**United States Senate**

**Before the Committee on Energy and Natural Resources**

**Prepared Statement of James J. Hoecker**

Counsel to WIRES (Working group on Investment in Reliable and Economic
electric Systems)

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*Oversight Hearing On The State of The Nation's Transmission Grid*

*July 31, 2008*

Senator Bingaman and Honorable Members of the Committee, my name is Jim
Hoecker. Thank you for the opportunity to testify this morning on the
current status and future of the electric transmission system. I am
especially honored to have the opportunity to return before this
Committee for the first time since my service on the Federal Energy
Regulatory Commission ("FERC").

Today I appear before you as Counsel to WIRES, the Working group on
Investment in Reliable and Economic electric Systems. WIRES is a new
national coalition of both publicly-owned, investor-owned, and
cooperatively-owned transmission providers, customers, and services
companies. To my knowledge, WIRES is the only private sector group
exclusively dedicated to promoting investment in the electric
transmission system and educating policymakers and the public on the
benefits derived from the grid.

WIRES was formed in part to remove electric transmission investment from
the shadow cast by competitive markets and competitive generation over
energy policy conversations and to emphasize that, even though
transmission providers have been skilled in finding ways to serve larger
and more distant loads utilizing their existing assets, the need for
more transmission is real. When the transmission systems became more
fully integrated a half century ago, we had no plasma TV's or
energy-hungry computers; no one seriously conceived of the possibility
that automobiles would be plugged into the electric system; large-scale
regional bulk power markets were only a blip on the horizon; few people
were concerned about the consequences of greenhouse gases in the
atmosphere; and extensive deployment of "location-constrained" wind,
solar, biomass, or geothermal technologies for electric generation --
not to mention low-carbon forms of coal generation -- was a fantasy.

Transmission providers now find themselves playing catch-up. We do so
while facing growing challenges: a level of competitive commerce that
tests the limits of the grid's capabilities; persistent transmission
constraints in many areas; a projected one-third increase in electricity
demand by 2030, on top of a 34% increase in demand between 1992 and
2007; and the practical challenge of linking major renewable and
low-carbon resources to consumers many hundreds of miles away.
Transmission expansion has naturally become a priority for the renewable
energy industry and for states with renewable portfolio standards. In
addition, technologists have discovered transmission's critical
importance. For instance, Andrew Grove, former CEO of Intel Corporation,
recently observed that "\[m\]ost everything runs on electricity. A big
exception is the transportation sector. . . .If we don't convert a large
portion of the transportation sector to electricity, we cannot make real
progress toward energy resilience." Such a transformative switch to
plug-in vehicles would compound the challenge of satisfying the
consumers' escalating demand for electricity and necessitate a stronger
transmission system to deliver power on demand. By expanding the high
voltage "backbone" network and ensuring that it becomes a "smart grid,"
we can empower consumers to control their own carbon footprint, enable
companies to make optimal use of existing assets, and help drive energy
efficiency and demand response.

.

Mr. Chairman, we need a strong electric transmission grid to be on the
Nation's list of top priorities for investment in infrastructure. I do
not know whether commentators like David Brooks are right in
anticipating that this will be an era of "epic legislation," but I agree
with him that energy and infrastructure must be two of our top national
priorities. The future of the grid is an important part of that policy
discussion. America's competitiveness and the success of public and
private efforts to promote clean energy resources and curb greenhouse
gas emissions will depend in part on upgrading and expanding the
transmission grid. While the Energy Policy Act of 2005 provided a
necessary push in the right direction in the form of financial
incentives, infrastructure corridor designations, and regulatory
coordination, Congress, federal and state regulators, and other
policymakers must maintain this new focus on the state of the Nation's
grid, which is after all among the most complex machines ever built and
one on which the Nation depends every day.

My testimony this morning describes WIRES' most recent work on
transmission. Most notably, WIRES commissioned a "White Paper" from an
independent Blue Ribbon Panel to ascertain what disinterested experts
would find is the best way to determine who should pay for expansions of
the grid in most circumstances. That paper is attached to my testimony.
WIRES also participated in the Department of Energy ("DOE") proceedings
that resulted in the first National Interest Electric Transmission
Corridors ("NIETC"). I discuss our views in support of that initiative
and our doubts about its long-term success. Finally, WIRES conducted a
brief examination of the factors which are escalating the cost of
developing new transmission facilities. It conveys the urgency of moving
forward in developing the grid. It too is attached.

I also wish to mention another WIRES report that will be forthcoming in
about six weeks. It will identify the "best practices" for integrating
location-constrained clean energy sources, especially wind power, into
the grid. WIRES is currently examining how several states have gone
about integrating wind and other location-constrained resources into the
existing grid. The states of Texas, California, Colorado, Minnesota and
others have developed and implemented renewable energy "zones" and
operational and regulatory protocols for moving those resources to
market. WIRES believes we will all learn from having this information
and these experiences distilled in one place. We will ensure that you
receive copies.

**Who Pays For Regional Transmission Projects?**

Transmission today operates in a new and challenging environment. The
highly balkanized wholesale power markets of the past, which consisted
of local monopolists that built facilities largely to serve customers
within their service territories, has given way to broad regional
markets that cross service territories and state boundaries. Where
transmission investment was once only a candidate for monopoly rate
base, today such costs can be allocated to users of
regionally-interconnected systems who can be very diverse. In both
bilateral utility and organized (i.e., markets run by regional
transmission organizations ("RTOs")) markets, the disputes over cost
allocation and cost recovery, and the procedural delays occasioned by
these disputes, are legendary.

There are numerous ways to allocate costs. At one end of a spectrum of
approaches is so-called participant funding which seeks to allocate
costs of a transmission upgrade or expansion to immediate "cost causers"
such as interconnecting generators even if facilities may have regional
reliability or economic benefits. At the other end of the spectrum is
the "socialization" of costs, meaning a broad allocation of all project
costs to the perceived beneficiaries of the project across the market or
region served. Different perceptions of the equities and the reliability
or economic benefits of a grid expansion have often chilled transmission
investment. The debate over cost allocation remains largely unresolved.

WIRES' Blue Ribbon Panel of five experts from academe, utility
operations, and the economic consulting world produced a short but
powerful analysis in October 2007. This "White Paper" is remarkable for
its clarity and flexibility. It is attached to this testimony but let me
summarize its main points.

Rather than choose the best practice from among competing cost
allocation approaches, the Blue Ribbon Panel ultimately decided to
articulate fixed principles for determining the benefits of new
transmission investments and for allocating the costs efficiently and
equitably among those who benefit from a transmission enhancement. Such
principles could be applied in all markets and in a variety of
circumstances. The Panel's White Paper relies on regional transmission
planning as the key and, if that process can be advanced either by
states acting together or at the federal level, policy makers and grid
operators should quickly find that regional transmission can be
responsibly developed, states the Panel. The paper concludes that
methods of allocating costs based on regional consensus or private
settlement agreements, while expedient, may not support a sustainable
and viable environment for attraction of capital into transmission
projects. The White Paper also finds that the debates over cost
allocations often simply serve as proxies for disagreements over other
issues such as siting.

At bottom, the Panel's paper concludes that a sound cost-recovery policy
must have one critically important foundation or pre-condition: [clear,
consistent and principled regulatory policy and oversight]{.underline}.
Good cost allocation, it asserts, should be based on: (1) establishing a
credible process for deciding which transmission investment should
proceed, with the process based on inclusiveness and transparency;
(2) assuring that regulation provides an adequate definition of the
geographic footprint(s) of physical, regional electricity market(s) to
be served in the transmission planning and expansion policy;
(3) establishing a credible and principled "transaction chain", linking
those that ultimately benefit from open-access transmission -- *e.g.*,
customer loads -- with the responsibility to pay for transmission
investment; (4) using "rules of thumb" related to the size of the
transmission asset(s) being proposed as the basis for presumptions about
who should pay; and (5) clarifying the regulatory jurisdiction for
recovery of transmission investment costs to ensure appropriate price
signals and consistency with national policy for non-discriminatory
access to transmission.

The Panel thereby arrived at ten principles to guide the allocation of
costs of new network transmission investment in all areas of the United
States. Although admittedly favoring the broadest equitable allocation
of costs among the regional beneficiaries of a project, the paper does
not recommend a one-size-fits-all method of cost allocation.

[Principle 1]{.underline}. All viable methods of allocating the costs of
new network transmission require a study of who benefits from, and who
should pay for, an upgrade or expansion of the grid, unless regulators
establish as policy that certain types of facilities presumptively
benefit the entire market or region. In either case, sound planning
processes are critical to that determination.

[Principle 2]{.underline}. Network transmission investments should be
analyzed using a single standard (or unit of measure) that combines
reliability and economic values without distinction, as the basis for
cost allocation..

[Principle 3]{.underline}. The appropriate standard of measurement of
the benefits of transmission is aggregate societal benefits within the
geographic region being examined.

[Principle 4]{.underline}. Sound transmission planning (to analyze
benefits and costs and the distribution of benefits for the purpose of
allocating costs) should incorporate a number of features:

[Principle 4A]{.underline}. Transmission planning and analysis should be
done on a regional level -- tending toward larger regions as a general
rule. While the overall planning process must encompass a large region,
the planning studies cannot lose sight of the impacts on sub-regions.

[Principle 4B]{.underline}. Transmission planning and analysis should
include all of the demand loads (existing and anticipated) and all of
the supply resources (existing and anticipated) located within the
geographic region for which planning is taking place.

[Principle 4C]{.underline}. Transmission planning should occur in a
process that is open, transparent, and inclusive, and conducted by a
credible entity without particular attachment to specific interests or
market outcomes in the region.

[Principle 5]{.underline}. Transmission investments involving "baskets"
of projects that satisfy these standards and which emerge as a net
societal benefit (to either the region or sub-regions) through the
results of robust transmission planning processes should presumptively
be candidates for broad, or socialized, cost recovery across the region
benefiting from the project(s).

[Principle 6]{.underline}. As a rebuttable presumption in transmission
planning exercises, the larger the size of a new facility, the greater
its potential to serve the broadest segment of interstate commerce and
therefore the larger the region that should support it.

[Principle 7]{.underline}. The costs of new investment should be
allocated to customers in the benefiting region.

[Principle 8]{.underline}. New transmission investment should be
supported in federal or other wholesale rates, as appropriate, and not
be included in retail rate base subject to regulation by the various
states. To the extent that existing transmission assets can be removed
from retail rate base and transferred to federal or wholesale rates in
an orderly and coherent manner it would be useful to do so.

[Principle 9]{.underline}. On a going-forward basis only, cost
allocations for new transmission should be subject to periodic review to
determine whether beneficiaries from the investment have changed in any
major ways that distort cost responsibility. Established transmission
cost allocations should otherwise be rebuttably presumed just and
reasonable.

[Principle 10]{.underline}. Free entry of transmission investment should
be permitted, to the extent that the proponents are willing to pay for
such investment and that such investment does not adversely impact the
network in ways that are not addressed by the proponents.

In sum, the White Paper sets forth the best way to decide who pays for
transmission at all levels and in all markets and regions. It is
necessary to identify beneficial transmission enhancements through
thorough and open planning, to provide credible (if not precise)
determinations of whom benefits from an investment, and to adhere to
these principles for allocating costs when serving distinctly regional
needs \-- irrespective of conflicting stakeholder interests or the
political environment surrounding a specific project. If followed, the
Panel's principles could significantly reduce litigation and other
process impediments to new transmission.

Policy makers agree. During the July 17, 2008 FERC open meeting,
Commissioner Phillip Moeller recognized that such principles could be
instrumental in timely planning of the grid in the Pacific Northwest and
elsewhere. "\[C\]ontroversial aspects of the \[open access
transmission\] planning process, such as cost allocation, may delay the
process since there is a misperception of winners and losers. While some
think of cost allocation as a zero-sum game, I do not. Benefits greatly
exceed the costs for the majority of participants in nearly all cases.
The Blue Ribbon Panel Report . . . contained some excellent cost
allocation principles and I remain interested in any feedback."

**Facilities Siting and National Interest Electric Transmission
Corridors.**

Facilities siting is an intractable problem that often leaves all
parties dissatisfied and the long-term interests of electricity
consumers ignored. Congress sought a balanced approach to siting
transmission facilities when it adopted Section 216 of the Federal Power
Act in 2005. That provision allows FERC to site transmission as a
"back-stop" to state procedures, and grant any necessary federal rights
of eminent domain, ONLY (1) if the facilities are located within
broadly-defined corridors designated by DOE as experiencing significant
market inefficiency, high prices, and threats to reliability that should
be resolved through enhancement of the transmission system; (2) after
states have had the opportunity to consider a project under their
traditional authority to site facilities (or lack of such authority) and
have failed to act in a timely manner; and (3) pursuant to its own
subsequent review, including environmental analysis under the National
Environmental Policy Act and applicable laws, to ascertain what the
public interest requires.

The DOE carried out its responsibilities by designating two National
Interest Electric Transmission Corridors ("NIETC") -- one in the
Mid-Atlantic Area (Docket No. 2007-OE-01), and another in the Southwest
Area (Docket No. 2007-OE-02). WIRES supports DOE's action. The NIETC
process and these designations must be viewed in perspective. These
designations provide a context within which states can engage with
citizens and local or regional utilities in planning to meet our
infrastructure needs. They do not site facilities. They are not
determinative of the outcome of transmission siting or planning
processes. They do not, and will not, take property. The process does
not preempt or undermine protection of environmentally or culturally
sensitive areas or assets. A designation does not pick winners and
losers or specify a required route for any line. Any suggestion that
designations should be made more specific would place DOE in the role of
a "super" transmission planner, a role DOE is not prepared to fulfill by
virtue of its expertise, resources, or legal authority.

Regional planning of electric transmission is once again key to
achieving sound decisions on the merits of individual lines. If that
process can be advanced either by states acting together or at the
federal level pursuant to FERC's Order No. 890, policy makers and grid
operators will quickly find that regional transmission can be
responsibly developed to achieve access to reasonably priced electric
generation and to unlock the potential of the substantial new renewable
and other resources that are located far from electricity customers.

WIRES believes that the NIETC process [as it now exists]{.underline} is
not an adequate or complete answer to what ails transmission investment.
While it is a valid attempt to address the obvious mismatch between the
interstate operation of the grid at the high voltages and the exclusive
authority of states to determine if such lines are to be constructed,
the lead-time for planning and constructing transmission -- which is
already substantial \-- promises to remain so. For example, FERC
recently received a first request for pre-filing consultation under its
new back-stop siting rules after the states of Arizona and California
reached an impasse, not about where facilities should be built or even
about which state's ratepayers should bear the costs, but about the very
desirability of exporting electricity in interstate commerce. FERC's
careful process will add approximately two years or more to the already
considerable time this case has taken at the state level. When and if
FERC acts on a completed application, the matter will no doubt be
appealed. Next month is the third anniversary of EPAct and the second
anniversary of DOE's congestion study mandated by the Act. Any
constructive impacts from the NIETC process are still relatively
distant.

The NIETC process may also fail to achieve its goals for two additional
but related reasons. First, transmitting large amounts of remotely
located renewable generation to load will unquestionably entail entirely
new high-voltage network additions that will cross multiple
jurisdictions in many circumstances. The need to take advantage of these
domestic, "location-constrained" renewable and clean-coal resources will
be central to any climate change and energy independence goals.
Development of these generating facilities await some indication that
transmission capacity will be available to them. Yet, DOE's focus in
implementing NIETCs is transmission constraints and congestion that
already exist. Thus, for good reason, the Western Governors have stepped
up their efforts to identify renewable energy zones and use such
determinations as the basis for planning transmission. However, these
procedures represent potentially longer and more circuitous paths to
developing a thoughtful regional transmission plan than FERC has already
prescribed under Order No. 890. Second, upgrades or expansions to the
grid may also be necessary to ensure electric reliability for our
digital society, promote energy security, or meet economic development
and demographic trends. Section 1221 of EPAct permits DOE to take these
forward-looking factors into account when designating corridors but it
has largely chosen not to do so. I am unsure whether this reflects a
reading of the law or a practical decision about the difficulties of
formulating future plans for integrating alternative energy resources.

In the final analysis, delay in selecting and building the right
transmission in the right place to serve the right generation resources
cannot be good for consumers.

**The Challenge of Escalating Costs**

Transmission is generally the smallest component of the typical retail
electric bill. Embedded transmission services may cost as little as a
few mills in a 7-cent/kwh rate. This relative relationship is due to
several factors, not the least of which is the high cost of most fuels
and generation facilities and the large investment that integrated
utilities routinely make in distribution facilities. Moreover,
transmission infrastructure is aging and is often fully depreciated. The
prospect of major new investments in the grid may not change this
proportional relationship but it nevertheless represents a major, and in
our minds necessary, future outlay of capital that must be recoverable.

U.S. companies will have spent about \$30 billion on transmission in the
period 2006-2009, at a rate roughly double the annual expenditures at
the beginning of the century. However, only 668 miles of high voltage
transmission has been built across state lines since 2000. Economists
project that we will need to spend well over \$200 billion on new
transmission by 2030. That compares to as much as \$1 trillion that we
will need to spend on distribution and new electrical generation in that
time frame, however.

The industry recognizes the potential impact on consumers of such
expenditures. Those consumer impacts could be exacerbated by increases
in the cost of materials and human resources. It is reasonable to expect
that, as the Nation turns to the task of fixing many aspects of its
basic infrastructure (water, roads, bridges, railways) over the next few
years, the competition for materials, equipment, skilled labor, and
capital to strengthen the grid will also strengthen. Investments in
utility infrastructure internationally will place substantial additional
pressure on the cost of these resources as well. WIRES therefore cannot
emphasize strongly enough the need to plan grid expansions thoroughly
and intelligently and to be as economically efficient as possible during
the build-out. WIRES advocates taking maximum advantage of energy
efficiency, demand response, and conservation to rationalize investments
in the electrical system as a whole. Nonetheless, there is no substitute
for having a reliable integrated high voltage system.

I have also attached the WIRES study illustrating the nature of the cost
pressures currently on the transmission sector.

Thank you once again for your attention to this critical national
priority.