Advances in 
semiconductor-based power electronics have given rise to new solutions 
that allow more power flow through existing assets, while respecting 
local land use concerns. Advanced composite materials and alloys are 
also making an impact and are being used in new designs for conductors 
and cables. Diamond technology could replace silicon and achieve 
dramatic increases in current density. In addition, scientific 
discoveries in advanced materials are resulting in new concepts for 
conductors of electric power. For example, nanoscience is opening new 
frontiers in the design and manufacture of machines at the molecular 
level for fabricating new classes of metals, ceramics, and organic 
compounds (such as carbon nanotubes) that have potential electric power 
applications.
    High Temperature Superconductors. High temperature superconductors 
are a good example of advanced materials that have the potential to 
revolutionize electric power delivery in America. The prospect of 
transmitting large amounts of power through compact underground 
corridors, even over long distances, with minimal electrical losses and 
voltage drop, could significantly enhance the overall energy efficiency 
and reliability of the electric system, while reducing fuel use, air 
emissions, and physical footprint. Superconducting technologies can be 
used in generators, cables, transformers, storage devices, synchronous 
condensers, and motors--equipment that crosscuts the entire electric 
power value chain.
    Electricity Storage. Breakthroughs that dramatically reduce the 
costs of electricity storage systems could drive revolutionary changes 
in the design and operation of the electric power system. Peak load 
problems could be reduced, electrical stability could be improved, and 
power quality disturbances could be eliminated. Storage can be applied 
at the power plant, in support of the transmission system, at various 
points in the distribution system, and on particular appliances and 
equipment on the customer's side of the meter.
    Communications, Controls and Information Technologies. Information 
technologies (IT) have already revolutionized telecommunications, 
banking, and certain manufacturing industries. Similarly, the electric 
power system represents an enormous market for the application of IT to 
automate various functions such as meter reading, billing, transmission 
and distribution operations, outage restoration, pricing, and status 
reporting. The ability to monitor real-time operations and implement 
automated control algorithms in response to changing system conditions 
is just beginning to be used in electricity. Visualization tools are 
just beginning to be used by electric grid operators to process real-
time information and accelerate response times to problems in system 
voltage and frequency levels. Distributed intelligence, including 
``smart'' appliances, could drive the co-development of the future 
architecture for both telecommunications and electric power networks, 
and determines how these systems are operated and controlled. Data 
access and data management will become increasingly important business 
functions.
    Advanced Power Electronics. High-voltage power electronics allow 
precise and rapid switching of electrical power. Power electronics are 
at the heart of the interface between energy storage and the electrical 
grid. This power conversion interface--necessary to integrate direct 
current or asynchronous sources with the alternating current grid--is a 
significant cost component of energy storage systems. Additionally, 
power electronics are the key technology for power flow controllers 
(e.g., Flexible Alternating Current Transmission Systems--FACTS) that 
improve power system control, and help increase power transfer levels. 
New power electronics advances are needed to lower the costs of these 
systems, and accelerate their application on the network.
    Distributed Energy Technologies. Developments to improve the 
performance and economics of distributed energy generation and combined 
heat and power systems could expand the number of installations by 
industrial, commercial, residential, and community users of 
electricity. Devices such as fuel cells, reciprocating engines, 
distributed gas turbines and micro-turbines can be installed by users 
to increase their power quality and reliability, and to control their 
energy costs. They can lead to reduced ``upstream'' needs for electric 
generation, transmission, and distribution equipment by reducing peak 
demand.

Potential Benefits of Grid Modernization

    An expanded and modernized grid will virtually eliminate electric 
system constraints as an impediment to economic growth and in fact will 
promote and encourage economic growth. As stated in The National 
Transmission Grid Study, wholesale markets save consumers $13 billion 
annually, but constraints cost billions more. Robust national markets 
for electric power will encourage growth and open avenues for 
attracting capital to support infrastructure development and investment 
in new plant and equipment. New business models will emerge for both 
small and large companies for the provision of a wide variety of new 
products and services for electricity customers, distributors, 
transmitters, and generators.
    More energy efficient transmission and distribution will reduce 
line losses and help avoid emission of air pollution and greenhouse 
gases. More economically efficient system operations and the expanded 
use of demand-side management techniques will reduce the need for 
spinning reserves, which could also lower environmental impacts. A 
modernized national electric grid will facilitate the delivery of 
electricity from renewable technologies such as wind, hydro, and 
geothermal that have to be located where the resources are located, 
which is often remote from load centers.
    Faster detection of outages, automatic responses to them, and rapid 
restoration systems will improve the security of the grid, and make the 
grid less vulnerable to physical attacks from terrorists. Greater 
integration of information and electric technologies will involve 
strengthened cyber security protections. Expanded use of distributed 
energy resources will provide reliable power to military facilities, 
police stations, hospitals, and emergency response centers. This will 
help ensure that ``first-responders'' have the ability to continue 
operations even during worst-case conditions. Greater use of 
distributed generation will lessen the percentage of generated power 
that must flow through transmission and distribution systems, reducing 
strain on the grid. Higher levels of interconnection with Canada, 
Mexico, and ultimately other trading partners will strengthen America's 
ties with these nations and boost security through greater economic 
cooperation and interdependence.

Conclusion

    The electric grid is an essential part of American life. America 
has under-invested in maintenance of the national electric grid and in 
the development and deployment of advanced electric delivery 
technologies. Most of today's existing infrastructure of wires, 
transformers, substations, and switchyards has been in use for 25 
years, or more. The aging of this infrastructure, and the increasing 
requirements placed on it, have contributed to market inefficiencies 
and electricity congestion in several regions. These conditions could 
lead to higher prices, more outages, more power quality disturbances, 
and the less efficient use of resources. Jobs, environmental 
protection, public health and safety, and national security are at 
risk. We must act now or risk even greater problems in the future.
    In recognition of this, President Bush has asked the U.S. 
Department of Energy to lead a national effort to modernize the 
electric grid. The newly formed Office of Electric Transmission and 
Distribution has been given the assignment to do just that. The Office 
will work in partnership with the electric industry, states, and other 
stakeholders to develop a national vision of the future for America's 
electric grid, and a national roadmap of collaborative activities to 
achieve the vision. The Office's activities will include research and 
development, technology transfer, modeling and data analysis, and 
policy analysis.
    Modernizing the grid will involve time, resources, and 
unprecedented levels of cooperation among the electric power industry's 
many and diverse stakeholders. Neither government nor industry can 
shoulder these responsibilities alone. The Office of Electric 
Transmission and Distribution stands ready to lead this transformation.

Appendix

           List of Technology Options for Grid Modernization

    This appendix, taken from The National Transmission Grid Study, 
contains a list of some of the technologies that are being researched 
and deployed to modernize the electric grid. The range of potential 
technologies is enormous and the list presented is not exhaustive.

          Advanced Composite Conductors: Usually, transmission 
        lines contain steel-core cables that support strands of 
        aluminum wires, which are the primary conductors of 
        electricity. New cores developed from composite materials are 
        proposed to replace the steel core.

           Objective: Allow more power through new or existing 
        transmission rights of way.

           Benefits: A new core consisting of composite fiber materials 
        shows promise as stronger than steel-core aluminum conductors 
        while 50 percent lighter in weight with up to 2.5 times less 
        sag. The reduced weight and higher strength equate to greater 
        current carrying capability as more current-carrying aluminum 
        can be added to the line. This fact along with manufacturing 
        advances, such as trapezoidal shaping of the aluminum strands, 
        can reduce resistance by 10 percent, enable more compact 
        designs with up to 50 percent reduction in magnetic fields, and 
        reduce ice buildup compared to standard wire conductors. This 
        technology can be integrated in the field by most existing 
        reconductoring equipment.

           Barriers: More experience is needed with the new composite 
        cores to reduce total life-cycle costs.

           Commercial Status: Research projects and test systems are in 
        progress.

          High-Temperature Super-Conducting (HTSC) Technology: 
        The conductors in HTSC devices operate at extremely low 
        resistances. They require refrigeration (generally liquid 
        nitrogen) to super-cool ceramic superconducting material.

           Objective: Transmit more power in existing or smaller rights 
        of way. Used for transmission lines, transformers, reactors, 
        capacitors, and current limiters.

           Benefits: Cable occupies less space (AC transmission lines 
        bundle three phase together; transformers and other equipment 
        occupy smaller footprint for same level of capacity). Cables 
        can be buried to reduce exposure to electric and magnetic field 
        effects and counteract visual pollution issues. Transformers 
        can reduce or eliminate cooling oils that, if spilled, can 
        damage the environment. The HTSC itself can have a long 
        lifetime, sharing the properties noted for surface cables 
        below.

           Barriers: Maintenance costs are high (refrigeration 
        equipment is required and this demands trained technicians with 
        new skills; the complexity of system can result in a larger 
        number of failure scenarios than for current equipment; power 
        surges can quench (terminate superconducting properties) 
        equipment requiring more advanced protection schemes).

           Commercial Status: A demonstration project is under way at 
        Detroit Edison's Frisbie substation. Four-hundred-foot cables 
        are being installed in the substation. Self-contained devices, 
        such as current limiters, may be added to address areas where 
        space is at a premium and to simplify cooling.

          Below-Surface Cables: The state of the art in 
        underground cables includes fluid-filled polypropylene paper 
        laminate (PPL) and extruded dielectric polyethylene (XLPE) 
        cables. Other approaches, such as gas-insulated transmission 
        lines (GIL), are being researched and hold promise for future 
        applications.

           Objective: Transmit power in areas where overhead 
        transmission is impractical or unpopular.

           Benefits: The benefits compared with overhead transmission 
        lines include protection of cable from weather, generally 
        longer lifetimes, and reduced maintenance. These cables address 
        environmental issues associated with EMFs and visual pollution 
        associated with transmission lines.

           Barriers: Drawbacks include costs that are five to 10 times 
        those of overhead transmission and challenges in repairing and 
        replacing these cables when problems arise. Nonetheless, these 
        cables represent have made great technical advances; the 
        typical cost ratio a decade ago was 20 to one.

           Commercial Status: PPL cable technology is more mature than 
        XLPE. EHV (extra high voltage) VAC and HVDC applications exist 
        throughout the world. XLPE is gaining quickly and has 
        advantages: low dielectric losses, simple maintenance, no 
        insulating fluid to affect the environment in the event of 
        system failure, and ever-smaller insulation thicknesses. GILs 
        feature a relatively large-diameter tubular conductor sized for 
        the gas insulation surrounded by a solid metal sleeve. This 
        configuration translates to lower resistive and capacitive 
        losses, no external EMFs, good cooling properties, and reduced 
        total life-cycle costs compared with other types of cables. 
        This type of transmission line is installed in segments joined 
        with orbital welders and run through tunnels. This line is less 
        flexible than the PPL or XLPE cables and is, thus far, 
        experimental and significantly more expensive than those two 
        alternatives.

             Underwater application of electric cable technology has a 
        long history. Installations are numerous between mainland 
        Europe, Scandinavia, and Great Britain. This technology is also 
        well suited to the electricity systems linking islands and 
        peninsulas, such as in Southeast Asia. The Neptune Project 
        consists of a network of underwater cables proposed to link 
        Maine and Canada Maritime generation with the rest of New 
        England, New York, and the mid-Atlantic areas.

          Tower Design Tools: A set of tools is being perfected 
        to analyze upgrades to existing transmission facilities or the 
        installation of new facilities to increase their power-transfer 
        capacity and reduce maintenance.

           Objective: Ease of use and greater application of 
        visualization techniques make the process more efficient and 
        accurate when compared to traditional tools. Traditionally, 
        lines have been rated conservatively. Careful analysis can 
        discover the unused potential of existing facilities. 
        Visualization tools can show the public the anticipated visual 
        impact of a project prior to commencement.

           Benefits: Avoids new right-of-way issues. The cost of 
        upgrading the thermal rating has been estimated at 
        approximately $7,000 per circuit mile, but reconductoring a 230 
        kV circuit costs on the order of $120,000 per mile compared 
        with $230,000 per mile for a new steel-pole circuit (Lionberger 
        and Duke 2001).

           Barriers: This technology is making good inroads.

           Commercial Status: Several companies offer commercial 
        products and services.

           Six-Phase and 12-Phase Transmission Line Configurations: The 
        use of more than three phases for electric power transmission 
        has been studied for many years. Using six or even 12 phases 
        allows for greater power transfer capability within a 
        particular right of way, and reduced EMFs because of greater 
        phase cancellation. The key technical challenge is the cost and 
        complexity of integrating such high-phase-order lines into the 
        existing three-phase grid.

          Modular Equipment: One way to gain flexibility for 
        changing market and operational situations is to develop 
        standards for the manufacture and integration of modular 
        equipment.

           Objective: Develop substation designs and specifications for 
        equipment manufacturers to meet that facilitate the movement 
        and reconfiguration of equipment in a substation to meet 
        changing needs.

           Benefits: Reduces overall the time and expense for 
        transmission systems to adapt to the changing economic and 
        reliability landscape.

           Barriers: Requires transmission planners and substation 
        designers to consider a broad range of operating scenarios.

             Also, developing industry standards can take a significant 
        period, and manufacturers would need to offer conforming 
        products.

           Commercial Status: Utilities have looked for a certain 
        amount of standardization and flexibility in this area for some 
        time; however, further work remains to be done. National Grid 
        (UK) has configured a number of voltage-support devices that 
        use modular construction methods. As the system evolves, the 
        equipment can be moved to locations where support is needed (PA 
        Consulting Group 2001).

           Ultra-High Voltage Levels: Because power is equal to the 
        product of voltage times current, a highly effective approach 
        to increasing the amount of power transmitted on a transmission 
        line is to increase its operating voltage. Since 1969, the 
        highest transmission voltage levels in North America have been 
        765 kV, (voltage levels up to 1,000 kV are in service 
        elsewhere). Difficulties with utilizing higher voltages include 
        the need for larger towers and larger rights of way to get the 
        necessary phase separation, the ionization of air near the 
        surface of the conductors because of high electric fields, the 
        high reactive power generation of the lines, and public 
        concerns about electric and magnetic field effects.

          HVDC: With active control of real and reactive power 
        transfer, HVDC can be modulated to damp oscillations or provide 
        power-flow dispatch independent of voltage magnitudes or angles 
        (unlike conventional AC transmission).

           Objective: HVDC is used for long-distance power transport, 
        linking asynchronous control areas, and real-time control of 
        power flow.

           Benefits: Stable transport of power over long distances 
        where AC transmission lines need series compensation that can 
        lead to stability problems. HVDC can run independent of system 
        frequency and can control the amount of power sent through the 
        line. This latter benefit is the same as for FACTS devices 
        discussed below.

           Barriers: Drawbacks include the high cost of converter 
        equipment and the need for specially trained technicians to 
        maintain the devices.

           Commercial Status: Many long-distance HVDC links are in 
        place around the world. Back-to-back converters link Texas, 
        WSCC, and the Eastern Interconnection in the U.S. More 
        installations are being planned.

          FACTS Compensators: Flexible AC Transmission System 
        (FACTS) devices use power electronics to adjust the apparent 
        impedance of the system. Capacitor banks are applied at loads 
        and substations to provide capacitive reactive power to offset 
        the inductive reactive power typical of most power system loads 
        and transmission lines. With long inter-tie transmission lines, 
        series capacitors are used to reduce the effective impedance of 
        the line. By adding thyristors to both of these types of 
        capacitors, actively controlled reactive power are available 
        using SVCs and TCSC devices, which are shunt- and series-
        controlled capacitors, respectively. The thyristors are used to 
        adjust the total impedance of the device by switching 
        individual modules. Unified power-flow controllers (UPFCs) also 
        fall into this category.

           Objective: FACTS devices are designed to control the flow of 
        power through the transmission grid.

           Benefits: These devices can increase the transfer capacity 
        of the transmission system, support bus voltages by providing 
        reactive power, or be used to enhance dynamic or transient 
        stability.

           Barriers: As with HVDC, the power electronics are expensive 
        and specially trained technicians are needed to maintain them. 
        In addition, experience is needed to fully understand the 
        coordinated control strategy of these devices as they penetrate 
        the system.

           Commercial Status: As mentioned above, the viability of HVDC 
        systems has already been demonstrated. American Electric Power 
        (AEP) has installed a FACTS device in its system, and a new 
        device was recently commissioned by the New York Power 
        Authority (NYPA) to regulate flows in the northeast.

          FACTS Phase-Shifting Transformers: Phase shifters are 
        transformers configured to change the phase angle between 
        buses; they are particularly useful for controlling the power 
        flow on the transmission network. Adding thyristor control to 
        the various tap settings of the phase-shifting transformer 
        permits continuous control of the effective phase angle (and 
        thus control of power flow).

           Objective: Adjust power flow in the system.

           Benefits: The key advantage of adding power electronics to 
        what is currently a non-electronic technology is faster 
        response time (less then one second vs. about one minute). 
        However, traditional phase shifters still permit redirection of 
        flows and thereby increase transmission system capacity.

           Barriers: Traditional phase shifters are deployed today. The 
        addition of the power electronics to these devices is 
        relatively straightforward but increases expense and involves 
        barriers similar to those noted for FACTS compensators.

           Commercial Status: Tap-changing phase shifters are available 
        today. Use of thyristor controls is emerging.

          FACTS Dynamic Brakes: A dynamic brake is used to 
        rapidly extract energy from a system by inserting a shunt 
        resistance into the network. Adding thyristor controls to the 
        brake permits addition of control functions, such as on-line 
        damping of unstable oscillations.

           Objective: Dynamic brakes enhance power system stability.

           Benefits: This device can damp unstable oscillations 
        triggered by equipment outages or system configuration changes.

           Barriers: In addition the power electronics issues mentioned 
        earlier, siting a dynamic brake and tuning the device in 
        response to specific contingencies requires careful study.

           Commercial Status: BPA has installed a dynamic brake on 
        their system.

          Battery Storage Devices: Batteries use converters to 
        transform the DC in the storage device to the AC of the power 
        grid. Converters also operate in the opposite direction to 
        recharge the batteries.

           Objective: Store energy generated in off-peak hours to be 
        used for emergencies or on-peak needs.

           Benefits: Battery converters use thyristors that, by the 
        virtue of their ability to rapidly change the power exchange, 
        can be utilized for a variety of real-time control applications 
        ranging from enhancing transient to preconditioning the area 
        control error for automatic generator control enhancement. 
        During their operational lifetime, batteries have a small 
        impact on the environment. For distributed resources, batteries 
        do not need to be as large as for large-scale generation, and 
        they become important components for regulating micro-grid 
        power and allowing interconnection with the rest of the system.

           Barriers: The expense of manufacturing and maintaining 
        batteries has limited their impact in the industry.

           Commercial Status: Several materials are used to manufacture 
        batteries though large arrays of lead-acid batteries continue 
        to be the most popular for utility installations. Interest is 
        also growing in so-called ``flow batteries'' that charge and 
        discharge a working fluid exchanged between two tanks. The 
        emergence of the distributed energy business has increased the 
        interest in deploying batteries for regional energy storage. 
        One of the early battery installations that demonstrated grid 
        benefit was a joint project between EPRI and Southern 
        California Edison at the Chino substation in southern 
        California.

          Super-conducting Magnetic Energy Storage (SMES): SMES 
        uses cryogenic technology to store energy by circulating 
        current in a super-conducting coil.

           Objective: Store energy generated in off-peak hours to be 
        used for emergencies or on-peak needs.

           Benefits: The benefits are similar to those for batteries. 
        SMES devices are efficient because of their super-conductive 
        properties. They are also very compact for the amount of energy 
        stored.

           Barriers: As with the super-conducting equipment mentioned 
        in the passive equipment section above, SMES entails costs for 
        the cooling system, the special protection needed in the event 
        the super-conducting device quenches, and the specialized 
        skills required to maintain the device.

           Commercial Status: Several SMES units have been commissioned 
        in North America. They have been deployed at Owens Corning to 
        protect plant processes, and at Wisconsin Public Service to 
        address low-voltage and grid instability issues.

          Pumped Hydro and Compressed-Air Storage: Pumped hydro 
        consists of large ponds with turbines that can be run in either 
        pump or generation modes. During periods of light load (e.g., 
        night) excess, inexpensive capacity drives the pumps to fill 
        the upper pond. During heavy load periods, the water generates 
        electricity into the grid. Compressed air storage uses the same 
        principle except that large, natural underground vaults are 
        used to store air under pressure during light-load periods.

           Objective: This technology helps shave peak and can help in 
        light-load, high-voltage situations.

           Benefits: These storage systems behave like conventional 
        generation and have the benefit of producing additional 
        generation sources that can be dispatched to meet various 
        energy and power needs of the system. Air emission issues can 
        be mitigated when base generation is used in off-peak periods 
        as an alternative to potentially high-polluting peaking units 
        during high use periods.

           Barriers: Pumped hydro, like any hydro generation project, 
        requires significant space and has corresponding ecological 
        impact. The loss of efficiency between pumping and generation 
        as well as the installation and maintenance costs must be 
        outweighed by the benefits.

           Commercial Status: Pumped hydro projects are sprinkled 
        across North America. A compressed-air storage plant was built 
        in Alabama, and a proposed facility in Ohio may become the 
        world's largest.

          Flywheels: Flywheels spin at high velocity to store 
        energy. As with pumped hydro or compressed-air storage, the 
        flywheel is connected to a motor that either accelerates the 
        flywheel to store energy or draws energy to generate 
        electricity. The flywheel rotors are specially designed to 
        significantly reduce losses. Super conductivity technology has 
        also been deployed to increase efficiency.

           Objective: Shave peak energy demand and help in light-load, 
        high-voltage situations. As a distributed resource, flywheels 
        enhance power quality and reliability.

           Benefits: Flywheel technology has reached low-loss, high-
        efficiency levels using rotors made of composite materials 
        running in vacuum spaces. Emissions are not an issue for 
        flywheels, except those related to the energy expended to 
        accelerate and maintain the flywheel system.

           Barriers: The use of super-conductivity technology faces the 
        same barriers as noted above under super-conducting cables and 
        SMES. High-energy-storage flywheels require significant space 
        and the high-speed spinning mass can be dangerous if the 
        equipment fails.

           Commercial Status: Flywheel systems coupled with batteries 
        are making inroads for small systems (e.g., computer UPS, local 
        loads, electric vehicles). Flywheels rated in the 100 to 200 kW 
        range are proposed for development in the near-term.

          Price-Responsive Load: Fast-acting load control is an 
        important element in active measures for enhancing the 
        transmission grid. Automatic load shedding (under-frequency, 
        under-voltage), operator-initiated interruptible load, demand-
        side management programs, voltage reduction, and other load-
        curtailment strategies have long been an integral part of 
        coping with unforeseen contingencies as a last resort, and/or 
        as a means of assisting the system during high stress, 
        overloaded conditions. The electricity industry has been 
        characterized by relatively long-term contracts for electricity 
        use. As the industry restructures to be more market-driven, 
        adjusting demand based on market signals will become an 
        important tool for grid operators.

           Objective: Inform energy users of system conditions though 
        price signals that nudge consumption into positions that make 
        the system more reliable and economic.

           Benefits: The approach reduces the need for new transmission 
        and siting of new generation. Providing incentives to change 
        load in appropriate regions of the system can stabilize energy 
        markets and enhance system reliability. Shifting load from peak 
        periods to less polluting off-peak periods can reduce 
        emissions.

           Barriers: The vast number of loads in the system makes 
        communication and coordination difficult. Also, using economic 
        signals in real time or near-real time to affect demand usage 
        has not been part of the control structure that has been used 
        by the industry for decades. A common vision and interface 
        standards are needed to coordinate the information exchange 
        required.

           Commercial Status: Demand-management programs have been 
        implemented in various areas of the country. These have relied 
        on centralized control. With the advent of the Internet and new 
        distributed information technology approaches, firms are 
        emerging to take advantage of this technology with a more 
        distributed control strategy.

          Intelligent Building Systems: Energy can be saved 
        through increasing the efficient operation of buildings and 
        factories. Coordinated utilization of cooling, heating, and 
        electricity in these establishments can significantly reduce 
        energy consumption. Operated in a system that supports price-
        responsive load, intelligent building systems can benefit 
        system operations. Note: these systems may have their own, 
        local generation. Such systems have the option of selling power 
        to the grid as well as buying power.

           Objective: Reduce energy costs and provide energy management 
        resources to stabilize energy markets and enhance system 
        reliability.

           Benefits: Such systems optimize energy consumption for the 
        building operators and may provide system operators with energy 
        by reducing load or increasing local generation based on market 
        conditions.

           Barriers: These systems require a greater number of sensors 
        and more complex control schemes than are common today. Should 
        energy market access become available at the building level, 
        the price incentives would increase.

           Commercial Status: Pilot projects have been implemented 
        throughout the country.

          Distributed Generation (DG): Fuel cells, micro-
        turbines, diesel generators, and other technologies are being 
        integrated using power electronics. As these distributed 
        resources increase in number, they can become a significant 
        resource for reliable system operations. Their vast numbers and 
        teaming with local load put them in a similar category to the 
        controllable load discussed above.

           Objective: Address local demand cost-effectively.

           Benefits: DG is generally easier to site, entails smaller 
        individual financial outlay, and can be more rapidly installed 
        than large-scale generation. DG can supply local load or sell 
        into the system and offers owners self-determination. Recovery 
        and use of waste heat from some DG greatly increases energy 
        efficiency.

           Barriers: Volatility of fuel costs and dependence on the 
        fuel delivery infrastructure creates financial and reliability 
        risks. DG units require maintenance and operations expertise, 
        and utilities can set up discouraging rules for 
        interconnection. System operators have so far had difficulty 
        coordinating the impact of DG.

           Commercial Status: Deployment of DG units continues to 
        increase. As with controllable load, system operations are 
        recognizing the potential positive implications of DG to 
        stabilize market prices and enhance system reliability though 
        this requires a different way of thinking from the traditional, 
        hierarchical control paradigm.

          Power-System Device Sensors: The operation of most of 
        the individual devices in a power system (such as transmission 
        lines, cables, transformers, and circuit breakers) is limited 
        by each device's thermal characteristics. In short, trying to 
        put too much power through a device will cause it to heat 
        excessively and eventually fail. Because the limits are 
        thermal, their actual values are highly dependent upon each 
        device's heat dissipation, which is related to ambient 
        conditions. The actual flow of power through most power-system 
        devices is already adequately measured. The need is for 
        improved sensors to dynamically determine the limits by 
        directly or indirectly measuring temperature.

          Direct Measurement of Conductor Sag: For overhead 
        transmission lines the ultimate limiting factor is usually 
        conductor sag. As wires heat, they expand, causing the line to 
        sag. Too much sag will eventually result in a short circuit 
        because of arcing from the line to whatever is underneath.

           Objective: Dynamically determine line capacity by directly 
        measuring the sag on critical line segments.

           Benefits: Dynamically determined line ratings allow for 
        increased power capacity under most operating conditions.

           Barriers: Requires continuous monitoring of critical spans. 
        Cost depends on the number of critical spans that must be 
        monitored, the cost of the associated sensor technology, and 
        ongoing cost of communication.

           Commercial Status: Pre-commercial units are currently being 
        tested. Approaches include either video or the use of 
        differential GPS. EPRI currently is testing a video-based 
        ``sagometer.'' An alternative is to use differential GPS to 
        directly measure sag. Differential GPS has been demonstrated to 
        be accurate significantly below half a meter.

          Indirect Measurement of Conductor Sag: Transmission 
        line sag can also be estimated by physically measuring the 
        conductor temperature using an instrument directly mounted on 
        the line and/or a second instrument that measures conductor 
        tension at the insulator supports.

           Objective: Dynamically determine the line capacity.

           Benefits: Dynamically determined line ratings allow for 
        increased power capacity under most operating conditions.

           Barriers: Requires continuous monitoring of critical spans. 
        Cost depends upon the number of critical spans that must be 
        monitored, the cost of the associated sensor technology, and 
        ongoing costs of communication.

           Commercial Status: Commercial units are available.

          Indirect Measurement of Transformer Coil Temperature: 
        Similar to transmission line operation, transformer operation 
        is limited by thermal constraints. However, transformers 
        constraints are localized hot spots on the windings that result 
        in breakdown of insulation.

           Objective: Dynamically determine transformer capacity.

           Benefits: Dynamically determined transformer ratings allow 
        for increased power capacity under most operating conditions.

           Barriers: The simple use of oil temperature measurements is 
        usually considered to be unreliable.

           Commercial Status: Sophisticated monitoring tools are now 
        commercially available that combine several different 
        temperature and current measurements to dynamically determine 
        temperature hot spots.

          Underground/Submarine Cable Monitoring/Diagnostics: 
        The below-surface cable systems described above require real-
        time monitoring to maximize their use and warn of potential 
        failure.

           Objective: Incorporate real-time sensing equipment to detect 
        potentially hazardous operating situations as well as dynamic 
        limits for safe flow of energy.

           Benefits: Monitoring equipment maximizes the use of the 
        transmission asset, mitigates the risk of failure and the 
        ensuing expense of repair, and supports preventive maintenance 
        procedures. The basic sensing and monitoring technology is 
        available today.

           Barriers: The level of sophistication of the sensing and 
        monitoring equipment adds to the cost of the cable system. The 
        use of dynamic limits must also be integrated into system 
        operation procedures and the associated tools of existing 
        control facilities.

           Commercial Status: Newer cable systems are being designed 
        with monitoring/diagnostics in mind. Cable temperature, dynamic 
        thermal rating calculations, partial discharge detection, 
        moisture ingress, cable damage, hydraulic condition (as 
        appropriate), and loss detection are some of the sensing 
        functions being put in place. Multi-functional cables are also 
        being designed and deployed (particularly submarine cables) 
        that include communications capabilities. Monitoring is being 
        integrated directly into the manufacturing process of these 
        cables.

          Direct System-State Sensors: In some situations, 
        transmission capability is not limited by individual devices 
        but rather by region-wide dynamic loadability constraints. 
        These include transient stability limitations, oscillatory 
        stability limitations, and voltage stability limitations. 
        Because the time frame associated with these phenomena is much 
        shorter than that associated with thermal overloads, 
        predicting, detecting and responding to these events requires 
        much faster real-time state sensors than for thermal 
        conditions. The system state is characterized ultimately by the 
        voltage magnitudes and angles at all the system buses. The goal 
        of these sensors is to provide these data at a high sampling 
        rate.

          Power-System Monitors

           Objective: Collect essential signals (key power flows, bus 
        voltages, alarms, etc.) from local monitors available to site 
        operators, selectively forwarding to the control center or to 
        system analysts.

           Benefits: Provides regional surveillance over important 
        parts of the control system to verify system performance in 
        real time.

           Barriers: Existing SCADA and Energy Management Systems 
        provide low-speed data access for the utility's infrastructure. 
        Building a network of high-speed data monitors with intra-
        regional breadth requires collaboration among utilities within 
        the interconnected power system.

           Commercial Status: BPA has developed a network of dynamic 
        monitors collecting high-speed data, first with the power 
        system analysis monitor (PSAM), and later with the portable 
        power system monitor (PPSM), both early examples of WAMS 
        products.

          Phasor Measurement Units (PMUs)

           Objective: PMUs are synchronized digital transducers that 
        can stream data, in real time, to phasor data concentrator 
        (PDC) units. The general functions and topology for this 
        network resemble those for dynamic monitor networks. Data 
        quality for phasor technology appears to be very high, and 
        secondary processing of the acquired phasors can provide a 
        broad range of signal types.

           Benefits: Phasor networks have best value in applications 
        that are mission critical and that involve truly wide-area 
        measurements.

           Barriers: Establishing PMU networks is straightforward and 
        has already been done. The primary impediment is cost and 
        assuring value for the investment (making best use of the data 
        collected).

           Commercial Status: PMU networks have been deployed at 
        several utilities across the country.

                    Biography for James W. Glotfelty
    Jimmy Glotfelty is currently Director of the Office of Electric 
Transmission and Distribution at the Department of Energy. This new 
office was established by Secretary Spencer Abraham to focus attention 
on the policy and research and development needs of the Transmission 
and Distribution systems. Prior to this position, he served as Senior 
Policy Advisor to Secretary Abraham. He is senior leader in the 
implementation of President Bush's National Energy Policy. He advises 
the Secretary on policy concerning electricity, transmission, 
interconnection, siting, and other areas within the DOE. He works 
closely with members of Congress and members of the FERC in order to 
ensure that we continue to move toward competitive wholesale electric 
markets. He is also responsible for the development of the national 
grid study to identify major bottlenecks across the U.S.
    Prior to joining the DOE, Jimmy served as Director of Government 
and Regulatory Affairs for Calpine Corporation's Central Region. He 
actively pursued restructured markets and new wholesale and retail 
markets for new power generation companies in Texas, Louisiana, 
Alabama, and Mexico. In addition to government affairs, Jimmy oversaw 
Calpine's Central Region public affairs efforts.
    From 1994 to 1998, Jimmy served as Director of General Government 
Policy and Senior Energy Advisor to Governor George W. Bush. He 
spearheaded many oil and gas initiatives, served as the Governor's 
office point staff member on both wholesale and retail electric 
restructuring in Texas, and oversaw the Texas State Energy Office. In 
addition to energy issues, Jimmy founded and managed the Governors High 
Technology Council, and was responsible for policy initiatives in the 
telecommunications, banking, housing, and pension arenas.
    During his career, Jimmy was Legislative Director for Congressman 
Sam Johnson (R-TX) where he was responsible for all legislative 
operations as well as energy, banking, and telecommunications issues. 
Jimmy has also served as Finance Director for the Republican Party of 
Texas and as Research Director for the lobby and public affairs firm 
Dutko and Associates.
    Jimmy resides in Arlington, VA with his wife, Molly, and sons, 
Chase and Walker.

    Chairwoman Biggert. Thank you so much.
    Mr. Glauthier is recognized. Am I pronouncing that 
correctly?
    Mr. Glauthier. Yes, that is fine. Glauthier. Thank you.
    Chairwoman Biggert. Glauthier. Thank you.

STATEMENT OF MR. T.J. GLAUTHIER, PRESIDENT AND CEO, ELECTRICITY 
              INNOVATION INSTITUTE, PALO ALTO, CA

    Mr. Glauthier. Thank you, Madame Chair and Members of the 
Subcommittee. I am T.J. Glauthier, the President and CEO of the 
Electricity Innovation Institute, an affiliate of EPRI, the 
Electric Power Research Institute. With me today, also, is Dr. 
Dan Sobajic, the Director of Grid Reliability and Power Markets 
at EPRI. I am here today testifying on behalf of both 
organizations. I will summarize my testimony.
    As you know, EPRI is a non-profit scientific organization 
formed by U.S. electric utilities 30 years ago to manage a 
collaborative research program on behalf of utilities, their 
customers, and society. Today, EPRI has more than 1,000 
members, including utilities of all owner types, independent 
system operators and independent power producers, and others. 
Electricity Innovation Institute was formed two years ago by 
the EPRI Board of Directors as an affiliated public benefit 
organization to sponsor long-term strategic R&D programs 
through public/private partnerships. Its Board of Directors is 
primarily composed of independent, bipartisan, public 
representatives.
    Both organizations are already actively engaged in R&D to 
modernize the electricity grid. Two years ago, in response to 
the events of September 11, 2001, an interdisciplinary EPRI 
team prepared a preliminary analysis of potential terrorist 
threats to the U.S. electricity system. Out of this effort grew 
an infrastructure security initiative, which has undertaken a 
short-term, tightly focused effort to identify key 
vulnerabilities and to design immediately applicable 
countermeasures.
    In addition, we recently have begun work with the 
Department of Homeland Security in which we are bringing 
utilities and ISOs together with DHS to help develop a system 
for them to monitor the security of the national power grid in 
real time. Now, after the power outage of August 14, EPRI is 
actively supporting the U.S./Canada joint task force working 
with DOE and the North American Electric Reliability Council, 
NERC.
    There are several current technologies that could be more 
widely used today to increase system reliability and security. 
First, there are gaps in the coverage of SCADA and EMS systems, 
which should be remedied. Second, system operators need to have 
greater visibility into what is happening in neighboring 
control areas. EPRI, Department of Energy, and others have 
demonstrated systems that could do this. Third, State 
estimators, systems that are needed for real time management of 
the grid, are not being fully utilized in many control areas 
today. And finally, there are some technologies that are either 
ready now or in nearing commercial availability, which include 
a Dynamic Thermal Circuit Rating system for improved management 
of transmission lines, new advanced high-temperature, 
lightweight conductors or transmission lines, which are 
undergoing testing by EPRI and the Department of Energy as 
noted by the previous witness, and FACTS devices, Flexible AC 
Transmission Systems that can control direct power flows, 
including loop flows.
    All of this is a precursor to the smart grid, which will be 
the modernization of the electricity transmission and 
distribution system to be an intelligent, always on, self-
healing grid. It will recognize power system vulnerabilities 
and alert operators to them, and in the event of a failure, 
will automatically island off those areas to isolate the 
problem. Smart grid will also support a more diverse and 
complex network of energy technologies, including an array of 
locally installed distributed power sources, such as fuel 
cells, solar power, and combined heat and power systems. This 
will give the system greater resilience, enhance security, and 
improve reliability. We believe such a smart grid will yield 
significant benefits both in power--in reducing the cost of 
power disturbances to the economy and in enabling a new phase 
of entrepreneurial innovation, which will, in turn, accelerate 
energy efficiency, productivity, and economic growth for the 
Nation.
    We offer four recommendations for the Energy Bill and have 
submitted legislative language to carry these out. First, to 
establish the smart grid as a national priority. This could 
increase the pace and level of commitment to the modernization 
of the electricity grid. Second, to authorize increased funding 
for R&D and for an aggressive program of technology 
demonstration and early deployment projects. We estimate that 
this will require increased federal funding for the Department 
of Energy on the scale of approximately $1 billion over the 
next five years, with the private sector contributing a 
significant amount of matching funding. Third, recognize a 
public/private institutional role for the R&D. It is vitally 
important that this program be carried out in partnership with 
the private sector. It is the industry that will ultimately be 
responsible for building, maintaining, and operating the 
electricity system to keep the lights on. This is more than a 
research program; it is an engineering and operations program 
on which the country will rely. And finally, develop a national 
approach for long-term funding of deployment, which will 
require approximately $100 billion over a decade, $10 billion a 
year for 10 years. We need a national financing approach that 
will be effective, fair, and equitable for all parts of 
society. We urge the Congress to include language in the Energy 
Bill that directs the Administration to work with the industry, 
the states, customers, and others to develop a recommendation 
and report back one year after enactment.
    In conclusion, this committee and the Congress can play a 
pivotal role in leading the modernization of the Nation's 
electricity infrastructure for the 21st century.
    Thank you, Madame Chair. I welcome any questions.
    [The prepared statement of Mr. Glauthier follows:]
                  Prepared Statement of T.J. Glauthier
    Thank you, Madam Chair, I am T.J. Glauthier, President and CEO of 
the Electricity Innovation Institute, an affiliate of EPRI, the 
Electric Power Research Institute. With me today is Dejan Sobajic, 
Director of Grid Reliability and Power Markets at EPRI.
    As you know, EPRI is a non-profit, tax-exempt, scientific 
organization formed by U.S. electric utilities in 1972 to manage a 
national, public-private collaborative research program on behalf of 
EPRI members, their customers, and society. Today EPRI has more than 
1,000 members, including utilities of all owner types (both U.S.-based 
and international), independent system operators (ISOs), independent 
power producers, and government agencies, collectively funding an 
electricity-related scientific research and technology development 
program that spans every aspect of power generation, delivery, and use.
    The Electricity Innovation Institute (E2I), formed two years ago by 
the EPRI Board of Directors as an affiliated non-profit, public benefit 
organization, sponsors longer-term, strategic R&D programs through 
public-private partnerships. Its Board of Directors is primarily 
composed of independent, bipartisan, public representatives.
    E2I is already actively engaged in modernizing the electricity 
grid. For example, with technical support from EPRI, 18 months ago we 
began a public-private R&D partnership to design and develop the system 
of technologies enabling a self-healing, `smart grid.' This partnership 
involves a number of public and private utility companies, the 
Department of Energy (DOE), several states, and the high tech industry. 
It has one multi-million dollar contract underway, with a team that 
includes General Electric, Lucent Technologies and others, to design an 
`open architecture' for the smart grid.
    EPRI and E2I actively support the dialogue on national energy 
legislation by providing objective information and knowledge on energy 
technology, the electricity system and related R&D issues.
    I sincerely appreciate the opportunity to address this 
distinguished Committee on a subject about which we are all concerned. 
The electric power system represents the fundamental national 
infrastructure, upon which all other infrastructures depend for their 
daily operations. As we learned from the recent Northeast blackout, 
without electricity, municipal water pumps don't work, vehicular 
traffic grinds to a halt at intersections, subway trains stop between 
stations, and elevators stop between floors. The August 14th blackout 
also illustrated how vulnerable a regional power network can be to 
cascading outages caused by initially small--and still not fully 
understood--local problems.
    In response to the Committee's request, my testimony today provides 
some of EPRI's and E2I's views on technology issues that require 
further attention to improve the effectiveness and reliability of the 
Nation's interconnected power systems. This testimony will be 
supplemented with a matrix table as requested by the Committee.

Context for power reliability

    Power system reliability is the product of many activities--
planning, maintenance, operations, regulatory and reliability 
standards--all of which must be considered as the Nation makes the 
transition over the longer-term to a more efficient and effective power 
delivery system. While there are specific technologies that can be more 
widely applied to improve reliability both in the near- and 
intermediate-term, the inescapable reality is that there must be more 
than simply sufficient capacity in both generation and transmission in 
order for the system to operate reliably.
    The emergence of a competitive market in wholesale power 
transactions over the past decade has consumed much of the operating 
margin in transmission capacity that traditionally existed and helped 
to avert outages. Moreover, a lack of incentives for continuing 
investment in both new generating capacity and power delivery 
infrastructure has left the overall system much more vulnerable to the 
weakening effects of what would normally be low-level, isolated events 
and disturbances.
    Two years ago, in response to the events of September 11, 2001, an 
inter-disciplinary EPRI team prepared the Electricity Infrastructure 
Security Assessment, a preliminary analysis of potential terrorist 
threats to the U.S. electricity system. Out of this effort grew the 
Infrastructure Security Initiative (ISI), which has undertaken a short-
term, tightly focused effort to identify key vulnerabilities and design 
immediately applicable countermeasures. The initial phase of the ISI 
has been completed and work is now underway to implement some of the 
technological solutions identified. More recently, E2I and EPRI began 
work with the Department of Homeland Security (DHS) to establish the 
National Electric Infrastructure Security Monitoring System (NESEC). 
This system will enable DHS to monitor the security of the national 
power grid in real time and can be used to identify and diagnose 
unusual events that might signal a terrorist attack in its early 
stages. Such a system could also be used to monitor grid operations for 
disturbances with potential to impact reliability.
    The electric power industry is one of the most data intensive and 
computing power-reliant of all industries, with Supervisory Control and 
Data Acquisition (SCADA) systems collecting data and sending control 
signals over wide geographical regions, in conjunction with the 
analytical functions performed by highly computerized Energy Management 
Systems (EMS).
    EPRI is actively supporting the U.S.-Canada Joint Task Force on the 
power outage of August 14th, working with DOE and the North American 
Electric Reliability Council (NERC). Based on information assembled and 
published by the task force so far, some basic, bottom-line preliminary 
implications can be drawn. One is that better, more complete 
information about system conditions in the affected region could have 
enabled quicker response by the various system operators, which might 
have helped avert so widespread an outage.
    A significant weakness of the North American power system is that, 
despite the computing power that is applied, not all parts of the power 
system are presently covered by SCADA and EMS systems. There are gaps 
in coverage, and some critical parameters must be computed from other 
measurements. EPRI strongly recommends that the industry move toward 
completing the data picture by ensuring that all transmission 
facilities down to the 169-kilovolt level are fully measurable and 
observable--in real time--for five key parameters: active power, 
reactive power, current, voltage, and frequency. In addition, each of 
the 150 individual control areas need to implement complete SCADA 
coverage for the entire system.

Seeing the bigger picture

    System operators also need the capability for a wide-area view of 
what is happening in neighboring control areas. This would represent a 
major improvement over existing conditions, under which operators 
cannot access the same level of information on neighboring systems that 
they have on their own system. Two years ago, in cooperation with NERC, 
EPRI conducted an R&D project sponsored under the industry-funded 
Reliability Initiative, which demonstrated an integrated, real-time 
visualization of the nationwide interconnected system, incorporating 
data on critical operating measurements from each control center, using 
the Internet for communication. There are similar demonstration efforts 
underway by other organizations as well. For a relatively modest cost, 
such a system could be made available to all system operators.
    A related issue involves interpretation and analysis of the 
operating data from SCADA and EMS systems. EMS application software 
programs known as state estimators are employed to process data and 
compute values for system parameters that are not measured. Results are 
critical for doing more complex analyses, such as contingency analyses 
of the impact of losing various system elements, such as power plants 
or transmission lines. Yet because of low confidence in the computed 
results for real-time decision-making, very few control center EMS 
state estimators are fully utilized today. EPRI believes that credible, 
complete information from operational state estimators is essential for 
reliability and should be required in all control areas.

Near-term solutions

    One relatively simple technology developed by EPRI and successfully 
demonstrated by several utilities could contribute to improved system 
reliability by enabling increased confidence of safe loading levels for 
transmission lines above their conservative static ratings. By 
integrating real-time sensor data on ambient temperature, wind speed, 
and line sag on specific circuits, EPRI's Dynamic Thermal Circuit 
Rating (DTCR) system allows operators to move more power on lines with 
reduced risk of thermal overload. DTCR is low-cost and can be quickly 
deployed on thermally constrained lines. Such dynamic line ratings, 
along with more complete SCADA coverage, would represent key inputs for 
more probabilistic-based contingency analyses of system instability. 
Such probabilistic-based analyses could extend the scope of 
contingencies considered from the loss of a single transmission line or 
generating source (N-1 contingency), which is the current criterion, to 
the simultaneous loss of multiple lines or generators (N-2 
contingency).
    On the hardware side of T&D systems, a mid-term solution for 
increasing the capacity of existing transmission corridors may soon be 
ready for commercial deployment: advanced high-temperature, low-sag 
conductors. These advanced conductors have the potential to increase 
current carrying capacity of thermally constrained transmission lines 
by as much as 30 percent or more. Five new types of aluminum conductor 
designs, reinforced or supported with steel or composite material, are 
being investigated by EPRI in collaboration with member utilities. One 
type is already under field test in a project with CenterPoint Energy 
in Houston; it also promises more rapid installation, since it has 
already been demonstrated that the conductors can be strung while 
energized. This work complements related ongoing activity supported by 
DOE's Office of Electric Transmission and Distribution, including 
testing activity at Oak Ridge National Laboratory.

Facing up to loop flows

    Numerous knowledgeable power system engineers have warned for many 
years that the phenomenon of loop flow would eventually have important 
implications for reliability, but those warnings have largely gone 
unheeded with the emergence of a competitive, wholesale bulk 
electricity market. Preliminary indications are that loop flows of 
power around the Lake Erie region may have played a role in the Aug. 
14th blackout.
    Loop flows are a key unresolved issue facing the industry today in 
terms how the power system status appears to operators, yet such flows 
generally are not accounted for in day-to-day operations. Loop flows 
result from the basic physics of electricity, which follows all 
available paths of least resistance, rather than a single line on a 
contract path from point A to point B. These loop flows have been 
present ever since power grids began to become interconnected, but only 
recently have loop flows reached a level sufficient to cause problems. 
With today's reduced operating margins of transmission capacity, they 
can make the difference between safe operating conditions and system 
overload.
    Loop flows can be controlled with solid-state power electronics 
technology, such as Flexible AC Transmission Systems (FACTS) technology 
developed by EPRI and power equipment vendors, but specific operating 
practices are necessary that require EMS state estimator information to 
establish proper settings for mitigation. FACTS technologies deployed 
in various configurations promise a new dimension of high-speed control 
flexibility to change the power system state and react to changes in 
ways that we cannot today. However, FACTS technologies are still 
emerging and their cost and size must be further reduced through 
continued R&D efforts before they are economical for widespread 
deployment.
    In addition to DTCR and improved data exchange standards and system 
information coverage, other near-term steps that could contribute to 
improved reliability include improved operator training, both for 
normal operation under heavy loading conditions and for service 
restoration from outages. Operators require more information in order 
to perform restoration procedures than are required under normal 
operating conditions. Reiterating the importance of a holistic approach 
to reliability, transmission and distribution infrastructure 
maintenance should be afforded the same priority as system planning, 
operations, and energy marketing that are addressed by standing NERC 
standards committees.
    Given that energy legislation now under consideration by the 
Congress would establish mandatory, enforceable reliability standards 
under NERC supervision, such standards should specifically address 
requirements for the provision of, and compensation for, reactive power 
for voltage support. Although the significance of this somewhat arcane 
component of alternating current transmission is lost on many people 
not trained in electrical engineering, its critical importance in the 
operation of interconnected systems and long distance transmission 
cannot be overemphasized. Reactive power is a non-billable, but 
essential, component of real or active power that helps maintain 
voltage and is critical for magnetizing the coils in large inductive 
loads so they can start up and begin drawing real power.

Intermediate term measures

    Beyond the more immediate steps and technologies available for 
boosting power system reliability, development of a number of emerging 
technologies that are still not yet ready for commercial deployment 
could benefit from increased industry and government support for 
demonstration efforts. These include the demonstration and integration 
of new inter-system communication standards based on open protocols to 
enable data exchange among equipment from different vendors, including 
SCADA and EMS systems. Two prime examples of such standards are the 
EPRI-developed Utility Communications Architecture for connecting 
equipment from different vendors and the Inter-Control Area 
Communication Protocol for linking control centers and regional 
transmission organizations.
    As described more fully below, EPRI's ultimate vision for the 
future of power delivery is an electronic, self-healing, adaptive 
`smart' power grid. However, realizing this vision fully will require 
development, demonstration, and integration over the next decade of key 
elements that do not yet exist, such as intelligent software to 
reconfigure systems to prevent blackouts. Yet features of the self-
healing grid of the future can be demonstrated today using off-the-
shelf, recently developed technologies. Such demonstrations could begin 
providing near-term benefits during the next several years, before the 
complete vision of a `smart' grid becomes reality within the next 
decade.
    The Electricity Innovation Institute (E2I), a non-profit affiliate 
of EPRI established to pursue public-private partnerships for strategic 
electricity R&D, is proposing just such a partnership to demonstrate 
Dynamic Risk and Reliability Management (DRRM). The proposed effort 
would develop and demonstrate a set of real-time tools to enable system 
operators to see and quickly react to grid conditions that threaten to 
cause outages. Unlike existing technologies, the tool set will combine 
a picture of real-time vulnerabilities with an assessment of the status 
of grid components to pinpoint ``hot spots,'' or areas where equipment 
failure could precipitate a widespread outage. Existing tools focus on 
monitoring the health of equipment or monitoring the status of the 
grid, but have not yet been effectively combined into one tool capable 
of providing a clear picture of overall risk. DRRM requires all the 
previously mentioned short-term improvements in data integrity and 
coverage in order to be effective.
    E2I is proposing to take maximum advantage of ongoing R&D to 
develop and implement a working demonstration of DRRM in the shortest 
possible time. Tools such as the EPRI-developed Maintenance Management 
Workstation for transmission substations, Probabilistic Risk Assessment 
for contingency analyses, Visualization of transmission conditions via 
EPRI's Community Activity RoomTM software, Transformer Advisor expert 
diagnostic system, and others will be brought together to support DRRM 
development.
    E2I is already engaged with several utility partners anxious to 
demonstrate DRRM tools on their transmission systems. The proposed work 
will require investment of $10 million to $20 million and take 
approximately two years to complete. Once demonstrated, DRRM will be 
designed for rapid deployment by transmission operators and RTOs. 
Results of using DRRM would provide the quantitative basis to support 
risk-based revisions to contingency analyses, reliability criteria, and 
operating practices.

Adaptive, self-healing response at the speed of light

    The smart grid encompasses both the long distance transmission 
system and the local distribution systems. Central to the concept is 
that it incorporate ubiquitous sensors throughout the entire delivery 
system and facilities, employ instant communications and computing 
power, and use solid-state power electronics to sense and, where 
needed, control power flows and mitigate disturbances instantly. The 
upgraded system will have the ability to read and diagnose problems, 
and in the event of a disruption from either natural or man-made 
causes, it will be `self-healing' by automatically isolating affected 
areas and re-routing power to keep the rest of the system up and 
running. It will be alert to problems as they unfold, and able to 
respond at the speed of light.
    Another advantage of the smart grid is that it will be able to 
support a more diverse and complex network of energy technologies. 
Specifically, it will be able to seamlessly integrate an array of 
locally installed, distributed power sources, such as fuel cells, solar 
power, and combined heat and power systems, with traditional central-
station power generation. This will give the system greater resilience, 
enhance security and improve reliability. It will also provide a 
network to support new, more energy efficient appliances and machinery, 
and offer intelligent energy management systems in homes and 
businesses. For utilities and their customers, `smart' grid technology 
could also enable the incorporation of significant amounts of 
electricity stored in battery systems, flywheels, compressed-air, and 
other forms of storage, when they are economical, for load management, 
voltage support, frequency regulation, and other beneficial 
applications, including providing a buffer between sensitive equipment 
and momentary power disturbances.
    The enhanced security, quality, reliability, availability, and 
efficiency of electric power from such a smart grid will yield 
significant benefits. It will strengthen the essential infrastructure 
that sustains our homeland security. Moreover, it will reduce the cost 
of power disturbances to the economy, which have been estimated by EPRI 
to be at least $100 billion per year--and that's in a normal year, not 
including extreme events, such as the recent outage. Further, by being 
better able to support the digital technology of business and industry, 
the smart grid will also enable a new phase of entrepreneurial 
innovation, which will in turn accelerate energy efficiency, 
productivity and economic growth for the Nation.
    The economic benefits of the smart grid are difficult to predict in 
advance, but they will consist of two parts. These are stemming the 
losses to the U.S. economy from power disturbances of all kinds, which 
are now on the order of one percent of U.S. gross domestic product, and 
taking the brake off of economic growth that can be imposed by an aging 
infrastructure.

Electricity Sector Framework for the Future

    On August 25, 2003, EPRI released a report on the current 
challenges facing the electricity sector in the U.S., outlining a 
Framework for Action. The report, the Electricity Sector Framework for 
the Future (ESFF), was completed prior to the August 14 outage, and was 
developed over the past year under the leadership and direction of the 
EPRI Board of Directors.
    EPRI engaged more than 100 organizations and held a series of 
regional workshops, including a diverse group of stakeholders--
customers, suppliers, elected officials, environmentalists, and 
others--in producing the Framework. That dialogue provided valuable 
insights into the causes of problems, such as the disincentives for 
investment and modernization in transmission facilities, which have 
become much more widely recognized since the August outage.
    The ESFF report lays out a coherent vision of future risks and 
opportunities, and of a number of the issues that must be dealt with in 
order to reach that future. It also reflects viewpoints widely shared 
by the broader electricity stakeholder community that contributed to 
its development. Its vision of the future will be based on a 
transformed electricity infrastructure that is secure, reliable, 
environmentally friendly, and imbued with the flexibility and 
resilience that will come from modern digital electronics, 
communications, and advanced computing.
    But to arrive at that future, many parties must take action in the 
near-term. The report calls upon Congress to take action in a number of 
areas, such as establishing mandatory reliability standards, clarifying 
regulatory jurisdictions, and helping to restore investor confidence in 
the electricity sector so that needed investments can be made.
    EPRI President and CEO Kurt Yeager and I presented a staff briefing 
on the Electricity Sector Framework for the Future that was hosted by 
this committee on September 11, 2003. The full ESFF report is also 
publicly available.

Recommended Congressional action

    Current legislation under consideration by Congress contains some 
good provisions in support of technology development, but the national 
transformation of the grid is so important that it requires stronger 
action and support from the Congress in the energy bill. EPRI submitted 
specific legislative language, focusing on the technology and R&D areas 
that we believe are vital to modernizing the Nation's electricity 
transmission and distribution grid, to the House and Senate leadership 
who are currently meeting to discuss H.R. 6. In addition, there are 
four key areas of technology policy that the energy legislation should 
address, as described below:

1. Establish the `Smart Grid' as a national priority

    Congress can provide real leadership for the country by 
establishing the `smart grid' as national policy and as a national 
priority in the legislation. By articulating this as national policy 
and offering a compelling vision for the country, Congress can increase 
the pace and level of commitment to the modernization of the 
electricity grid.
    That action itself will help to focus the attention of the federal 
and State agencies and the utility industry and others in the private 
sector. By making the smart grid a national priority, Congress will be 
sending a clear message that this modernization is critically important 
in all sectors and in all regions of the country, and that deployment 
should be undertaken rapidly.

2. Authorize increased funding for R&D and demonstrations

    To carry through with the priority of the smart grid, the 
legislation should include significantly increased development funding. 
In particular, it should contain authorization for significant 
additional appropriations over the next five years for programs managed 
by DOE, working in partnership with the private sector.
    The Administration has taken some steps in this direction in its 
earlier budgets, but this demands even stronger, more targeted action 
by the Congress. Support is needed in two areas. One is more extensive 
R&D in the relevant technologies, needed to provide all the components 
of the smart grid. The other area is to support an aggressive program 
of technology demonstration and early deployment projects with the 
states and the industry, to prove out these components, and to refine 
the systems engineering which integrates all these technologies in 
real-world settings.
    EPRI estimates that this research and demonstration program will 
require increased federal funding for R&D on the scale of approximately 
$1 billion, spread out over five years, with the private sector 
contributing a significant amount of matching funding. These R&D and 
demonstration funds represent an investment that will stimulate 
deployment expenditures in the range of $100 billion from the owners 
and operators of the smart grid, spread out over a decade.

3. Recognize a public/private institutional role for R&D

    It is vitally important that the legislation recognize that this 
R&D and demonstration program should be carried out in partnership with 
the private sector. The government can sponsor excellent technical 
research. However, it is the industry that will ultimately be 
responsible for building, maintaining and operating the electricity 
system to keep the lights on and the computers humming. And as we've 
just seen, there is little tolerance for error--it has to work all the 
time--so this is more than a research program, it is an engineering and 
operations program on which the country will rely.

4. Develop an approach for long-term funding of deployment

    A national approach is needed to fund the full-scale deployment of 
the smart grid throughout the country. The scale of deploying the 
technology, and doing the detailed systems engineering to make it work 
as a seamless network, will require significant levels of investment, 
estimated at $100 billion over a decade.
    These implementation costs for the smart grid will be an investment 
in the infrastructure of the economy. This investment will pay back 
quickly in terms of reduced costs of power disturbances and increased 
rates of economic growth.
    Nevertheless, this is a substantial challenge for an industry that 
is already under financial strain, and is lacking investment incentives 
for the grid. It's a challenge, too, because this investment must be 
new and additional to what the industry and its customers are already 
providing to keep the current systems operating. A business-as-usual 
approach will not be sufficient.
    We need a national financing approach or mechanism that will be 
effective, fair, and equitable to all parts of society. This will 
require agreement among the industry, state regulatory commissions, 
customers and other stakeholders as to how that should be carried out.
    The answer to this will undoubtedly take extended discussions with 
the various stakeholder groups. Rather than rush to judgment on one or 
another specific approach, we urge that Congress include language in 
the energy bill to direct the Administration to develop an appropriate 
recommendation. The Administration should work with the industry, the 
states, customers, and other to develop its recommendation and report 
back to Congress at a specific time, no later than one year after 
enactment.

Conclusion

    As noted earlier, the cost of developing and deploying the smart 
grid for the country should be thought of as an investment in the 
future--in a secure, reliable, and entrepreneurial future--that will 
pay back handsomely over many decades to come as the energy backbone of 
the 21st century.
    Thank you, Madam Chair. I welcome any questions you may have.

                      Biography for T.J. Glauthier
    T.J. Glauthier is President and Chief Executive Officer of the 
Electricity Innovation Institute (E2I), which sponsors strategic R&D 
programs through public/private partnerships. He has managed the start-
up of this new organization, which began full operation in January of 
2002. As CEO, he is ultimately responsible for all operations and 
performance of E2I, including overseeing the activities of the other 
officers, reporting to the Board of Directors, and coordinating with 
EPRI and its other affiliated organizations. In addition, he takes an 
active role in the strategic direction of key programs, such as the 
CEIDS program to develop the new technologies needed to transform the 
transmission and distribution electricity infrastructure into a self-
healing, `smart grid' to increase security, reliability and 
flexibility.
    Prior to joining the Institute, Mr. Glauthier was the Deputy 
Secretary and Chief Operating Officer of the U.S. Department of Energy 
from 1999 to 2001. In that capacity, he directed the day-to-day 
management and policy development of the Department's over 120,000 
federal and contractor employees and $18 billion annual budget. In his 
COO role, Mr. Glauthier had broad oversight across all four of the 
Department's major lines of business: Defense, Science, Energy, and 
Environment. He was also responsible for the corporate offices, such as 
policy, International Affairs, the CFO, procurement, and personnel. Mr. 
Glauthier also testified before Congress, coordinated with the White 
House and other agencies, and represented the Department and the 
President in national and international forums.
    Before coming to the Energy Department, from 1993 to 1998, Mr. 
Glauthier served for five years in the Office of Management and Budget 
as the Associate Director for Natural Resources, Energy and Science. In 
that capacity, he and his staff of 70 served as the key link between 
the Executive Office of the President and agencies such as the 
Departments of Agriculture, Energy, and Interior, the EPA, NASA, NSF, 
the Army Corps of Engineers, and a number of smaller or independent 
agencies, such as the Smithsonian Institution, the Kennedy Center, and 
TVA, together accounting for over $60 billion in annual discretionary 
appropriations and over 350,000 federal and contract employees.
    Earlier, Mr. Glauthier spent over twenty years in management 
consulting. For most of that time, he was with Temple, Barker & Sloane, 
Inc., where he began as a specialist on corporate and financial 
planning for Fortune 500 companies, and later became the Vice President 
in charge of the firm's Public Policy and Management Group.
    Immediately prior to joining the Clinton Administration, Mr. 
Glauthier spent three years as Director of Energy and Climate Change at 
the World Wildlife Fund, where he dealt with technology transfer, the 
climate change treaty, and the 1992 Earth Summit in Rio de Janeiro.
    Mr. Glauthier is a graduate of Claremont Men's College and the 
Harvard Business School.

    Chairwoman Biggert. Thank you very much.
    And now, Dr. Smith. Would you turn on your microphone, so 
that the green light is lit?

STATEMENT OF DR. VERNON L. SMITH, NOBEL LAUREATE, PROFESSOR AT 
                    GEORGE MASON UNIVERSITY

    Dr. Smith. Thank you, Madame Chair. It is a pleasure for me 
to be here and to have the opportunity to make, perhaps, a 
small contribution to a very large problem.
    To me, the basic problem is not at the transmission level; 
it is in the--it is between the substation and the end-use 
consumer. That is the area in the entire electric power system, 
which has been a--is still--basically is locked in 1930's 
technology, and there is no incentive there to innovate. And 
I--to me, and that gives us an extremely inflexible demand side 
system.
    And it is--for example, it is very vulnerable. You 
couldn't--I can't imagine designing a more vulnerable electric 
power system to terrorist attack. You are from Chicago. Suppose 
terrorists take out half of the supply of energy to Chicago. 
Utilities have no option but to shed--but to turn off half of 
the substations. It is much better to turn off the lowest half 
priority of power, not everything below a substation. If--and 
it is fundamentally an incentive problem, an incentive to 
innovate prices and an incentive to develop the kinds of 
technologies that both fit consumer preferences and enable the 
energy suppliers to profit from providing those services.
    I want to show a slide.
    
    

    And I--let me apologize for the old technology here, but it 
is--this is a--this slide shows the variation in just the 
marginal cost of energy in the Midwest. This is a period in the 
'80's in a hot August week. It is the hourly variation and the 
cost of just the energy component of people's bills. At the 
time, the energy component of people's bills would have been a 
flat, roughly three cents a kilowatt. And you will notice that 
actual costs are peaking as high as 81/2 cents and as low as 
11/2 cents. That is the kind of variability you have when the 
system is strained. And it--whether it is strained enough to 
take out transmission lines still, it happens very, very 
commonly. Notice here what that means is that the peak users 
are imposing costs on the system that are far larger than the 
price they are paying. In effect, the utility is subsidizing 
peak consumption. It is sending signals--a signal that says dry 
your clothes at 3 p.m. in the afternoon, okay. And off-peak, 
the--basically the users are being taxed, because they are 
paying a price much above the marginal cost of producing the 
energy.
    If I could have the second slide, please.
    
    

    I want to show you the effect of laboratory experiments 
comparing--this is a--these are two-sided spot markets made by 
human subjects who profit from--the wholesale buyers are 
profiting by trying to buy power low and reselling it to 
customers. Generator owners are attempting to profit by selling 
power above their cost of generation. It is a two-sided market. 
And what we are comparing is the effect of demand side bidding 
where you can interrupt 16 percent of the peak demand, that is 
about 20 or 24 percent, I have forgotten, of the shoulder 
demand. And the red here shows the tremendous increases in 
prices when it is just a one-sided market without the 
opportunity for the wholesale buyers to strategically bid into 
that market and interrupt a portion of their demand and an 
attempt to keep prices down. Blue shows four different 
experiments where wholesale buyers are actively bidding in 
their own interests, and you will notice that those prices are 
far lower. Also, they spike a whole lot less. The energy 
spiking on peak is coming from generators bidding into a market 
with a completely inflexible demand. And all over the world, 
you see those spikes.
    Now what is to be done? Well, my view is that you need to 
open up that portion of the grid below the substation level for 
innovation and competition. That means people attempting to 
make money by introducing technologies that are saving to give 
customers a break on their peak charges, and also, of course, 
there are possibilities for distributed generation to be 
installed closer to the customer and to bypass the entire grid 
and get below the substation level. And I think the--that means 
allowing alternative energy suppliers to come in and sell 
energy to the customers of the local wires company. That means 
the inference have to get access to the wires in order to 
install the technologies that their customers prefer. The local 
wires company is not well motivated to let people in there. 
Madame Chairman, you, perhaps, remember when you bought a new 
telephone for your home, you had to buy it from the American 
Telephone and Telegraph Company. You were not allowed to buy a 
telephone separately and install it in your house. And 
furthermore, Ma Bell, at the time, gave you a choice. When 
things really opened up, you got your choice between black, 
white, and red. All right. All of that has changed.
    The other thing that you couldn't do under the government-
sanctioned monopoly of AT&T is let anyone in your house, any 
repairman in your house to fiddle with the telephone wires. 
That person had to come in an AT&T truck. All of that has 
changed. Arguments were made at the time. We can not let people 
in there to fiddle with the wires, because it is the integrity 
and security of the bid we are worrying about. Not any--I mean, 
you know, that is real complicated that red, green, and yellow 
wire in there, and it has to be handled by AT&T. That is the 
situation we face in the local distribution utilities. And I 
think until that is opened up, we are going to continue to have 
problems.
    Thank you.
    [The prepared statement of Dr. Smith follows:]
                 Prepared Statement of Vernon L. Smith
    Testimony will address the following four questions:

        1)  Briefly describe the market structure for the electricity 
        sector as it existed 15 years ago and contrast it with the 
        structure today.

        2)  What barriers currently prevent wider adoption of 
        commercially available energy technologies? What policy choices 
        would be most conducive to greater adoption of these 
        technologies?

        3)  How is uncertainly affecting the economics of investment in 
        the electricity sector? How can we structure a market to ensure 
        reliable electricity at the lowest cost?

        4)  What are the incentives for utilities to invest in 
        transmission research and development? How can we encourage 
        investment in research and development in a highly competitive 
        electricity sector?

Responses:

    Q1: The market structure at the retail level, which is where the 
system is rigid and unresponsive, has not changed in 15 years. 
Essentially from the neighborhood substation to the end use customer, 
we are talking about 1930's technology. Two slides:
    Slide 1; Variability of wholesale energy cost during a hot August 
week in the Midwest (1980s), showing the effect of a fixed energy 
retail price: Customers pay less than the cost of their energy consumed 
on peak, and the loss to the utility is therefore a subsidy that 
encourages consumption; customers pay more than the cost of their 
energy off peak, and are therefore taxed to discourage consumption.
    Slide 2; Effect of profit-motivated human subjects who bid their 
demand in to the spot market along with supply-side bids by generation 
firms who have market power on the shoulder demand periods. Sixteen 
percent of peak (20 percent of shoulder) demand is interruptible. 
Market power is neutralized by the wholesale demand side buyers; price 
spikes all but disappear; and prices are much lower, more nearly 
reflecting the dynamic changes in wholesale costs.

    Q2: The barriers are the continuation of 85 years of regulation of 
the local distribution franchised monopoly preventing free entry by 
alternative suppliers of ENERGY. Regulation protects the right of the 
local distributor to tie the sale of energy into the rental of the 
wires.
    It's like legally franchising the right of the rental car companies 
to require their customers to buy all their gasoline from the rental 
car company's own supplies. But of course the technologies required are 
very different in electricity.
    Two suggested policies:

        1.  Permit free entry by qualified energy suppliers; over time 
        phase out energy sales by the local wires companies.

        2.  Allow entrants access to the wires between the end user 
        outlet, and the substation to install technologies that fit 
        consumer preferences, and allow interruption of peak time 
        energy deliveries when its cost is more than individual 
        customers want to pay. Similarly, entrants can compete to 
        provide customers off peak discounts.

    Q3: At the retail level no one knows what menu of dynamic pricing 
contracts and corresponding technologies will fit individual consumer 
circumstances, and emerge as profitable for retail energy suppliers. 
Moreover, no one knows what new lower cost technologies will emerge 
once there is an incentive for firms to innovate between the substation 
and the end use consumer. This is normal market investment uncertainty. 
The structure needed to deal with that uncertainty is indicated in the 
two policies recommended in Q2.

    Q4: The first order of business is not at the transmission level. 
Transmission is strained and stressed by inflexible peak consumption 
tending to exceed energy supplies. Transmission capacity is entirely 
determined by peak requirements, but at the consumption level there is 
neither the technology nor the competitive incentive to implement a 
dynamic price responsive demand that limits peak consumption, and 
reduces peak transmission requirements. More expensive transmission 
capacity could easily do more harm than good by casting in concrete the 
downstream rigid retail incentive demand structure.
    The retail energy supply sector is not now close to being highly 
competitive. When it is, the supplying firms will have all the 
incentive they need to innovate and profit thereby.

                           Demand, Not Supply

Wall Street Journal

By Vernon L. Smith and Lynne Kiesling

    Immediately following the failure of the electrical network from 
Ohio to the Northeast Coast, a cascade of rhetoric swept across news 
networks, blaming the blackout on an antiquated grid with inadequate 
capacity to carry growing demand for electrical energy. As in the 
California energy debacle, we are hearing the familiar call on 
government to ``do something.''
    The California government response--doing something--left the state 
with a staggering and unnecessary level of debt. Meanwhile, without any 
additional action by the state, the demand and energy supplies in 
California have returned to their normal and much less stressful levels 
and wholesale prices are back to normal. There is no news except good 
news, but have we gained any deep understanding of power system 
vulnerability and its efficient cure from this event?
    Before Congress and the administration begins to follow the 
California model and throw other people's money at the power industry, 
let's have some sober and less frantic talk.
    A systematic rethinking of the power demand and supply system--not 
just transmissions lines--is required to bring the energy industry into 
the contemporary age. Eighty-five years of regulatory efforts have 
focused exclusively on supply--leaving on dusty shelves proposals to 
empower consumer demand, to help stabilize electric systems while 
creating a more flexible economic environment.
    Under these regulations, a pricing system has developed that is so 
badly structured at the critical retail level that if it were 
replicated throughout the economy, we would all be as poor as the 
proverbial church mouse. Retail customers pay averaged rates, making 
their demand unresponsive to changes in supply cost. Without dynamic 
retail pricing, no one can determine whether, when, where or how to 
invest in energy infrastructure. Impulsive proposals to incentivize 
transmission investment, without retail demand response, puts the cart 
before the horse and risks expensive and unnecessary investment 
decisions, costly to reverse.
    At the end-use customer level, the demand for energy is almost 
completely unresponsive to the hourly, daily and seasonal variation in 
the cost of getting energy from its source--over transmission lines, 
through the substations and to the outlet plugs. The capacity of every 
component of that system is determined by the peak demand it must meet. 
Yet that system has been saddled with a pure fantasy regulatory 
requirement that every link in that system at all times be adequate to 
meet all demand. Moreover, the industry has been regulated by average 
return criteria, and average pricing.
    When the inevitable occurs, as in California, and unresponsive 
demand exceeds supply, demand must be cut off. Your local utility sheds 
load by switching off entire substations--darkening entire regions--
because the utility has no way to prioritize and price the more 
valuable uses of power below that relic of 1930s electronic technology. 
This is why people get stuck in elevators and high-value uses of power 
are shut off along with all the lowest priority uses of energy. It's 
the meat-ax approach to interrupting power flows. Between the 
substation and the end-use consumer appliance is a business and 
technology no-mans-land ripe for innovation.
    When a transmission line is stressed to capacity, and its 
congestion cost spikes upward, the market is signaling the need for 
increased capacity in any of three components of the delivery system: 
increased investment in technologies for achieving price responsive 
demand at end use appliances; increased generation nearer to the 
consumer on the delivery end of the line; or increased investment in 
transmission capacity.
    What is inadequately discussed, let alone motivated, is the first 
option--demand response.
    Many technologies are available that provide a dual benefit--
empowering consumers to control both energy costs and usage while also 
stabilizing the national energy system. The simplest and cheapest is a 
signal controlled switch installed on an electrical appliance, such as 
an air conditioner, coupled with a contract that pays the customer for 
the right to cut off the appliance for specified limited periods during 
peak consumption times of the day. Another relatively inexpensive 
option is to install a second, watt-hour meter that measures nighttime 
consumption, when energy usage is low, coupled with a day rate and a 
cheaper night rate. More costly is a time-of-use meter that measures 
consumption in intervals over all hours of the day, and the price is 
varied with delivery cost throughout the day. Finally, a load 
management system unit can be installed in your house or business that 
programs appliances on or off depending on price, according to consumer 
preferences.
    More important, better and cheaper technologies will be invented 
once retail energy is subject to free entry and exit. No one knows what 
combination of technology, cost and consumer preferences will be 
selected. And that is why the process must be exposed to the trial-and-
error experiment called free entry, exit and pricing. As in other 
industries, investors will risk their own capital--not your tax dollars 
or a charge on your utility bill--for investments that fail. Also, as 
in other industries with dynamically changing product demand, 
competition will force prices to be slashed off-peak, and increased on-
peak to better utilize capacity.
    Together with demand response technologies, a simple regulatory fix 
can give new entrants the incentive to provide customers with 
attractive retail demand options. Local regulated distribution 
utilities have always had the legally and jealously protected right to 
tie in the rental of the wires with the sale of the energy delivered 
over those wires. But these are distinctly separable activities. Just 
as rental car companies are separate from gas stations, electricity can 
be purchased separately from the company that delivers it to you--
provided only that they can access the wires to install metering, 
monitoring and switching devices that fit the budget/preferences of 
individual consumers.
    Remember when Ma Bell would not let you buy any telephone but hers, 
and would not let you admit any licensed electrician into your house to 
access the telephone wires except those arriving in her service truck? 
All that has changed for the better in telecommunications, but we are 
still stuck in a noncompetitive world in the local utility industry.

                                 * * *

    Against the backdrop of the wars in Iraq and Afghanistan, the East 
Coast blackout stimulated deja vu speculation of Sept. 11 and fears of 
shadowy operatives bent on disaster. Since 2002, the Critical 
Infrastructure Protection Project at George Mason University has worked 
under a Department of Commerce grant to integrate the study of law, 
technology, policy and economics relating to the vulnerability of key 
U.S. infrastructure. Prime among this continuing research is 
investigation of the susceptibility of the national power grid.
    As it turns out, terrorist speculation, though false, did not fall 
far from the truth. If you were to design an electrical system 
maximizing vulnerability to attack, it is hard to imagine a better 
design than what has evolved in response to regulation. If a terrorist 
attack took out half the energy supply to Chicago, the only viable 
response would be to shut down half the substations. Demand response 
would allow a prioritization of energy use, shutting down only the 
lowest priority of power consumption while supplying high value uses--
such as production facilities, computer networks, ports, airports and 
elevators. Power systems badly need the flexibility to selectively 
interrupt lowest value uses of power while continuing to serve higher 
value uses. Retail price responsiveness in a competitive environment 
provides such a priority system.
    The implementation of retail demand response in the electric power 
industry would provide a wide range of benefits including lower capital 
and energy costs, fewer critical power spikes, consumer control over 
electricity prices, and the environmental benefits gained by empowering 
consumers to use electricity more wisely. Despite Milton Friedman's 
admonition, by adding increased flexibility to the electricity grid and 
sparing critical infrastructure from shutdown, demand response creates 
a more efficient and resilient economic structure while providing more 
robust security as a free lunch.
    Mr. Smith, on leave at the University of Alaska Anchorage, is 
professor of economics and law at George Mason and the 2002 Nobel 
laureate in economics. Ms. Kiesling is senior lecturer in economics at 
Northwestern and director of economic policy at the Reason Foundation.

    Updated August 20, 2003
                     Biography for Vernon L. Smith
    Vernon L. Smith was born in the flat plains of Wichita, Kansas 
during the boom years preceding the Great Depression, January 1, 1927. 
Born to politically active parents--and an avowedly Socialist mother 
who revered Eugene Debs--Vernon Smith's early ideological 
indoctrination would prove pivotal to his attraction to the economic 
sciences.
    While earning his bachelor's degree in electrical engineering at 
the California Institute of Technology in 1949 Smith took a general 
economics course. Intrigued, Smith pursued the science, receiving a 
Masters in Economics from the University of Kansas in 1952 and a Ph.D. 
from Harvard University in 1955.
    Dr. Smith's initial training in the hard sciences lead him to 
pursue the application of the scientific method in his chosen 
profession, and social science, of economics. Predisposed to have the 
heart of a socialist, Dr. Smith expected to prove the inefficiencies of 
market mechanisms when he conducted his first economic experiments in 
1956 at Purdue University, using his students as subjects. However, Dr. 
Smith's experiments--testing economic concepts and theories under 
controlled conditions--instead overwhelmingly demonstrated to him the 
clear efficiencies of markets. Smith found that even with very little 
information and a modest number of participants, subjects converge 
rapidly to create a competitive equilibrium.
    Specifically, Smith's experiments proved large numbers of perfectly 
informed economic agents were not prerequisites for market efficiency--
a radical departure from conventional economic thought. Smith compiled 
his early experiments and in 1962, while a Visiting Professor at 
Stanford University, published his findings in the Journal of Political 
Economy. The article, ``An Experimental Study of Market Behavior,'' is 
today considered the landmark paper on experimental economics.
    Continuing his work, again at Purdue University, Smith conducted 
more and more experiments while also becoming well known as an expert 
in capital theory formation and an early pioneer in the field of 
environmental economics. Widening the interest in academia, Smith 
continued to research and teach experimental methods, as well as 
explore new avenues, at Brown University, University of Massachusetts, 
University of Southern California, California Institute of Technology 
and the University of Arizona.
    Displaying an unusual breadth of academic understanding and 
application, Smith has published and co-published numerous seminal 
works exploring, and defining, experimental economics as well as other 
economic disciplines. His ``The Principle of Unanimity and Voluntary 
Consent in Social Choice'' published in the Journal of Political 
Economy in 1977 initiated the systematic study of institutional design 
for public choice decisions. The 1982 ``Microeconomic Systems as an 
Experimental Science'' in the American Economic Review marked the still 
adhered to methodology for experimental economics. His 1982 ``A 
Combinatorial Auction Mechanism for Airport Time Slot Allocation'' in 
the Bell Journal of Economics provided a real-world application of 
experimental economics on economic systems design. The 1988 ``Bubbles, 
Crashes and Endogenous Expectations in Experimental Spot Asset 
Markets'' published in Econometrica examined stock market bubbles and 
rational expectations. The 1994 ``Preferences, Property Rights and 
Anonymity in Bargaining Games'' in Games and Economic Behavior started 
the systematic study of personal exchange.
    At the same time the slow but steady development in experimental 
economics begun by Smith in the 1950s and 1960s was superseded by 
accelerated development in the 1970s and 1980s. After establishing 
himself as the field's pre-eminent researcher, Smith collaborated with 
several noted economists to refine and improve his subject.
    From Smith's foundation of research, the modern experimental 
methods in economics began to gain acceptance. The research expanded to 
include the economic performance of many real-world institutions. 
Attempts to apply laboratory experimental methods to policy problems 
became systematic. The convergence properties of multiple markets were 
discovered. Conspiracy, price controls and other types of market 
interventions were examined experimentally for the first time. New 
forms of markets were studied, such as methods for deciding on programs 
for public broadcasting. All this research stems from the initial 
contributions of Dr. Vernon Smith.
    Current research is focused on the design and testing of markets 
for electric power, water and spectrum licenses and a new field 
`neuroeconomics' which analyzes the impact of brain functions on 
economic decision-making. As well, Dr. Smith and his colleagues have 
worked with the Australian and New Zealand governments on privatization 
issues, developed market designs for the Arizona stock exchange, and 
designed an electronic market for water in California.
    Dr. Smith's groundbreaking work has led to an explosion in the 
application of laboratory experimental methods. Volumes of experimental 
papers are being published each year and the number of experimental 
laboratories are growing rapidly around the world. ICES is now the 
preeminent facility serving as a model for experimental economic and 
laboratory development throughout the world.
    On December 10, 2002 Dr. Smith received the Bank of Sweden Prize in 
Economic Sciences in Memory of Alfred Nobel--the Nobel Prize in 
Economics--from His Majesty Carl XVI Gustaf for ``for having 
established laboratory experiments as a tool in empirical economic 
analysis, especially in the study of alternative market mechanisms.''

    Chairwoman Biggert. Thank you very much. I certainly do 
remember those phones. I think we had to lease them, too, and 
then finally you could purchase them. I hate to admit it, but I 
do remember.
    Mr. Casten, if you would like to begin.

STATEMENT OF MR. THOMAS R. CASTEN, CEO, PRIVATE POWER, LLC, OAK 
  BROOK, IL; CHAIRMAN, WORLD ALLIANCE FOR DECENTRALIZED ENERGY

    Mr. Casten. Madame Chairwoman, Members of Congress, thank 
you for the opportunity to present my views on preventing 
blackouts while saving money and reducing pollution.
    We have the technology to greatly improve the U.S. power 
system. Building local power that recycles presently wasted 
energy will reduce system vulnerability, reduce future capital 
expenditures for power, reduce energy costs/pollution, 
greenhouse gas emissions, and significantly improve the 
economy. What is not to like?
    But all of the technologies that generate power locally and 
thus lower the throughput on existing wires are discouraged 
and, indeed, stopped by many barriers. We have heard much about 
an industry vision of a smart and self-healing grid. And I 
think those are welcome changes, but that view focuses on 
modernizing the grid, and it falls short on modernizing the 
world view that continues to treat central generation as 
optimal. Pursuing this obsolete central generation vision will 
lead to more wires we don't need, will raise the cost of power 
to consumers, and will only modestly lessen system 
vulnerability.
    Finally, I would like to note that Isabel was the ninth 
area-wide blackout in the last seven years, which is still 
going on. The only unique thing about the blackout in question 
is that it was not attributed to an act of God. And so we are--
we can chase some culpable individual, but in the western 
states, a tree branch knocked out 18 states six years ago and 
on and on.
    Now on background, responding to your questions. I have 
been attempting to change the way the world makes power for 25 
years, believing that we can no longer afford the waste 
inherent in remote generation. The U.S. power system reached 
the pinnacle of its efficiency in 1959 when it converted 33 
percent of the fuel that it burned into delivered energy. It 
has not increased one percentage point in the ensuing four 
decades, despite of all of the technology.
    I founded Trigen Energy Corporation, ultimately taking it 
public on the New York Stock Exchange, to correct this. The 56 
power plants that we built used a variety of fuels: biomass, 
coal, oil, natural gas, and waste fuels. They ranged from a 
single megawatt to over 200 megawatts. In total, we made more 
power than the single largest nuclear plant in the United 
States, all locally. Each of these plants recycled the normally 
wasted heat. Operating in 18 states, including Pennsylvania, 
Georgia, Michigan, Tennessee, and Indiana, we achieved our 
mission of producing heating, cooling, and electricity with 
less than half the fossil fuel and less than half the pollution 
of conventional generation. If the system was anywhere near 
optimal, it would not be possible to achieve those kind of 
results.
    After an unwelcome buyout of Trigen, I joined with others 
to form Private Power to purchase and operate projects that 
recycle energy. We recently announced agreement to acquire six 
projects in northern Indiana. They are within an hour's drive 
of Hinsdale, Madame Chairman, and I would be delighted to--and 
honored to have you and your staff visit those projects. And I 
think it would be useful.
    We generate 460 megawatts of power with virtually no fossil 
fuel. One of the projects recovers heat from 368 coke ovens, 
uses utility style technology to convert that into 100 
megawatts of power and 200,000 pounds of steam. And all of that 
power stays right at the steel mill. Three of the projects burn 
blast furnace gas that had been flared and create another 300 
megawatts of power. One conventional project burns gas in a gas 
turbine, but achieves 21/2 times the efficiency of central 
power, because we take all of the heat and use it for the cold 
rolling process at the steel mill.
    The projects have won several environmental awards. They 
significantly reduce greenhouse gases, and they save the four 
steel companies over $100 billion a year. Moreover, today's 
concern about blackouts and system vulnerability, these 
projects ease the transmission loads and reduce line losses to 
other customers. All of the power stays home, is used by the 
steel mills, and in times of high system demand, these projects 
automatically adjust their output to support the voltage on the 
back end of the lines, and that allows the wires to carry more 
power with fewer losses to other consumers.
    We have analyzed the data that EPA keeps of flare gas, of 
heat exhausted from industrial processes and of pressure drop 
that is ignored by our central power system. We find that this 
waste energy in the United States, if recycled, could produce 
between 45,000 and 90,000 megawatts of fossil fuel-free, 
pollution-free power. That is the equivalent of 90 nuclear 
plants with no environmental problems. Another 300 gigawatts, 
which would be about half of the U.S. power demand, and all of 
the projected 20-year load growth could be generated by burning 
fuel locally where you could take the normally wasted heat and 
recycle it to avoid putting more fuel into a boiler.
    In summary, local power has these benefits. It does not 
need transmission wires. It is thus cheaper to construct. It 
avoids the nine percent average line losses. It recycles waste 
heat inherent in all power generation. Or even better, it uses 
industrial waste heat to generate the power. EPA just completed 
a study that combined heat and power emits 1/20 of the 
pollution of the average central power station. We have 
estimated that the $390 billion U.S. heat and power system 
could slash $100 billion a year out of its costs by deploying 
local power.
    You asked what the barriers are to local power, and I will 
be quick about them. I have summarized them later. It is 
illegal to run a private wire across the street in all 50 
states. Rate commissions allow their utilities to charge for 
100 percent of the wires and generation for backup, even though 
on an actual basis, it is about two percent. It is like 
charging $100 for $100 of life insurance. There is no 
locational value given in where the power is located. In Texas, 
it costs the same to move power across the street as the whole 
way across the state, discouraging the local power. There are 
all of the policy decisions, I am sad to say, including this 
committee, use the wrong metric. You talk about what is the 
cost of the power at the generator. What is the capital cost of 
the generator? It is an irrelevant question. What is the cost 
at the consumer after you pay for the wires? Local power 
doesn't need wires. The environmental policy does not recognize 
the output and therefore gives no encouragement to recycling 
energy.
    What are the policy choices that you could follow to 
encourage local power? I think most important, use the right 
metric and talk about the real thing: what does it cost at the 
consumer? Secondly, I think Congress should remove the ban on 
private wires. This would give all local power developers a 
fair chance to get a reasonable price on using existing wires 
to move their power. There wouldn't be any new wires built, but 
we would have a fair discussion. You need to demand standard 
interconnection rules without the excessive and bogus safety 
concerns of the red and green wires that Dr. Smith refers to. I 
think you should encourage or demand recycled power. I would 
strongly support a clean portfolio standard that mandates that 
a growing percentage of power come from recycled energy, and 
that will encourage local power. That is where it all is. And 
finally, I would suggest that you have the national 
laboratories shift their focus from new generation technology 
to focusing on the interconnection issues and getting 
deployment of the technologies that are already there.
    Finally, you asked what the local deployment differences 
are. The U.S. generates only six percent of its total power 
locally, all of the rest coming from remote plants. By 
contrast, Denmark, Finland, and the Netherlands generate over 
40 percent of their power out of local plants, saving wires and 
making it cheaper. Within the U.S., the picture is equally 
diverse. Three states, South Carolina, South Dakota, and 
Kentucky, have virtually no local generation. At the other 
extreme, Hawaii produces 33 percent. California, I think, is 
about 25 percent local power. New York and Maine are in the 
high teens. The differences are in State encouragement of wider 
choices.
    The high local power states encourage local power with 
requirements for utilities to purchase the power at full cost. 
They tackled interconnection rules. They tailored their 
environmental management to output standards and rewarded 
efficiency. And they have provided grants to break old 
paradigms. The states with little local power have laws 
preventing third parties from generating power on site and 
selling it. They give no locational value to power.
    In conclusion, I note that Congress faces a seemingly 
unpleasant task. The power industry begs help to build more 
wires. The papers are asking for $100 billion for improved grid 
and wires. They ask for new eminent domain rights so that the 
wires can slash across our parks and backyard. I think this 
will raise prices. It will annoy the voters, and it will 
largely fail to address system vulnerability or to mitigate 
power system related problems. There is a better solution. 
Local generation operation options are technically right. They 
are environmentally superior. They are at least twice as 
efficient as the average central generation. My work in Trigen 
and now Private Power has proven the value of these systems. I 
think that if Congress lifts the many barriers, everyone will 
follow.
    Thank you.
    [The prepared statement of Mr. Casten follows:]
                 Prepared Statement of Thomas R. Casten

Madam Chairwoman, Congresspersons, Ladies & Gentlemen:

    My name is Tom Casten and I am the Chairman and CEO of Private 
Power in Oak Brook, Illinois. I appreciate the opportunity to present 
my views on preventing blackouts while saving money and reducing 
pollution. We have the technology, but block its use because of a now 
obsolete worldview. We have heard much about an ``industry consensus 
vision'' for a smart, self-healing grid. This view focuses on 
modernizing the grid, but falls short on modernizing the worldview and 
leads to more wires we don't need. Applying three (3) simple principals 
will optimize the power system. The principals are:

          Build local power

          Build smaller

          Recycle waste energy.

Blackouts blackouts everywhere

    On August 14th, around 2:00 PM, a 31-year-old, 650 megawatt Ohio 
power station failed. Transmission controllers struggled to route power 
from remote plants, overloading transmission lines. At 4:06, a 1200-
megawatt transmission line melted, starting a failure cascade. Lacking 
local generation, system operators could not maintain voltage and five 
nuclear plants tripped, forcing power to flow from more remote plants 
and overloaded regional lines. By 4:16 PM, the northeastern U.S. and 
Ontario, Canada lost power.
    Before the even more recent blackouts associated with Hurricane 
Isabelle that many of you have experienced, the August 14th blackout 
was the eighth area-wide loss of power in seven years. It differed from 
the prior seven blackouts in one respect--the cause was not seen as an 
act of God. Herewith the recent record:

        1996--  A falling tree branch in Idaho led to a failure 
        cascade, blacking out 18 states.

        1997--  An ice storm in Quebec downed transmission lines and 
        blacked out much of New England.

        June 1998--  A tornado downed a Wisconsin power line leading to 
        rolling brownouts east of Mississippi.

        2000--  Low water and a failed nuclear plant caused a power 
        crisis in California with a month of brownouts and rolling 
        blackouts. This nearly bankrupted California.

        1999-2002--  Three separate ice storms caused large area 
        blackouts in Oklahoma.

        2003--  A thirty-one year old coal plant in Ohio tripped. Lines 
        overloaded as power moved from further away, voltage dropped, 
        dramatically reducing the capacity of transmission lines and 50 
        million people lost power.

A review of electric generation history

    For electricity's first 100 years, the optimal way to produce and 
deliver power was with large, remote central stations feeding long 
wires; this formed a deep, central generation bias. Initially all power 
came from two central technologies--hydro and coal fired steam plants. 
Hydroelectric plants were inherently remote and early coal plants were 
noisy and dirty--not good neighbors. Also coal plants required skilled 
operators, making them inappropriate for smaller users. For 80 years, 
power from remote plants--linked to the user by an ever-growing set of 
wires--enjoyed cost advantages over local power. Nuclear power 
technology, commercialized in the 1960's, was also seen as inherently 
remote by everyone but Admiral Rickover and the U.S. Navy.
    Everyone assumed that central generation was and would always be 
technically and economically optimal. Many laws and regulations 
reinforced this assumption. If all generation is central, then all 
power must flow through wires, which seemed to be a natural monopoly. 
Laws enshrined a monopoly approach, with good results. The country was 
rapidly electrified and power prices feel from $4.00/kWh in 1900 to 5.8 
cents/kWh in 1968. The electric age celebrated its 88th birthday. 
Technology was changing but local power technologies were blocked.
    The monopoly approach created an incredibly strong power industry 
with deeply vested interests in all power flowing through their wires, 
and once central technologies matured, progress stopped. Between 1969 
and 1984 power prices rose 65 percent. After 1959, delivered average 
efficiency never improved beyond 33 percent. But things changed. People 
came to hate the ugly fifth column of transmission lines. We learned 
more about the bad side effects of burning fossil fuel and as 
population grew, electricity demand grew with it. Fossil fuel imports 
also grew, unbalancing the budget. Then 9/11 terrorist attacks focused 
attention on infrastructure vulnerability.
    These issues must inform the discussions about preventing 
blackouts. Fortunately, we have the technology to simultaneously 
address all problems if we change the central generation paradigm:

        1.  Build local power

        2.  Build smaller

        3.  Recycle waste energy.

Distributed generation comes of age

    Technical progress has provided many local power answers. It 
employs proven central generation technologies and fuels but is located 
next to electric and thermal loads. DG power goes directly to users, 
bypassing transmission, and DG plants recycle normally wasted heat, 
saving fuel and pollution. Local generation options are technically 
ripe, environmentally superior, and at least twice as efficient as 
average central generation. In fact, much of the technical progress has 
occurred as a result of government supported research.
    But do not limit focus to sexy new technologies like micro 
turbines, solar photovoltaic or fuel cells. There are many proven local 
power technologies, matched to all medium to large electric loads.
    Economics of scale have been reversed by the microcomputer. Small 
steam turbines, able to extract power from local energy waste were 
available in 1950 but required operators, making most on-site 
generation less economic than central power. Today, microcomputer 
controls enable steam turbines to operate unattended and produce 
economic local power.
    Modern gas turbines are clean and compact, unobtrusive neighbors. 
Two 5MW gas turbines now generate power at the steam plant serving the 
White House, the DOE and the EPA, and they are more than twice as 
efficient as central plants because they recycle wasted heat. Their 
power needs no transmission wires. It stays home.
    The most efficient gas turbine yet built is a 50 megawatts 
LM6000GE, matched to middle sized industrial complexes or large 
universities. The next best turbine in the world is 4 megawatt solar 
mercury turbine, perfect for hospitals and small industry.
    An even better local power opportunity burns no new fuel. The U.S. 
flares waste gas, vents waste process heat and fails to harness steam 
pressure drop that could support 45 to 90 gigawatts of local, fuel-
free, pollution free, wire-free power--over 10 percent of U.S. load. 
Only 1 to 2 gigawatts of this waste energy is currently recycled. The 
needed technology is available, proven, and less expensive than central 
plants and wires.
    The U.S. is out of transmission capacity and electric peak load is 
projected to grow by 43 percent over 20 years--300 gigawatts. Line 
losses have grown from 5 percent in 1960 to 9 percent in 2002 and 
exceed 20 percent on peak. If we stay with the central generation 
paradigm, we must build 375 GW of large new plants to accommodate peak 
line loses. By contrast, 300 GW of local power will meet peak load with 
no new wires and no added line loses. And, because local plants can 
recycle waste heat, we will burn only half the fuel.
    The technology is here today but it is the outmoded laws, 
regulations and the vested interests in central power that keep 
deployment at bay.
    As I have said, the optimal approach is to:

        1.  Build local power

        2.  Build smaller

        3.  Recycle waste energy.

How can Congress find solutions?

    This Congress faces a seemingly unpleasant task. The power industry 
begs help to build more wires--$100 billion of new wires and an 
improved grid. They ask for new federal eminent domain rights to enable 
new wires to slash through forests and backyards. This will raise 
prices, annoy voters, and largely fail to address system vulnerability 
or to mitigate power system related problems.
    There is a better approach:

        1.  Demand and use the right metric in all discussions. What is 
        the delivered cost of power? Stop focusing on capital cost and 
        the cost per kWh at the generator--count the line costs and 
        line losses and extra capital for peak loads. Recognize the 
        locational value of power.

        2.  Remove regulatory barriers to local power. Instead of new 
        federal eminent domain for transmission wires, overturn the 50 
        state bans on private wires. Give distributed generation 
        operators the right to bypass the wires monopoly and deliver 
        their power across the street, just as federal laws allow 
        private gas pipes. Few private pipes are built and few private 
        wires will be built, but lifting bans on private wires will 
        transform the power industry, ending the ability of monopolies 
        to block local power with excessive line charges. Couple this 
        right with standardized interconnection access, the right to 
        backup power and an environmental regulatory framework that 
        recognizes the environmental benefits of the combined 
        production of power and heat (CHP).

        3.  Encourage and/or demand recycled power development. Pass a 
        clean portfolio standard that requires a growing percentage of 
        power from renewables and recycled energy. Give manufacturers a 
        reason to recycle waste fuel, waste heat and pressure drop.

        4.  The work of the national laboratories has pushed the 
        frontier of technology but with efforts often conducted in 
        isolation of broader national needs. There is a need to assess 
        and refute the still widespread belief that distributed 
        generation can not be safely integrated into the electric 
        distribution system at reasonable costs. Every effort should be 
        made to showcase and highlight the many existing commercial 
        technologies that DOE and others have had a role in developing 
        which can safely and cost effectively integrate DG into the 
        grid.

    This is a short summary of an analysis showing that the optimal way 
to meet future electric load growth is with distributed generation--
using proven technology DG. I have attached a more comprehensive 
analysis in the form of a paper entitled ``Preventing Blackouts.''
    In closing, let me reiterate how to prevent more blackouts while 
saving money and reducing pollution:

        1.  Build local power

        2.  Build smaller

        3.  Recycle waste energy.

                     Biography for Thomas R. Casten
    Thomas R. Casten has spent over 25 years developing and operating 
combined heat and power plants as a way to save money, increase 
efficiency and lower emissions. A leading advocate of clean and 
efficient power production, Mr. Casten is the founding Chairman and CEO 
of Private Power LLC, an independent power company in Oak Brook, IL, 
which focuses on developing power plants that utilize waste heat and 
waste fuel. In 1986 he founded Trigen Energy Corporation and served as 
its President and CEO until 1999. Trigen's mission reflects that of its 
founder: to produce electricity, heat, and cooling with one-half the 
fossil fuel and one-half the pollution of conventional generation.
    Mr. Casten has served as President of the International District 
Energy Association and has received the Norman R. Taylor Award for 
distinguished achievement and contributions to the industry. He 
currently serves on the board of the American Council for an Energy-
Efficient Economy (ACEEE), the board of the Center for Inquiry, and the 
Fuel Cell Energy Board. He is the Chairman of the World Alliance for 
Decentralized Energy (WADE), an alliance of national and regional 
combined heat and power associations, wind, photovoltaic and biomass 
organizations and various foundations and government agencies seeking 
to mitigate climate change by increasing the fossil efficiency of heat 
and power generation. Tom's book, ``Turning Off The Heat,'' published 
by Prometheus Press in 1998, explains how the U.S. can save money and 
pollution.



             New York City, Early Evening, August 14, 2003



    On August 14th, around 2:00 PM, a 31-year-old, 650 megawatt Ohio 
power station failed. Transmission controllers struggled to route power 
from remote plants, overloading transmission lines. At 4:06, a 1200-
megawatt transmission line melted, starting a failure cascade. Lacking 
local generation, system operators could not maintain voltage and five 
nuclear plants tripped, forcing power to flow from more remote plants 
and overloaded regional lines. By 4:16 PM, the northeastern U.S. and 
Ontario, Canada lost power.



    This was the eighth major North American outage in seven years, not 
counting five localized blackouts in New York City and Chicago. These 
area wide failures began in 1996 with a blackout of 18 western states, 
followed by a 1997 ice storm in Quebec that knocked out much of New 
England, a 1998 tornado that crippled midwestern power systems, 
California system failure in 2000, three ice storms in Oklahoma and the 
August 2003 blackout. Pundits spread blame widely and call for massive 
investment in wires, while ignoring the fundamental flaw--excessive 
reliance on central generation of electricity.
    Power system problems are deeper than repeated transmission 
failures. Average U.S. generating plants are old (average age 35 
years), wasteful (33 percent delivered efficiency) and dirty (50 times 
the pollution of the best new distributed generation). Centralized 
generation, besides requiring ugly, highly visible transmission lines, 
does not recycle its own byproduct heat or extract fuel-free power from 
industrial waste heat and waste energy. This leaves two starkly 
contrasting ways to address blackouts:

          Spend billions on new wires. This will not completely 
        eliminate blackouts and will exacerbate other problems.

          Save money by encouraging distributed generation. 
        This will greatly reduce system vulnerability and deliver a 
        host of other benefits.

    Distributed generation (DG) has come of age. It employs proven 
central generation technologies and fuels but is located next to 
electric and thermal loads. DG power goes directly to users, bypassing 
transmission, and DG plants recycle normally wasted heat, saving fuel 
and pollution. Local generation options are technically ripe, 
environmentally superior, and at least twice as efficient as average 
central generation.
    Unfortunately, laws and regulations block distributed generation. 
The industry and its regulators are caught in an overloaded, wire-
entangled web that blocks innovation.

The Wiring of America

    Central generation--long considered optimal--is an outgrowth of 
early generating technologies. Hydroelectric plants were inherently 
remote and early coal plants were noisy and dirty--not good neighbors. 
And coal plants required skilled operators, making them inappropriate 
for smaller users. For 80 years, power from remote plants--linked to 
the user by an ever-growing set of wires--enjoyed cost advantages over 
local power.
    By contrast, transportation required small engines that did not 
need skilled operators. Coal was tried for automobiles (the Stanley 
Steamer), but soon displaced by oil fired piston engines. For the first 
six decades of the 20th century, power technology evolved along two 
separate paths--coal fired steam turbines for electricity and oil 
fueled piston engines for transportation.
    Over time, engine-driven power plants became cheaper to build, but 
required more expensive fuel and were only economic for backup or 
remote electric generation. Coal fired steam power remained a better 
value for electricity into the 1960 period.
    Aircraft needs spurred another power generation technology, the 
combustion turbine. Pioneered near the end of WWII, early combustion 
turbines lacked efficiency but produced more power per pound than 
engines--critical to aircraft. Technology marched on. By the early 
1980's, combined cycle gas turbine plants had become more efficient 
than the best steam power plants. To fill the gap left by environmental 
pressure on coal plants, turbine manufacturers developed turbines 
suitable for stationary power generation.



    By 1980, local gas turbine generation cost less to install and 
operate, required less net fuel and produced fewer net emissions that 
the best possible remote gas turbine generation and associated wires. 
Turbines are available from sub-megawatt to two hundred megawatt, 
appropriate for local loads; the plants are all automated, clean and 
quiet. Generating power locally avoids capital for transmission lines 
and eliminates transmission losses. Local power plants, unlike remote 
generation plants, can recycle byproduct heat, reducing net fuel use 
and cost. The power industry embraced turbine technology, but clung to 
central generation, missing opportunities to save money and pollution 
with distributed gas turbine generation.
    Many other trends of the past thirty years also make distributed 
generation attractive. Turbine and piston engine power plant electric 
efficiency continues to increase. Transmission system losses of 
remotely generated power have increased from 5 percent to 9 percent, 
due to congestion. Computer controls enable unattended local generation 
based on waste gas and waste fuel. The most efficient generation 
technology ever invented, back pressure steam turbines, were 
historically limited by operator needs. With computer controls, these 
devices can economically extract power from waste heat, waste fuel, and 
steam pressure drop in virtually every large commercial and industrial 
facility. The U.S. currently vents or flares heat, low-grade byproduct 
fuel and steam pressure drop that could support 45 to 90 gigawatts of 
back pressure turbine generation capacity--6 to 13 percent of current 
U.S. peak load.\1\
---------------------------------------------------------------------------
    \1\ Thomas R. Casten and Martin J. Collins, Recycled Energy: An 
Untapped Resource, April 19, 2002.
---------------------------------------------------------------------------
    Even coal-fired local power now beats the costs of power delivered 
from remote coal plants. Advances in fluid bed boilers enable on-site 
production of heat and power with coal, biomass and other solid fuels 
in environmentally friendly plants. The limestone beds chemically bond 
with sulfur as calcium sulfate and limit combustion temperatures, 
reducing NOX formation. These clean coal plants, located near users, 
recycle heat to achieve 2.5 times the efficiency of remote coal plants.
    Given all of these advances, an optimal power system would generate 
most power near load, using existing wires to shuttle excess power. 
Because electricity flows to the nearest connected users, regardless of 
the sales contract, locally generated power bypasses transmission 
lines.
    Which brings us back to those long protected, overburdened, 
vulnerable, and failing wires that connect remote central plants to 
customers. Although the power industry finds itself waist deep in the 
big muddy, it clings to central generation. Every stakeholder pays. 
Power prices shot up by 65 percent from 1968 to 84, needless 
environmental damage continues, many major industry players have 
declared bankruptcy or are close, banks are saddled with billions of 
non-performing loans to new central plants and blackouts have become a 
way of life.

Regulations and Industry Responses

    Competition cleanses, discarding firms that cling to yesterday's 
technology. But the electric industry has long been sheltered from 
competition. The electric industry's guiding signals have, since 1900, 
come from regulation rather than from markets. All ``deregulation'' to 
date has left intact universal bans on private electric wires and many 
rules that penalize local power generation and protect the incumbent 
firms from cleansing competition. History sheds light on how and why 
utilities and regulators have enshrined central generation and largely 
continued to oppose local power generation.



    Electricity, commercialized in 1880, is arguably the greatest 
invention of all time. But early developers faced a big problem, 
finding money for wires to transport electricity to users who didn't 
think they needed it. To manage the risk, developers asked city 
councils for five-year exclusive franchises.
    Thousands of small electric companies sprang up; by 1900, there 
were 130 in Chicago alone. Greedy alderman sold votes to extend 
franchises. Samuel Insull conceived of (and got) an Illinois state 
granted monopoly in perpetuity. State monopolies spread.
    States established regulatory commissions to approve capital 
investments and set rates that assured utilities fair returns on 
capital. Under rate-based regulation, investments in efficiency 
improvements increase the rate base, but all savings go to customers. 
This approach does not allow utilities to profit from increasing 
efficiency. This misalignment of interests eventually caused industry 
stagnation, but in the early years, utilities chased efficiency to 
compete with candles, oil lamps, muscle power and self-generation.
    Banks cheerfully loaned money to monopoly-protected utilities 
fueling a race to grow and acquire other systems. Power entrepreneurs 
borrowed huge sums to gain control over vast areas of the country. In 
1929, the bubble burst; demand for electricity sagged, and over 
leveraged trusts could not pay debt service. Utility bankruptcies 
deepened the Great Depression. Congress's response--the Public Utility 
Holding Company Act (PUHCA)--prevented utility amalgamation and 
assigned federal watchdogs to oversee finances. PUHCA blocked profit 
growth via acquisition or financial engineering. Profit-seeking 
utilities had two options: (1) sell more power and (2) invest more 
capital in the rate base.
    Both strategies favored central generation over local power. 
Utilities sponsored research in electric appliances, motors and other 
novel uses of electricity that increased sales and provided significant 
public benefits. But they also fought local generation with every 
available means.
    Electric distribution companies have an understandable bias against 
generation that bypasses their wires and cuts potential profits. 
Utility monopolies long made it ``Job One'' to preserve the monopoly. 
The electric industry sponsored ``Ready Kilowatt'' campaigns to win 
industry love and skillfully coached (and paid) governments at every 
level to block distributed generation.
    For eight decades, central generation was the optimal technology. 
The regulatory approach delivered nationwide electrification and real 
prices fell by 98 percent. Electrification not only improved standard 
of living, but also played a strong role in positive social change.
    Then, beginning in the late 1960's problems arose. Central 
generation ceased to be optimal, but the industry ignored local power 
innovations. Which brings us back to stakeholder costs.

The Good Times End

    By 1960, as competition withered away, utilities began pursuing 
questionable strategies. With no way to recycle byproduct heat, fuel 
efficiency never moved beyond 33 percent. Utilities and their 
regulators rushed to convert many coal-fired power plants to oil, just 
in time for the OPEC embargo in 1973. Many utilities committed to build 
massive central plants that required up to ten years to construct, far 
beyond safe planning horizons. When rising prices induced conservation, 
electric load growth flattened and left the industry with massive 
overcapacity.
    Then came nuclear. The utility industry committed vast sums, 
underestimating complexity and safety concerns. Some nukes were built 
near budget, but others broke the bank. Cost overruns of 300 percent to 
500 percent were common. Long Island Lighting spent 19 years and $5 
billion building Shoreham, only to have New York Governor Cuomo close 
the plant before it generated any power.
    Figure 1 shows the rising real prices of U.S. electricity after 
1968.\2\ From 1970 to 1984, real electric prices rose 65 percent.
---------------------------------------------------------------------------
    \2\ Prices given in 1996 dollars as reported at www.eia.doe.gov
---------------------------------------------------------------------------
    Regulatory responses nearly got it right, flirting with local 
generation. The 1978 Public Utility Regulatory Policy Act or PURPA 
sought to improve efficiency by exempting plants that recycled some 
heat from Federal Power Act regulations and required utilities to buy 
power from these plants at avoided costs. Utilities fought PURPA to the 
Supreme Court, losing in 1984. But subsequent changes removed the 
pressure to build plants near users, and nascent DG was again driven 
back.
    Next came Three Mile Island. State commissions, fed up with nuclear 
cost overruns and rising prices, overturned the tacit regulatory 
compact. They challenged the prudence of utility investments in nuclear 
plants, claiming mismanagement. Historically friendly regulators 
ordered CEOs to remove billions of dollars from rate base and reduce 
electric prices. Utility shareholders took a bath.



    The two changes did stop electric price inflation; prices dropped 
to 1969 levels by 2000. But utility managements went into shock. They 
curtailed in-system investments, but still needed to put massive cash 
flow to work. Smarting from independent power producers' (IPPs) 
``poaching'' of their generation under PURPA, many utilities funded 
unregulated subsidiaries to ``poach'' generation in other territories. 
Never questioning the central generation mantra, utility subsidiaries 
began a disastrous race to build remote gas turbine plants, ignoring 
this strategy's vulnerability to rising gas prices. In thirteen months 
following May, 2001, the eleven largest merchant power plant builders 
destroyed over $200 billion of market capitalization. ENRON, NRG, and 
PSE&G and Mirant have since declared bankruptcy while, Dynegy, CMS and 
Mission struggle to pay creditors. Industry players that embraced gas-
fired remote merchant plant development have seen their credit ratings 
lowered to junk status. These mistakes have already cost a dozen 
utility CEOs their jobs, pounded utility shareholders and caused 
enormous bank losses.

    Major transmission failures did not start immediately. Spare 
transmission capacity, built in the days of compliant regulation, 
absorbed load growth until 1996, when a falling tree set off an 18 
state blackout throughout the west. By then, load growth had made the 
non-growing T&D system vulnerable to extreme weather (ice storms, 
tornadoes, hurricanes and drought induced hydro electric shortages), 
human error, and terrorists.
    As costs and environmental concerns mounted, States began to 
experiment with partial deregulation, but never eased protection of 
wires, leaving utilities free to continue fighting DG by charging 
excessive backup rates and denying access to customers. Commissions 
allowed generators to sell to retail customers, but then set postage 
stamp transmission rates, charging the same to move power across the 
street or across Texas. DG power, which only moves across the street, 
was left to pay identical transmission rates to power moving hundreds 
of miles through expensive transmission wires. Wholesale power prices 
give little recognition to the locational value of generation.
    Environmental regulations also suppress distributed generation. The 
1976 Clean Air Act and subsequent amendments penalize efficiency. 
Almost all emission permits are granted based on fuel input, with no 
relationship to useful energy output. All new generation plants are 
required to install ``best available control technology,'' while 
existing plants retain 'grandfather'' rights to emit at historic 
levels. These grandfather rights give economic immortality to old 
central stations and block innovation, and thus bear some 
responsibility for system failures.



    The costs to all stakeholders from the central generation world 
view extend to other societal problems. The balance of payments suffers 
from needless fuel imports. The U.S. demands for fossil fuel begat 
military adventures. Inefficient generation raises power costs, hurts 
industrial competitiveness and makes electric generation the major 
source of greenhouse gas emissions, threatening entire ecosystems.

An Exception Disproves the Rule

    NIPSCO encouraged local power at the steel mills they serve in 
northern Indiana. Parent NiSource formed an unregulated subsidiary in 
1994 that invested over $300 million in 460 megawatts of distributed 
power. Primary Energy built five projects that recycle waste heat and 
normally flared blast furnace gas. All of the power is consumed at the 
steel mills, easing transmission congestion and supporting local 
voltage.
    The steel mills collectively save over $100 million per year by 
producing power with waste energy. These distributed generation 
projects produce no incremental emissions and displace the emissions of 
a medium sized coal fired station, 24/7. They are the environmental 
equivalent of roughly 2,500 megawatts of new solar collectors, which 
would only operate 20 percent of the time, on average.
    These projects have not hurt NIPSCO, on balance. Yes, the utility 
sells less electricity to the mills, but steel production has risen, 
requiring more shifts and pumping up the local economy, increasing 
other electric sales. There is no reason why similar projects cannot be 
built to the benefit of all stakeholders in every other electric 
territory.

Whether 'tis Nobler to Spend or to Save; That is the Question

    There are two distinct paths to avoid blackouts. Spend $50 to $100 
billion on new and upgraded transmission lines or save money by 
removing barriers to distributed generation.
    The first path will raise electric rates by 10 to 15 percent and 
will exacerbate other problems. The second path will cost taxpayers 
nothing and mitigate other problems.
    To follow the second path, governments must:

          Allow anyone to sell backup power

          Enact standard and fair interconnect rules

          Void laws that ban third parties from selling power 
        to their hosts.

          Give every power plant identical emission allowances 
        per unit of useful energy.

          Recognize the locational value of generation.

          Most importantly, allow private wires to be built 
        across public streets.

    These changes will transform the $390 billion U.S. heat and power 
business into a dynamic marketplace of competing technologies and allow 
distributed generation's competitive advantages to prevail. Utilities 
and IPPs will build new DG capacity to serve expected electric load 
growth and reduce transmission congestion.



    Ending central generation bias will upset vested interests and 
require a great deal of political effort, but the rewards for this 
leadership will be immense--lower power prices, reduced pollution, 
reduced greenhouse gas emissions, and a vastly less vulnerable national 
power system.

    Thomas R. Casten has spent 25 years developing decentralized heat 
and power as founding President and CEO of Trigen Energy Corporation 
and its predecessors and currently as founding Chairman and CEO of 
Private Power LLC, an Illinois based firm specializing in recycling 
energy. Tom currently serves are Chairman of the World Alliance for 
Decentralized Energy (WADE), an alliance of national and regional 
combined heat and power associations, wind, photovoltaic and biomass 
organizations and various foundations and government agencies seeking 
to mitigate climate change by increasing the fossil efficiency of heat 
and power generation.
    Tom's book, ``Turning Off the Heat,'' published by Prometheus Press 
in 1998, explains how the U.S. can save money and pollution.
    The author can be reached at: Private Power LLC, 2000 York Rd., 
Suite 129, Oak Brook, IL 60523; Phone: 630-371-0505; Fax: 630-371-0673; 
E-mail: [email protected]

                               Discussion

    Chairwoman Biggert. Thank you very much.
    At this point, we will open our first round of questions. 
And the Chair recognizes herself for five minutes.
    Mr. Glotfelty, your office is charged with improving the 
reliability of the electric system. And Dr. Smith has argued 
that the best way to encourage innovation and investment is to 
have a fully competitive market. Is there a conflict between 
innovation and reliability and between competition and 
reliability? And are you concerned that as we move toward a 
completely competitive market that there will be increased 
pressure to push the system beyond its limits? And then Mr. 
Casten suggests that there should be a--it would--it should be 
local and we should use waste energy. Has--is your committee 
looking--or commission looking into this, also?
    Mr. Glotfelty. To address Dr. Smith's concern, we 
absolutely agree that demand response is a critical component 
to ensuring future reliability as is distributed resources. 
They are one of the components in a wide array of choices that 
we have to implement. I don't believe either one of them are 
the silver bullet to ensuring greater reliability or a greater 
and more efficient transmission system or electrical system, 
generally speaking, but they are two of the most critical 
components as we move forward that have to be addressed.
    The problem, from our standpoint, is both of those issues 
are State issues. They deal with retail customers. At the 
federal level, we deal at the wholesale level. So there has 
been a conflict for many years that the Congress has grappled 
with when considering energy legislation as to do you violate 
the States' rights that deal with the retail customer and say 
demand response is a federal issue and therefore we promulgate 
these rules. And the same thing with distributed resources. It 
is a conflict that I think is apparent in the energy bill that 
is being considered today, but it can be resolved. And it 
should be resolved, because both provide a valuable component 
for a more efficient and reliable transmission system.
    Chairwoman Biggert. As far as the recycling of waste 
energy, is this a possibility?
    Mr. Glotfelty. Absolutely. Combined heat and power, in this 
Administration, going as far back as the President's National 
Energy Policy, we have said time and time again that we are 
believers in that. Combined heat and power is very efficient. 
It is good for the environment. In my past life, I worked for a 
company that owned about 20 co-generation plants. They are very 
good for the environment, and they are very good for the 
system. Again, you get into the--and those were large plants. 
But as you get into smaller combined heat and power plants, the 
majority of the rules that are prohibiting their application 
into the system are at the State level. They are not at the 
federal level. I think this--FERC has tried to implement 
standard interconnection agreements, and they do affect large 
generation that is tied into the transmission system, not 
that--at the distribution level that is under State regulation.
    Chairwoman Biggert. Thank you.
    Mr. Casten, you talked about some of the--where your 
company--at the steel mills, et cetera, but could you just kind 
of describe the products or services and then what benefits do 
your products--projects offer to both your company and to your 
customers?
    Mr. Casten. Every steel mill puts coke and iron ore in a 
big blast furnace and makes iron out of it. It emits a very 
dirty, low-energy gas. EPA requires that gas to be flared to 
clean up some of the pollutants in it. Three of our projects 
put in a special boiler, burn that gas, cleaning up the 
pollution, and then just recycle the energy and turn it into 
electricity and steam, all of which goes to the steel mill, 
cuts down their purchase of outside power and cuts down their 
pollution, et cetera. There are comparable projects with most 
chemical factories, refineries, other places with the same type 
of thing. So they benefit from lower prices, the grid benefits 
from less demand on the system.
    Chairwoman Biggert. Is this something like methane gas from 
landfills or anything that could be used?
    Mr. Casten. Methane gas from landfills is a great example 
of recycling. It can use some other technologies, because it is 
about half as energy intensive as natural gas. The stuff we are 
burning is eight percent of the energy of natural gas, so there 
are a variety of technologies to get the different waste heat, 
but yes, many things can be done.
    Chairwoman Biggert. Thank you.
    My time is up, so I will recognize Mr. Lampson for five 
minutes.
    Mr. Lampson. Thank you. Madame Chair.
    Let me start by asking Mr. Glotfelty and Mr. Glauthier a 
comment on Mr. Casten's testimony. What are your feelings and 
maybe concerns? It doesn't matter whoever wants to start.
    Mr. Glotfelty. I believe he is on target. I mean, he--
again, he has addressed one of the issues that needs to be 
addressed in order for us to get a more efficient and reliable 
system. It--I think from my standpoint, if we got, even in our 
wildest dream, 20 or 30 percent integration of distributed 
resources in our system, in a decade, that would still mean 
that 700,000 megawatts would still have to travel over our 
transmission system. So we can't neglect the transmission and 
distribution system and put all of our eggs in the distributed 
resources basket, because it will not supply all of our needs 
in real time. But it is a critical component that can help us 
over the next decade achieve a more reliable and efficient 
system.
    Mr. Glauthier. And I agree with that. I think we need to go 
even further than Mr. Casten did. We really need to think about 
distributed energy resources that include photovoltaics and 
other renewables, ultimately fuel cells in widespread use. The 
system that will support that needs to be modernized. The 
distribution system, as well as the transmission system, needs 
to be upgraded to a point where it can incorporate that kind of 
equipment and support it effectively. We need to be able to 
make that kind of distributed energy, literally point and play. 
So you know, as you bring home a new printer for your computer, 
you plug it in, and the system recognizes that and initializes 
and it can incorporate that. Today, that is not the case for 
electricity. Every new application is a custom connection. We 
need to make that sort of technology improvement. And that is 
part of the modernization that we are supporting that I think 
the Department of Energy can lead and the Congress can help to 
provide the kind of direction and support for it that we think 
is important.
    Mr. Lampson. Mr. Glauthier, you have seen the New York 
Times article from Tuesday this week regarding reactive power?
    Mr. Glauthier. Yes, I have.
    Mr. Lampson. Can you tell me a little bit about reactive 
power first? And then has EPRI done a study relative to 
reactive power and the August 14 blackout?
    Mr. Glauthier. EPRI has conducted some analysis of working 
with First Energy and with the data there and has submitted 
that to the Department of Energy to the--for the use of the 
task force, that is the international task force. And we expect 
that that will be some of the information that they will be 
able to put together to come up with a final answer on what had 
happened.
    The reactive power itself is something I can give you a 
brief explanation, but I am not an electrical engineer. And I 
do have with me, as I mentioned earlier, Dr. Sobajic from EPRI, 
who could give you more in detail if you would like to have 
that.
    Mr. Lampson. Just a simple, if you can.
    Mr. Glauthier. Reactive power is necessary to be able to 
allow the regular power to flow through the lines. And there 
has to be enough of this balance, if you will, to allow the 
whole system to operate. So if you have plants that are 
operating and just providing their power into the system and 
not reactive power, they--those have to draw reactive power 
from somewhere else. It is a necessary balance in the system. 
And that is something that utilities in the past were, I think, 
more able to provide because the whole systems were integrated. 
As we restructure the system and we have independent entities 
performing the different functions, that becomes more 
complicated. It requires more coordination and more coordinated 
management.
    Mr. Lampson. We may explore that more in time. Is it 
possible that this committee can have a copy of that study? 
Could you get it to us?
    Mr. Glauthier. At this point, we would be willing to submit 
it to you, but it is really a restricted report, because we are 
trying to provide it to the task force for its use, and we 
envision making it public later on as part of the data that, I 
think, everyone will have access to eventually. So we would ask 
that you would respect that, if you would, and on that kind of 
a basis, we would be willing to do that.
    Mr. Lampson. Okay. We would like that when it is possible.
    Let me--my time is running very short now, and this is sort 
of an open-ended question that I have, and I want everyone to 
respond to. Perhaps we can start it and then on the second time 
around, we will continue what I am doing. But I thought it 
would be interesting to hear your comments, all of you, about 
the top three technologies that are already developed and need 
to be deployed in order to increase the reliability and 
efficiency of the bulk power transmission system and perhaps 
the top three technologies that need to be developed for 
further--to further increase the efficiency and reliability.
    And the red light came on, so that is my question. When we 
come back around the second time around, that is what I would 
like for you to begin with.
    Chairwoman Biggert. Thank you, Mr. Lampson.
    The Chair recognizes Dr. Ehlers for five minutes.
    Mr. Ehlers. Thank you, Madame Chair.
    I--first of all, I just want to commend Mr. Casten for what 
he is doing. This is something that is badly needed, and we 
really have to expand it across the country. This is something 
we have known about for years and just never get behind it and 
push it, because everyone likes to think of grand projects 
rather than small projects. I was not aware of any 
discrimination by the State public utility commissions on this. 
I thought they were all adapting to it. If that is a problem, 
that is something we can try to address.
    Mr. Glauthier, I really appreciate your comments about a 
smart grid. Something that really has irritated me since the 
blackout is the repetitive theme I heard initially on the news 
media that the grid is so complicated, no one can really 
understand it. And that is one of the most absurd statements I 
have heard, because there are far more complicated systems that 
we deal with in this world than the grid. And clearly, we know 
how to do it. We can understand it. And we have to do what you 
said, build a smart grid that incorporates our knowledge of 
today into a system that is a little bit, perhaps, archaic.
    Having said that, I do want to pursue the reactive power, 
since you said you brought an engineer around. And I don't know 
how many of you are engineers. But I would like to hear the 
explanation. Is it just caused by the phase difference between 
the--or is this something different?
    Mr. Glauthier. With your permission, I would be happy to 
introduce Dr. Sobajic. Would you----
    Mr. Ehlers. Okay.
    Dr. Sobajic. Well, I will try to do this simply, although--
I am Dan Sobajic. I am working for EPRI. I am Director of Grid 
Reliability and Power Markets. And this is a subject that has 
been brought up in many occasions like this one, you know. And 
sometimes we engineers, you know, have a difficulty explaining. 
We go through analogies to make people understand it.
    Mr. Ehlers. Well, we have two physicists here, myself and a 
staff member--no, three now.
    Dr. Sobajic. Well, you are----
    Chairwoman Biggert. This is beyond some of our pay grade, 
however.
    Mr. Ehlers. So you can get technical for us, and----
    Dr. Sobajic. Well, let me put it this way. T.J. just 
mentioned that if you deal with the ultimate in current, as we 
are dealing mostly in our grid, the power that flows is not 
active or reactive. There is just the plain power. And this is 
what you have down the lines. And power is the contract. It is 
what mathematically becomes the product of the voltage and 
current and if you like to go deeper in the electricity. 
However, these systems, when analyzed, and this is what we have 
to do in order to understand them very well, leads to some 
representations that involve complex numbers, if you like 
mathematics. Okay. And these numbers have a so-called real and 
imaginary part. Now you, perhaps, remember that. This is what 
we call active power or the part that is the real part or it is 
active. And the other one is so-called reactive. Okay. It 
doesn't mean that it is imaginary. Again, this is what 
mathematicians like to call it. But this is--these are the 
components of that phenomenon. And then you can go further on 
and analyze what are the effects of these two components when 
you break it up. And you can see that both of them are needed. 
You know. Active power, as we all know, does the work, and 
reactive power is very important to allow active power to do 
the work. So it is--it leads to an analogy that someone said it 
is about a car. You know, you need the gas to drive it, but you 
need the oil in order to be able to start the car and move. It 
is not quite there, but this is sort of coming to what it is.
    So basically to put it, the bottom line is that you need to 
respect the need for the active power in order to be--to have 
an efficient functioning system. And I think I should stop 
there, because the rest goes into the market rules and why 
don't we have it and so on and so forth.
    Mr. Ehlers. My question is are power companies deliberately 
ignoring this in order to push more real power out and 
therefore connect--collect more money without taking care of 
the complex variables involved? Say hey, there is a limit to 
what you can do here.
    Dr. Sobajic. I think what one can see is that the way how 
the market system has been set up, it is clearly promoting 
delivery of the active power. The reactive power is, as we call 
it, an auxiliary service, which is already--which is the word 
auxiliary. It means, you know, something, perhaps, outside or--
that is definitely needed, but----
    Mr. Ehlers. But does a power generator make more money by 
ignoring the ancillary?
    Dr. Sobajic. Well, I think the auxiliary services are also 
recognized in the market model and provided for. Whether there 
is a balance in how these services are both recognized in terms 
of the market rules, that is a different question, but clearly 
there is a financial incentive whether to do the active or not. 
Thank you.
    Mr. Ehlers. Okay. That is what I was trying to get, whether 
it is a physical problem or a financial problem.
    Dr. Sobajic. No, it is not a physical problem.
    Mr. Ehlers. Okay. Yeah.
    Dr. Sobajic. I think systems are quite capable of----
    Mr. Ehlers. Okay. So it is a financial issue and therefore 
it should be subject to regulation?
    Dr. Sobajic. Possibly.
    Mr. Ehlers. All right. All right. If Mr. Smith wants----
    Dr. Smith. Sir, may I speak just briefly to this point? 
Think of reactive power as being associated with voltage and 
frequency control. If you don't provide it at the end of a long 
line, a long transmission line, it very much limits the 
capacity of real power that you can get through that line. It 
is possible, entirely possible that if--that someone might gain 
by limiting the transmission throughput by providing inadequate 
reactive power to compensate for the absorption in that long 
line. But this is--I think it is--why it is important 
ultimately that reactive power as well as real power be priced 
out node by node, and I think we--and I think that technology 
is going to allow us to do that in real time. And we are moving 
in that direction. I have worked with the Australians, and they 
are right now particularly--very much interested in pricing--
developing pricing systems for reactive power in the grid.
    Mr. Ehlers. And I might just observe there was a similar 
problem years and years ago when two electrical plants first 
interconnected, because they would play games having a phase 
lag and trying to gain financial advantage that way.
    Dr. Smith. Yes. Yes. That is entirely possible. That is the 
reason why you want to pay people for producing reactive power.
    Mr. Ehlers. Thank you very much.
    Chairwoman Biggert. Thank you, Dr. Ehlers.
    The gentleman from California, Mr. Honda.
    Mr. Honda. Thank you. Madame Chair.
    I find this discussion pretty interesting and for a novice, 
I think some of the lines are becoming pretty clear. What I 
hear folks saying is that there is a distinction in terms of 
policy arenas that one is federal and other state. And so it 
sounds like that there could be some artificial barriers just 
because of that. And what I hear other folks say is that if you 
are thinking about the consumer, and it seems to me if you look 
backwards in terms of policy making, then it would be--creates 
a different paradigm of the areas of responsibility. And it 
seems like if we go from the consumer backwards to create a 
policy for energy, it might make more sense than solving some 
of the problems in terms of barriers. Because what I have 
learned about our problems is that the grid and the 
transmission and the generation of electricity and the 
consumption is not state. It is regional. And so, you know, it 
seems like there are some archaic paradigms that we are forced 
to work under.
    I guess my question is are there different ways of looking 
at policy development rather than separation of federal and 
State and looking at the consumer and developing policies that 
way. And I think I agree that we have to have a smart grid, you 
know, for us to have at this period of generation of energy so 
that the consumer ultimately ends up being the winner. What 
would be your comments to the observation I am trying to make 
and trying to understand, wrap my arms around?
    Mr. Casten. May I answer?
    The policy all stems from the fact that the paradigm is 
that all power flows through their wires. They are a natural 
monopoly. We have to protect the monopoly, and so we have set 
up a very powerful set of vested interests to make sure that 
all power ever used will flow through those wires. And the 
regulators see it as their job to protect that. As a 
consequence, we don't look at it from the consumer point of 
view and say what would we do in an optimal situation without 
this. The example just discussed is classic. In all of the 
power plants we have ever built, we have often been required to 
support the voltage at the back end, to change our power factor 
to help out the grid. We have never been paid for it. It is a 
value that you need, that the consumer needs, but the system 
doesn't want distributed generation. And consequently, we don't 
do the right things. We really have to fundamentally go back to 
saying no more monopoly on wires, and then it will start to 
unfold itself.
    Mr. Honda. Thank you.
    Dr. Smith. Let me say that I think here is the problem. 
Every customer is charged for this cost for the wires and all 
of these capital investments. It is determined by peak demand, 
not average demand. A customer who is served by energy sources 
closer to him, which is what Mr. Casten is talking about, 
shouldn't have to pay the full price for the capital costs. He 
is not using it, or he is only using it for backup or something 
like that. And he should have substantial savings from that. 
And until you have that kind of a system, you are not going to 
have the ordinary innovations that occur in response to the 
people's attempt to profit by doing things better. You just 
simply don't have maximum opportunity for that development to 
occur. So when you compare the electric power industry with 
industries that--telecommunications and computers and 
everything, you see an industry which is not nearly as flexible 
and not as prone to innovate. And we are talking about 
innovating in the interests of the customer: saving him money 
and giving him better service.
    Mr. Glauthier. I think your observations are very 
interesting in that there are many states and Federal 
Government are trying to find ways to spur this kind of 
innovation and flexibility for customers. Many of the states 
are going through restructuring or trying to find ways to do 
that that allows the innovation but also protects the 
customers. This is one area where the commodity we are dealing 
with is an essential requirement for everyone. Electricity 
underpins our whole way of life, so it is not an optional item 
but rather one that they need to be sure there is an adequate 
protection. And there also are generally going to be 
connections into the grid. We are not talking about 
applications where people are going to generally go off the 
grid and be totally independent, so you need these things to be 
interconnected and to be integrated.
    I think what we need is also the technology development 
that will support this. Right now, the communications system 
and the power system are not integrated, so in order to do the 
real time pricing that Dr. Smith talked about or to provide the 
real dogmatic load management systems, you need communication 
to the customer site, so the customer systems recognize when 
there is a peak in the demand and they ought to scale back 
their own use or at what points they really change their 
generation and perhaps generate power into the grid. But I 
think these two go together; the regulatory questions and the 
technology development are both important.
    Mr. Glotfelty. Very quickly, I would agree with most 
everything that was said but go back to the jurisdictional 
issue, which I think is the biggest problem. The interaction 
with the retail consumer is governed by the state, which means 
we have 50 different State rules on how we get distributed 
resources or demand side management or control technologies 
onto the grid to allow more consumer interaction. And that is a 
tough issue to crack, considering that retail consumption of 
electricity is not an interstate commerce, as is the wholesale 
market. It is something that I think Congress is trying to 
address. But in the meantime, the Department of Energy, as well 
as many associations and groups, have been working with the 
states to try and get model interconnect agreements and model 
policies that can be adopted at the State level to increase the 
deployment of these technologies. However, it is not as quick 
as it could be. But it is a challenge, and it is moving down 
the road.
    Mr. Honda. Thank you, Madame Chairman. Just a real quick 
comment. I think if the consumers got more educated, there 
would be some changes.
    Chairwoman Biggert. Thank you, Mr. Honda.
    We do have a vote coming up, but we have got time for 
another round of questioning from Dr. Gingrey.
    Dr. Gingrey. Thank you. Madame Chairman. I will make this 
brief, because I know we do have to go vote.
    Excuse me. Mr. Glotfelty, the National Grid Study, which 
led to the creation of your office, called for the elimination 
of transmission bottlenecks, can demand response technologies 
and distributed generation technologies help eliminate the 
bottlenecks and the grid congestion generally? And if so, how 
would we best encourage these technologies?
    Mr. Glotfelty. The answer is a resounding yes. There are 
models out there for demand side management that today decrease 
bottlenecks. A great example of that is in southwestern 
Connecticut. They have had a very hard time building additional 
transmission lines. With the implement of a market in the 
Northeast, prices this past summer were going very high. A new 
demand side management program that the Department helped 
support but was supported by the utilities as well as the 
state, allowed a tremendous demand response, which reduces--
reduced prices for not only the consumer but for the whole 
region. There is a great example, and it is a great model that 
can be replicated across the country.
    For distributed resources, I think there are a lot of 
models from the--in the Southeast to California. Other states 
have good models for putting additional distributed resources 
on the grid. I think, again, we go back to this State issue. 
Each State is different and each region is different, so the 
model is going to have to fit each region.
    Dr. Gingrey. And let me ask both you and Mr. Glauthier. 
Some have suggested that much of our transmission and 
distributive congestion could be relieved by simply replacing 
the basic 1950's era grid technologies, such as the wires, the 
transformers, and the mechanical switches with today's state-
of-the-art technology. For example, we have heard of wires, and 
I think you mentioned this earlier, that carry three to five 
times more power or digital switches that improve the capacity 
of the grid. How much would this help compared with the 
technologies you have proposed and that others have mentioned? 
And how would its costs compare with some of these alternatives 
that we have already discussed this morning?
    Mr. Glauthier. Thank you.
    I think those are very important, and I think they are all 
part of the overall solution, that there is not any one 
solution that will take care of this. The transmission lines, 
or conductors as you talked about, are under testing by the 
Department of Energy and by EPRI and others. And there are at 
least five or six different manufacturers of that. So there is 
the opportunity for some competition among those. And they are 
quite cost-effective, if they prove out. Right now they are in 
the testing phase to be able to be certified for use in 
commercial applications. So our hope is that those will be 
ready soon, perhaps in the next year or 2 years that those can 
begin to be used.
    Other digital controls also can be installed, but in some 
cases, the cost needs to come down. There are the FACTS 
devices, the Flexible AC Transmission Systems I described. 
There are only nine or ten of those installed in the country 
right now because they cost several million dollars a piece, in 
some cases $10 million or more. But those are solid State 
controls that can actually direct the power flow and can 
eliminate loop flow problems and other difficulties. That is 
the kind of thing. We need to spur the development of a family 
of those controls that can be scaleable down to smaller sizes 
and be cheaper and be installed in numerous locations 
throughout the whole grid.
    Dr. Gingrey. Thank you. And thank you, Madame Chairman. 
That concludes my questioning.
    Chairwoman Biggert. Thank you, Dr. Gingrey. As you heard 
from the buzzers, and if you heard the beepers that--we do have 
a vote on the House Floor, so we will--it is just one vote, so 
it should not take us too long. So we will stand in recess to 
the call of the Chair.
    [Recess.]
    Chairwoman Biggert. If we could resume, the witnesses will 
then take their seats. All right. We will call the Committee to 
order again. As long as some of our Members have not returned, 
I think that we could give five minutes to Mr. Lampson on the 
question that he asked earlier.
    Mr. Lampson. Thank you very much. I might as well start.
    I had already posed the question to you, and so if each of 
you would talk about the technologies that exist and we need to 
implement and those that we might need to try to develop over 
time. Right. From the left to the right. All right.
    Mr. Glotfelty. From our perspective, I think the 
technologies that are here today that just need to be deployed 
onto the grid are: higher capacity transmission lines; wide 
area measurement systems, which measure the state of the grid, 
voltage, all sorts of components of the grid in a wide area, we 
have it in the West, we do not have it in the East; and 
training for our operators to use this new technology that is 
coming. It is critical that they have an understanding of how 
new power electronics and new technologies can help them make 
the system more reliable.
    I think in the future it is high temperature 
superconductivity and the wide variety of technologies that 
come from that, whether they be cables, fault current limiters, 
or other technologies that really have no losses. It is storage 
and it is power electronics. Storage has the ability to help 
peak shave. It has the ability to help provide backup for 
entities that--like batteries. There are new technologies 
coming down the road that can help entities be more efficient 
as well as firm up their reliability for their industrial 
processes. And power electronics, of course, is something that 
we are working on with EPRI as well as the industry on how we 
make sure that the grid is controllable, how we can isolate 
problems without them becoming widespread where we can really 
ensure that the grid is reliable in the future. It is a few 
years off, but we are working on it today.
    Mr. Glauthier. Thank you.
    I add to that list a couple of things that are here now. 
The State estimators is a software term that--systems that can 
calculate within seconds, the PJM system about every 30 seconds 
calculates the state of the system from all of the data coming 
in exactly what is happening. The State estimators are not 
being widely used in most of the systems around the country. 
The systems need more sophisticated work so that the operators 
will really feel that their information coming out of them is 
reliable. That is an area that is here. It can be done now. It 
is--needs to be improved so that operators have the best 
information possible as they are running the system.
    Along with that is wide area data to the operators so they 
can see what is happening in neighboring control regions. They 
have the data on their own control region but they have no idea 
exactly what is going on in the areas around them. It is very 
helpful, and it is possible with today's technologies. In fact, 
it has been demonstrated in some applications that DOE has done 
and that we have done how to do this and how to make that data 
available on a real time basis.
    Mr. Lampson. Are either of those extremely expensive to 
implement?
    Mr. Glauthier. No, they are not. They are----
    Mr. Lampson. Well, why aren't we already talking about 
doing it then? Why----
    Mr. Glauthier. Part of it has to do with access to the 
data. It is providing data to your neighbors, you know, your 
own operations. There is some extra software development and 
some costs involved, so it just hasn't been high on the list, 
but it is something that I think we need to make a greater 
priority. And now that outage in August will perhaps give more 
visibility to that sort of thing. It has just not been viewed 
as one of the top priorities.
    I would echo what Mr. Glotfelty said about the 
transmissions lines, the new conductors that will be able to 
carry a greater amount of throughput so you could re-conductor 
some existing transmission corridors and get more power through 
those without having to build or permit new transmission 
corridors and the like.
    On the existing technologies, I would also say real time 
sensors. We have sensors in all sorts of applications now in 
other sectors. We are a wireless society and becoming a 
wireless society, but the electricity sector is not--has not 
caught up. The electricity sector is not as widely computerized 
and is not using the real time information that it could. Mr. 
Glotfelty mentioned the wide area monitors or sensors in the 
West. We ought to have them throughout the whole system and 
it--and all sorts of equipment. Ultimately, every piece of 
equipment is going to be sending in information about how I am 
doing and what is happening.
    In terms of new technologies, the power electronics area is 
really important. I mentioned the FACTS systems earlier that 
can actually control the power flowing through an area of 
connection. And right now, the wires are just a set of dumb 
wires. The wires are out there, and you put power into one 
place and it will flow through the system. But we need real 
controllers out there. And we can do that, but they are 
expensive. We need to develop a more cost-effective set of 
those, a scaleable set that will be able to be used widely 
throughout the system.
    Just two other quick things. The technology to get the 
distributed energy resources, the kinds of things that Mr. 
Casten has talked about and in addition solar powered and many 
other kinds of renewable power, to be able to be plug and play. 
That is actually something that can be done. We are working on 
it with the manufacturers and vendors. The Department of Energy 
is working on it. It is not something that is going to take a 
long time, but it has to be done in a way that provides the 
standardized protocol, the standardized methods so that these 
can be widely used.
    Mr. Lampson. Madame Chair do you want to let--just let 
them--we still don't have anyone else to--or do you have a 
question that you want to go on a different direction on and we 
will come back to the last two on?
    Chairwoman Biggert. No.
    Mr. Lampson. Okay. Then----
    Chairwoman Biggert. Proceed, Dr. Smith.
    Dr. Smith. I think the problem is to have--try to get in 
place incentives that enable people to put their own money up, 
incur the cost of investing in some of these new technologies 
and getting the benefit from it. Now what is hard, of course, 
is that those benefits are widely distributed in the system. 
And the problem--and the grid. And the problem is to figure out 
how those savings can--the individual who incurs the investment 
can, because of the savings he is enabling the system to enjoy, 
to capture revenues in response to his--to the investment costs 
that he incurs.
    Now I would ask--would like to ask Mr. Glauthier if he 
sees--if he is at all hopeful that the control system could 
enable you to also compute benefits and savings and come up 
with a way of pricing this so that the individual who invests 
in it can benefit.
    Mr. Glauthier. I think the answer is yes, if I may.
    Mr. Lampson. Please. Go ahead.
    Mr. Glauthier. Really having the access to the data and 
having a set of information coming in through--from throughout 
the system on a real time basis does give you the power then to 
construct different kinds of pricing systems, to administer 
them, to make the whole system a richer and more robust way of 
managing.
    Dr. Smith. That is all I have.
    Mr. Lampson. Okay. Mr. Casten, do you want to tell me about 
those technologies?
    Mr. Casten. Thank you.
    The three most important, hands down, the microprocessor. 
Old power plants required six to eight attendants per shift. 
And when you double up all of that labor, you just can't make a 
small power plant economic. The microprocessor lets us operate 
any kind of technology unattended. And it just takes the scale 
out of--one of its advantages. Another advantage is that we do 
connect up in real time to all of our customers' meters. And 
once we have got a customer, we do what we say the--what Dr. 
Smith says the grid ought to do. We are monitoring and actually 
causing them to drop their peak loads to make better use. That 
is one.
    Number two is the advances in gas turbine efficiency. When 
I entered this business 25 years ago, the best gas turbine was 
22 percent efficient, and the best thermal plant was about 33 
percent efficient. Today, the best thermal plant is still 33 
delivered. The best gas turbine is about 42. You can combine 
the cycle and get it up to 55. The best news is that if you 
take the two most efficient gas turbines in the world today, 
one of them made by Solar is four megawatts, about the load on 
the Hinsdale Hospital. So there is no reason why you can't put 
these things out. In fact, it makes no sense to burn gas 
anywhere but locally, thanks to that and the third technology.
    The pollution control is astonishing what has happened at 
the source. The best turbine available 25 years ago was about 
200 parts per million of NOX, which is roughly comparable to 
what you get out of a big thermal plant. The best ones today 
are two parts per million. So we formed this whole paradigm 
that the power plants had to be located a long ways away, 
because they had to be located a long ways away. They were ugly 
and dirty and needed a lot of people. Today, they are 
inconspicuous. There could be one in the basement of this 
building, and you would never know it.
    With respect to the second part of your question, what 
technology is needed, I can offer only two. One I wholly 
support Dr. Smith's idea of getting to the point where there is 
a signal on the wire telling every consumer the marginal cost 
of power at that moment so that smart appliances could pick it 
up and decide whether to wash my dishes right now or wait until 
three in the morning. The other thing I think the Committee 
could look at is some work on technologies that we cover energy 
from lower quality heat. That is a field that hasn't been 
investigated very much. There are some promising ways to use 
even lower temperature heat and convert it to electricity, and 
that needs some science, some fundamental science.
    Thank you.
    Mr. Lampson. Thank you all very much, and I yield back.
    Chairwoman Biggert. Thank you. Then I will continue with 
the questioning.
    Mr. Glauthier, many have said, and I think that you agree, 
that we have under-invested in the grid. And I wonder if you 
have some indicators of this under-investment. But I also want 
to go a little bit further than that, because we are talking 
about a grid, and we have heard a lot--most of you had 
mentioned at some time we run into State laws and that--and 
another factor has been that because of the deregulation that 
this has had a--has been a factor in the blackouts that we have 
incurred. So is there--do we have a choice of whether we are 
going to really improve the grid? Should we have a national 
policy so that we can, you know, avoid the State laws and, for 
example, then Mr. Casten would be, perhaps able to cross the 
street with his--with private lines? It seems like we have got 
an awful lot of factors here with the regulation that is 
causing part of the problem. And maybe start with you, Mr. 
Glauthier.
    Mr. Glauthier. Yes. Thank you.
    Investment has been lagging in the grid, the distribution 
and transmission parts of the system, and especially the 
transmission part, for the last decade. Part of it is due to 
the confusion that there has been about what the regulatory 
structure and the ownership responsibilities will be for the 
transmission system. There are changes that the Federal Energy 
Regulatory Commission has proposed, changes that individual 
states have put forward. And many cases, the owners and 
potential investors in the grid just need the rules clarified. 
They could----
    Chairwoman Biggert. And I believe that that is also in the 
National Energy Bill that we have right now that is in 
conference.
    Mr. Glauthier. It is. And it is part of the energy 
proposals by this Administration and the previous 
Administration to try to make those decisions. So that will 
help. And there is, I think, a question about the returns. 
There is a lot of discussion about what rate of return is 
sufficient to bring about that kind of investment. The question 
really needs to be focused on what is the realized rate of 
return. It is one thing to have an allowed rate of return, but 
if, because of rate freezes or because of other delays or other 
things, they are--companies are not able to realize the returns 
that are allowed, that is an issue. So I would suggest that 
people need to look at the reality of what returns actually 
will come.
    Chairwoman Biggert. Okay. Do you have any figures on that 
that you would----
    Mr. Glauthier. Well, the investment right now in the 
transmission system and the grid is about $3 billion a year. 
And the estimates that the Electric Institute has used is that 
they think it ought to go up to about $5 billion a year to--
really to maintain the current system. And our feeling, as I 
said earlier, is that we think the investment needs to be about 
$10 billion a year in order to modernize the system so that you 
are not just fixing the current system but you are also moving 
ahead to really add the computerization, the sensors, the real 
time controls that are needed to make this system operate in 
both the reliable and secure fashions we described and to 
enable the kinds of applications that will really make it 
possible to use it so that customers can control their loads 
better and you can get more distributed energy and other things 
connected.
    Chairwoman Biggert. Well, given the cost of transmission 
improvements then tenths of a cent per kilo-hour and the 
benefits to customers that you describe, which are orders of 
magnitude higher? Should the rate payers bear this cost?
    Mr. Glauthier. Rate payers probably will, and it is not a 
huge cost. The total of all electricity revenues right now in 
the country is about $250 billion a year. So if you add $10 
billion a year to that, that is a four percent increase. But 
the key is that this needs to be an incremental investment. The 
utilities already are spending the money to try to keep their 
current systems running and to keep the lights on for 
everybody. They are operating under regulatory controls at the 
states where people are trying to keep the customers--give the 
customers the lowest rates possible. Everyone needs to realize 
that this is an investment in the future and it will provide a 
lot of benefits.
    As Dr. Smith said earlier, the benefits are widely 
dispersed, and so it is harder to identify exactly who gets 
those benefits. But there are real benefits there. Our estimate 
is that the cost of power disturbances right now is about $100 
billion a year, year in and year out. And that is not the cost 
of the August outage. That is just the regular disturbances, 
not always blackouts, but often the fluctuations that are 
enough to make a chip producer go off line or to make a 
pharmaceutical batch that has been going for 10 days unusable, 
things of that sort.
    Chairwoman Biggert. And would special financing be 
required?
    Mr. Glauthier. What our recommendation is that the 
Department of Energy be instructed to look into this and work 
with the customers. Work with the State regulatory commissions, 
work with the industry and other stakeholders, and come back in 
a year with the recommendation. We think that there may be 
mechanisms that would provide incentives for this investment or 
other ways, perhaps working with the National Association of 
Regulatory Utility Commissioners to have the states, as a 
group, embrace some approach to going ahead. Ultimately, the 
customers probably pay all of this cost, but if there is a 
concerted effort to do it and a commitment to really move ahead 
and invest something in the system, that is what is going to 
make it happen. A business-as-usual approach is probably going 
to take a long time and just, you know, be very, very slow.
    Chairwoman Biggert. Would anybody else like to speak either 
to the under-investment or to the national policy or--Mr. 
Casten?
    Mr. Casten. The slight problem with the investment is that 
the industry knows how vulnerable it is to continuing the 
present model. And if the industry doesn't know, the banks do. 
And so there is a growing reluctance to put a lot more money 
into wires, which are probably obsolete before you ever build 
them.
    And my second comment is that I don't know how any of this 
mess gets straightened out until Congress asserts that 
electricity is, indeed, interstate commerce, because you have 
heard that all day. And it is just really a problem with all of 
the states asserting jurisdiction.
    Chairwoman Biggert. Anyone else?
    Dr. Smith.
    Dr. Smith. I think the real problem is not so much under-
investment but the direction of investment. You see, we have 
these technologies that can improve the grid and make it more 
efficient. We also have technologies that completely bypass the 
grid that Mr. Casten was talking about. And I have a question I 
want to raise. Suppose that I own a high-rise apartment, in 
particular this is for Mr. Casten, but for anyone else. Suppose 
I own a high-rise apartment house, and I want to buy one of 
those four-megawatt units to supply my own power needs, and any 
excess capacity, I want to dispatch it out to the rest of the 
world through the local substation. What are the barriers to my 
doing that? Can I do that?
    Chairwoman Biggert. Physically or legally?
    Mr. Casten. Can I answer that?
    Chairwoman Biggert. Sure.
    Mr. Casten. First of all, the commission is going to say 
that it is okay to charge you for 100 percent of all of the 
facilities to back you up, because you might go down at the 
time of the absolute system peak. So you are going to pay for 
all of the wires anyway, and this is going to mean you probably 
don't want to do it. If they charge maybe four percent, you 
would cover it.
    Secondly, the power from that generation excess is going to 
flow to the nearest user. It does by the laws of physics. But 
you will be given a discounted amount for the extra power, 
based on what the wholesale market is from big plants minus a 
discount because it is too small to mess with. You will get no 
locational value for the fact that your little operation is 
actually going to strengthen the local grid. You will get no 
value for the fact that this is going to help the big utility 
avoid the cost of putting another buried transmission--or 
distribution line in the street. So the commissions will look 
at the costs only, not look at the benefits. And the net result 
of all of that is that you will probably decide just to stay 
where you are.
    Dr. Smith. Thank you.
    Chairwoman Biggert. Thank you.
    And if I might, I have one more question, and this is 
switching gears a little bit, but as we proceed with our energy 
bill conference, which I am a conferee and Mr. Lampson is a 
conferee, we will be looking at authorization levels and which 
will be higher, but--for these R&D programs. And in addition, 
in the electricity provision, we are attempting to push the 
regulatory reforms that really have--we have discussed here 
today. Which of these, in your view, is of greater importance, 
the R&D or regulating reform? So I think we will start with Mr. 
Glotfelty.
    Mr. Glotfelty. I think they are equally important. The R&D 
must continue, whether it is done at the basic level with the 
government and universities or the more applied level with 
industry, to make sure that those technologies actually get 
deployed in the grid. But they won't be deployed into the grid 
unless we have the regulatory reform. The cost that we are 
talking about of upgrading the grid, if they cost $100 billion, 
may very well be offset by the reduction in energy costs. If 
your bill is $100: $10 is transmission, $10 is distribution, 
and $80 is energy, if we increase the transmission component or 
even the distribution component as well to allow these other 
technologies and you decrease--and that incremental increase 
can very well be more than offset by a decrease in energy 
costs. Distributed resources, demand response reduce costs for 
everybody, not just the single user.
    So I think they go hand in hand, and they both must be 
addressed as we move forward to make this system more reliable.
    Chairwoman Biggert. Thank you.
    Mr. Glauthier.
    Mr. Glauthier. I would note that the regulatory issues you 
are dealing with are, of course, at the federal level. And as 
we said earlier, many of the issues that bear on the 
applications that we are talking about are at the State level. 
So there may be a lot that can be done through means of working 
with the states and not necessarily all through your 
legislation.
    The organizations I represent are R&D organizations, so let 
me speak to that part of your question and that is we do think 
that increased authorization levels are appropriate here. And 
the levels that are in the House-passed bill last year for the 
R&D and electricity area, we would increase or suggest 
increasing about $500 million a year. I mentioned earlier that 
we thought that the program ought to be $1 billion--I am sorry, 
$100 million a year, $500 million over five years. That ought 
to be about $1 billion. There is currently about half of that 
in those levels for these kind of programs. So we think it 
ought to be increased but not by the full amount that I said. 
Importantly, I think it ought to be increased to be 
transmission and distribution system R&D, not just for the 
transmission system. The very things that we talked about here 
that are really done at the customer level typically are 
through the distribution system, and so it is important that 
the R&D do both. We need to modernize the whole grid, not just 
half of it. And importantly, too, to include demonstration 
projects so that the Department can work with those utilities 
or those customers who are at the leading edge of technologies 
and help support the first applications in order to get those 
technologies demonstrated and really into working order.
    So I would emphasize those three elements of the R&D 
program.
    Chairwoman Biggert. Thank you.
    Dr. Smith.
    Dr. Smith. I am sorry. I have no more comments on that, but 
I may have another question later.
    Chairwoman Biggert. Okay.
    Dr. Smith. I am learning here on some of this technology, 
okay. My background--I do have an engineering--electrical 
engineering degree, but it is from Cal Tech in 1949, and I 
don't stay up. I am doing economics, so I am really delighted 
with this----
    Chairwoman Biggert. Well, we are delighted that you are 
here, so thank you----
    Dr. Smith [continuing]. Interchange.
    Chairwoman Biggert [continuing]. For your contribution.
    Mr. Casten.
    Mr. Casten. I would like to give you a very clean answer. 
The regulation. The--a veritable Hoover Dam that holds back 
thousands of technologies that--many of which appropriations of 
this committee over the years have helped to bring forward. But 
they sit there. Let those flowers bloom and then we can do a 
better job of figuring out what kind of new fertilizer we need. 
Right now, we don't know where those flowers are going to go, 
because they are all held back. So fix the regulation first.
    Chairwoman Biggert. Thank you.
    Mr. Lampson. I want to go back to Dr. Smith's question. 
What is the solution? Is there a solution to this? Is there a 
way to reach a point? Is total deregulation of letting anybody 
go out and do whatever they want to do the answer? What----
    Dr. Smith. Well, regulation by--people are always regulated 
by markets and prices. The question is how free should those 
prices be? And Mr. Casten was saying that is--in answer to my 
question here is we have these technologies, which also have 
the advantage that they completely bypass the grid, so you 
don't even have to use this. You don't have to worry about more 
investment in it. Although it still may be used as a backbone, 
as a backup, of course. And there just isn't the price 
incentive there for anyone to do it, to invest in that, because 
of the local regulation. And I agree with Mr. Glotfelty that 
the problem is really at the State level in the kinds of issues 
we are here--that I am talking about. The problem is at the 
State level, and that is why I am spending more of my time at 
that level and not up here testifying in Congress, because I 
think that is where the problem is.
    I think the danger, though, is that if that is not fixed at 
the State level, then at the national level we will do things 
that are not cost efficient because we are forced at the 
national level to invest in more supply side capacity and that 
is not at all--need not at all be the most efficient way to 
create a more flexible system. I don't know whether it is 
feasible to--for the feds to simply declare that electricity is 
a commodity, whether it crosses State lines or not, and gets in 
the business of separating wires from energy. I think that is 
what we have to do. Energy is a commodity that can be supplied 
competitively. And the local utility ties in the sale of energy 
with the rental of the wires, and they have good motivation to 
do that. But I believe that that should be--they shouldn't--
that tie-in sale should not be taken for granted as a part of 
the regulatory apparatus. And that should be entirely opened up 
so that the energy part can be supplied competitively, either 
with demand interruption technologies and control or with 
generators closer to the customer.
    Mr. Lampson. Well, this has all been fascinating, and we 
have lots more to learn, and I am sure that we will be spending 
a good bit of time before we take the next steps, but thank you 
all for being here, and thank you, Madame Chairman, for letting 
me participate.
    Chairwoman Biggert. Before we bring the hearing to a close, 
I would like to thank our panelists before the Subcommittee 
today. You truly are experts, and we have--I think we have had 
a great hearing, thanks to you. So if there is no objection, 
the record will remain open for additional statements from the 
Members and for answers to any follow-up questions the 
Subcommittee may ask the panelists. Without objection, so 
ordered. The hearing is now adjourned.
    [Whereupon, at 12:05 p.m., the Subcommittee was adjourned.]
                              Appendix 1:

                              ----------                              


                   Answers to Post-Hearing Questions




                   Answers to Post-Hearing Questions
Responses by James W. Glotfelty, Director, Office of Electric 
        Transmission and Distribution, U.S. DOE

Questions submitted by the Subcommittee on Energy

Q1.  The creation of the new Office of Electric Transmission and 
Distribution separated R&D for transmission, distribution, and 
interconnection from R&D for distributed generation. What was the 
reasoning behind this? How do you intend to ensure that these R&D 
programs remain coordinated?

A1. The R&D division corresponds with appropriations subcommittee lines 
(distributed generation is under the Interior and Related Agencies 
Subcommittee; T&D is under the Energy and Water Development 
Subcommittee). The new office includes all of the activities previously 
funded in the Electric Energy Systems and Storage activity in the 
Energy Supply account (EWD appropriation): high-temperature 
superconductivity, energy storage, electric transmission reliability, 
and distribution and interconnection. The Energy Conservation account 
(Interior appropriation) funds R&D on industrial gas turbines, micro-
turbines, reciprocating engines, and materials and sensors for those 
engines and turbines.
    Distributed generation is a critical component of a portfolio of 
technologies that will help us over the next decade to achieve a more 
reliable and efficient electric system. However, it will compliment and 
supplement existing generation, not supplant it entirely. Even if 
distributed generation contributes 20 or 30 percent of new capacity 
additions in the Nation's electric system over the next decade, 
hundreds of gigawatts of electricity would still have to travel over 
the transmission system. The new Office is committed to a secure, 
reliable, economic electricity system utilizing all of our generation 
assets and technologies. We will work closely with both central 
generation (including large-scale renewables, coal, nuclear, natural 
gas) and distributed generation. The program managers assigned to 
distributed generation R&D and those assigned to transmission and 
distribution R&D will continue to work closely together, share 
information, and participate in each other's peer reviews.

Q2.  In your testimony you state that distributed generation has 
important contributions to make, but will not be the single solution to 
reliability concerns. What is your estimate of the size of the 
potential market for distributed generation? Please include your 
assumptions about technology costs, etc.

A2. One estimate I have seen is that of Resource Dynamics Corporation, 
an energy consulting company that utilizes an extensive set of tools 
including proprietary databases and models to develop innovative 
business solutions for energy technologies and markets. Based on their 
analysis, today's installed distribution generation is 169 gigawatts, 
which includes some 134 gigawatts of backup units which can be used in 
the event of power supply failure. The distributed generation potential 
(using current technologies) is about 80 gigawatts (which includes 
combined heat and power and peak shaving, but does not include backup 
units). It grows to almost 180 gigawatts when future improvements in 
distributed generation technologies and some more innovative 
applications (e.g., customer aggregation) are considered.

Q3.  Last year the General Counsel for the North American Electric 
Reliability Council (NERC) testified that ``Some entities appear to be 
deriving economic benefit or gaining competitive advantage from bending 
or violating [NERC's voluntary] reliability rules.'' Is there a 
technology remedy for this problem?

A3. Installing systems to monitor conditions regionally and respond to 
potential problems more quickly is one remedy. High-speed, time-
synchronized data systems that are now being deployed could be used to 
track and predict the potential for outages in near-real time. However, 
this high-speed dynamic information could also be used to do state 
estimation, system model improvement, and recalculate the ``security'' 
of grid in real time, providing the results to transmission providers 
for their system and neighboring systems. If mandatory reliability 
standards were in place, these systems could better detect non-
compliance, and with the potential for penalties, the monitoring alone 
would provide incentive for compliance.

Questions submitted by Minority Members

Q1.  What sector makes up the largest percentage of electric load: 
household, industrial, commercial, etc.? In the next decade where will 
we see the largest increase in efficiency? Where will we see the 
largest increase in demand?

A1. The Energy Information Administration (EIA) estimates that 
residential sector comprises the largest percentage of electric load 
(roughly 36 percent), followed by commercial (roughly 32 percent), and 
industrial sectors (roughly 29 percent).
    On the upstream end of the supply line, energy efficiency involves 
getting the most usable energy out of the fuels that supply the power 
plants. The EIA estimates that nearly two-thirds of all energy used to 
generate electricity is wasted, with transmission and distribution 
losses amounting to nine percent of gross generation. Thus, combined 
heat and power, coupled with new technologies applied to the storage of 
energy and the transmission of electricity, will contribute to energy 
efficiency. With respect to load, several energy efficiency programs at 
the Department affect the commercial sector. These programs are 
designed to stimulate investment in more efficient building shells and 
equipment for heating, cooling, lighting, and other end uses.
    According to EIA projections, the largest demand increases are 
expected in the transportation sector (2.8 percent annual growth 
between 2001 and 2025, but with a tiny fraction of the total 
electricity sales), followed by the three much larger electricity sales 
sectors: the commercial sector (a 2.2 percent annual growth between 
2001 and 2025), the residential sector (a 1.6 percent annual growth 
between 2001 and 2025) and the industrial sector (also 1.6 percent 
annual growth between 2001 and 2025).

Q2.  Despite the inevitable increases in efficiencies of household 
devices, do you believe demand per household will increase as more 
electronic devices are added to average house and the average house 
gets bigger?

A2. Yes, but not at the rate of increase in the 1960s (over 7 percent). 
According to the EIA (Annual Energy Outlook 2003, p. 66),

         ``The continuing saturation of electric appliances, the 
        availability and adoption of more efficient equipment, and 
        promulgation of efficiency standards are expected to hold the 
        growth in electricity sales to an average of 1.8 percent per 
        year between 2001 and 2025. . .''

Q3.  You mention that reliability will be enhanced when grid operators 
are able to make adjustments in real-time, to fluctuations in demand. 
Why are they not able to do that now? In terms of personnel, what are 
the primary hurdles towards achieving a smoother running system?

A3. Most of the electricity in our country is generated at the moment 
it is needed. To meet changing electrical demands, some power plants 
must be kept idling in case they are needed. These plants are known as 
``spinning reserves.'' During times of high electrical demand, 
inefficient power plants may be brought on-line to provide extra power, 
and the transmission system may be stretched to near its limit, which 
also increases transmission energy losses. Thus, today, adjustments to 
demand are primarily made at the gross level (i.e., day-ahead markets, 
backed up by spinning reserves).
    Price responsive load, or demand response, programs could be more 
efficient in responding to demand fluctuations in real-time. However, 
wholesale market and retail rules that allow grid operators to use 
demand response are limited. Retail pricing and demand response 
programs are largely controlled by the States, and it is difficult for 
grid operators to influence them.
                   Answers to Post-Hearing Questions
Responses by T.J. Glauthier, President and CEO, Electricity Innovation 
        Institute, Palo Alto, CA

Questions submitted by the Subcommittee on Energy

Q1.  Which of the technologies you mention in your testimony could be 
deployed tomorrow on a mass scale? For the technologies that can't be 
readily deployed, what are the barriers to near-term implementation?

A1. One relatively simple technology developed by EPRI and successfully 
demonstrated by several utilities could contribute to improved system 
reliability by enabling increased confidence of safe loading levels for 
transmission lines above their conservative static ratings. By 
integrating real-time sensor data on ambient temperature, wind speed, 
and line sag on specific circuits, EPRI's Dynamic Thermal Circuit 
Rating (DTCR) system allows operators to move more power on lines with 
reduced risk of thermal overload. DTCR is low-cost and can be quickly 
deployed on thermally constrained lines. Other near-term steps that 
could contribute to improved reliability include improved operator 
training, both for normal operation under heavy loading conditions and 
for service restoration from outages.
    On the hardware side, a mid-term solution for increasing the 
capacity of existing transmission corridors may soon be ready for 
commercial deployment: advanced high-temperature, low-sag conductors. 
These advanced conductors have the potential to increase current 
carrying capacity of thermally constrained transmission lines by as 
much as 30 percent or more, and demonstrations are underway.
    Loop flows can be controlled with solid-state power electronics 
technology, such as Flexible AC Transmission Systems (FACTS) technology 
developed by EPRI and power equipment vendors. However, FACTS 
technologies are still emerging and their cost and size must be further 
reduced through continued R&D efforts before they are economical for 
widespread deployment.
    Development of a number of emerging technologies that are still not 
yet ready for commercial deployment could benefit from increased 
industry and government support for demonstration efforts. These 
include the demonstration and integration of new inter-system 
communication standards based on open protocols to enable data exchange 
among equipment from different vendors, including SCADA and EMS 
systems. Two prime examples of such standards are the EPRI-developed 
Utility Communications Architecture for connecting equipment from 
different vendors and the Inter-Control Area Communication Protocol for 
linking control centers and regional transmission organizations.
    A more complete description of how advanced technologies can help 
improve power system reliability and what barriers need to be overcome 
is presented in the EPRI report, Electricity Sector Framework for the 
Future--which may be downloaded from http://www.epri.com/.

Q2.  You've outlined several specific actions in your testimony that 
government, in conjunction with the private sector, can take to ensure 
grid reliability in the future. What is the current level of investment 
in grid infrastructure by the private sector and what should their 
investment be in the future. What about for R&D investments?

A2. As discussed in the Electricity Sector Framework for the Future, 
Vol. 2, pp 29-30, infrastructure investment levels relative to revenues 
are now below the levels seen in the Depression of the 1930s, producing 
an ``investment gap'' of at least $20 billion a year. For example, 
electricity sector investments in transmission assets in 1999 were $3 
billion, approximately half of what they were in 1979, and 30 percent 
of the recent peak level reached in 1970. In October 2002, energy 
analysts at Oak Ridge National Laboratory estimated that $56 billion of 
investments in transmission infrastructure was needed in this decade 
just to maintain the current quality of transmission service. The 
current level of capital expenditures is far short of this minimum 
level.
    Looking toward the future, EPRI recommends a research and 
demonstration program that will require increased federal funding for 
R&D on the scale of approximately $1 billion, spread out over five 
years, with the private sector contributing a significant amount of 
matching funding. These R&D and demonstration funds represent an 
investment that will stimulate deployment expenditures in the range of 
$100 billion from the owners and operators of the smart grid, spread 
out over a decade.

Q3.  What is your estimate of the size of the potential market for 
distributed generation? Please include your assumptions about 
technology costs, etc.

A3. Most estimates show distributed energy resources (DER) eventually 
representing 10-20 percent of U.S. total generation, depending on a 
variety of assumptions. EPRI does not have its own estimate. Rather, we 
have focused on determining the market potential of DER in particular 
applications. Specific findings include:

          New DR applications for baseload electric-only and 
        co-generation are fairly limited. Economics for these 
        applications are only favorable in areas with very high 
        electric prices, low gas prices, and sites with good electric 
        and thermal load profiles.

          Future peaking applications may offer important 
        opportunities for using DER. For example, peaking DER can be 
        applied in combination with a number of different electricity 
        contract types, including time-of-use rates (to avoid buying 
        power during peak price periods), interruptible rates (to 
        sustain operations during outages), flat rates (to present a 
        flatter load profile to the electricity seller), and rates with 
        peak demand charges (to reduce peak demand).

          Significant opportunities may exist for selling DER 
        for backup power to businesses that have not traditionally used 
        DER for such applications.

          DER projects that provide multiple solutions to a 
        customer (e.g., heat and electricity) are much easier to 
        justify economically. When considering a DER project, all 
        potential benefits need to be explored and economically 
        quantified.

    In Attachment A, ``Analysis of DER Applications Potential,'' Table 
1 shows the results of our analysis for baseload electric, co-
generation and peaking power DER potential in the industrial and 
commercial sectors. Tables 2-4 show the assumptions involved in the 
analysis.

Ouestions submitted by Minority Members

Q1.  If it is going to take ten years or more to get the smart grid 
developed and implemented, are there steps we need to be taking to make 
the current grid more reliable in the interim. Are we adding complexity 
through distributed power? Do we need to go slow on this or other 
innovations?

A1. Although ultimately revolutionary in its effect, the smart grid 
will be evolutionary in its development. Some pieces--e.g., current 
utility applications of DTCR and FACTS--are already being put into 
place. Others, such as the Dynamic Risk and Reliability Management 
(DRRM) system, which would enable system operators to react quickly to 
grid conditions that threaten to cause outages, will require that a 
sophisticated system monitoring and communications systems to be 
implemented first. It is therefore vital that government and the 
private sector to work in partnership in demonstrating and deploying 
new technologies in an orderly fashion. Specifically, EPRI is already 
engaged with several utilities partners to demonstrate DRRM tools on 
their transmission systems, and we propose a public-private initiative 
to hasten their widespread deployment.
    The role of DER in improving power system reliability is complex. 
In general--everything else being equal--the closer that power is 
generated to loads, the greater potential for high reliability. Put 
another way, the longer the lines used to delivery power, the more 
potential there is for interruptions. Conversely, however, if DER is 
not integrated properly with the existing grid, both reliability and 
safety may be jeopardized. For example, linemen may be injured if power 
flows in an unexpected direction along a distribution line because of a 
DER unit on a customer's premises. To make sure that increased use of 
DER supports reliability and safety, EPRI is helping develop new 
interconnection standards (discussed in more detail below) and is 
working to make individual DER units more ``plug and play'' compatible 
with existing power systems. In the language of the question--the point 
is not to go slowly, but to go carefully.

Q2.  We set up safety margins in other lifeline institutions. For 
instance, in the banking industry, a certain percentage of the 
financial assets of a bank must be kept as reserves, and energy 
generation reserves are a long-established practice in the industry. Do 
we need similar limits on percentage of resources that can be used with 
regard to transmission capacity?

A2. A distinction should be made between infrastructure capacity versus 
consumable resources. Bank reserves and fuels for electricity are 
consumables, which can be used to reduce the probability of it running 
out. Power plant capacities and transmission capacities, on the other 
hand, represent fixed infrastructure, requiring long lead time for 
construction. Because they are highly capital intensive, it is not 
economical to overbuild by a large degree. And once these facilities 
are built, the costs are sunk, so it makes no economical sense not to 
make use of them for normal operation. An analogy is building a highway 
with more lanes than currently needed. It does not make sense to block 
off a lane from normal usage and hold it in reserve.
    Because generator and transmission capacities have measurable 
probabilities of outages, however, extra generators and lines are 
needed for backup when outages occur. In this way, the backup units 
that are not directly affected by an outage will generally be 
sufficient to keep most of the grid intact and deliver power 
economically.
    In the case of setting safety margins for generation capacity, the 
rule of thumb is that for most regions, a 15 to 20 percent reserve 
margin (based on the annual peak load forecast) would be adequate. With 
transmission, however, there is no comparably simple reserve margin to 
compute, because the loading of the transmission lines changes 
frequently in response to economic dispatch or wholesale power market 
fluctuations. Flows can go in one direction at one time and then in the 
opposite direction some other time. Lines are often loaded to the 
maximum operating limit. If the demand and the wholesale power market 
cause certain transmission lines to be loaded above their operating 
limits, then the grid operators can usually re-dispatch the generation 
or curtail the wholesale power transactions so as to keep the loadings 
below the operating limits. The extreme remedial action would be to 
curtail firm customer loads.
    The question thus arises of how to set transmission operating 
limits, based on the concept of providing an adequate safety margin. 
NERC requires that no transmission line or transformer should become 
loaded above its reliability limit upon the sudden outage of another 
single transmission line or transformer, anywhere else in the grid. 
This requirement is known as the ``single-contingency criterion.'' For 
example, if two transmission lines serve an isolated area, then the 
loss of one of the two lines must not result in overloading the 
remaining line. For example, if each of the two lines can carry 100 MW 
of power, then the maximum amount of load they can serve together under 
this criterion is only 100 MW. Most of the time, when both lines are in 
service, they will share the load between them--each carrying 50 MW, 
with 50 MW of spare capacity. Then, if one line goes down, the other 
can safely carry the full 100 MW load.
    The single-contingency criterion is based on the assumption that if 
a line outage happens, the operator will know about it immediately and 
take corrective action to bring the system to a safe operating 
condition where with the possible onset of another line outage, the 
system is still reliable. The rating of the transmission line's 
operating limit is based on this reaction time. For thermal overloads, 
the rating is typically based on the ability to sustain 30 minutes of 
this load level without physical damage or without sagging onto trees, 
causing a short circuit. Thus, if either the monitoring equipment fails 
to notify the operator, or the corrective action cannot be taken within 
the 30 minutes to relieve the overload, this single contingency 
criterion will not be adequate.
    The blackout of August 14, 2003 has brought these two potential 
problems into visibility. First, alarm systems or state estimators 
could fail to notify the operator. Second, the re-dispatch or 
curtailment process may either not work properly due to bad data or too 
lengthy a communication process. Thus, to compensate for these 
potential factors, it may perhaps be necessary either to re-examine the 
definition of the operating limits, or to change the single-contingency 
criterion to a double-contingency criterion, or to a probabilistic 
reliability criterion. In any case, it is likely that this will result 
in the need for more transmission investment so as to provide the 
additional safety margin.
    Further information about efforts to improve grid reliability in 
response to the dramatic increases in inter-regional bulk power 
transfers that have resulted from industry restructuring is presented 
in Assessment Methods and Operating Tools for Grid Reliability: An 
Executive Report on the Transmission Program of EPRI's Power Delivery 
Reliability Initiative. [Note: This report appears in Appendix 2: 
Additional Material for the Record.]

Q3.  Are there areas where our standards development is inadequate and 
is there a federal role in funding the development of consensus 
standards organizations that work with your industry?

A3. Industry and government have a long history of working together 
closely with standards-making organizations, such as the Institute of 
Electrical and Electronic Engineers (IEEE). Recent work on the IEEE 
1547 Standard for Interconnecting Distributed Resources with Electric 
Power Systems provides an excellent example. The three-year effort has 
been fully supported by the power industry, EPRI, the U.S. Department 
of Energy, and other stakeholders.
    This new standard establishes the technical foundation for the 
interconnection of all distributed energy resources (DER) with electric 
power systems. It ensures that major investments in DER technology 
development by the power industry and government organizations will 
result in real-world applications providing alternative sources of 
electric power to the electric utility operating infrastructure. The 
IEEE standard may be used in federal legislation and rule-making, in 
state PUC deliberations, and by more than 2,500 electric utilities in 
formulating technical requirements for interconnection agreements.
    The efforts and commitment of the many stakeholders were 
instrumental in the fast-track success of the standard and in the 
implementation of the complementary 1547 body of standards-development 
activities. EPRI and numerous other organizations have hosted the 
meetings, and many companies have supported the participation of their 
employees. Altogether, the 1547 Working Group has involved more than 
350 members. To further aid in the safe and reliable integration of DER 
with electric power systems, the Group is currently working on a series 
of ancillary standards related to testing (P 1547.1), applications (P 
1547.2), and communications (P 1547.3).




                   Answers to Post-Hearing Questions
Responses by Thomas R. Casten, CEO, Private Power, LLC, Oak Brook, IL; 
        Chairman, World Alliance for Decentralized Energy

Questions submitted by the Subcommittee on Energy

Q1.  Which states or regions--or countries do a good job of supporting 
distributed generation? Why do you think this is?

A1. No U.S. state does a good job. New York, personally encouraged by 
Governor Pataki, has developed standard interconnection rules for very 
small DG and has started to address standby power. California, reeling 
from shortages and brownouts, has claimed support for DG and offers 
some avoidance of penalty rates for small DG.
    However, several countries are doing a surprisingly good job in 
supporting DG. Portugal leads in leveling the playing field. The single 
national grid company is required to purchase DG under a formula that 
considers the avoided cost of central generation, the transmission 
capital saved by local generation, the transmission losses saved by DG, 
the impact of recycling heat from DG on pollution, and the availability 
of the DG. By contrast, no state in the U.S. gives any credit to the DG 
plant for any costs beyond avoided cost of central generation, ignoring 
the savings of T&D capital and losses and the pollution savings.
    Indian regulators have had a recent epiphany, recognizing that the 
country is starved for power, has up to 50 percent losses in the grid 
(compared to 10 percent in U.S. on average) and that one of the 
country's major industries, sugar cane, could produce significant power 
without fossil fuel, saving imports and carbon emissions. One-year-old 
policies provide 13-year contracts for DG at full value and require the 
local grid to pay half of the costs of interconnecting with these local 
generators.
    China, operating in a command and control mode, does not allow new 
factories to build boilers for thermal energy when there is a nearby 
power plant that can supply waste thermal energy. China increased power 
output over the prior decade by roughly 45 percent, but actually 
reduced CO2 emissions by nearly 15 percent in the same 
decade by promoting more efficient DG.
    In general, I think the public and its leaders accept the central 
generation paradigm without much thinking and the monopoly protected 
utilities, beneficiaries of the resultant practices, find it in their 
interest to maintain the laws and approaches that prevent more 
efficient, but competitive DG. When a polity comes under intense 
pressure, all assumptions come under question. New York lost industrial 
jobs and ``enjoyed'' nation leading high electric prices and began to 
change. California power crises caused thinking. Indian poverty finally 
toppled conventional wisdom.

Q2.  What steps should the Federal Government take to allow distributed 
generation and combined heat and power to compete fairly?

A2. 

          Reshape all debate to consider the delivered cost of 
        power.

          Use antitrust laws to vigorously oppose state rules 
        that limit private wires or otherwise prevent DG from competing 
        to supply customers with electric power.

          Revamp EPA rules to focus on permit limits and 
        allowance trading programs based on pollution per megawatt hour 
        of useful electricity or thermal energy, applicable equally to 
        all heat and power generation, eliminating all grandfather 
        rules, legacy pollution permits and differences between types 
        of plants and age of plants. This will reward efficiency and 
        force the industry to build power plants close to users where 
        thermal energy can be recycled.

          Focus research and development support on energy 
        recycling technologies, which are inherently DG.

          Exercise federal jurisdiction over power regulation 
        as the interstate commerce it truly is. This will lessen the 
        power of local monopolies to preserve anti-competitive rules 
        and should lead to more functional markets.

Questions submitted by Minority Members

Q1.  What future role do you see for the national laboratories in 
helping to fulfill your goal of building more local power, building 
smaller units and recycling waste energy? Are there specific programs 
in the laboratories that should be better funded or redirected to 
produce the needed technologies?

A1. There has been very little work done by industry or the labs on the 
technologies that recycle low-density waste energy. Industry rejects 
vast quantities of exhaust heat that does not support economical 
electric generation with conventional Rankine cycle steam plants, but 
which has higher quality than the typical geothermal field. Technology 
does exist (organic fluid Rankine cycle) to recycle this heat. Small 
technical improvements would help economics.
    The proof of feasibility for recycling can be found in a typical 
geothermal field. A California geothermal project described by LBL taps 
thermal energy from the ground to produce 40 megawatts of electricity. 
A 250-megawatt coal fired power plant exhaust contains the same 
quantity and quality of energy in its exhaust, and could, using current 
organic fluid Rankine cycle generation, produce an added 40 megawatts 
with no added fuel. Without the subsidies received for ``renewable'' 
energy by the geothermal installation and using today's technology, it 
has not made economic sense to recycle coal exhaust. The labs could 
work on increasing the efficiency and capital efficacy of low 
temperature recycling, which would lead to myriads of DG plants 
wherever factories exhaust waste heat.
    The labs, especially LBL, have documented some of the potential to 
recycle waste energy from U.S. industry and gathered information about 
how other more efficiency focused societies do a better job of 
recycling energy from steel, primary metals, foundries, glass 
production, etc. The results are in obscure technical papers that never 
reach policy makers or the general public. The labs could popularize 
this information to great advantage.

Q2.  You list as one of your approaches (page 4) to finding solutions 
the need for standardized interconnection access for distributed energy 
sources.

A2. There are, according to DOE, over 6,000 DG plants that supply nine 
percent of U.S. energy, all of which are interconnected with the grid. 
Yet, every new DG plant proponent, with the exception of a few very 
small plants that fall under standard rules in Texas, NY, and 
Massachusetts must go through extensive hearings and subject their 
designs to individual approval by the local utility, which has 
financial incentive to prevent the existence of a new competitor. These 
hearings are filled with dire warnings of the dangers to the utility 
workers and suggestions that without extraordinary prudence, the DG 
plant could trip the entire grid. Yet, to my knowledge, there are no 
known cases of utility workers being electrocuted by DG plants or of DG 
plants causing grid failure. In fact, the connection of a one-megawatt 
electric motor has nearly the same impact on the grid as a one-megawatt 
generator. For the motor, there are national standards, incorporated in 
local codes, and no hearing is needed. For the generator, the process 
could take up to 18 months and a great deal of money. DG will not 
improve U.S. standards of living or reduce U.S. fuel use and pollution 
until there are national standards for interconnection of all sizes of 
DG.

Q3.  What are the unresolved technical issues associated with 
standardized interconnections? Do new technologies need to be developed 
to ensure that these interconnections will function more safely and 
seamlessly?

A3. In private conversations, the utility personnel assigned to 
interconnection debates admit that there are no major technical issues, 
only commercial issues. Change the rules to make the utility operating 
the distribution grid embrace efficiency and energy recycling, and the 
interconnection technical issues will all go away. See above regarding 
over 6000 installations, per DOE, and add the unnoticed 100,000 back 
pressure turbines that generate electricity in parallel with the grid 
(industry data). It is common for the utility community to insist that 
there are great and deep technical issues, because legally trained 
regulators lack the confidence to overrule utilities on safety issues.
    The new technologies most in need of development are hybrid direct 
current supply systems for computer intensive users, and the control 
technology needed to blend on-site power with grid backup to increase 
the reliability of power from its present state, which was designed for 
the industrial motor requirement, to today's needs for power quality by 
computers and servers. These technologies, as already deployed, start 
with any type or quality of incoming power, invert that power to DC and 
then prepare conditioned alternating current. Advances in direct 
current distribution and control will make DG the obvious economic 
choice and move the focus away from unfounded safety issues to very 
real economic and efficiency concerns.
                              Appendix 2:

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                   Additional Material for the Record



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