BEFORE THE

**UNITED STATES SENATE**

# COMMITTEE ON ENERGY AND NATURAL RESOURCES

# TESTIMONY OF THE HONORABLE MARSHA H. SMITH

**COMMISSIONER, IDAHO PUBLIC UTILITIES COMMISSION**

**ON BEHALF OF THE**

**NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS**

# ON

**"State of the Nation's Electric Transmission Grid"**

**July 31, 2008**

**National Association of**

**Regulatory Utility Commissioners**

**1101 Vermont Ave, N.W., Suite 200**

**Washington, D.C. 20005**

**Telephone (202) 898-2200, Facsimile (202) 898-2213**

**Internet Home Page http://www.naruc.org**

Good morning Chairman Bingaman, Ranking Member Domenici, and Members of
the Committee:

My name is Marsha H. Smith, and I am a member of the Idaho Public
Utilities Commission (IPUC). I also serve as President of the National
Association of Regulatory Utility Commissioners (NARUC), on whose behalf
I am testifying here today. I very much appreciate the opportunity to
appear before you this morning and offer a State perspective on
transmission issues.

NARUC is a quasi-governmental, non-profit organization founded in 1889.
Our membership includes the State public utility commissions serving all
States and territories. NARUC's mission is to serve the public interest
by improving the quality and effectiveness of public utility regulation.
Our members regulate the retail rates and services of electric, gas,
water, and telephone utilities. We are obligated under the laws of our
respective States to ensure the establishment and maintenance of such
utility services as may be required by the public convenience and
necessity and to ensure that such services are provided under rates and
subject to terms and conditions of service that are just, reasonable,
and non-discriminatory.

There are many challenges to resolve prior to the development of the
much needed growth in the transmission system that is so vital to
reliable electric service, our economic growth, and our national
security. Without greater development of and increased capacity in the
transmission systems, our efforts to assemble the energy resources that
will be necessary, should we embark on a policy that will constrain
carbon emissions, may not achieve the desired results. Additionally, it
has been projected that the demand for electric energy in the United
States will grow by more than 30 percent over the coming decades.
Significant upgrades will be necessary in order to meet this demand.
Solutions to the current transmission challenges facing us are not
quick, simple, noncontentious, inexpensive, nor, in some cases, obvious.
Finding and implementing solutions will require cooperation by, not
confrontation among, the various stakeholders. I would now like to
address a few specific issues with regard to the state of the nation's
transmission grid.

**[Congestion Study and NIETCs]{.underline}**

The Energy Policy Act of 2005 (EPAct 2005) required the Department of
Energy (DOE) to conduct a study of electric transmission congestion one
year after the legislation was enacted, and every three years
thereafter.[^1] After considering alternatives and recommendations from
interested parties, DOE must issue a report, based on the study, which
may designate any geographic area experiencing electric energy
transmission capacity constraints or congestion that adversely affects
consumers as a national interest electric transmission corridor
(NIETC).[^2]

The first DOE Congestion Study was issued on August 8, 2006. On April
26, 2007, the DOE issued two draft NIETCs -- the Mid-Atlantic Area
National Corridor (some or all counties in Delaware, Ohio, Maryland, New
Jersey, New York, Pennsylvania, Virginia, West Virginia, and the
District of Columbia); and the Southwest Area National Corridor (seven
counties in southern California, three counties in western Arizona, and
one county in southern Nevada). On October 2, 2007, DOE finalized the
designations of both NIETCs - the Mid-Atlantic Area National Interest
Electric Transmission Corridor (Docket No. 2007-OE-01) and the Southwest
Area National Interest Electric Transmission Corridor (Docket No.
2007-OE-02). DOE affirmed the NIETC designation orders on March 10,
2008.

***NARUC Perspective***

At a July 18, 2006 Annual Pacific North West Economic Region Summit in
Edmonton, Alberta, Canada, DOE listed the following principles during an
"Ending the Stalemate" presentation:[^3]

1.  The initial round of NIETC designations should focus on the most
    congested areas in the country;

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1.  The NIETC designations must have clear and supportable boundaries;

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1.  The NIETC designations must be defensible and demonstrate due
    diligence -- by both the DOE and regional planning entities;

2.  DOE should not issue an NIETC designation until it has the
    information needed to bound an NIETC appropriate to the underlying
    problem;

3.  Congress did not intend for DOE to become a planning or siting
    agency. The NIETC designations should not be route-specific, and
    siting should be left to those who have siting authority;

4.  The NIETC designations should support, not conflict with, efforts
    and conclusions by regional planning entities; and

5.  The NIETC concept is intended to overcome obstacles to transmission
    expansion, not impose new ones.  The NIETC process must therefore be
    timely and simple.

NARUC's comments to DOE expressed its concern that the Congestion Study
does not adequately conform to these principles or the express terms of
the agency's statutory charge. In order to remedy these deficits, the
agency should, at a minimum, (1) perform a more granular analysis of
congestion prior to designating a specific NIETC and (2) work
cooperatively with the various regional planning organizations and the
affected States within each region. Specifically, a review of the
Congestion Study highlighted the following problems:

1.  The Congestion Study Methodology, without further review and
    explanation, should not provide the basis for any NIETC Designation;

2.  EPAct 2005 Section 1221 requires a full and productive consultation
    with affected States before DOE makes any NIETC designations;

3.  There should be deference to areas with mature regional planning
    processes;

4.  DOE should consider solutions other than transmission, such as
    initiatives to expand demand-response programs and relieve
    congestion problems and transmission constraints before making an
    NIETC designation; and

5.  An NIETC designation should not be made unless cost allocation
    concerns have already been resolved.

NARUC appreciated the DOE Secretary's decision to solicit comments
before taking final action on any specific NIETC designations. We
commended the Secretary's attention to the comments made by NARUC
members and State regional organizations on the Draft NIETC
designations. NARUC did not make specific comments to DOE on either
Draft NIETC; rather, NARUC focused on two general issues:

1.  The default 12-year term for a NIETC Designation should be modified
    to a default three-year term to conform with the issuance of the
    Congestion Study; and

2.  Clarification on DOE's authority under Federal Power Act (FPA)
    Section 216(a)(2) to designate a conditional area of congestion
    based solely on projections of future congestion.

NARUC did not appeal either the DOE Congestion Study or the NIETC
designations. There are, however, pending appeals by individual States,
regional, and national environmental groups of both NIETC designations
in a number of federal district and appellate courts.

***Western Perspective***

The Western perspective is that the designation of the Southwest NIETC
was based on anecdotal information and information from various
transmission studies, not a systematic review of historical flow data
provided by the Western Electricity Coordinating Council (WECC), the
regional reliability organization.[^4] The breadth of the Southwest
NIETCs, especially in southern California and western Arizona is too
sweeping. DOE failed to develop objective metrics that would determine
when there is congestion that would warrant a NIETC designation.  The
various measures WECC provided to DOE did not show any consistent
pattern that would indicate one path in the West is more congested than
any other. The Western Interstate Energy Board's Committee on Regional
Electric Power Cooperation (CREPC) invited DOE to hold a workshop to
develop metrics to define congestion.  To date, it has not been held.
Such a selective use of information undermines acceptance of a DOE
designation.

In any case, the primary concern over adequate transmission in the West
is not existing congestion; rather, it is future congestion that will
result from locating new power plants. DOE has told its staff not to
consider future congestion as part of their 2009 Congestion Study
required by EPAct 2005. Currently, DOE is in the process of preparing
for the 2009 study and is holding regional workshops to consult with
States and other stakeholders. During the first Western workshop in San
Francisco on June 11, 2008, many participants raised similar points
about congestion metrics and the need to be forward looking about
analyzing congestion. The WECC transmission planning group, Transmission
Expansion Planning Policy Committee (TEPPC) plans to take a closer look
at congestion metrics in preparation for the 2009 Congestion Study.

DOE should be putting more emphasis on the implementation of EPAct 2005
Section 1221(h). Federal agencies are the major cause of delay in
transmission permitting in the West.  This was true before the passage
of the legislation, and remains the case.  Aside from an interagency
MOU, the federal agencies have not done much more to fix the problem. As
to EPAct 2005 Section 368, the idea of designating NIETCs across federal
lands is a good one. Unfortunately, the federal agency work thus far is
likely to be out-of-date and irrelevant when the NIETCs are finalized.
Much has changed regarding fuel choices since the passage of the
legislation. For example, the focus in the West is on renewable
generation, not new coal plants.  But, the proposed NIETCs were largely
based on existing right-of-ways or transmission plans that had coal
plants as the anchors of any new transmission.  DOE should redo the
Section 368 corridor work once the Western Governors Association's
Western Renewable Energy Zones (WREZ) work is completed and load-serving
entities (LSEs) indicate which zones they are interested in.

The geographic location of my home State makes it important to the
future development of transmission in the western grid. Idaho has
entered into a "Cooperating Agency Status" with the lead federal agency,
the Bureau of Land Management, on the Gateway West Project. Obviously,
access to federal lands is critical to the success of this venture. At
1.6 to 2.6 million dollars per mile, decisions that reroute transmission
paths can result in extraordinary costs to consumers. The reality is
that customers ultimately pay for transmission projects. Transmission is
the key to insuring energy security and new generation resources
(renewable, nuclear, natural gas, *etc.*) are dependent upon new
transmission development.  

**[Siting]{.underline}**

A major impediment to siting energy infrastructure, in general, and
electric transmission, in particular, is the great difficulty in getting
public acceptance for needed facilities. This tells us that no matter
where siting responsibility falls -- with State government, the Federal
government, or both -- as prescribed in the EPAct 2005, siting energy
infrastructure will not be easy and there will be no "quick fix" to this
situation.

During the EPAct 2005 debate, NARUC opposed the "backstop siting"
provision. NARUC's position prior to passage of EPAct 2005 was, and
continues to be, that to have the greatest economical and environmental
benefits transmission facilities should not be nationalized; practical
considerations require they be regionalized and that this
regionalization should be encouraged, not required. Just as States have
a role in the siting of interstate highways, States need to continue
having an active role in transmission decisions.

EPAct 2005 gave federal backstop siting authority of certain electric
transmission facilities to the Federal Energy Regulatory Commission
(FERC).[^5] Upon NIETC designation by DOE, FERC may issue permits to
construct or modify electric transmission facilities if FERC finds that:

(1) A State in which such facilities are located does not have the
    authority to approve the siting of the facilities or to consider the
    interstate benefits expected to be achieved by the construction or
    modification of the facilities;

(2) The applicant is a transmitting utility but does not qualify to
    apply for siting approval in the State because the applicant does
    not serve end-use customers in the State; and

(3) The State with siting authority takes longer than one year after the
    application is filed to act, or the State imposes conditions on a
    proposal such that it will not significantly reduce transmission
    congestion or it is not economically feasible.

To issue a permit, FERC must find that proposed facilities:

(1) are used for interstate commerce;

(2) are consistent with public interest;

(3) significantly reduce transmission congestion in interstate commerce;

(4) are consistent with national energy policy; and

(5) maximize the use of existing towers and structures.

As Congress considered of EPAct 2005, NARUC expressed deep concern with
the language that eventually became Section 1221. At that time, NARUC
opined that the language would in essence overrule legitimate State
agency concerns and laws with regard to how a State ruled on a
transmission project. The language would then permit FERC to vacate the
decision and preempt State law and actions. Whether our initial
observations and fears were accurate will only be determined by future
decisions of FERC. FERC issued the Final Order -- Order No. 689 --
implementing its backstop siting authority on November 16, 2006.

***NARUC Perspective***

In its comments on the FERC rulemaking, NARUC said it expects that the
backstop siting authority will have limited applicability because the
majority of the State commissions have the authority to approve or deny,
as the case may be, proposed transmission projects within their
jurisdictions and because State commissions are frequently allowed to
address the interstate benefits of proposed projects. Furthermore, many
State statutes require a petitioner to obtain a certificate of public
convenience and necessity, or some other similar certificate, from a
State commission before constructing transmission facilities regardless
of whether the applicant provides electric service to end-use customers.
NARUC proposed that:

1.  FERC clarify that federal backstop siting authority under FPA
    Section 216 is only triggered when the State Commission fails to or
    cannot act in a timely manner;

2.  FERC clarify how it will apply the federal backstop criteria;

> 3\. The proposed rule be revised to implement the due process
> requirements of the statute; and
>
> 4\. The Final Rule adopted should incorporate a reference and
> deference to extensive siting records developed at the State level to
> prevent duplication and confusion.

The Final Order gives the States one full year to consider a
transmission line siting application before the federal pre-filing
process begins. The intent is to avoid conducting "parallel proceedings"
-- where a State commission and FERC would be considering a siting
application at the same time. If such "parallel proceedings" were
allowed, that process would create *ex parte* and prejudgment concerns
under State law. Such a situation could potentially result in an
applicant "gaming" the siting process by purposefully filing a deficient
application to the State with the hopes of starting the one-year federal
clock and precluding adequate State consideration of the application.
NARUC did not appeal the FERC backstop siting rule. There are pending
court appeals by individual States of this rule.

***Western Perspective***

The Western perspective is that Congress needs to clarify that if a
State turns down a transmission line proposal for good reason and within
a reasonable timeframe, FERC should not be able to second guess the
State. In Order No. 689, FERC voted 4-1 in favor of saying that Congress
did not care if a State acted timely or reasonably. FERC Commissioner
Suedeen Kelly dissented by saying it was incomprehensible that Congress
intended FERC to override timely State decision. Additionally, it only
seems fair that the one-year clock for State action needs to be
suspended whenever a federal agency is the cause for the State delay in
a permitting decision.

**[Cost Allocation]{.underline}**

State regulators are concerned about transmission reliability, adequacy,
and the costs required to support the development of robust competitive
wholesale markets. The investment that is needed to upgrade the
nation\'s transmission grid in order to support expanded wholesale power
markets will cost billions of dollars. Notwithstanding the general
benefit to the wholesale electric marketplace of encouraging the
construction of new generating capacity and its interconnection to the
grid, it is also important to provide proper price signals to encourage
optimal demand response and promote economic and efficient expansion of
the transmission grid and siting of generation. The FERC has in the past
adopted transmission pricing policies that generally provide for the
direct assignment of costs to the parties causing the costs.

FERC Order No. 2000 stated the \"\[m\]arket designs that base prices on
the average or socialization of costs may distort consumption,
production and investment discussions and ultimately lead to
economically inefficient outcomes.\"[^6] FERC has departed, in some
instances, from a transmission pricing policy that provides for the
assignment of costs to the cost-causative parties. In general, NARUC
supports efficient pricing policies that result in the economic use and
expansion of the transmission systems to support a robust wholesale
electricity market. We recognize that transmission investments needed to
maintain the reliability of the existing transmission systems should
continue to be recovered through transmission rates charged to all
transmission users. We advocate that the cost of upgrades and expansions
necessary to support incremental new loads or demands on the
transmission system should be borne by those causing the upgrade or
expansion to be undertaken, except that FERC should not preclude the
assignment of interconnection cost to the general body of ratepayers
within a State when that State\'s regulatory body determines that such
allocation is in the public interest.

A robust regional electric transmission system is an essential
prerequisite to support a) reliability and b) the market function
allowing more generators to reach loads and compete directly for
wholesale sales to such loads in order to increase competition among
generation suppliers and meet national goals for renewable generation
and energy independence. A new rate design is needed that will
facilitate the construction of the strong transmission backbone required
to support the nation's wholesale electric markets, future increases in
renewable generation capacity, and reliability.

**[Incentive Rates]{.underline}**

Pursuant to Section 1241 of EPAct 2005, which adds a new FPA Section
219, FERC proposed a rulemaking to amend its regulations to establish
incentive-based rate treatments for the transmission of interstate
electric energy by public utilities to ensure reliability and reduce the
cost of delivered power by reducing transmission congestion. NARUC's
comments to FERC discussed the factors, other than the absence of
incentive-based rate treatments that affect the level of transmission
system investment, offered a framework for implementation of the new FPA
Section 219, and discussed the role of research and development in
encouraging the use of new technologies.

In particular, NARUC said that the Final Rule should require certain
showings as a prerequisite for an award of incentives and provide that
the amount of incentives awarded in connection with any particular
project will not exceed the amount necessary to obtain construction of
the proposed facilities. By specifying the purposes for which incentives
are available and requiring FERC-jurisdictional rates to remain just and
reasonable,[^7] Congress has clearly recognized the risks to customers
involved in incentive rate awards. We said that FERC should carefully
limit the availability of incentives to projects of the type specified
in FPA Section 219 to reduce the risk that consumers will be forced to
pay higher rates for the construction of facilities that would have been
built regardless of the availability of an incentive or that do not
provide substantial benefits to customers. FPA Section 219(a) clearly
establishes that authorized "incentive-based rate treatments" are
intended to facilitate the construction of new transmission facilities
that either ensure reliability or reduce the cost of power by reducing
congestion. NARUC asked FERC to include language in any rule adopted in
this proceeding to ensure that a successful applicant for
incentive-based ratemaking treatments must prove to the Commission that
the proposed transmission facilities would not be constructed in the
absence of an incentive award and that the proposed facilities will
either materially improve reliability or materially reduce the overall
cost of power by reducing transmission congestion. A failure to make the
necessary showing will result in a denial of the application for an
incentive award. Congress's recognition of these limitations on the
availability of incentives is appropriate given that some transmission
investment will occur with or without incentive support and because the
construction of new transmission facilities may not invariably improve
reliability or reduce costs to a degree appropriately reflective of the
cost of the project.

Furthermore, while certain of the incentives proposed inherently specify
the amount of the incentive to be awarded, the same is not true of other
proposed incentives. As a result, NARUC asked that FERC should specify
in its Final Order that the amount of incentives awarded in connection
with any particular project will not exceed the amount necessary to
obtain construction of the proposed facilities. FERC issued the Final
Order -- Order No. 679 -- on July 20, 2006.

For an example of the implementation of the FERC transmission incentives
rule, please see the New England Conference of Public Utility
Commissioners (NECPUC) involvement in the Docket: Docket No.
ER08-69-000. One of the concerns recently voiced by the NECPUC was that
applying rate of return adders to the actual cost of a project,
regardless of how much the project's eventual cost exceeded original
estimates, would create perverse incentives by rewarding transmission
owners for bringing projects in *over* budget.  On June 12, 2008, NECPUC
filed a complaint with FERC in that Docket pointing out that the costs
of many of the projects that FERC had ruled eligible for rate of return
adders are now double and triple their originally estimated levels.
The resulting cost of the incentive adder to ratepayers, NECPUC
observed, would be far greater than FERC could have anticipated when it
approved the adder. NECPUC urged FERC to prevent this result by limiting
the adder to the transmission owner\'s original estimated cost. Because
rapidly rising costs of material and construction is a nationwide
phenomenon, FERC's ultimate disposition of NECPUC\'s complaint may have
significant ramifications beyond New England.   While we expect the
Commission to fully consider the merits of these critical issues as it
addresses the NECPUC complaint, this case may illustrate the extent that
the policies Congress adopted in 2005 should be reexamined in light of
changing market conditions.

In conclusion, there is much to be done to ensure that this nation
avoids an "electric transmission crisis." The solutions to the
challenges will not come quickly or easily. Finding these solutions will
require cooperation by, not confrontation among, the various
stakeholders, including State and federal government. Thank you and I
look forward to your questions.

[^1]: Section 216(a)(1) of the Federal Power Act (FPA).

[^2]: Section 216(a)(2) of the FPA.

[^3]: *See* "Ending the Stalemate" July 18, 2006 DOE presentation at
    [http://pnwer.dataweb.com/tables/jointables/meetingparticipantjoin/files/presentation/souder.pdf#search=%22DOE%20Alberta%20corridors%22](http://pnwer.dataweb.com/tables/jointables/meetingparticipantjoin/files/presentation/souder.pdf#search=).

[^4]: *See* CREPC comments at
    <http://www.westgov.org/wieb/reports/crepc/07-06-07CREPC_comments_SWNIETC.pdf>
    and WECC comments at
    <http://www.westgov.org/wieb/reports/crepc/07-06-07TEPPC_comments_SWNIETC.pdf>.
    The Western Governors Association (WGA) passed a Resolution that
    says: "The Western Interstate Energy Board is to report to the
    Governors on whether the Department of Energy's designation or
    proposed designations of NIETCs in the West is based on sound
    analysis and information and whether such designations adequately
    incorporate information from state and regional renewable energy
    zone studies\... The WGA staff and the Western Interstate Energy
    Board are directed to develop potential recommendations to the
    federal government on policy changes needed to enable the region to
    move renewable energy generation to market, including but not
    limited to changes to Sections 368 and 1221 of the Energy Policy Act
    of 2005,

    and changes to FERC Order 890." The full Resolution is at
    [[http://www.westgov.org/wga/policy/08/electricity8-8.pdf]{.underline}](http://www.westgov.org/wga/policy/08/electricity8-8.pdf)
    .

[^5]: Section 216 of the FPA.

[^6]: Order No. 2000 at pp. 642-3.

[^7]: FPA Section 219(d) provides that "\[a\]ll rates approved under the
    rules adopted pursuant to this section, including any revisions to
    the rules, are subject to the requirements of Sections 205 and 206
    that all rates, charges, terms, and conditions be just and
    reasonable and not unduly discriminatory or preferential."