Grid Upgrades Necessary for Deregulated Market

Posted September 19, 2003 at 10:01am

We can have our cake and eat it, too. Our nation can enjoy both lower electricity prices and improved transmission operation and reliability. The Aug. 14 blackouts and our recent experience in electricity markets demonstrate the importance of continuing the transition to vibrant wholesale competition and improving the delivery infrastructure of transmission.

The blackouts appear to have spread due to a lack of redundancy in the transmission grid and a failure in communication and coordination between neighboring utilities and transmission entities. As passed by the House, H.R. 6, the Energy Policy Act of 2003, provides a number of remedies to the situation and would ensure that any future blackouts are less severe.

First, Congress must remove barriers to transmission investment by repealing the Public Utility Holding Company Act, which needlessly restricts capital investments in our nation’s energy infrastructure.

Studies have shown that reliability is jeopardized and consumers are paying more than a billion dollars per year because of energy infrastructure constraints. At the height of the California energy crisis, a number of large companies expressed interest in building much needed generation, transmission, and natural gas facilities, but were turned away by PUHCA’s unnecessary restrictions. Investors have already announced their intention to invest billions of dollars in the industry once PUHCA is repealed.

Next, Congress should require the Federal Energy Regulatory Commission to provide a regulated rate for transmission, which will renew private company interest in expanding transmission capacity. Over the past several years the Energy Department, FERC, North American Electric Reliability Council, and others have warned that a lack of investment in electric transmission capacity in the nation’s power grids could lead to blackouts. For example, in a 2000 report NERC wrote:

“To support the reliability of the bulk power system, proper incentives must be developed to encourage transmission construction.”

H.R. 6 directs FERC to reform its transmission rates to provide for more investment in transmission infrastructure and prompt deployment of reliability-enhancing transmission technologies.

Congress must also pass mandatory reliability standards. Empowering the North American Electric Reliability Council to enforce its standards will provide the body with the authority to compel utilities to follow common rules. Reliability standards are currently voluntary and unenforceable. This “honor system” worked well for two decades, but the growth of competition and demand now necessitate enforceable rules. This provision, while critical, addresses only technical and operational issues — it will do little by itself to encourage investment in new infrastructure.

Legislating reliability alone will not alleviate our problems of insufficient transmission.

Transmission siting reform is important toward removing further barriers to important interstate lines. A national transmission grid study last year by the Energy Department found that 21 eastern and 15 western paths were congested more than 10 percent of the year, and close to one-third of all transmission paths were congested at some point in the year. One barrier to new construction of, and new investment in, transmission is siting restrictions at the state and local levels. H.R. 6 provides for a federal backstop in siting transmission lines on private lands. H.R. 6 retains state authority on this issue, but requires state action within one year. Our legislation also streamlines the process of coordination among federal agencies when an applicant wants to site transmission lines on federal land.

Currently, transmission assets receive less favorable tax treatment than other critical infrastructure and technologies. The U.S. tax code should be amended to provide enhanced accelerated depreciation for electric transmission assets, similar to the tax treatment governing other major capital assets. In addition, Congress should ensure that electric companies that sell or otherwise dispose of their transmission assets into a FERC-approved Regional Transmission Organization or Independent Transmission Company do not suffer tax penalties. These provisions are important parts of the tax title of H.R. 6.

Many utilities have joined RTOs or ISOs. In these organizations, utilities maintain ownership of the lines, but the lines are operated independently by the RTO or ISO for gains in regional coordination and efficiency. Most RTOs and ISOs also serve as reliability coordinators, who became of particular importance on Aug. 14. In two days of blackout hearings in the Energy and Commerce Committee, we learned that well-established RTOs helped stem the tide of the cascading blackouts.

I join many experts in my belief that participation in RTOs should be universal, on terms acceptable to utilities and states. Improved operation of transmission will allow existing utilities and independent power companies to compete to the benefit of those utilities which must purchase power. Some suggest an RTO means taking low cost power and sending it away. Instead, I believe RTOs mean more low-cost producers will have the opportunity to enter the market. H.R. 6 expresses the sense of Congress that all utilities should be in RTOs, on acceptable terms. It also suggests federal regulators should set transmission rates which give incentives for RTO participation, and result in new transmission capacity.

In 1992, Congress began a wonderful new era where companies compete to sell your utility power at prices far below what they had previously been. We need a transmission system that can handle this new era and get less expensive power where its needed. I am confident that the House-Senate Energy conference committee can deliver for the American people on electricity. We cannot and should not put the “genie back in the bottle,” or American consumers will see higher power costs. Let’s finish the job on energy policy and give our nation an electricity grid for the 21st century.

Rep. Joe Barton (R-Texas) is the chairman of the Energy and Commerce subcommittee on energy and air quality.