Power Line Woes Not Likely to End With FERC Siting Authority

As the debate over President Bush's energy plan continues to unfold, ways in which to bolster the nation's sagging power transmission infrastructure are getting increased scrutiny. The White House energy blueprint has helped to bring the issue front and center by proposing to give the Federal Energy Regulatory Commission (FERC) eminent domain authority over transmission siting.

But a closer look at some of the underlying reasons for the current lack of transmission capacity -- from meager returns on investment to questions over adequate compensation for the use of transmission lines -- makes it clear that even if FERC gets a say over transmission siting, a thicket of issues will still need to be resolved before any meaningful new transmission construction occurs in the United States.

The outlook for transmission expansion in the U.S. and North America over the next several years is less than encouraging. The Bush administration's recently released energy task force report notes that there are 157,810 miles of electricity transmission lines in the United States, but that transmission grid expansions are expected to be slow over the next 10 years, with additions totaling only 7,000 miles. And in recent testimony on Capitol Hill, an official with the North American Electric Reliability Council (NERC) projected that the existing North American transmission network, which currently includes around 200,000 circuit miles of high-voltage lines, will grow by less than half a percent a year over the next decade (see NGI, May 21). "The lack of additional transmission capacity means that we will increasingly experience limits on our ability to move power around the country," said David N. Cook, NERC's general counsel, in testimony before the Senate Energy and Natural Resources Committee.

Jay Carriere, manager of transmission issues at the Edison Electric Institute, said that the return on investment for transmission assets "is just not what it needs to be to encourage transmission owners to invest in their system above and beyond what they would normally do for reliability purposes." Utilities are more inclined to put their money in unregulated investments that have a market test and afford the companies greater returns. "They put their money where they can make the money," he said. Carriere pointed out that the return on equity for transmission investments is typically around 11%. In some cases, that number can go slightly higher, depending on whether a state has gone through restructuring or not, he added. "The financial incentive right now is just backward and not what it needs to be," Carriere told NGI.

The question of how transmission owners are compensated for the use of their lines is another problem area, according to Stephen Lee, area manager for grid operations and planning development at the Electric Power Research Institute (EPRI). Lee argued that there is currently no fair compensation mechanism for the payment of transmission line usage, noting that the majority of the U.S. still operates under a contract path model. That means that when a generating company wants to sell power out of its own area, it will look for the cheapest, contractual path that will take its energy to the ultimate destination. But when the flow is making its way from point A to point B, the possibility exists that some of that power will go through another company's transmission lines as well, without that company getting compensated for the use of its lines. "So for the transmission owner to put in money to upgrade that line, or build more lines on that path, does not make sense because he's already not getting paid for people using his line, so there's no incentive for him to build a line for someone else just to use it even more," Lee said.

Looking forward, the EPRI official said that regional transmission organizations (RTOs) may not completely solve the issue of compensation for transmission line use. He noted that RTOs will have the authority to have transmission lines built within their areas and set up a fair tariff and a higher return on equity to compensate those investors who build lines."But even with that, unless they also have within their own system, what we call a flow-based reservation and compensation system, you still have the dichotomy between who will get paid and who builds the line on a fair basis," Lee stated. Since there will not be one mega-RTO covering the entire U.S., but rather several RTOs sprinkled throughout the country, the EPRI executive said that there will still be transmission lines between RTOs that may remain bottlenecked. Therefore, the compensation for those lines could still be an issue, he said.

Allen Mosher, director of policy analysis at the American Public Power Association (APPA), also raised the question of how RTOs will fit into the larger debate over new transmission line construction. "The big conundrum in all of this is that, to the extent that RTOs profit from congestion, then they really don't have a good incentive to put in new transfer capability," he said. "That is, they may make as much or more money with lower risk by charging high prices for congested existing capacity," he went on to note. RTOs are a "necessary, but not sufficient condition for [a] long-term industry structure that leads to the right amount of transmission in the right location," Mosher.

Meanwhile, Carriere noted that another big obstacle for adding new transmission relates to siting issues. "The only thing that can really be done about that is eminent domain and federal authority over siting," the EEI analyst said. The White House energy task force report proposes that FERC be given that authority. Carriere said that a FERC armed with eminent domain authority could act as a "backstop" on transmission siting issues. States currently hold sway over most transmission siting matters. Carriere noted that FERC could serve as a final arbiter in situations where states or an RTO are unable to come up with a transmission project solution. "FERC, I think, is saying at that point...it's necessary for FERC to have that siting authority like it has for natural gas," he added.

APPA, meanwhile, has passed a resolution that supports giving FERC some eminent domain authority over transmission as part of a long-term solution. "The problem is that it is long-term," APPA's Mosher said. "There's no way that FERC could get its capability up and running within a year or two to do things like they do on the pipeline side. It's something that's going to happen in the five or 10 year period, even assuming that FERC gets the authority from Congress."

It remains unclear as to whether Congress will pass legislation giving FERC transmission siting authority. The political earthquake set off by the recent decision of Sen. James Jeffords (VT) to leave the Republican Party and become an independent means that Senate committee chairmanships will now go to Democrats. Sen. Jeff Bingaman (D-NM) will take over as chairman of the key Senate Energy and Natural Resources Committee (see NGI, May 28). Bingaman has introduced comprehensive energy legislation that touches upon several transmission-related areas, but it does not explicitly propose giving FERC transmission siting authority. On the House side, a discussion draft of emergency legislation sponsored by Rep. Joe Barton (R-TX) originally included a section that would have amended the Federal Power Act to give FERC limited authority over the siting of transmission facilities. However, that language was subsequently taken out of the legislation in later drafts (see NGI, April 30).

All of this begs the question of how much of a fight states may put up over relinquishing some of their siting authority to FERC. "If we're talking about wholesale federal authority to build transmission by anybody who wants to build it, wherever they want to build it, I think you'll have a huge fight," said Glenn English, CEO of the National Rural Electric Cooperative Association (NRECA). English said that if FERC uses eminent domain authority on a very limited basis "then I think that you'll see much less resistance." The NRECA executive went on to say that FERC having eminent domain power over transmission siting may not be needed, "except in some very rare cases and I think that would be acceptable to the states and that's obviously a compromise."

Irrespective of whether FERC ultimately winds up with having a say over transmission siting, the prospect for adding new transmission capacity is further complicated by the fact that some states with low-cost generation may have little incentive to build new lines. "States that have low-cost generation right now, their fear is that if you build a transmission line or a corridor through their state, that's just going to send their low-cost power to a high-cost state," said EEI's Carriere.

For now, the Bush administration continues to highlight the need for upgrading the U.S. electricity grid. Just last week, Secretary of Energy Spencer Abraham said that investment in new transmission capacity has "failed to keep pace" with growth in electricity demand and changes in the industry's structure. Appearing at Consolidated Edison's Sprain Brook Substation in Yonkers, NY, Abraham also said, "If we remove the transmission constraints across the country, like those present in New York, the result will be lower prices and improved reliability." Last Monday Abraham directed the Western Area Power Administration to take the first step toward building the necessary transmission capacity to relieve the bottleneck in California's Path 15.

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