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76–590 PDF 2001

S. HRG. 107–200

ELECTRIC TRANSMISSION INFRASTRUCTURE

AND INVESTMENT NEEDS

HEARING

BEFORE THE

SUBCOMMITTEE ON WATER AND POWER

OF THE

COMMITTEE ON

ENERGY AND NATURAL RESOURCES

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

TO RECEIVE TESTIMONY ON ELECTRIC TRANSMISSION INFRASTRUCTURE AND INVESTMENT NEEDS; POLICY AND TECHNOLOGY ISSUES

AUGUST 7, 2001

(

Printed for the use of the

Committee on Energy and Natural Resources

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES

JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii

BYRON L. DORGAN, North Dakota

BOB GRAHAM, Florida

RON WYDEN, Oregon

TIM JOHNSON, South Dakota

MARY L. LANDRIEU, Louisiana

EVAN BAYH, Indiana

DIANNE FEINSTEIN, California

CHARLES E. SCHUMER, New York

MARIA CANTWELL, Washington

THOMAS R. CARPER, Delaware

FRANK H. MURKOWSKI, Alaska

PETE V. DOMENICI, New Mexico

DON NICKLES, Oklahoma

LARRY E. CRAIG, Idaho

BEN NIGHTHORSE CAMPBELL, Colorado

CRAIG THOMAS, Wyoming

RICHARD C. SHELBY, Alabama

CONRAD BURNS, Montana

JON KYL, Arizona

CHUCK HAGEL, Nebraska

GORDON SMITH, Oregon

ROBERT M. SIMON, Staff Director

SAM E. FOWLER, Chief Counsel

BRIAN P. MALNAK, Republican Staff Director

JAMES P. BEIRNE, Republican Chief Counsel

SUBCOMMITTEE ON WATER AND POWER

BYRON H. DORGAN, North Dakota, Chairman

BOB GRAHAM, Florida

RON WYDEN, Oregon

TIM JOHNSON, South Dakota

DIANNE FEINSTEIN, California

MARIA CANTWELL, Washington

THOMAS R. CARPER, Delaware

GORDON SMITH, Oregon

JON KYL, Arizona

LARRY E. CRAIG, Idaho

BEN NIGHTHORSE CAMPBELL, Colorado

RICHARD C. SHELBY, Alabama

CHUCK HAGEL, Nebraska

JEFF BINGAMAN and FRANK H. MURKOWSKI are Ex Officio Members of the Subcommittee

LEON LOWERY, Professional Staff Member

HOWARD USEEM, Senior Professional Staff Member

(III)

C O N T E N T S

STATEMENTS

Page

Anderson, Tracy, Program Manager, 3M Electrical Products Division, St.

Paul, MN ............................................................................................................... 45

Caldwell, James H., Jr., Policy Director, American Wind Energy Association .. 48

Dorgan, Hon. Byron L., U.S. Senator from North Dakota ................................... 1

Hacskaylo, Michael S., Administrator, Western Area Power Administration,

Department of Energy ......................................................................................... 4

Humann, Ted, Senior Vice President for Transmission, Basin Electric Power

Cooperative, Bismarck, ND ................................................................................. 20

Longenecker, William G., Energy Industry Analyst, Office of Markets, Tariffs

& Rates, Federal Energy Regulatory Commission ............................................ 9

MacFarlane, John, Chairman & CEO, Otter Tail Power Company .................... 19

Moler, Elizabeth A., Senior Vice President for Government Affairs and Policy,

Exelon Corporation .............................................................................................. 22

Pomeroy, Hon. Earl, U.S. Representative from North Dakota ............................ 3

Porter, Clifford, Director, Lignite Research, Development and Marketing Program, Lignite Energy Council, Bismarck, ND ................................................... 54

Sparby, David, Vice President for Government and Regulatory Affairs, Xcel

Energy, Inc. .......................................................................................................... 32

(1)

ELECTRIC TRANSMISSION INFRASTRUCTURE

AND INVESTMENT NEEDS

TUESDAY, AUGUST 7, 2001

U.S. SENATE,

SUBCOMMITTEE ON WATER AND POWER,

COMMITTEE ON ENERGY AND NATURAL RESOURCES,

Bismarck, ND.

The subcommittee met, pursuant to notice, at 10:08 a.m. in the

Judicial Room, Best Western Doublewood Inn, 1400 East Interchange Avenue, Hon. Byron Dorgan presiding.

OPENING STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA

Senator DORGAN. The hearing will come to order. This is a hearing of the Subcommittee on Water and Power with the U.S. Senate

Energy Committee.

My name is Byron Dorgan. I am chairman of the subcommittee

and I am joined today by Leon Lowery, who is with the professional staff of the Senate Energy Committee. We are also going to

be joined by my colleague, Congressman Pomeroy, who is in the

State and in town today and I have invited him to join us and he’ll

be with us shortly.

I am joined by staff assistant Ladeene Freimuth, who works with

me on energy issues, and I am pleased to have her here, as well.

Let me make a brief opening comment and then I would like to

begin hearing some testimony.

The purpose of having a hearing on transmission issues, transmission infrastructure and investment needs today is because we

are trying to write a new energy plan. Our chairman, Jeff Bingaman, had us working on one title, which was the research and development title, late last week. We completed that, but that is only

the first title. When we come back in September, we will begin the

efforts to complete writing an energy plan.

This is not an easy task. We did not understand it to be easy

when we started, but from my perspective, I am interested nationally in a range of issues. I believe we must produce more. That

means more oil, more natural gas and more coal. We must do it

in a manner that is environmentally sensitive. And even as we

produce more, we must conserve more. We must have more efficient appliances and efficient use of energy and we must have renewable energy and limitless energy sources, as well. And all of

those areas are areas that we should pay attention to in an energy

bill.

2

But especially in North Dakota we have a need to be concerned

about the issue of transmission. Whether it is production of wind

energy or the production of additional electric energy, it is not

going to be of much value to the region or the country if we are

not able to transmit that, and we don’t have the transmission capability and infrastructure at present to substantially increase what

this State and what our resources contribute to this country’s energy needs.

Because of that, we want to make sure that we are doing on the

transmission side the right things and trying to develop the right

policies. And Senator Bingaman has agreed to host a series of hearings. I am going to be holding a hearing this morning, I will be

holding a hearing in Seattle in a couple days, a hearing in New

Mexico. We have a series of hearings that are being held, and the

purpose is to gather information, gather thoughts and ideas.

And let me just finally say this. North Dakota has a great deal

at stake on these issues. We produce oil, we produce coal, we have

natural gas, we produce electric energy in substantial quantity, we

have vast deposits of lignite, and so we have a lot at stake and we

have a lot to contribute to this country in terms of energy supply

and production. But the linchpin to making this available in most

cases is transmission lines, especially with the opportunities to

produce electric energy.

We have a representative of 3M today, and I am not about giving

commercials for corporate enterprises except to say that there is a

lot of really interesting, exciting work going on in new technology.

In transmission and new technology this is a composite conductor

that is produced by 3M. Other companies are engaged in interesting research. This is, I understand, three to four times more efficient than current transmission wires and we can run using new

technology, new approaches, new devices, new wires across the

same corridors and have substantial new opportunities to export

electricity from our State.

I want to say one more time that when we contribute energy to

a country that needs it, I want it all to be done in a manner that

is very sensitive to our environment, with clean coal technology

and the concern that all of us have about making certain there is

significant and robust investment in that area. And Senator Bingaman especially, with me and others, believes very strongly in that.

We can use our coal resources in a very thoughtful, environmentally safe way, and we intend to do that.

But I want to thank all of you for being here. We have eight witnesses. It is my hope that we can complete this in 2 hours.

And I indicated that, Congressman Pomeroy, before you came

that I was happy to invite you to participate. You are not only in

the State, but in town, the House is in recess, as well, and I thank

you for being here. If you have a comment, I would be happy to

hear from you.

[The prepared statement of Senator Dorgan follows:]

PREPARED STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR

FROM NORTH DAKOTA

Today, we will hear from our witnesses on policies and technologies to address

transmission investment and infrastructure needs for North Dakota, the region, and

the nation. I am pleased that we have as witnesses today representatives from the

3

FERC, the PMAs, IOUs, and rural electric cooperatives, and from the lignite and

wind industries, as well as from 3M—the latter to represent some of the new, innovative transmission technologies that are being developed.

I would like to thank all of our witnesses for being here today, and especially

thank those of you who have traveled long distances and adjusted your schedules

to be here today. Your input will be invaluable to the energy debate, to me, and

to the Committee’s record, as we use this information to develop national energy

policy legislation.

Transmission is one of the most critical aspects of the energy debate and the energy policy Congress will be developing in the coming weeks. We can have vast energy supply sources, as is the case in North Dakota with its coal and wind, among

other traditional and renewable energy resources, but if we can’t move and export

those resources, then we won’t be able to use the resources to power our homes,

businesses, and more. North Dakota is referred to as ‘‘the Saudi Arabia of wind,’’

because of its enormous potential for wind energy. And yet, we don’t have a single

turbine built yet, because we can’t move the power that the wind would generate.

We are facing problems with transmission both here in North Dakota and nationwide in terms of capacity constraints, siting issues, reliability of the electricity system, to name a few. We need to figure out the most effective structures and policies

to enhance the effectiveness of our system and facilitate transmission across state

boundaries, regions, and the nation. We need to enhance transmission to rural as

well as urban areas. I know our witnesses will shed light on many of these issues.

And it’s not just about building more transmission lines, either. There’s a lot we

can do with our existing rights-of-way. New, advanced transmission technologies,

such as composite conductor material, superconductor material, and other methods

and devices can increase the efficiency of our transmission infrastructure.

3M, for example, whom we will hear from today has developed a composite conductor transmission line. This line replaces existing lines and does not require new

towers or new rights-of-way. As a result, extensive environmental assessments and

permit reviews are not required, which will significantly expedite the time in which

we can expand our transmission capacity. The 230 kilovolt (kV) line is being tested

in France. 3M is hoping to test 500 and 750 kV lines in the United States. The lines

increase the efficiency over existing lines tremendously and our witness will elaborate upon this even more.

I have passed amendments at last week’s Energy Committee markup and have

inserted language in Senate appropriations bills to promote, develop, and test such

innovative, new transmission technologies.

Though not the total solution, these technologies could go a long way toward helping solve some of the transmission capacity constraints we are facing.

I look forward to learning more from our witnesses about the combination of technologies and policies that Congress needs to examine to help solve the transmission

problems we are facing.

Now, I would like to invite our first panel to testify.

STATEMENT OF HON. EARL POMEROY,

U.S. REPRESENTATIVE FROM NORTH DAKOTA

Mr. POMEROY. Very briefly, Chairman Dorgan. Let me say how

sweet it is to say Chairman Dorgan. I appreciate very much you

using your subcommittee chairmanship of the Senate committee to

advance a particular focus on the issue of transmission.

When you think about it in North Dakota, the striking similarities that exist between the transmission issues facing our ability

to get more power produced in North Dakota to national markets

to the railcar shortages we face every year in terms of getting the

year’s harvest out. We produce way more crop than we consume.

We make a very significant contribution to our national food needs,

in fact global food needs, but we have difficulty getting it to market.

We produce more power than we consume. Our potential to make

a much greater contribution to the Nation’s energy needs are profound, and yet getting our power to the markets is constrained

4

presently by a power grid that no one would maintain was constructive with an eye toward energy needs in the 21st century.

I believe transmission is absolutely a key to North Dakota lignite

development, key to alternative and renewable fuels development

ranging from in particular wind energy when you talk about North

Dakota.

So as far as I am concerned, the House-passed energy bill last

week did not devote sufficient discussion of the transmission issues

in particular, and that is why your hearing is so particularly timely. I am very pleased your allowing me representing the House to

participate. Thank you, Byron.

Senator DORGAN. Congressman Pomeroy, thank you. I might say

just as an editorial comment, the House energy bill, as Congressman Pomeroy said, I think will be changed very substantially by

the Senate. It has obviously some ingredients that will be common

to both bills, but the Senate will take, in my judgment, a substantially different approach than the House did.

Mr. POMEROY. It needs work.

Senator DORGAN. Then that is what we are about.

Mr. POMEROY. Good.

Senator DORGAN. We are joined today by a representative of

FERC, the Federal Energy Regulatory Commission.

And I should mention that this morning or yesterday, I guess,

Chairman Curt He ́bert of FERC announced his resignation effective at the end of the month, so FERC will be experiencing some

changes.

William Longenecker, who is an energy industry analyst at

FERC, is with us, and we have the administrator of Western Area

Power Administration from Lakewood, Colorado, Mike Hacskaylo.

We appreciate very much your being with us. We have asked witnesses to summarize their testimony and we will make their full

testimony a part of the record. We have asked, if we could, for 5-

minute statements so that there is room for questions.

Why don’t we begin with Mr. Hacskaylo. Why don’t you proceed.

STATEMENT OF MICHAEL S. HACSKAYLO, ADMINISTRATOR,

WESTERN AREA POWER ADMINISTRATION, DEPARTMENT OF

ENERGY

Mr. HACSKAYLO. Thank you, Mr. Chairman. Good morning. Good

morning, Mr. Pomeroy. I appreciate your invitation to be here

today to speak on behalf of the Western Area Power Administration.

Western is one of the four Federal power marketing administrations. We market and transmit 10,500 megawatts of Federal power,

power produced at Federal powerplants, to nearly 650 wholesale

customers spread across 15 Central and Western States.

For the purposes of this hearing, a significant point is that Western owns, operates and maintains almost 17,000 miles of high-voltage transmission system across the West. We are part of that backbone, that high-voltage backbone to move power between States,

between markets. We have our employees based at 51 duty stations

in 12 States, including here in Bismarck, North Dakota, with our

North Dakota maintenance facility.

5

We operate four control areas and maintain about 1,600 loadserving interconnections with other utilities inside our control area

boundaries. We schedule energy. That is, we move energy owned

by one entity being sold to another entity with at least another

hundred load-serving entities with which we do not have a direct

interconnection.

Additionally, we make unused transmission capacity on our system available to any other buyer and seller, including power marketers and brokers, at a cost-reimbursable basis. As a matter of

policy, Western offers transmission capacity on its system on a

first-come, first-served basis under our open access tariff. This is

in accordance with FERC Order 888 and 889.

For example, we are working with the Basin Electric Power Cooperative on interconnections in a variety of areas, including the

Miles City DC tie. We are working with East River Electric Cooperative in South Dakota with their proposed T substation as they

interconnect with our system in the Sioux Falls area. That is a new

substation to deal with low growth in the area. We are also working with entities such as Basin on new transmission lines such as

the Hettinger-to-Belfield line. Thank you, Mr. Chairman, for your

efforts on that important project. That will help move power back

and forth in this part of the country.

We also provide interconnections with merchant powerplants

seeking transmission paths to move their power to load centers; for

example, in California and in southern Arizona. We have underway

eight interconnections with these merchant plants, and these are

large plants, 500 megawatts to 700 megawatts, to move power into

and through California.

Western Area Power Administration is responsive to the emerging generation market and we have seen strong demand on our

available transmission capacity. We now have little capacity available to serve new generation or additional loads beyond these

projects we are presently working on, so the system is becoming

constrained.

In recent years transmission improvements, generation additions

and maintenance and rehabilitation programs have often been deferred, I think this is a fair statement, across the industry. At the

same time load growth, deregulation and restructuring, transmission open access, and merchant plant interconnections are placing unprecedented demands on the interconnected power grid.

Systemwide disturbances in the West in 1994 and 1996, energy

shortages and price spikes in the Midwest last summer and the

roller coaster ride that is going on in California have focused attention on the reliability of the nation’s power grid and its ability to

meet an ever-growing, instantaneous demand for high-quality, reliable electric service.

There are those that say that electricity is what powers the nation’s economy, and they are right. And what the economy demands

is this high-quality, reliable service, and that is where transmission

comes into play.

Clearly, the system is much more integrated and being operated

much more closer to the margin than in the past and its components are much more sensitive to disruptions. Minor outages that

6

would have been a local inconvenience a few years ago now have

the potential to take down an entire regional system.

From the investment side, we work closely with the Congress

through our budget process to obtain funds to upgrade our system

as needed to improve reliability. We work closely with our customers as they advance funds to some of our activities. Merchant

powerplants that interconnect with our system have to pay a

freight, they pay their share of the costs to upgrade the system,

and we are looking for more flexible ways with appropriate Congressional and customer oversight to use these funds to take care

of emerging situations, rapid load growth and requests for quick

interconnections.

We at Western look forward to continuing to work with the members of your committee as you seek ways to reinforce the infrastructure and investments in the nationwide power grid.

Thank you for the opportunity to testify.

[The prepared statement of Mr. Hacskaylo follows:]

PREPARED STATEMENT OF MICHAEL S. HACSKAYLO, ADMINISTRATOR, WESTERN AREA

POWER ADMINISTRATION, DEPARTMENT OF ENERGY

Thank you, Mr. Chairman and members of the committee, for your invitation to

speak with you today on behalf of Western Area Power Administration (Western).

I will focus my remarks on Western’s improvements and investments in the transmission infrastructure of the high-voltage system we own and operate on behalf of

the people of the United States. Western’s concerns are to protect public safety

around our facilities and to maintain the reliability of our high-voltage transmission

system.

Western is one of the four Federal power marketing administrations. We market

and transmit Federal power to nearly 650 wholesale customers spread across 15

Central and Western states. This power is generated at 55 hydro plants owned and

operated by the U.S. Bureau of Reclamation, the U.S. Army Corps of Engineers and

the International Boundary and Water Commission. To deliver this power to our

customers—the cities and towns, public utility and irrigation districts, rural electric

cooperatives, and Federal, state and tribal organizations we own and operate nearly

17,000 miles of high-voltage transmission lines, 256 electrical substations, 359 communication sites and a variety of other supporting facilities. Our employees are

based at 51 duty stations in 12 states.

We deliver power to some of the most isolated communities in the nation. Our

facilities are scattered across a 1.3 million-square-mile service territory traversing

some of the most rugged terrain in the continental United States. Our transmission

system is an integral part of the nation’s high-voltage electrical grid in the West.

We operate four control areas and maintain about 1,600 load-serving interconnections with other utilities inside our control area boundaries. We schedule energy

with another 100 load-serving entities with which we do not have direct interconnections. Additionally, we make unused transmission capacity on our system

available to any other buyer and seller, including power marketers and brokers, on

a cost-reimbursable basis.

Maintaining the reliability of our vast transmission system to serve customers

around the clock is our most significant operational obligation. This requirement is

buttressed by:

• our contracts with customers to deliver firm power,

• our commitments to the North American Electric Reliability Council and its

member councils to reliably operate the transmission system, and

• our duty to safeguard this critical infrastructure.

Today, the Nation’s transmission grid is interconnected, interstate and international. As Deputy Energy Secretary Francis Blake testified before this committee

two weeks ago, assuring this integrated transmission system can reliably deliver

bulk electricity is a core Federal issue.

The Administration’s National Energy Policy noted that our energy infrastructure

has failed to keep pace with the changing requirements in our energy system. Nationwide, since 1989, electricity sales have increased by 2.1 percent per year, yet

transmission capacity has increased by only 0.8 percent per year. Some experts

7

* The summary has been retained in subcommittee files.

across the electric industry sector agree that the bulk power transmission grid may

need to be expanded to remove bottlenecks.

The National Energy Policy also directed the Secretary, by December 31, 2001,

to examine the benefits of establishing a national grid, identify transmission bottlenecks and identify measures to remove those bottlenecks.

Recent load growth in the Western United States has greatly impacted transmission system reserve margins. The interconnected power grid is constrained by

insufficient capacity where demand is greatest.

As a transmission system owner, Western must continue to take prudent steps

to improve grid operations and ensure the safety and reliability of the Federal

transmission system. We continue to cooperate with new merchant powerplants requesting interconnections to our transmission system.

As a matter of policy, Western offers transmission capacity on a first-come, firstserved basis under our Open Access Tariff. This includes providing interconnections

to merchant powerplants seeking transmission paths to move their power to load

centers. Western is responsive to the emerging generation market, and we’ve seen strong demand on our available transmission capacity. We now have little capacity

available to serve new generation or additional loads beyond the dozen projects now

in planning or under construction across our service territory.

Before new generation is added, extensive studies are undertaken to evaluate its

effects on the transmission grid. A number of technical, stop-gap measures address

reliability in the short term. They do not, however, resolve the long-term reliability

and operational security threats to the transmission system under the increasing

stress and burden of many more bulk power transactions moving power long distances in response to market demands.

Western has played a key role in joint transmission planning and construction

across the West. Western conducts its own studies and participates in studies conducted by entities including Western Systems Coordinating Council, Western Regional Transmission Association and Southwest Regional Transmission Association

as well as local and statewide transmission planning groups.

Results of these studies have led us to develop a description of immediate and potential projects for grid enhancements to the Federal transmission system as permitted within the confines of Western’s statutory authorizations and funding. A

summary of these projects was provided to the Federal Energy Regulatory Commission earlier this year in response to the Commission’s Order on Removing Obstacles

to Increased Electric Generation and Natural Gas Supply in the Western United

States (FERC Docket No. EL01-47-000). I am providing that summary for the Committee’s use.*

At Western, our charter is different from investor- and consumer-owned utilities.

They are required to invest in generation and transmission assets to meet load

growth needs in their franchised service territories. Our transmission system was

built to provide a way to deliver power from the Federal dams to the preference customers who have first call on this publicly generated power. Today, Western’s highvoltage system provides a critical backbone of transmission grid in parts of the

Western United States. This system includes nearly 9,000 miles of steel pole lines

and 7,900 miles of wood-pole lines.

Wood-pole structures are expected to last an average of 40 years. Sixty-three percent, or 4,983 miles, of Western’s wood-pole structures are more than 40 years old.

Another 19 percent, or 1,482 miles, of wood-pole lines will reach the 40-year mark

in this decade. Western has a long-term strategy for maintaining and extending the

life of its aging infrastructure, particularly our wood-pole transmission lines.

Part of that strategy is an ongoing wood-pole replacement program to reinforce

and replace individual poles. The other part is rebuilding entire line segments. This

summer, we completed a rebuild of the Havre-Shelby line in northern Montana.

This 115-kV transmission line was originally placed into service in 1951. Beginning

in 1993, Western crews began the methodical task of replacing the rotted wooden

poles on this 95-mile line, one by one, to extend the life of this vital line bringing

electricity to small, isolated rural communities such as Chester, Rudyard and Kremlin. The project was scheduled to be completed in 2002, but the crews devised several innovations that sped up the work by a full year.

Last year, we began a similar life extension project in North Dakota on a 56-mile,

115-kV transmission line between Rugby and Neal Substation near Voltaire and

Bergen. The line was originally placed into service in April 1952. We rebuilt the

first 10-mile stretch last summer and expect to finish in 2005. Next year, we’ll begin

work on the 1949 vintage, 41-mile Williston-Watford City line and the 1951 vintage,

34-mile Watford City to Charlie Creek line.

8

We have also been able to stretch out our infrastructure replacement activities.

The Havre-Shelby rebuild project was stretched out over nine years. It costs $7,000

in material and labor to replace one H-frame wood-pole structure. These costs include pro-rated shares for the heavy equipment and the often hidden costs of engineering design, work planning and acquiring the necessary materials. These costs

also include the time and work needed to take down the old structures and comply

with environmental requirements. The materials cost alone is about $3,500 for each

structure.

When you multiply the costs across Western’s entire system, the amount is quite

substantial.

The equipment in our substations is also aging. Next year, we’ll have 216 transformers and 183 circuit breakers that will have been in service for more than 40

years. Circuit breakers have an average service life of 30 to 35 years. The useful

life of a transformer is 45 to 50 years. Like all responsible utilities, Western monitors its electrical equipment and attempts to obtain the greatest useful life from

each component as a matter of sound fiscal policy and good business practice. Keeping each older piece of equipment in service must be weighed against any increased

risk to reliability and liability.

Many of our partner utilities have minimized capital outlays in the past decade

for transmission facilities in the face of uncertainty about who will pay for system

additions and upgrades. As a result, transmission improvements, generation additions and maintenance and rehabilitation programs have often been deferred. At the

same time, load growth, deregulation and restructuring, transmission open access

and merchant plant interconnections are placing unprecedented demands on the

interconnected power grid.

Systemwide disturbances in 1994 and 1996, energy shortages and price spikes in

the Midwest last summer and the roller coaster ride that’s going on in California

have focused attention on the reliability of the nation’s power grid and its ability

to meet an ever growing instantaneous demand for high-quality, reliable electric

service.

Clearly, the system is more integrated and being operated much closer to the margin than in the past, and its components are more sensitive to disruptions. Minor

outages that would have been a local inconvenience a few years ago now have the

potential to take down an entire regional system.

Western’s construction, rehabilitation and maintenance programs have generally

kept pace with system needs for repairs, replacements and upgrades. Interconnection projects with numerous proposed merchant plants have pulled resources away

from work on our own system the past couple of years. This trend will continue in

the near future. Given the time frames required to construct new or upgraded facilities, Western expects stresses on the existing transmission grid will increase before

any relief is evident. The possibility of both planned disturbances (sometimes called

rolling blackouts) and unplanned outages will remain high in the near future.

We at Western must maintain our excellent record of power system reliability.

Today, as a WSCC member, we face sanctions and fines if a system disturbance is

traced to poor maintenance practices or not replacing outdated equipment as required by reliability criteria. We expect the voluntary reliability systems that operate across the rest of the nation will soon be contractually or legislatively required

as recommended in the National Energy Policy.

Compounding these funding pressures in the Upper Great Plains region is our requirement to meet network load requirements on the Integrated System that we

jointly own and operate with Basin Electric Power Cooperative and Heartland Consumers Power District. Under a 1998 agreement, we and others transmit power

across facilities owned by the three entities using a single transmission rate.

Requests to interconnect with this system are forcing us to replace aging system

components that cannot continue to withstand the strains now being placed upon

them much longer. Our Congressional mandate to sell power at the lowest possible

cost consistent with sound business principles, along with extensive customer involvement in developing our power rates and our construction, rehabilitation and

maintenance work plans serves to cap the amount of work we can accomplish each

year. Regardless, the need to continue addressing our aging inventory of equipment

is unavoidable.

We’ve been able to find creative ways to leverage our appropriated dollars with

customer funding to meet our needs. Customer funding for these activities can offset

our need for appropriated dollars. But their reluctance to provide more funding

stems from their need to be competitive in the marketplace and the uncertainty over

the future shape of the industry. Customers have no future guarantee they will receive the benefits of system improvements they finance today.

9

We at Western look forward to continuing to work with the members of this committee as you seek ways to reinforce the infrastructure and investments in the nationwide power grid.

Thank you for the opportunity to testify before you today.

Senator DORGAN. Mr. Hacskaylo, thank you very much for being

here and we will ask some questions after we hear from Mr. William Longenecker from FERC. Thank you for joining us.

STATEMENT OF WILLIAM G. LONGENECKER, ENERGY INDUSTRY ANALYST, OFFICE OF MARKETS, TARIFFS & RATES,

FEDERAL ENERGY REGULATORY COMMISSION

Mr. LONGENECKER. Thank you. Mr. Chairman, members of the

subcommittee and Mr. Pomeroy.

Thank you for the opportunity to appear here today. I am

pleased to offer testimony on current issues affecting the outlook

of the Nation’s electric transmission system. My testimony will

focus on the development of regional transmission organizations— so-called RTOs—and how the Federal Energy Regulatory Commission can help on transmission infrastructure improvements and investments. The views expressed in this testimony are my own and

they do not necessarily reflect those of the Commission or any one

Commissioner.

FERC addressed the issue of access to the transmission lines of

public utilities in Order No. 888, which was issued in 1996. Order

No. 888 required all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce

to provide open access and nondiscriminatory transmission tariff

service and to functionally unbundle wholesale power services.

Since Order No. 888 was issued, wholesale electricity markets

have become much more regional than local, encompassing large

multistate areas. For competition to flourish and bring benefits to

wholesale, as well as retail customers, it is critical that there be

adequate transmission to carry electricity from sellers to buyers.

The transmission grid is the essential superhighway for interstate electricity commerce, but it is becoming congested due to increased demands. Transmission constraints frequently prevent the

use of lowest-cost generating facilities, and transmission expansion

has not kept pace with changes in the electricity marketplace.

In Order No. 2000, issued in 1999, the Commission sought to address several transmission impediments to competition in wholesale electricity markets. There are continuing opportunities for discriminatory treatment in access to transmission. There are engineering and economic inefficiencies in the operation of the transmission system and in managing congestion. Transmission reliability problems have increased. Pancaked transmission rates, where

a separate access charge is assessed every time the transaction

contract path crosses the boundary of another transmission owner,

restrict the size of regional power markets.

Finally, uncertainties associated with transmission planning and

expansion processes has severely limited needed additions to the

Nation’s transmission system. We have found that these transmission problems could be best addressed if the interstate transmission grid were operated on a regional basis in a manner which

is independent of entities that are buying or selling electricity.

10

Accordingly, Order No. 2000 required all public utility transmission owners and operators to submit filings related to the creation of regional transmission organizations. The Commission has

strongly encouraged public power and cooperative entities which

constitute such an important part of the Nation’s electric system to

participate fully in RTOs.

In addition, FERC has recognized that there must be adequate

returns on transmission investments so as to encourage such investment. Order No. 2000 specifically indicated the Commission’s

receptiveness to innovative rate proposals that would reward those

making new transmission.

The Commission has aggressively acted to review pending RTO

applications and announce that it favors the development of one

RTO for the Northeast, one for the Midwest, one for the Southeast

and one for the West.

In conclusion, FERC is keenly aware of the importance to electricity markets of full and fair access to efficient and reliable transmission service. The Commission views the creation of RTOs as the

single best approach to addressing, among other things, transmission congestion and facilitating expansion of the transmission

grid.

I will be pleased to answer any questions you may have.

[The prepared statement of Mr. Longenecker follows:]

PREPARED STATEMENT OF WILLIAM G. LONGENECKER, ENERGY INDUSTRY ANALYST,

OFFICE OF MARKETS, TARIFFS & RATES, FEDERAL ENERGY REGULATORY COMMISSION

I. OVERVIEW

Mr. Chairman and Members of the Subcommittee.

Thank you for the opportunity to appear here today. I am pleased to offer testimony on current issues affecting the outlook for the Nation’s electric transmission

system. In particular, my testimony will focus on the development of regional transmission organizations (RTOs) and how the Federal Energy Regulatory Commission

(FERC or the Commission) can help on infrastructure improvements and investments. The views expressed in this testimony are my own, and do not necessarily

reflect those of the Commission or any one Commissioner.

A competitive market is the best way to protect the public interest and ensure

that consumers’ needs are met over the long run at reasonable prices. For competition to flourish and bring benefits to wholesale as well as retail customers, it is critical that there be adequate transmission to carry electricity from sellers to buyers.

It is also critical that transmission services be provided on the interstate grid on

a fair and non-discriminatory basis.

The transmission grid is the essential superhighway for interstate electricity commerce, but it is becoming congested due to increased demands. The use of the interstate transmission grid has grown dramatically, but transmission expansion has not

kept pace with these changes in the interstate electricity marketplace. Also, wholesale electricity markets have become much more regional than local, encompassing

large multi-state areas. Thus, the existing grid is being pushed to its operational

limits, and transmission constraints frequently prevent the use of lowest cost generating facilities. The institutional structures used in the past for planning and expanding the grid are not currently meeting our needs.

For a number of years, the Commission has recognized the importance of an efficient transmission grid, and has exercised its authority to make the transmission

system operate efficiently.

II. ORDER NO. 888

The Commission addressed the issue of access to the transmission lines of public

utilities in its Order No. 888, which was issued in 1996. There, we found that unduly discriminatory and anti-competitive practices existed in the electric industry,

and that transmission-owning utilities had discriminated against others seeking

transmission access. Accordingly, Order No. 888 required all public utilities that

11

own, control or operate facilities used for transmitting electric energy in interstate

commerce to provide open access non-discriminatory transmission tariff service and

to functionally unbundle wholesale power services from transmission services.

III. ORDER NO. 2000

In Order No. 2000, issued in 1999, the Commission sought to address several remaining transmission impediments to competition in wholesale electricity markets.

These impediments were identified as continuing opportunities for discriminatory

treatment in access to transmission lines, and engineering and economic inefficiencies in the planning and operation of the transmission system. We identified the following specific problem areas that Order No. 2000 is intended to address: the reliability of the nation’s bulk power system is being stressed in ways that were not

experienced before; it is increasingly difficult to accurately compute the available

transmission capacity on transmission facilities; existing transmission congestion

management systems do not optimize regional congestion relief and are cumbersome, inefficient and disruptive to bulk power markets; the uncertainty associated with transmission planning and expansion have resulted in a noticeable decline

in planned transmission investments; and pancaked transmission rates (where a

separate access charge is assessed every time the transaction contract path crosses

the boundary of another transmission owner) restrict the size of regional power markets. Order No. 2000 also recognizes that wholesale trading patterns have become

increasingly regional and multi-state in character.

Many of these transmission problems, we found, could best be addressed if the

interstate transmission grid were operated on a regional basis, in a manner which

is independent of entities that are buying or selling electricity. Utility-by-utility

management of the interstate transmission grid is inadequate to support the efficient and reliable operation of the bulk power market. Accordingly, Order No. 2000

requires all public utility transmission owners and operators to submit filings related to the creation of regional transmission organizations (RTOs). RTOs are institutions that will own and/or operate the transmission grid on a regional basis and that

will not participate in the power sales business, i.e., they must be independent of

power market participants.

Order No. 2000 requires that RTOs address essential transmission functions on

a regional basis. These functions include operation of the grid, maintenance of reliability, congestion management, planning and expansion, calculation of transmission capacity, parallel path flow management, and tariff administration. Although not all transmission owners are public utilities subject to the Commission’s general Federal Power Act jurisdiction, the goal of Order No. 2000 is for all transmission-owning entities, including non-public utility entities (e.g., municipal and

electric power cooperative utilities) to place their transmission facilities under the

control of independent RTOs.

Accordingly, in the future, the Commission will look to RTOs not only to ensure

non-discriminatory access over the interstate grid, but also to manage congestion

over existing regional transmission constraints and take the lead in regional transmission planning and expansion to remove or mitigate constraints over the longterm. RTOs must have the authority to ensure the short-term reliability of the regional grid and must be responsible for planning, and for directing or arranging,

necessary transmission expansions and upgrades that will enable it to provide efficient and reliable transmission service. We expect that the RTOs will have a process

for determining the most cost-effective transmission upgrades, and that this process

would take into consideration any technological advances in the transmission of energy that may be available.

IV. COMMISSION EFFORTS TO ESTABLISH RTOS EXPEDITIOUSLY

Recognizing the critical importance of transmission issues, FERC established an

aggressive timetable in Order No. 2000 for RTO implementation, and we have been

acting expeditiously in response to the RTO filings. Since the beginning of 2001, the

FERC has issued over 20 orders on RTO filings. The Commission has also recently

ordered mediation in an effort to create one large RTO for the Northeast U.S. and

another for the Southeast U.S. Creation of effective RTOs has been and continues

to be one of the top priorities of the Commission.

V. OTHER COMMISSION ACTIONS

In addition to efforts to get RTOs established, we have recognized that there must

be adequate returns on transmission investments so as to encourage such investment by the private sector. Order No. 2000 specifically recognizes the importance

of transmission pricing reform, and indicates the Commission’s receptiveness to inVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
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novative rate proposals that would reward those making new transmission investments.

FERC also believes that so-called ‘‘merchant’’ transmission projects sponsored by

entities other than traditional utilities can play a role in expanding competitive generation alternatives for customers, and it has taken initial action on two merchant

high voltage direct current transmission line projects: the Neptune Regional Transmission System, LLC project consisting of several thousand miles of undersea cable

which will connect capacity rich regions in Maine, New Brunswick and Nova Scotia

with capacity constrained markets in Boston, New York City, Long Island and Connecticut; and the TransEnergie U.S. Ltd. 26-mile undersea cable project from Connecticut to Long Island, New York.

In evaluating these proposals, the Commission has established criteria to use to

determine whether merchant transmission line projects should qualify for negotiated or bid transmission rates: the merchant project should assume full market

risk; the merchant project should create tradable transmission rights; the merchant

project should not preclude access to essential facilities by competitors; the merchant project should be subject to market monitoring for market power abuse; the

physical energy flows on the merchant project should be coordinated with, and subject to, reliability requirements of the relevant RTO; and the merchant project

should not impair pre-existing property rights to use the transmission grids or interconnected RTOs or utilities.

Another related area where we have acted to increase efficiencies involves interconnection of generating facilities with the transmission system. In recent orders

the Commission has stated its intent to evaluate in the near future the importance

of standardizing interconnection policies and procedures. FERC has already taken

some steps in this direction by encouraging utilities to file their interconnection

rules. Standardizing interconnection rules and procedures may help minimize cost

and barriers to entry for new generation.

VI. LIMITATIONS ON THE COMMISSION’S ABILITY TO RESOLVE TRANSMISSION ISSUES

FERC is statutorily unable to directly and completely address all transmission

problems. A significant portion of the nation’s transmission grid is owned and operated by utilities not subject to FERC’s open access requirements. For example, the

Commission has limited authority with respect to transmission facilities owned by

the Federal government, state and municipal governments, and rural electric cooperatives or within the Electric Reliability Council of Texas (ERCOT). Public power

entities control about 30% of the nation’s electricity transmission grid. We have encouraged public power and cooperative entities, which constitute such an important

part of the Nation’s electric system, to participate fully in RTOs. In Order No. 2000,

the Commission stated that a properly formed RTO should include all transmission

owners in a region, including municipals, cooperatives, Federal power marketing

agencies, Tennessee Valley Authority and other state and local entities. Certain tax

laws impede public power and cooperatively-owned utilities from fully participating

in the development of RTOs. One such example is the Internal Revenue Code’s re- strictions that may prevent transfer of operational control of existing transmission

facilities financed by tax-exempt bonds to a for-profit transmission company.

FERC also has no authority over transmission siting decisions. Even though public utilities must offer to expand transmission facilities to fulfill a transmission service request, the utilities first must obtain siting permission from relevant state and

local authorities.

VII. CHANGES THAT HAVE BEEN PROPOSED TO IMPROVE TRANSMISSION EFFICIENCY

Although the Commission itself has not taken a position on what action Congress

should take with respect to transmission issues, and I a staff member do not here

make any such recommendations, I note that a number of measures have been proposed to improve the operation of the Nation’s transmission system. Among these

are:

• proposals to extend the Commission’s open access regulatory authority to all

transmission facilities, including those owned by municipalities, rural cooperatives, the Tennessee Valley Authority, and Federal power marketing administrations;

• proposals for the Commission to have transmission siting authority for transmission facilities as a backstop in limited circumstances;

• proposals providing for enforcement of transmission reliability rules by a selfregulatory organization subject to the Federal oversight; and

• proposals for legislation to eliminate tax code and other restrictions that impede

public power entities from fully participating in RTOs.

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VIII. CONCLUSION

Full and fair access to efficient and reliable transmission service is vitally important to competitive electricity markets. The Commission has been diligent in exercising its authority to promote competitive markets. Currently, in our view, the creation of RTOs is the best approach to addressing a wide range of transmission problems, including transmission congestion and expansion of the transmission grid,

among other things. RTO implementation is one of the Commission’s top priorities.

Senator DORGAN. Mr. Longenecker, thank you very much. Let me

ask a series of questions and then call on my colleague, Congressman Pomeroy.

First of all, with respect to WAPA, my understanding is that the

capacity doesn’t exist at this point for us to move much additional

electric energy from North Dakota. I think you indicated that in

your testimony.

Mr. HACSKAYLO. Yes, sir. That is correct.

Senator DORGAN. Can you give me your perspective of why we

have not seen investment and why we have not seen substantial

improvement in the capability in the transmission system, and not

just in North Dakota, but nationally? If you look at the miles of

transmission capability available, it really has not changed much

over the last couple of decades. Why is that the case?

Mr. HACSKAYLO. I think the most significant reason is that the

rules of how the electric utility industry operates are changing.

They are in a state of flux. It used to be in the days of regulated

monopolies, regulated utilities, that utilities could make an investment in transmission and the State commissions or FERC would

guarantee the return on investment so there is some certainty on

the fact that the investment would in effect pay off.

Now in these days of deregulation, in these days of companies

merging, in these days of merchant plants coming into the system,

that certainty is gone. And where investors are looking for a relatively quick return on the investment, we are not finding that in

transmission. I think transmission has to be viewed more as a

long-term, steady investment, with steady returns. So I think the

rules are changing. That is the main reason.

Senator DORGAN. Under a mechanism in which you had regulatory authorities providing returns that were sufficient to justify

the investment and the investor would know those returns would

be available, we had a buildout and we had certain redundancy

and we had guarantees of service at a certain price. When we go

to the marketplace and the marketplace decides on the incentives

for the buildout to exist, would we have at the conclusion of that

a redundancy in the system that will give the consumers the same

protection of continued service that exists under the regulated system?

Mr. HACSKAYLO. The economic theory underlying that premise

says yes. The facts may be very different. The facts may be very

different because redundancy by nature implies overcapacity, capacity that might not always be used, and yet it still has to be paid

for.

Senator DORGAN. And the marketplace would not view that overcapacity with great sympathy, would it?

Mr. HACSKAYLO. It is hard to say. Certainly in California, given

the transmission problems there, I think we are beginning to see

some recognition that there does need to be redundancy in the sysVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
14

tem, additional capacity to deal with reliability issues. But it is a

hard-fought issue and the costs are tremendous in California of not

having the reliability, not having the extra capacity there to deal

with system emergencies.

Senator DORGAN. But I am just asking, is not the extra capacity

almost antithetical to the market system?

Mr. HACSKAYLO. It is hard to make the two fit together.

Senator DORGAN. Maybe impossible?

Mr. HACSKAYLO. I do not know. I do not know. Again, I think the

industry is still in a state of flux. The rules keep changing. Directions are still different. So I think the jury is still out on whether

all of this is going to work.

Senator DORGAN. Let me ask you your view of technology. I

talked about composite conductor technology this morning. How do

you view technology as being able to address some of these transmission issues, especially in our region, especially in North Dakota? Are you high on technology producing substantial progress

here, or do you think we are going to have to make progress the

old-fashioned way, put more lines and more towers and worry less

about increased technology?

Mr. HACSKAYLO. The new technology has very much a role to

play in the industry, and certainly within Western’s system. We

have already made use of AC to DC to AC converter stations in

Miles City and in Sidney and Nebraska. We’ve made use of flexible

thyristor series compensation devices at various substations that

we have in the West. The technology helps reduce losses on the

system. It helps improve efficiencies on the system. So there is definitely a role for cost-effective technology to take its place as we rebuild transmission lines, as we upgrade our system.

Senator DORGAN. Mr. Longenecker, FERC is going through some

rather interesting times. Would you agree with that?

Mr. LONGENECKER. Yes, sir.

Senator DORGAN. Especially given what is going on in California

and, of course, it has been the subject of great controversy and its

actions or lack of actions have the subject of great controversy in

Washington, D.C., recently.

You describe in your testimony pretty much what we hear from

most members of FERC, and that is that as our country has

changed, the mechanism by which we develop and transmit electrical energy has to change, as well. Most of our structure was built

for an intrastate-regulated system, and now we are trying to create

a circumstance where we have effectively a transmission highway

to be able to move energy back and forth across the entire country

through RTOs. It is an entirely different approach, is it not?

Mr. LONGENECKER. Yes, it is.

Senator DORGAN. And can you tell me, how does FERC see our

movement to the RTOs and the upgrade of the capability and the

capacity? How do you see that happening? Can you describe the

Federal involvement, State involvement, how that relates to the

competitive market system? We are not only changing from a regulated environment to an unregulated environment in some cases.

We are also changing from an intrastate to essentially a regional

and national system. Tell me FERC’s impression of different levels

of government’s responsibility here.

15

Mr. LONGENECKER. Well, I think we see RTOs as taking the lead

in assessing transmission needs within a region that are necessary

to meet the evolving electricity market needs such as generation

services. We see the RTO working with the States to decide how

to best meet those transmission needs with the technology that

might be the most economical solution to fixing appropriate in constrained areas, for example, and whether or not transmission is the

answer. It may be that a generating station would be the better solution. We also see RTOs taking the lead in terms of seeking siting

approvals, and so forth, for whatever projects that the RTO

through a collaborative process, has decided best fit the needs at

a particular time in a particular power market.

Senator DORGAN. Congressman Pomeroy.

Mr. POMEROY. Thank you both for very interesting testimony.

Mr. Hacskaylo, did you in indicating the projects WAPA was participating in reflect that basically WAPA transmission facilities are

being used to carry privately generated power?

Mr. HACSKAYLO. Yes, sir.

Mr. POMEROY. How long has that been going on?

Mr. HACSKAYLO. It has been going on for as long as there has

been a Western Area Power Administration. What we do is use our

transmission system to move power from generation to load to our

preference customers, and then with the additional capacity in the

system we make that available to others to gain revenue to help

repay the cost of the Federal investment.

Mr. POMEROY. The whole Power Administration concept is the

Federal Government builds facilities and recoups costs from power

generated over a period of time?

Mr. HACSKAYLO. Yes, sir. That is correct.

Mr. POMEROY. It also addresses neatly some of the investment

issues you speak to?

Mr. HACSKAYLO. I think so.

Mr. POMEROY. Might that be a model then for Congress to look

at as we would further invest Federal dollars in expanding carrying capacity on existing WAPA lines or other Power Administration

facilities that could then be cost out over time carrying the power

generated by others?

Mr. HACSKAYLO. That certainly is one option to be considered,

yes, sir.

Mr. POMEROY. Mr. Longenecker, how long have these RTOs been

an essential part of load management coordination?

Mr. LONGENECKER. Well, the RTOs are in the process of forming,

and in many parts of the country RTOs are an extension of the existing independent system operator that has already been in place

for a number of years as a consequence of our Order No. 888 having been issued. In fact, many of the ISOs in the Northeast have

proposed to transform themselves into an RTO.

Mr. POMEROY. You have two sentences in your statement—excuse me for interrupting—that get to the point you were making,

I think.

On page 3 of your testimony you state, ‘‘existing transmission

congestion management systems do not optimize regional congestion relief and are cumbersome, inefficient and disruptive to bulk

power markets; the uncertainty associated with transmission planVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
16

ning and expansion have resulted in a noticeable decline in

planned transmission investments.’’ So we have a bad system, it is not working very well, we have

got very little investment in terms of building a new and better

system and the hope is RTOs. Now, what leaves me a little anxious

about that is RTOs are quite new. I am concerned about whether

they have within the RTO the governing capacity to really make

it work to optimal efficiency, and, secondly, whether because they

are inherently regional, as their very name implies, whether these

regionals can hook up in a clear national system, and FERC is obviously betting the ranch on these RTOs at the present time.

Would you please tell me just briefly how this is going to work?

Mr. LONGENECKER. Well, we first determined in Order 2000 that

utility-by-utility management of each transmission grid does not

work.

Mr. POMEROY. Right.

Mr. LONGENECKER. We have had some ISOs—independent system operators—formed in various parts of the country, but even

those, though they are larger and are serving subregions of electricity markets, they are not serving the entire marketplace, the

electricity marketplace that has developed, for example, in the

Northeast, and so we have a replication of the problem we had

with individual utilities managing small transmission grids. We

have a little bit bigger organizations, ISOs, managing bigger transmission grids, but it is not——

Mr. POMEROY. It is not the entire coordination?

Mr. LONGENECKER. It is not the full coordination. They have differing approaches to congestion management in these subregions.

They have not agreed on how to deal with a single market transaction that might cross their seams, the borders of the individual

independent system operators.

Mr. POMEROY. My question is, will RTOs need to assume——

Mr. LONGENECKER. We are looking for RTOs to be large enough

to deal with the evolving electricity marketplace, the wholesale

markets that are growing because of the interest in nontraditional

utilities becoming involved with the selling of power.

Mr. POMEROY. And will FERC then provide the national overlay

coordinating the RTOs?

Mr. LONGENECKER. Well, under Order 2000 we require the RTOs

to work with their neighbors to facilitate trade and work on common business practices, and so forth.

Mr. POMEROY. I am not convinced the good neighbor policy is

enough to get an optimal national framework for building the next

century’s energy grid, but it remains to be seen. We look forward

to continued dialogue with you on that.

Thank you, Mr. Chairman.

Senator DORGAN. Mr. Hacskaylo, you made a comment about, in

some cases, minor problems could shut down a regional system at

the present time because of a lack of transmission capacity. Can

you expand on that?

Mr. HACSKAYLO. A good example is what is called the path 15

bottleneck in central California. Due to system constraints as far

away as Idaho, and, remember, we are dealing with an interconnected transmission system here, interstate. As a result of some

17

system conditions in Idaho, for example, the flow of power from

northern California to southern California can drop from approximately 3,500 megawatts down to 900 megawatts at certain times

of the year. That can cause rolling blackouts. It did so in northern

California. It can cause system disturbances in severe cases such

as we saw in 1996 coming out of the Northwest. A relatively small

problem can cause the entire Western interconnected system to

break up for a short period of time before the system operator can

restore it. So that is what all the utilities focus on, is the reliability

of the interconnected system, as well as their own systems, to prevent that from happening. Where we see problems like this based

on studies, we try to work together to solve them, to get the transmission upgrades in place to relieve congestion.

Senator DORGAN. Mr. Longenecker, tell me what FERC’s position

is on some sort of mandatory FERC jurisdiction over the RTOs.

What kind of jurisdiction?

Mr. LONGENECKER. RTOs would be public utilities, and, hence,

they would be subject to our jurisdiction. I am not sure if your

question is going to public participation in RTOs. We certainly are

encouraging public power bodies and cooperative systems to become full participants in the RTOs.

Senator DORGAN. The reason I ask the question is, as you know,

in the development of the RTOs, the creation of the RTOs, there

is a healthy discussion going on about pricing plans and the mechanisms by which you price transmission and we have the license

plate versus the postage stamp proposals, and the distinction between the two can have a profound impact on certain regions of the

country. And I assume that under some circumstances if the pricing scheme is a scheme that is not satisfactory, you will have difficulty bringing some into the RTO organizations. Do you agree

with that?

Mr. LONGENECKER. I think FERC is very keenly interested in encouraging participation by all transmission owners, and an important factor that we realize in that regard is that each participant

feel that it is being fully compensated for its contribution to a larger RTO effort. What has happened is that many of the RTOs that

have developed so far, they are proposing the zonal rate approach

as a transition mechanism to bring some certainty to each of the

participants that they are going to be recovering their contribution

to the system, the larger system.

Senator DORGAN. What is the progress of the development of

RTOs at this point?

Mr. LONGENECKER. The Commission has actually issued about 20

or so orders since this past January in regard to various RTO proposals. The RTO West effort is very much active in trying to form

something larger than the Pacific Northwest area where it started.

It is working towards the formation of a larger westwide RTO. The

Northeast ISOs—independent system operators—are in the process

of a mediation conference right now ordered by our Commission to

look into the possibility of forming a larger RTO for the Northeast.

The same thing is happening in the Southeast. And very recently

the Midwestern independent system operator and the Alliance RTO

reached a settlement to form a super region which would basically

run, I think, from the Dakotas all the way to Virginia, a super reVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
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gion where there would be no pancaked rate in place. It would be

a systemwide rate to facilitate trade over a large region of the

country from middle America to Virginia.

Senator DORGAN. Mr. Hacskaylo, WAPA, of course, is a very important element of our energy picture here in North Dakota and

our region. I was reading in some testimony that we essentially do

not have additional capacity at this point to unlock opportunities

for additional production of electric energy and transmission of that

energy from North Dakota. Is that the case? Do you agree with

that?

Mr. HACSKAYLO. It is accurate. The system here is constrained,

yes, sir.

Senator DORGAN. And the solution to that, of course, is to find

ways either through technology or through new transmission lines

and the development of those lines connecting into RTOs and being

able to be part of a regional and national grid, that allows us to

access a whole series of new energy sources and new energy production in North Dakota. Do you agree with that?

Mr. HACSKAYLO. Yes, sir.

Senator DORGAN. And in order to do that, there are some significant controversies on building transmission corridors. I mean, that

is not without some controversy. There is some controversies dealing with the RTO issues. I mentioned a couple. We will have some

testimony about them in a while from others about pricing. There

are some people who think that, as you indicate in your testimony,

this is all ‘‘theory,’’ putting together a system in which the market

sends signals to replace a system that has largely been a regulated

system that has tried to have over the years some redundant supply. I got when you testified some skepticism, maybe I read that

wrong, but give me your assessment. Is this going to fit? Are we

moving in the right direction? Are there points that we have to be

very concerned about as we try to put this together in a new energy policy, and, if so, what are they?

Mr. HACSKAYLO. I think we are moving in the right direction. As

I indicated, we do have an industry that is in flux, the rules keep

changing. We have new direction from FERC and from others on

ways to go. But I think that a judicious blend of the market dictating here is a good place to put generation, whatever type, wind

power, coal, whatever, because it can be sold to this load center,

we, the developers, whoever they might be, can make money on it,

and we need this transmission and here is how we work the transmission. This can work, but it is going to take time. It is not going

to happen overnight.

Senator DORGAN. Let me raise one additional point finally, and

that is, notwithstanding transmission or just transmission issues,

some of us would observe that in a State like North Dakota where

we have been blessed with relatively low-cost power for a long period of time and have been well satisfied with that, that there are

others in the country that want access to that power, and if they

achieve that access, our power will be replaced by higher-cost

power. So what we are talking about being able to transmit our energy, if you have a so-called truly competitive system, those who

have been pushing most for restructuring, which are the largest

manufacturing companies in the country, the automobile industry

19

and others, would like to access cheaper power, where is that going

to come from and how is it going to be replaced? Some would say

more production, for example.

But, you know, I must say that I worry a bit about restructuring

and its ultimate goal of making power available to be moved at a

moment’s notice and leaving a State like North Dakota, which is

a very heavy user of power and has a significant need for the lowcost power that it has enjoyed for a long while. We don’t want to

be in a situation where North Dakota is left with a circumstance

where that power is replaced by higher-cost power simply because

we have a national system.

Congressman Pomeroy, do you have other questions?

Mr. POMEROY. We did not build the interstate highway system

based on the reaction of local investing interest. It is a national

system to serve national transportation needs. I really agree when

it comes to transmission, it is the critical backbone for the Nation’s

energy delivery system, it needs to be national, it needs to be coordinated, it needs to be fair to remotely populated areas that

produce the power, as well as serve to maximum advantage the

urban areas.

That is why, Mr. Chairman, I think this panel has been an excellent panel, has shown that I am not sure, left to its own devices,

we are at all on the road we need to be on to get this transmission

system into shape for the 21st century. Thank you.

Senator DORGAN. Mr. Hacskaylo and Mr. Longenecker, thank

you very much for being with us today, and we will make your entire statement a part of the record.

Mr. LONGENECKER. Thank you, sir.

Senator DORGAN. I would like next to call on Ted Humann, senior vice president of transmission of Basin Electric Power; Dave

Sparby with Xcel Energy; and Elizabeth Moler, senior vice president, government affairs, Exelon Corporation.

While they are coming up, let me ask that we make a part of the

record by consent testimony submitted by Otter Tail Power.

[The information referred to follows:]

OTTER TAIL POWER COMPANY,

August 7, 2001.

Hon. BYRON DORGAN,

220 E. Rosser Ave., Room 312, Bismarck, ND.

DEAR SEN. DORGAN: It’s my understand you are convening a panel in Bismarck

today for the purpose of discussing ‘‘Issues associated with Transmission Expansion’’

in North Dakota.

As you may be aware, Otter Tail Power Company has served electric customers

in North Dakota for some ninety years now, and in this continuing capacity, I believe we have a significant stake in discussions related to transmission expansion.

Our company currently operates some 2,700 miles of transmission lines in North

Dakota, and we serve power to 249 North Dakota communities with these lines. It’s

my belief that these facts should have earned us a seat at the table for today’s discussions.

It may have been your impression that our views are represented by the North

Dakota Lignite Energy Council on this issue. While we are members in good standing of the LEC, it should be noted that areas of common interest and purpose are

generally limited to the extraction and sale of lignite coal in North Dakota. The electric transmission business, on the other hand, represents a very distinct dimension

of the utility business. Issues relating to regional transmission are more approVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
20

priately handled through MAPP and, in the future, will be handled through the

MISO.

Very Sincerely,

JOHN MACFARLANE,

Chairman & Chief Executive Officer.

STATEMENT OF OTTER TAIL POWER COMPANY

INTRODUCTION

Otter Tail Power Company would like to thank Senator Dorgan for the opportunity to provide testimony today on the topic of ‘‘Issues associated with Transmission Expansion.’’ This topic is very timely and Otter Tail Power Company looks

forward to assisting in developing policy on this issue in the future. Our comments

will focus on what Otter Tail Power Company believes are the primary issues related to electric transmission in our region, together with what we believe are some

potential solutions to challenges faced by the transmission grid.

BACKGROUND

Otter Tail Power Company is an investor-owned utility based in Fergus Falls,

Minnesota, serving approximately 135,000 customers in North Dakota, Minnesota

and South Dakota. Otter Tail Power own 5,300 miles of transmission lines in those

three states, of which approximately 2,700 miles are located in North Dakota. In

North Dakota, we serve power to 249 communities; only three of these communities

have populations over 3,000. In 1999, Otter Tail Power’s residential electric rates

were 24% less than the national average cost for electricity.

CHALLENGES FACING THE TRANSMISSION SYSTEM

Since the passage of the 1992 Energy Policy Act, the electric utility industry has

been in a constant state of transition. Twenty-five states have disaggregated the

electric generation business from the electric delivery business, leaving a confusing

hodge-podge of deregulation experiments. Changes in the electric transmission business, on the other hand, have been driven from the federal level by the FERC. But

while central coordination of change in the transmission sector has created at least

some degree of uniformity across the country, many issues are still unresolved and

an environment of uncertainty has resulted. This uncertainty has further slowed the

development and expansion of the transmission system, exacerbating a trend that

dates back to the late 1970’s. A recent study indicates that transmission investment

throughout the United States has been declining for the last twenty years and, in

1999, was roughly half of what it was in 1979. Like most other areas of the country,

North Dakota, South Dakota and Minnesota are living today on yesterday’s invested

transmission capital.

Running parallel to this transmission deficit trend is an ever growing electric demand on the transmission system. By order of the FERC, wholesale power transactions are now an efficient means of bringing buyers and sellers together in the

wholesale market. But these transactions are causing the regional grid to be used

in ways that neither its designers nor the regulators intended or envisioned. In addition to serving as a local conduit to carry electricity from power plants to customers, the grid is now being relied on to do much more, including:

• Act as regional highways linking generators in one state to customers in another;

• Maintain reliability of an entire interconnected system;

• Provide flexibility over a wide range of generation, transmission and load conditions;

• Facilitate an ever increasing number of economic exchanges among market participants who are moving electricity over ever increasing distances.

In summary, the regional transmission grid is being stretched to its limits. These

limitations have resulted in limits to the expansion of the generation system. This

is a particular problem for North Dakota, where we have abundant supplies of coal

and almost unlimited potential for wind generation.

In addition to preventing generation expansion, transmission ‘‘gridlock’’ holds the

potential for serious reliability problems in our future. We are at a critical juncture

where transmission expansion must occur. Significant transmission reliability problems were identified in eastern North Dakota last winter, e.g. and these were only

resolved through the cooperative efforts of GRE, Minnkota Power, Xcel Energy,

MDU, Manitoba Hydro and Otter Tail Power Company. Repeated circumstances of

this nature are not a desirable approach to dealing with transmission challenges in

21

the future, however. North Dakota already has nearly twice as much generation as

we require for our own use, and we need to pay attention to our export channels

if we want to remain a significant seller of electricity—much less a bigger player

in new markets. Increasing our market share of power sales in other states requires

a remedy for the problem of inadequate transmission capacity. We need the help

of the Congress and we need the help of the FERC in this regard.

To better understand the barriers to transmission expansion, one must first understand the regional nature of the transmission system. Transmission systems and

electrons do not recognize state boundaries. Rather, they are governed by the laws

of physics. This is why it’s a challenge to explain to citizens and politicians alike

that a transmission line in one state can have a significant impact on customers

in another state, and that thinking in terms of state boundaries is counter-productive.

The regional nature of the transmission system has increased the difficulty of

doing multi-state transmission expansions. While some states like North Dakota

have very workable siting laws, other states’ laws are more stringent and, in some

cases, impossible. For a project that crosses state boundaries, one state may take

a year to approve the project, while the other state may take seven years; or, the

other state may choose to ignore the project altogether. This state-by-state approach

makes it difficult, if not impossible, for utility companies to make necessary additions to the transmission system.

A final barrier to transmission system expansions is the uncertainty that results

from disparate methods of transmission pricing. In many cases, it is unclear who

is going to pay for transmission system expansion costs. Because of this uncertainty,

it is difficult for companies to commit to large capital investments. A common methodology needs to be established for ‘‘who is going to pay the freight’’.

To all of the challenges above, add the potential for negative publicity that new

electric transmission projects generally receive, and it’s not difficult to understand

why utility companies choose to exhaust all other options before going through the

hassles of trying to get a new transmission project approved and constructed.

SOLUTIONS TO THE CHALLENGES

The top priority for developing solutions to the challenges cited above is for the

Congress to give the FERC authority to mandate participation in Regional Transmission Organizations (RTO’s). This will facilitate the resolution of most of the other

transmission issues, including the development of regional tariffs that provide greater certainty with respect to transmission pricing and cost recovery. At present, participation in RTO’s by transmission owners is voluntary. Mandatory, common membership in RTO’s will provide the best vehicle for development of common rules and

transmission tariffs among owners of transmission facilities.

Regional transmission tariffs are very important for North Dakota, as well as they

are for all of the transmission-owning utilities serving North Dakota. Certain methods of tariff pricing could result in significant cost shifts from urban areas to rural

areas and this would be detrimental to our rural economy. Owners of both urban

and rural transmission systems will do their best to protect their interests, but in

the end, all transmission system stakeholders need to be willing to come to the table

and compromise to establish tariffs that benefit everyone. In return, both regulators

and the public must be willing to accept compromises that may result in increased

costs in the short run, but hold the promise of improved reliability and cost savings

in the long run. Again, the best vehicle for accomplishing all of the above is the Regional Transmission Organizations that are being formed with the FERC’s encouragement today.

A final mandate for Congress: Give FERC the authority to establish ‘‘need’’ for

interstate transmission system additions. States should retain the right to determine appropriate routes for new transmission lines, accounting for environmental

concerns, etc. But the ‘‘need’’ for new transmission lines should not be considered

on a state-by-state basis. Rather, it should be planned on a regional basis by the

RTO’s, with an eye toward achieving the greatest common good.

THE PRIVATE SECTOR SEEKS AN EQUAL OPPORTUNITY TO EXPAND

Otter Tail Power Company is very interested in being a part of North Dakota’s

transmission future. In fact, we are currently a partner in a transmission project

with Xcel Energy and Manitoba Hydro that involves the construction of 160 miles

of 230 kilovolt transmission line from Central North Dakota to central Manitoba.

This is the largest transmission expansion in North Dakota since the mid-1980’s.

Together with our partners and the North Dakota Public Service Commission, we

22

have demonstrated what it takes to move a transmission project forward successfully.

For any transmission project proposed by the RTO, all transmission providers

should have the opportunity to bid on ownership and construction of that project.

Entities that can construct, own and maintain the new transmission line most efficiently while still meeting recognized standards of performance, should be awarded

the right to do so. Competition of this sort among transmission providers would be

healthy for consumers, and it would be beneficial for all of North Dakota.

Otter Tail Power Company would like to thank Senator Dorgan and his staff for

the opportunity to present this testimony. We look forward to working with the Senator as we build our energy future together.

LOREN LAUGTUG,

Director, Legislative and Regulatory

Affairs.

TIM ROGELSTAD,

Manager, Transmission Planning.

Senator DORGAN. Thank you for being with us. Why don’t we

begin with Elizabeth Moler. Elizabeth, thank you very much for

being here.

STATEMENT OF ELIZABETH A. MOLER, SENIOR VICE PRESIDENT FOR GOVERNMENT AFFAIRS AND POLICY, EXELON

CORPORATION

Ms. MOLER. Thank you very much, Mr. Chairman and Congressman Pomeroy. I appreciate the invitation to join you in Bismarck

today. I have not been in Bismarck in a long time. I was overdue.

My name is Elizabeth Moler. My friends call me Betsy. I am the

senior vice president for government affairs and policy of Exelon

Corporation. Exelon Corporation is headquartered in Chicago, Illinois. Through our subsidiaries ComEd and PECO Energy we serve

over five million customers principally in Chicago and Philadelphia

areas, so we have generator installations in over 20 States.

Prior to joining Exelon, I served as the Deputy Secretary of the

U.S. Department of Energy and as a member and the Chair of the

Federal Energy Regulatory Commission from 1988 to 1997. Before

that I served as senior counsel to this committee.

Your letter of invitation asked me to focus today on transmission

issues. I am pleased to do so.

Our transmission capacity, as the previous witnesses and as you,

Mr. Chairman, have observed, has not expanded to keep pace with

demand. The current situation is comparable to a country road carrying the traffic on an interstate highway. The transmission system is facing significant increases in congestion. Between 1999 and

2000, in one year, transmission congestion grew by more than 200

percent. And in the first quarter of this year transmission congestion was already three times the level experienced during the same

period in 2000. The constraints that you see depicted on these

maps, Mr. Chairman, are replicated many times all over the country.

Annual investment in transmission is simply not enough to ensure that we have a reliable grid, and we will not make the needed

investment through private enterprise or through government companies unless Congress modernizes the regulatory regime governing our transmission grid.

23

My testimony today provides a policy prescription to cure the

problems in our Nation’s transmission infrastructure. I should add

that most of these issues, Mr. Chairman, and the solutions are addressed in Chairman Bingaman’s July 20 White Paper. We endorse

his proposal wholeheartedly with only two minor tweaks.

Can you imagine what it would be like to have different rules

apply to individual cars using the same interstate highway? Chaos

would reign. But that is the circumstance today along our interstate transmission grid. No wonder it does not work very well. In

order to have the transmission grid function more efficiently, we

simply must have all traffic subject to the same rules of the road.

As Mr. Longenecker testified, the current rules of the road were

written in Order No. 888 issued in 1996 while I was Chair of the

Federal Energy Regulatory Commission. It directed all utilities

subject to FERC’s jurisdiction, an important caveat, to provide

other users with access to transmission facilities.

Order 888, however, applies directly only to those who are subject to the FERC’s jurisdiction under the Federal Power Act. Thus,

the open access regime looks like a piece of Swiss cheese. The holes

in the cheese are those transmission facilities that are not subject

to the Federal jurisdiction. They include high-voltage lines owned

by cooperative utilities, publicly owned utilities, and federally

owned utilities for a total of 27 percent of our Nation’s transmission lines. In certain parts of the country, like the West, there

are really more holes than there are cheese.

In order for the transmission system to work more efficiently, all

transmission-owning entities should be subject to the Federal Energy Regulatory Commission’s jurisdiction.

An equally confused regime applies when determining which regulatory authority has jurisdiction over a particular transmission

line. The same set of high-voltage transmission lines is used to

serve both wholesale and retail customers. Yet, in some circumstances the State regulatory authorities have jurisdiction over

those live wires. In other circumstances the local co-op has jurisdiction over those wires, or the local municipal utility has jurisdiction

over those wires. In still others FERC has jurisdiction.

The who is in charge here question is not one that is easily answered. We have a crazy-quilt system of regulation over the Nation’s transmission grid. It is subject to discrimination and abuse.

Congress clearly has the authority, and I would assert the duty, to

establish one traffic cop for these highways.

The only practical solution that I know of given the use of the

transmission line is to put all transmission under FERC’s jurisdiction, whether the wires are used for wholesale transactions, whether they are used to serve bundled or unbundled retail load, and

whether they are owned by municipal utilities or a cooperative.

With respect to transmission siting, Exelon supports granting

FERC a backstop role to site new transmission lines when States

are unwilling or unable to act on new transmission line applications. Such an approach would give States the first opportunity to

act on transmission siting applications.

It made sense in 1935 when the Federal Power Act was enacted

to leave transmission siting with the States since transmission

lines were generally local in nature. Now, however, our transVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
24

mission system is being asked to move large amounts of electricity

across long distances and across State lines.

The problems are not theoretical. They are real. AEP, for example, in Ohio has been trying to site a facility across Virginia for 10

years. They got the permit from the Virginia commission last

month. However, they still do not have their permits from the Federal agencies. They are now talking to the Forest Service. Regulators in Idaho have been reluctant to build new capacity to serve

California. Regulators in Connecticut recently refused to site a line

across Connecticut because, heaven forbid, it helped serve people in

New York. The problems are real.

FERC-mandated regional transmission organizations are being

established across the country. These RTOs will have responsibility

to plan how the transmission grid should be upgraded and where

new lines are necessary. If State regulatory authorities are unwilling or unable, and under some States’ statutes they are unable, to

take into account the benefit in another State, Federal regulators

should examine the need for the facilities and issue the required

permits.

There has been a lot of loose rhetoric about the fact that this

would mean FERC would have authority to take private property.

That simply is not true. Eminent domain authority would rest with

the holder of the certificate. If necessary, they could go to court to

exercise the eminent domain authority. This model exists for natural gas pipelines today. It works. It should be applied to the electric

transmission grid.

Let me now turn to Federal tax issues. We also believe that the

Internal Revenue Code should be amended to allow the tax-free restructuring of transmission ownership and to allow municipal and

cooperative utilities to participate in competitive wholesale and retail markets without imperiling their existing tax and financial status.

FERC Order 2000 issued last year has already been mentioned.

It requires utilities to form regional transmission organizations.

I am in charge of Exelon’s RTO formation efforts for both ComEd

and PECO. RTOs will be these large-scale organizations. However,

being in an RTO means that we will have to give up control over

transmission lines to this independent third party who is going to

be charged with running the RTO. Once that happens, the transmission lines will no longer have any strategic value to us as a

company. We would sell our transmission system. ComEd, for example, is on record as saying we would be willing to sell our transmission system to the RTO, thus, furthering FERC’s pro competition policies, if it did not mean we would have to pay a tremendous

tax bill upon the sale of that transmission asset.

Exelon endorses legislation that would enable a utility to sell its

transmission assets to the RTO, or to an independent transmission

company under the purview of an RTO, without having to pay

taxes on the gain realized by the asset transfer. We would, however, of course, be willing to reinvest the gain in infrastructure to

serve our customers within a specified period of time.

If this legislation were enacted, it would encourage utilities to

transfer the ownership of their transmission systems to RTOs. The

RTOs, in turn, would be able to obtain the critical mass of assets

25

under their ownership that would enable them to operate more efficiently, and this further would encourage the RTOs, the new owners, to invest in transmission infrastructure.

When Congress restructured the telecommunications industry, it

provided a similar mechanism for telecommunications asset

divestitures. It should do so again in this instance.

I would note that the transmission tax provisions were included

in H.R. 4 passed by the House of Representatives last week, and

I would further note that this was not one of the controversial

areas of the bill.

Let me talk now about innovative pricing for transmission assets.

Current returns on transmission are simply too low to attract the

huge amounts of capital necessary to fund investments in transmission expansion. A comprehensive national policy should include

direction to FERC to provide innovative transmission rates for

transmission owners, not just to owners who have made the transmission improvements and not just to RTO operators, which is the

current FERC policy today.

There are two additional statutes on the books, the Public Utility

Holding Company Act and the Public Utility Regulatory Policies

Act, which have outlived their usefulness and are a barrier to competition.

Last, but by no means least, Congress should give FERC specific

statutory authority over the reliability of the interstate transmission grid. The organization now charged with the responsibility

for reliability issues, the North American Electric Reliability Council, does not have the necessary tools to do its job. In particular,

it needs significantly enhanced authority to make its rules mandatory for all segments of the industry.

Mr. Chairman and Congressman Pomeroy, I have given you a

rather comprehensive listing of the transmission issues that need

to be addressed by the Congress. Given the absolutely vital importance that transmission plays in our Nation’s economy, you should

be commended for focusing on this vitally important subject. It is

certainly an arcane area, but it is vitally important.

I have spent the last decade of my professional life focused on

transmission issues, strange but true. The needs of the Nation’s

electricity superhighway cannot be ignored. Transmission should

not be allowed to become the weakest link in our industry because

we cannot tell it good-bye.

I would be pleased to answer any questions you may have.

Thank you.

[The prepared statement of Ms. Moler Follows:]

PREPARED STATEMENT OF ELIZABETH A. MOLER, SENIOR VICE PRESIDENT FOR

GOVERNMENT AFFAIRS AND POLICY, EXELON CORPORATION

Mr. Chairman and Members of the Subcommittee:

I appreciate the invitation to join you in Bismarck today to testify before the Subcommittee on Water and Power. My name is Elizabeth A. (Betsy) Moler. I am the

Senior Vice President for Government Affairs and Policy of Exelon Corporation.

Exelon, formed last year by the merger of Unicom Corporation and PECO Energy,

is headquartered in Chicago, Illinois. We serve over five million customers principally in Illinois and Pennsylvania, which have both restructured their electricity

markets. Prior to joining Exelon, I served as the Deputy Secretary of the United

States Department of Energy (from 1997-98), and as a Member and the Chair of

26

the Federal Energy Regulatory Commission (from 1988-1997). Before that I served

as Senior Counsel to your Committee.

Your letter of invitation requested me to focus my testimony today on the electric

transmission infrastructure and investment needs, and to address transmission policy and technology issues. Before I turn to the transmission policy issues, I want

to comment briefly on the overall policy context facing our industry.

The electricity industry is in the middle of a sometimes painful transition from

an industry composed of highly regulated integrated utilities with monopoly service

territories and cost-based pricing, to an industry with competitive power generation

markets, market-based pricing and a wide diversity of market participants. New institutions are emerging, such as regional transmission organizations. It remains our

firm belief that market-oriented restructuring of the electric industry remains the

best opportunity we have to provide consumer benefits and to develop reliable new

sources of supply. We must work together to make competitive markets work.

Let me turn now to the transmission policy issues.

IMPORTANCE OF TRANSMISSION INFRASTRUCTURE; NEED FOR NEW INVESTMENT

Our transmission capacity has not expanded to keep pace with demand. The current situation is comparable to a country road trying to carry the traffic of an interstate highway. All segments of the electricity industry are imposing tremendous demands on the transmission system to carry more and more transactions across even

greater distances. As a result, the transmission system is facing significant increases in congestion. Between 1999 and 2000, transmission congestion grew by

more than 200 percent. In the first quarter of 2001, transmission congestion was

already three times the level experienced during the same period in 2000. Annual investment in transmission has been declining by almost $120 million a

year for the past 25 years. Transmission investment in 1999 was less than half of

what it had been 20 years earlier. Maintaining transmission adequacy at current

levels would require about $56 billion in investment during the present decade. The

Electric Power Research Institute (‘‘EPRI’’) estimates it will cost up to $30 billion

to bring the western regional transmission system back to a stable condition and

$1 billion to $3 billion a year after that to maintain this condition in the face of

continued growth.

How do we ensure sufficient transmission capacity to help assure the success of

competitive electricity markets? We believe the following proposals should be included in a comprehensive national energy policy. I should add that most of these

issues—and solutions—are addressed in Chairman Bingaman’s July 24th Electricity

White Paper. We endorse his proposal wholeheartedly with only minor tweaks.

PROPOSED POLICY PRESCRIPTION

FERC: A Single Traffic Cop

Can you imagine what it would be like to have different rules apply to individual

cars using the same interstate highway? Chaos would reign. That’s the circumstance

today along our interstate transmission grid; no wonder it doesn’t work very well.

In order to have the transmission grid function more efficiently, we simply must

have all traffic subject to the same rules of the road.

In 1992, Congress passed the Energy Policy Act (EPAct). One of its most significant provisions is a requirement that, upon request, utilities must transmit or

‘‘wheel’’ wholesale power generated by others. If a utility fails to wheel when requested to do so on mutually satisfactory terms, the requesting party can petition

the FERC for an order requiring the wheeling.

In 1996, when I was the Chair of the FERC, the Commission determined there

was the opportunity for discriminatory behavior and anti-competitive abuse in

wholesale electric markets. We issued a landmark decision, known as Order No.

888. It directed all utilities under FERC’s authority to provide other users with access to transmission facilities on the same terms and conditions that they themselves have. The purpose was to promote wholesale competition by providing ways

for competitive generators to move their power to wholesale customers through

open, non-discriminatory transmission services.

Order No. 888, however, only applies directly to those utilities that are subject

to FERC’s jurisdiction under the Federal Power Act. Thus, the open access regime

looks like a piece of Swiss cheese. The holes in the cheese are those transmission

facilities in the United States that are not subject to FERC jurisdiction. They include high voltage transmission lines owned by cooperative utilities (6%); publicly

owned utilities (8%); and federally owned utilities (13%), for a total of 27% of our

Nation’s transmission lines. In certain parts of the country, like the West, there are

more holes than cheese.

27

In order for the transmission system to work more efficiently, all transmissionowning entities should be subject to FERC jurisdiction.

Who’s in Charge Here?

A similarly confused regime applies when determining which regulatory authority

has jurisdiction over the transmission line. The same set of high voltage transmission wires is used to serve both wholesale and retail customers. Yet, in some circumstances the state regulatory authorities have jurisdiction over those wires; in

other circumstances the local cooperative or the local municipal utility has jurisdiction over those wires; in still others the FERC has jurisdiction.

This confusing circumstance is due to FERC’s determination in Order No. 888

that it has jurisdiction over transmission used for wholesale transactions, as well

as the transmission component of so-called ‘‘unbundled’’ retail sales (where the electricity and transmission services are sold separately). Order No. 888 determined

that state authorities have jurisdiction over the transmission component of so-called

‘‘bundled’’ retail sales (where the electricity and transmission services are sold as

a package). Since that decision was made in 1996, approximately half of the states

have restructured their electricity markets. In states that have ‘‘unbundled’’ their

retail sales and have adopted customer choice, FERC has jurisdiction. In states that

still have ‘‘bundled’’ retail sales (that is, where customers do not have the ability

to choose their electricity supplied), state authorities have jurisdiction over the

transmission wires that serve retail load, while FERC has jurisdiction over wires

for wholesale transactions.

That jurisdictional call was reviewed, and upheld, by the United States Court of

Appeals for the District of Columbia Circuit. Indeed, the DC Circuit determined that

FERC has jurisdiction over all transmission, but that it properly exercised its discretion to regulate only certain transactions when it issued Order No. 888. The DC

Circuit’s decision is now under review by the Supreme Court of the United States.

While I supported FERC’s decision at the time that Order No. 888 was issued,

the jurisdictional call is proving not to be practical in today’s world. We have a

crazy-quilt system of regulation over our Nation’s transmission grid. It is subject to

discrimination and abuse. The Supreme Court should not make the policy call on

who has jurisdiction and under what circumstances. Congress clearly has the authority—and I would say the duty—to clarify this ambiguity. The only practical solution is to put all transmission under FERC’s jurisdiction, whether the wires are

used for wholesale sales, or whether they are used to serve bundled or unbundled

retail load.

Transmission Siting Authority

Exelon supports granting FERC a backstop role to help site new transmission

lines when states are unable or unwilling to act on new transmission line applications. Such an approach would give states the first opportunity to act on transmission siting applications.

It made sense in 1935 when the Federal Power Act was adopted to leave transmission siting authority with the states, since transmission lines were generally

local in nature. Now, however, our transmission system is being asked to move large

amounts of energy across long distances and across state lines. In some instances

state authorities are being asked to consider siting transmission lines whose primary beneficiaries are electricity customers in other states. Many state siting agencies do not have authority to consider the beneficial effects of siting a new transmission line if those benefits accrue to citizens in another state. Under these circumstances, it is becoming increasingly difficult to obtain the necessary siting permits from affected states, which may receive few direct benefits and thus have little

incentive to approve construction. As I will discuss later in my testimony, FERCmandated Regional Transmission Organizations (RTOs) are being established across

the country. These RTOs will have the responsibility to plan how the transmission

grid should be upgraded and where new lines are necessary. If state regulatory authorities are unwilling to site the lines identified by RTOs, federal regulators should

examine the need for the facilities and issue required permits.

Under several proposals pending before the Congress, FERC would be given the

authority to issue a certificate of public convenience and necessity for a transmission line if state authorities do not act in a timely fashion. There has been a

lot of loose rhetoric that this would mean FERC would have authority to ‘‘take’’ private property. That simply is not true. Eminent domain authority would rest with

the holder of the certificate. If necessary, they could go to court to exercise that authority. Electric utilities that are issued such certificates by the states also may exercise the power of eminent domain if they are unable to acquire the rights-of-way

through other means.

28

Federal Tax Issues

We also believe that the Internal Revenue Code should be amended to allow the

tax-free structuring of transmission ownership and to allow municipal and cooperative utilities to participate in competitive wholesale and retail markets, without imperiling their existing tax and financial status.

By way of background, the Federal Energy Regulatory Commission (‘‘FERC’’)

issued Order No. 2000 last year. The order requires utilities to form what are

known as ‘‘regional transmission organizations’’ or RTOs. RTOs will be large-scale

regional organizations that will manage the flow of electricity over our Nation’s transmission lines. Our Nation’s utilities are in the process of forming RTOs. FERC

has mandated that they begin operation no later than December 15, 2001. These

new organizations will enable utilities to pool their transmission assets. An independent entity that is not associated with the utilities will be charged with operating the transmission lines in a manner that will make the transmission grid operate

much more efficiently. A well-functioning transmission grid will spur investment.

Certainly everyone is aware of the tremendous problems with electricity supplies

and prices that have plagued California and the Western part of our country in the

past year. Prices have skyrocketed; there have been shortages of electricity, which

have resulted in rolling brownouts and even blackouts from time to time. The Chairman of the FERC, the Honorable Curtis He ́bert, testified recently that if there had

been an RTO serving the Western region that the electricity crisis in the West

would not have been nearly as severe.

Secretary of Energy Spencer Abraham recently issued a request for private investors to upgrade the transmission grid in California. The transmission resources in

the State are simply not adequate to meet the State’s needs. The Department of Energy is now evaluating private investors’ plans to upgrade the California grid along

a critical North-South part of the grid known as Path 15. The shortcomings of Path

15 have been known for years and years, yet neither the Federal government

(through the Western Area Power Administration) nor the private utilities have

made the infrastructure upgrades that are necessary.

Unless we do something to encourage additional investments in our transmission

infrastructure the California experience could be repeated time and time again.

Properly structured, properly designed RTOs will meet that need.

President Bush and Vice President Cheney’s National Energy Policy Development

Group Report, released on May 17, calls for the development of a National Transmission Grid. While the specific details of the Administration’s proposal are still

being written, the Administration strongly supports further investment in our transmission infrastructure and the FERC’s Order No. 2000 initiative.

We believe that the best model for organizing RTOs is to establish a for-profit

transmission company known as a transco. A transco will have a business orientation. It will have an economic incentive to maximize throughput, make appropriate

cost-effective transmission upgrades, and do a good job of managing congestion on

the grid. Transcos should eventually own transmission system assets. In order to

encourage utilities to sell their transmission systems to the transco, Congress

should make changes in our tax laws.

Under current law, if a utility divests its transmission system to one of these

RTOs, it would suffer a tremendous tax burden. Exelon endorses legislation that

would enable a utility to sell its transmission assets to the RTO, or to an independent transmission company under the purview of an RTO, without having to pay

taxes on the gain realized by the asset transfer. In order to benefit from the provision, the utility must reinvest the proceeds in qualified utility property. This will

encourage utilities to transfer their transmission systems to the RTOs. The RTOs

in turn will be able to obtain the critical mass of assets under their ownership that

will enable them to operate more efficiently and will encourage investment in additional infrastructure.

In addition, municipal owners of transmission argue they cannot join RTOs because tax code provisions preclude the ‘‘private use’’ of tax-exempt financed utility

property. These provisions should be modified to allow municipal transmission assets to be placed into an RTO without violating ‘‘private use’’ rules.

When Congress restructured the telecommunications industry, it provided a similar mechanism for telecommunications asset divestitures. It should do so again in

this instance.

I would note that the tax provisions have very broad support within the utility

industry. An unusual coalition of investor owned utilities, and small and large municipally owned utilities—groups that are frequently at odds with one another—developed the tax relief proposal I just described. The essential elements of the proposal were included in H.R. 4, the energy bill passed last week by the U.S. House

of Representatives. Unlike many of the provisions in that bill, these provisions had

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broad bipartisan support. Chairman Bingaman’s July 24, 2001, White Paper on

Electricity Legislation, highlighted the issue as follows:

‘‘Certain provisions of the tax code (that) create a disincentive for participants in the market to engage in certain of the structural changes that are

necessary. These provisions should be repealed. The tax code should be

amended to allow utilities to spin transmission assets off into separate corporations and to remove tax restrictions on participation by public power

utilities and cooperative utilities. While such provisions are not jurisdictional to this Committee, they represent an essential component of a functional electricity policy and should be pursued through the committees of

jurisdiction.’’

The Bingaman proposal should be modified to provide relief if assets are sold

rather than spun off. Sen. Murkowski has included all of the elements of the agreement reached last year between the investor owned utilities (through the Edison

Electric Institute, or EEI), and the municipal utilities (through the American Public

Power Association, or APPA, and the Large Public Power Council, or LPPC) in his

proposed legislation, S. 389.

Innovative Pricing

Current returns on transmission are too low to attract the huge amounts of capital needed to fund investments in transmission expansion. A comprehensive national energy policy should include direction to FERC to utilize innovative transmission pricing incentives, including rates of return more appropriate with the higher levels of investor risk in a restructured electricity industry. These incentives

must be available to all transmission owners; not just to owners who have made

transmission improvements and not just to RTO operators—which is the current

FERC policy.

PUHCA and PURPA

The Public Utility Holding Company Act of 1935 (PUHCA) has outlined its usefulness and is a barrier to competition. It was enacted during the Great Depression

with a goal of simplifying the existing utility company structures and to protect investors and consumers from multi-state utilities that had adopted abusive structures and practices. PUHCA now applies to fewer than 20 out of the Nation’s more than 200 electric and natural gas utilities. It limits their geographic scope and product diversification, and imposes burdensome filing requirements. It severely limits

the ability of those who are subject to it—including Exelon—to compete in today’s fast evolving energy marketplace.

PUHCA is also a barrier to RTO formation, because it effectively limits those who

can invest in RTOs. PUHCA is such a burden that none of the major investment

banking firms, and none of the major engineering firms (to name just a couple of

categories that would logically be interested in investing in RTOs) is willing to invest in RTOs. The Securities and Exchange Commission (SEC) has called for its repeal, believing that they have more than adequate authority to protect investors

from abuse under other securities laws. State regulators also support its repeal, provided that FERC is given adequate authority to compel utilities to produce records

necessary for their regulatory purposes and to guard against captive customers

being forced to subsidize non-utility business ventures. Both provisions are included

in legislation pending in the Senate. It is long past time to repeal this outmoded

statute.

Another statute that has outlived its usefulness is the Public Utility Regulatory

Polices Act of 1978 (PURPA). It was enacted to help alleviate the oil and natural

gas shortages of the late 1970s and to encourage the development of electricity generation by non-traditional players and to encourage construction of generators

fueled by alternative energy resources. Certain provisions in PURPA now stand in

the way of more competitive and efficient wholesale power markets particularly the

provisions that require utilities to purchase generation from so-called ‘‘qualified facilities’’ or QFs. Those provisions have become both antiquated and burdensome in

light of the later enactment of EPAct. PURPA should be repealed prospectively.

However, existing contracts should be honored.

Reliability Organization

Last, but by no means least, Congress should give FERC specific statutory authority over the reliability of the interstate transmission grid. The organization now

charged with the responsibility for reliability issues, the North American Electric

Reliability Council (NERC), does not have the tools necessary to do its job. In particular, it needs significantly enhanced authority to make its rules mandatory for

all segments of the industry. As NERC testified recently before the full Energy and

30

Natural Resources Committee, it is seeing increasing violations of its reliability

rules. A voluntary reliability regime lacks the enforcement authority needed in a

competitive electricity market. A comprehensive national energy policy should include provisions to establish a self-regulating reliability organization, with FERC

oversight, to develop and enforce reliability rules and standards that are binding on

all market participants. This Committee approved and the Senate passed a similar

bill last year.

Conclusion

Mr. Chairman, I have given you a comprehensive listing of the transmission

issues that need to be addressed by the Congress. Given the absolutely vital importance that transmission plays in our Nation’s economy you should be commended

for focusing on this vitally important—but admittedly arcane—subject area. I have

spent the last decade of my life focused in large part on transmission issues. The

needs of the Nation’s electricity superhighway cannot be ignored. Transmission

should not be allowed to become ‘‘The Weakest Link’’ in our industry because we

cannot simply tell it ‘‘Goodbye’’. Action is needed to ensure our country has affordable and reliable electricity for years to come. Congress has been debating electricity

issues for six years. In the meantime, our Nation’s electricity infrastructure has not

kept pace with the growing demands of our new economy. California’s woes have

clearly sounded an alarm bell that must be heeded by the Congress. The time to

act is now.

I would be pleased to answer any questions the Committee may have.

Senator DORGAN. Ms. Moler, thank you very much.

Next, we will hear from Mr. Ted Humann representing Basin

Electric Power Cooperative.

STATEMENT OF TED HUMANN, SENIOR VICE PRESIDENT FOR

TRANSMISSION, BASIN ELECTRIC POWER COOPERATIVE,

BISMARCK, ND

Mr. HUMANN. Thank you, Senator. My name is Ted Humann. I

am the senior vice president for transmission at Basin Electric

Power Cooperative in Bismarck, North Dakota. Basin Electric delivers approximately 1,700 megawatts of primarily coal-based generation to its 121 member cooperatives located in North and South

Dakota, Montana, Wyoming, Nebraska, Iowa, Minnesota, Colorado

and New Mexico.

I will focus my comments today on two issues relating to the

high-voltage transmission system in this region, the movement towards regional transmission organizations and the transmission

constraints in North Dakota.

Basin Electric owns and operates high-voltage transmission facilities on both the eastern and western transmission grids. For our

discussion here today, I will limit my comments to the Basin Electric facilities on the eastern grid, but the issues are similar on the

west.

Basin Electric owns approximately 1,300 miles of high-voltage

transmission facilities on the eastern grid that are interconnected

with the high-voltage facilities of the Western Area Power Administration and Heartland Consumers Power District and operate as a

single system known as the integrated system. This integrated system consists of approximately 9,000 miles of high-voltage transmission facilities located in six States. In response to the reciprocity requirements of Order 888 of the Federal Energy Regulatory

Commission, the non-jurisdictional owners of the integrated system

developed and operate the system under an open access tariff.

Basin Electric’s facilities on the west grid also operate under an

open access tariff.

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Basin Electric and the other owners of the integrated system

have been following the development of the regional transmission

organizations and are continuing to negotiate with existing regional transmission organizations or groups that hope to develop

an active regional transmission organization. Talks have been held

with the Midwest independent system operator, Crescent Moon,

Desert Star, Southwest Power Pool and others, in an effort to determine if the integrated system should be a party to a regional

transmission organization.

The primary reason why Basin Electric and the other independent system operator owners have not elected to join a regional

transmission organization is the way they are proposing to price

transmission service using ‘‘license plate’’ pricing. In general, license plate pricing is where each transmission owner recovers the

cost of owning and operating its transmission system from the customers whose loads are located within the area serviced by that

system, known as a zone. Customers with loads in one zone and

generation in another zone obtain transmission service in the other

zones for free. They bear none of the costs of the transmission facilities in the other zones, even though they may be principal beneficiaries of those transmission facilities.

The Midwest independent system operator is a good example. In

the Midwest independent system operator, the existing load control

area becomes a geographical rate zone and a customer located in

a rate zone pays the tariff only in that zone. With only that payment, the utility can receive power from anywhere within the Midwest independent system operator region for no additional charge.

This methodology is similar to purchasing a license plate for your

car. If you purchase a license plate for your car in North Dakota,

you can drive your car anywhere for no additional charge. This

pricing does not work because, unlike highways, there is no cost assessed to build the electric transmission system. The gasoline tax

pays for the interstate highway system.

If the integrated system were to join the Midwest independent

system operator, there would be an increase of approximately $40

million in the cost of transmission service to the customers in the

integrated system zone because of license plate pricing. This occurs

because more than one-third of the integrated system is located in

other rate zones. The current integrated system rate is approximately four mills per kilowatt-hour. If the integrated system is located in the Midwest independent system operator, the transmission costs for users of the integrated system would almost double. A typical integrated system residential consumer could see an

increase of more than $100 per year in his bill.

Basin Electric believes that postage stamp pricing is the only fair

and equitable method for pricing transmission service in a world of

regional transmission organizations. Under this method there is a

single rate paid for the use of the transmission system for the entire regional transmission organization region. This would require

the sharing of transmission costs equally among all customers located in the regional transmission organization and would encourage construction of improvements to the transmission system for

the benefit of all consumers. Postage stamp pricing eliminates the

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inequities that license plate pricing brings to rural areas and creates a level playing field among market participants.

In recent weeks several FERC commissioners have noted the superior benefits of postage stamp pricing and the fallacy of using license plate pricing to avoid cost shifts.

Basin Electric supports the development of regional transmission

organizations and would even support a congressional grant of

mandatory FERC jurisdiction over regional transmission organizations, if that grant of jurisdiction included the following:

Number one, regional transmission organizations must utilize

postage stamp pricing;

Small systems that are operating primarily distribution facilities

should not be required to include their facilities in the regional

transmission organization;

There should be no mandatory rate unbundling requirement;

Any legislation should not materially alter the existing roles of

the rural utilities service or the Federal power marketing agencies;

Existing contracts should be grandfathered;

And, also, standard depreciation and typical rates of return

should be used for all new facilities constructed instead of incentive

rates.

As you mentioned earlier, Senator, there are transmission constraints in North Dakota in our inability to move additional generation out of the State. We feel before any significant amount of

new generation can be built in North Dakota, be it fossil fuel, wind

or other alternative forms of energy, significant additions to the

transmission system will have to be constructed.

It is my view that these transmission facilities will not be constructed under license plate pricing because it truly allows some

parties to use portions of the transmission system and not pay for

the privilege.

The thought I would like to leave with you is that postage stamp

pricing will foster the development of an interstate transmission

grid similar to the interstate highway system. This interstate grid

will allow for the future development of this region’s abundant coal

and wind energy resources and will provide the needed infrastructure to support the National Energy Policy.

Because of time constraints, I must conclude my remarks. I appreciate the opportunity to speak to you and look forward to answering any questions that you may have. Thank you.

Senator DORGAN. Mr. Humann, thank you very much.

Next we will hear from Dave Sparby.

STATEMENT OF DAVID SPARBY, VICE PRESIDENT FOR GOVERNMENT AND REGULATORY AFFAIRS, XCEL ENERGY, INC.

Mr. SPARBY. Thank you, Mr. Chairman and Representative Pomeroy. I am Dave Sparby from Xcel Energy. Excel serves several

communities in North Dakota together with 11 other States in the

Midwest, and we move power and energy between these communities with about 16,000 miles of transmission line.

My message today allows me to join this choir saying that we

need more transmission infrastructure, but maybe because I am

the guy that goes out to get all the regulatory permits and government approvals, my voice is perhaps a little louder and a little

33

shriller than maybe others. And that is because those of us who

have done that appreciate the very long lead times necessary for

transmission improvements under today’s regulatory framework.

I know when I am asked what is that transmission system going

to look like 4 or 5 years out, I can respond, take a look out your

window, because large interstate transmission line additions typically require at least that much time to get permitted, to get designed, and to get built under today’s regulatory framework.

Now, this system and these improvements are going from being

needed more urgently to being an absolute necessity in a short period of time. In the Midcontinent Area Power Pool, we see more requests for transmission being denied every single month than we

have seen for the previous months. We are seeing line-loading relief being called on a national basis more and more frequently. We

have seen the amount of investment in transmission on a normalized peak-load basis declining for more than two decades. None of

this makes sense when you consider that transmission is about 6

percent of the average consumer’s bill, and generation is about 60

percent.

Very small changes in the amount of transmission investment

can create huge savings for consumers, our local economies and the

environment when looking at the value of their total investment.

Now, the regulatory and legislative policies that we want to

change will result in attracting more investment to the transmission business and providing some needed structural changes to

help resolve many of these new issues the industry is facing.

In the very briefest of words, we need some additional incentives,

and we need those incentives designed to promote the upgrade and

expansion of our current network. Traditional cost-based, average

rate-based kind of regulation provides no incentives to expand and

improve that system.

And, Mr. Chairman, I think your concerns with respect to issues

like research and development are right on. As we move to a desegregated industry, who is going to do that, what the level of that is

going to be and how it is going to get done I think is a very significant public policy issue.

We are one of the few industries, notwithstanding the work of

3M and others, that still use basically 1930’s level of technology in

an age of microchips. We need to move past that.

Part of our program would be to direct the Federal Regulatory

Commission, who has already undertaken some work with incentive regulation, but to continue their efforts to consider innovative

noncost-based forms of regulation to expand this transmission network and to get the needed improvements operational.

Now, with respect to a comment that Mr. Pomeroy made, I agree

with the comment that RTOs perhaps standing alone may be worth

thinking about whether or not they are going to meet all the challenges necessary to get power transmission network into place.

We at Xcel have advocated the use of independent transmission

companies in conjunction with RTOs to help get that transmission

built. ITCs are companies that we propose would earn returns on

getting that transmission constructed and getting those megawatts

of power moved. The ITC can work within an RTO and also be subject to incentive regulation to make sure that issues like quality of

34

service and the location and geography of service get properly addressed.

We think for-profit transmission companies, together with innovative regulation, offer a great alternative that we should proceed

along to help ensure transmission gets constructed.

Other fixes, I think Ms. Moler addressed completely, PUHCA,

some tax changes, expediting and reforming the siting process.

These changes are changes we need to make today to ensure that

the transmission network that carries our energy five years from

now is in place.

Thank you very much.

[The prepared statement of Mr. Sparby follows:]

PREPARED STATEMENT OF DAVID SPARBY, VICE PRESIDENT FOR GOVERNMENT AND

REGULATORY AFFAIRS, XCEL ENERGY, INC.

Chairman Dorgan and members of the subcommittee:

Thank you for the opportunity to come to Bismarck and testify.

I am David Sparby, Vice President for Government and Regulatory Affairs of Xcel

Energy Inc. Xcel Energy was created as the result of a merger between Minneapolisbased Northern States Power (NSP) and Denver-based New Century Energies

(NCE). The merger of those two companies was completed on August 17 of last year,

only 17 months after it was announced. Xcel Energy serves more than 3 million

electricity and 1.5 million natural gas customers in 12 states, and 2 million electricity customers internationally. Xcel has $1.5 billion of existing transmission assets and over 16,000 miles of transmission lines.

INTRODUCTION

Electricity powers the U.S. economy and continues to provide the means to improve the quality of life in our homes. Constantly evolving electrically-powered technologies have made us more productive at work. The expectation that electricity will

be there when we need it is fundamental to the American way of life in the 21st

century. Adequate supply of highly reliable and reasonably priced power is and will

continue to be of the highest national priority.

Over the past decade, the electricity supply industry has undergone a profound

change that—in many ways—mirrors the changes in our economy. Consumers today

demand more electricity and expect lower prices. At the same time, the digital workplace requires greater reliability of the electricity supply than was needed in the

past.

In response, the electricity supply industry has embarked on a quest for greater

efficiency and reliability in the generation, transmission and distribution of electric

energy.

While most power is still generated and delivered today by vertically integrated

companies, the electricity supply industry is evolving into separate generation,

transmission and distribution businesses. Independent generators selling to the burgeoning wholesale market today build most new generating facilities, while many

traditional utilities, often directed by state legislation or regulation, now concentrate

on individual elements of the electricity business.

The wholesale electricity market, which once handled few transactions, now handles hundreds daily. The geographic size of these markets is also increasing rapidly,

holding out the promise of greater competition and lower prices for consumers. The

transmission grid was designed by integrated utilities to serve their retail customers. While transmission was interconnected to support reliability and some economic diversity, it was never intended to support the level of inter-company trading

that is currently occurring. In addition, the siting of new transmission is an extremely cumbersome and difficult process due to the concerns of local communities.

As a result, the transmission system is being stretched to the limit and concerns

about the reliability of the system are increasing.

There is an urgent need to improve our electric infrastructure—the fundamental

bedrock of reliability and an economic and efficient wholesale energy market. The

federal government can help by establishing a clearer statutory framework for the

electric industry of the future. This framework should:

• Allowing for and supporting the creation of for-profit independent transmission

companies that are price regulated by the FERC;

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• Encouraging non-jurisdictional utilities to join RTO’s and ITC’s by providing appropriate incentives (We are trying to get publics and co-ops into TRANSLink

through the carrot rather the stick approach);

• Provide incentives for increased investment in and improved operation of transmission facilities;

• Provide innovative, non-cost-based forms of transmission rate regulation to promote smarter management of the existing grid to reduce congestion and increase reliability;

• Remove federal barriers that block a more efficient system; and

• Establish an enforceable reliability code of conduct.

While the Federal Energy Regulatory Commission (FERC) can address a number

of these issues, there is much that only the Congress can do. Congress should:

Support ITC’s

Late last year, FERC took another large step in ensuring workable competitive

markets by issuing its Order 2000, which called upon jurisdictional utilities to voluntarily form Regional Transmission Organizations (RTOs). As the name suggests,

RTOs will ensure that the transmission grid is operated on a regional basis to support efficient wholesale markets. Establishing RTOs would:

• Reduce opportunities for market abuse by separating control of transmission

systems from transmission owners;

• Reduce the charging of multiple transmission rates for use of transmission

within the RTO; and

• Eventually level rates within the operating region.

FERC Order 2000 also envisions the creation of for-profit Independent Transmission Companies or ITC’s. As their name implies, ITC’s are companies whose sole

purpose is the provision of transmission service to the wholesale markets. ITC’s are

designed to work within the regional transmission organizations and promote the

efficient operation and extension of the transmission system to support the growing

need for new investment, particularly investment that is necessary to transfer large

amounts of energy from one region to another, and thereby promote greater efficiency and use of generation and transmission resources.

The biggest gap in FERC’s RTO authority remains its inability to impose the

same requirements on federal electric utilities, municipal utilities and electric cooperatives. These utilities operate important transmission facilities that are integral

to RTOs throughout the nation. FERC has invited these entities to participate in

mediation talks. However, because FERC lacks jurisdiction over these entities’

transmission systems, it cannot put the same pressure on them to join RTOs that

it has clearly demonstrated it intends to put on shareholder-owned utilities. Support

of ITC’s that include these non-jurisdictional companies is an efficient mechanism

for FERC to include these companies in regional organizations.

Remove Disincentives From the Tax Code

Ultimately, RTOs will succeed only if all transmission owners in a region join. In

some areas of the country, such as the Pacific Northwest, the participation of all

publicly-owned transmission entities will be needed to form an effective RTO. Municipal owners of transmission argue they cannot join RTOs because tax code provisions preclude the ‘‘private use’’ of tax-exempt financed utility property. These provisions should be modified to allow municipal transmission assets to be placed into

an RTO without violating ‘‘private use’’ rules.

For-profit transmission companies covering large regional areas are ideal candidates for RTO membership. Unfortunately, it is difficult, complex and expensive

for utilities to spin-off or sell their transmission assets without incurring large tax

liabilities. This discourages formation of transmission companies and slows needed

realignment of the utility industry. The tax code should be modified to allow deferred recognition of any gain resulting from these types of reorganizations.

H.R. 4, passed by the House last week, includes necessary changes to municipal

utilities’ ‘‘private use’’ restrictions and the deferred gains recognition required by

IOUs.

Upgrade and Provide Necessary Incentives to Expand the Transmission System

Generation is of little use if the power that is generated cannot be moved to where

it is needed, and when it is needed, instantaneously. ‘‘Busy’’ signals are not acceptable in our business. Our increasingly interconnected and overloaded transmission

system is what makes the entire electric system work (or not).

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1 North American Electric Reliability Council, Reliability Assessment 2000-2009, The Reliability of Bulk Electric Systems in North America, at 31 (October, 2000). 2 Id. at 5.

3Department of Energy, Power Outage Study Team Interim Report at S-2 (January 2000).

All segments of the electricity industry are imposing tremendous demands on the

transmission system to carry more and more transactions across greater distances.

As a result, the transmission system is facing significant increases in congestion.

On an interstate highway system overloaded with traffic, gridlock often results.

On a transmission system with congestion, transactions are curtailed to ensure that

the system does not become overloaded, limiting delivery of low-cost power and potentially resulting in a loss of reliability.

Annual investment in transmission has been declining by almost $120 million a

year for the past 25 years. Transmission investment in 1999 was less than half of

what it had been 20 years earlier. Maintaining transmission adequacy at current

levels would require about $56 billion in investment during the present decade. The

Electric Power Research Institute estimates it will cost up to $30 billion to bring

the western regional transmission system back to a stable condition and $1 billion

to $3 billion a year after that to maintain this condition in the face of continued

growth.

Without change, the prospects for future investment in transmission are not much

more promising. According to the North American Electric Reliability Council

(NERC), only 8,445 miles of transmission facility additions are planned throughout

North America over the next 10 years.1 This represents just a 4.2 percent increase

in total installed circuit miles, at a time when the EIA projects that electricity demand will grow by 1.8 percent per year.

NERC has reported that:

• Unless proper incentives can be developed to encourage investment in new

transmission facilities and siting problems can be resolved, few new transmission facilities and reinforcements will be constructed. The lack of necessary

additional transmission facilities and reinforcements will require that either

new technologies be developed to alleviate transmission congestion or that generating facilities be located and dispatched in a manner to minimize the use of

constrained transmission corridors.2

• Without adequate transmission capacity to meet growing demand, reliability

will be compromised, prices will increase, overall system efficiency will decline

and the benefits of wholesale generation competition will not be realized.

Government policies that have failed to recognize the key role of our transmission

system are partly to blame for the declining investment in transmission. As the Department of Energy’s Power Outage Study Team noted, ‘‘In many cases, state and

federal regulatory policies are not providing adequate incentives for utilities to

maintain and upgrade facilities to provide an acceptable level of reliability.’’ 3

FERC should be directed to provide incentive returns for investments that expand

our transmission capacity.

Provide Innovative, Non-Cost-Based Rate Regulation to Enhance Transmission Efficiency and Reliability

While progress toward deregulating generation markets continues, transmission

is, and will likely remain, a regulated business. Traditionally, transmission owners

have been allowed to recover their prudently incurred costs, based on depreciation

over many decades, plus earn a return on their investment. No consideration was

given to the critical value of adequate transmission to the reliable, competitive operation of electricity markets.

As a result, this cost-based form of regulation does not provide the incentives

needed to build and operate an efficient, reliable transmission system. Nor does it

encourage adoption of newer technology that may hold great promise for increasing

system efficiency and reliability. FERC should be directed to implement innovative,

non-cost-based forms of regulation to reward investments and operations that enhance reliability and greater system efficiency.

Without adequate transmission capacity to meet growing demand, reliability will

be compromised, prices will increase, overall system efficiency will decline and the

benefits of wholesale generation competition will not be realized. A regulatory regime that fosters an economic climate to encourage investment in transmission is

necessary. It is time for innovative, non-cost-based forms of regulation to reward

transmission investments and operations that enhance reliability and greater system efficiency.

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4See ‘‘The Regulation of Public-Utility Holding Companies,’’ a report of the Division of Investment Management, Securities and Exchange Commission, Executive Summary at viii (June

1995). 5 Id. at x.

Bipartisan provisions designed to adequately incent new investment in transmission was included in last year’s House-produced electricity bill. The same provisions were introduced as stand-alone legislation on August 3 by Reps. Sawyer and

Burr (H.R. 2814). It is our understanding that a bipartisan group of members from

the full Senate Energy Committee is preparing to introduce similar legislation immediately following the August break. We urge the Subcommittee’s careful consideration of this bill.

Repeal the Public Utility Holding Company Act of 1935

The Public Utility Holding Company Act of 1935 (‘‘PUHCA’’), was enacted during

the Great Depression with two primary objectives: the integration and simplification

of complex natural gas and electric utility holding company systems which then

dominated the utility industry and protection of investors and consumers through

effective regulation of multi-state utilities operating through subsidiaries.

PUHCA long ago achieved its first objective of restructuring the electric and natural gas industries. And consumer protection is now the purview of other regulatory

authorities, which didn’t exist 65 years ago.

PUHCA met its first objective by dismantling and simplifying the organizational

structure of the more than 200 complex electric and gas utility holding company systems in existence in the mid 1930s. These geographically scattered and diverse businesses were limited to the operation of a single integrated utility system, plus such

other businesses as were closely related to an integrated utility system. By the early

1950s, according to the Securities and Exchange Commission (‘‘SEC’’), the agency

responsible for administering PUHCA, the reorganization of the electric and gas

utility industries was complete.4

The second objective of PUHCA—to protect investors and consumers—was met by

authorizing the SEC to regulate certain holding companies that remained the owner

of utility subsidiaries in more than one state. This regulation requires advance SEC

approval for many business and financial transactions, including the issuance of

debt or equity, acquiring utility or non-utility assets and entering into service arrangements with affiliated companies.

Even the SEC has recommended PUHCA’s repeal because it is no longer needed

and is largely duplicative of other investor and consumer protection authority administered by the SEC and the states. As an SEC report has noted, ‘‘[a]cting under

authority in the Securities Act of 1933 and the Securities Exchange Act of 1934, the

SEC has, over the past six decades, created a comprehensive system of investor protection that obviates the need for many of the specialized provisions of the Holding

Company Act.’’ 5

Not only has PUHCA outlived its usefulness, but it also is a barrier to competition. It requires fewer than 20 out of the nation’s more than 200 electric and natural

gas utilities to register and be subject to pervasive SEC regulation. By significantly

limiting geographic and product diversification, and imposing numerous burdensome

filing requirements, PUHCA severely limits the ability of companies to invest in

transmission or other projects not immediately within their traditional franchise

areas.

North Dakota Considerations

For many of the reasons stated above, transmission in the general geographic region around North Dakota has never been sufficiently upgraded to address limitations imposed by large generation additions in the 1970s in the coal fields of the

state.

The state currently suffers from a severe lack of export capacity. The technical

list is long: stability-based limits due to short circuits in the coal fields; blocks on

the state’s two DC lines, thermal limits on lines out of the coal fields and short circuits in the Twin Cities.

Because of its rich resource base and lack of problems with environmental compliance, it is Xcel’s view that rural regions like North Dakota are likely to host a large

percentage of the many new base-load generation facilities that will be needed in

the nation over the next 20 years. Some of these plans are already on the drawing

board.

We note again, however, that much of this generation will only be possible if incentives are put in place to ensure that associated transmission projects make financial sense.

38

Following is a description of proposed transmission projects to increase the ND

export level:

• Harvey-Glenboro 230 kv project. Xcel has planned this project to meet contractual obligations to ensure our ability to transfer 500 mw northward. In conjunction, our company is also considering an additional 200 mw southward capability in conjunction. • WAPA/Basin increase ND export 100 mw. WAPA has recently identified an

overbooking of its ND export allocation. The agency has identified some equipment additions that will be necessary to relieve stability issues but has yet to

address thermal concerns in western Minnesota. • North Dakota Lignite Council. Last fall, the Lignite Council (of which Xcel is

a member) performed a study to determine what would be required to deliver

another 500 and 1000 mw of generation from the Coal Fields to the Twin Cities.

The plan recommended upgrade of the existing Antelope Valley-Huron Line to

500 kv. The plan also calls for addition of a 500 kv line from Huron to Sioux

Falls and a 345 or 500 kv line from Sioux Falls to Lakefield Junction. The plan,

while comprehensive, still needs to address Xcel-planned wind generation additions. • Red River Valley Load serving. Last year the destruction of the McHenryRamsey 345 kv line revealed a major winter peak load serving risk in North

Dakota. A study is underway looking at adding major transmission to the valley. This includes options of a coal fields line, back feed line from Bemidji or

another line from Manitoba. Any of these could impact ND export levels.

There are also on the drawing board a number of new proposed generation

projects that will require new transmission investment:

• GRE has announced plans for a 500 MW coal field generation unit; • MDU has teamed with Westmoreland Coal to propose a separate 50O MW unit; • WAPA is considering two sites to add 300 MW of wind generation. The North

Dakota site would be near Jamestown and the South Dakota site near Ft.

Thompson. Both sites would require a 345 kv line across the state to Granite

Falls, MN and an additional 345 kv line from there to the Twin Cities; • OTP is proposing a 500 MW merchant plant that would require additional

transmission to the Twin Cities.

While Xcel supports all of these efforts, each raises concerns. In general, any increase in ND export will result in the need to increase transmission capacity

through western Minnesota. With limited routes, conflicts are already apparent in

the plans described above. One big conflict is with Xcel Energy’s own wind outlet

expansion plans. A single 345 kv line likely is not sufficient to deal with all the

plans.

To repeat once again, our ability to address these concerns within our business

plans depends on reforming current policies to ensure that additions to our transmission network provide returns commensurate with those available through other

investments.

Mr. Chairman, there are three issues unrelated to investment that Congress must

also address in order to ensure the development of wholesale markets, transmission

efficiency and reliability. These are:

Provide a Federal Role in Sighting of Transmission Facilities

The transmission planning, siting and approval process is often contentious, timeconsuming, and fragmented. It is also still largely based around the outmoded idea

that transmission facilities serve only small regional or local markets. Transmission

approvals can be difficult to obtain in a jurisdiction which does not see a direct benefit for its citizens, even though the region as a whole may benefit.

With today’s interconnected transmission grid, congestion in one area can have an

impact across state boundaries. This illustrates the urgent need for some level of

federal involvement in the transmission sighting process.

To begin, Congress should pass legislation that rewards the establishment of

planning mechanisms. Such legislation would allow an RTO, a member of an RTO,

including an ITC or any other applicant whose application is consistent with a planning process approved by an RTO (or comparable approved regional planning process) to submit a transmission expansion planning process for the construction and

expansion of facilities to the FERC for review and approval.

Plans should then be submitted to affected states for review and approval, much

as happens under current state regulation. If, however, states are unable or unwilling to approve projects that would affect the efficient function of wide-scale wholesale markets, then an RTO or other applicant should be allowed to request a certificate of public convenience and necessity.

39

If a transmission expansion plan has been approved through a FERC-approved

transmission planning process—and a certificate of convenience and necessity has

been granted for the facilities by the FERC after notice and the opportunity for comment—a right of eminent domain would become available to the holder of the certificate. The certificate holder should be entitled to exercise this right if unable to acquire the necessary land by contract, or if unable to agree with the property owner

on the amount of compensation for the required rights-of-way.

Require Federal Lands Agencies to Expedite Review of Applications for Transmission

Facilities That Would Cross Federal Lands

Transmission facilities are difficult to site for reasons such as landowner opposition and the requirement to obtain approvals from dozens of different jurisdictions.

Federal land management agency approvals, required when proposed facilities cross

federal lands, are often the most time-consuming and difficult approvals to obtain.

The federal government should not stand in the way of needed new transmission.

Federal land management agencies must do a better job of streamlining and coordinating review of proposed transmission projects. Congressional codification of this

directive would help expedite review of such projects.

Adopt an Enforceable Reliability Code of Conduct for the Bulk Power System

The system of voluntary reliability self-regulation by the electricity industry,

which has worked well in the past, is not adequate to meet the growing demands

on the bulk power system. With the advent of increased wholesale and retail competition, hundreds of new companies are today involved in the generation and sale

of electricity. The existing industry reliability system, dependent upon the voluntary

cooperation of incumbent electric utilities and institutions, simply was not designed

to address this new marketplace.

An enforceable reliability code of conduct adopted by an industry self-regulatory

organization with oversight by the FERC, extending to all market participants and

all owners of transmission, should replace the existing voluntary system designed

for a different era. The means to achieve this objective is federal legislation. Reliability legislation alone, however, will not solve the reliability problem. Reliability

legislation can only help fairly allocate shortages of electricity or transmission capacity. To help ensure reliability, Congress must also deal with the federal barriers

and disincentives that plague the electric industry.

CONCLUSION

Federal and state policies must encourage, not discourage, the building of new

transmission facilities needed to meet the power demands of a growing economy.

The federal government must help ensure that the wholesale markets work more

efficiently and reliably and that its policies do not stand in the way of greater efficiency. The adoption of legislation based on the recommendations outlined above

will help accomplish these objectives.

Action is needed now to ensure our country has affordable and reliable electricity

for years to come. Xcel looks forward to working with this subcommittee to achieve

these objectives.

Senator DORGAN. Mr. Sparby, thank you very much.

Your last point is certainly an appropriate point about siting and

having the plans in place and the ability to go ahead and build the

additional capacity we need. But all of you have talked some about

pricing, which I think is a key to this issue. The decision about

what additional capacity we need and how you price the utilization

of that capacity is central, it seems to me, to what we try to do

here in energy policy, and I would like to ask some questions about

that. I will start with you, Mr. Sparby.

You indicated that the cost-based, rate-based approach to pricing

really provides no incentives. On the other hand, the whole description of using a market-based would suggest the market would provide incentives from the market, itself, and yet you say using a

market-based approach you need financial incentives. Why do you

need incentives if you use a market-based approach for the buildout of a system? Would the market not send a signal that you need

40

additional capacity and thereby from the market provide the incentives?

Mr. SPARBY. Well, I think certainly if you were to apply marketbased incentives to transmission additions, yes, in part with some

other improvements, that does send a much better signal to investors. However, we are going to need that market-based incentive

together with some reforms in siting and some of the other reduction of barriers in the Tax Code, as well as the repeal of PUHCA,

to also get that investment on the ground.

Senator DORGAN. I don’t think I was very clear in my question.

A market-based incentive, if the market describes this additional

capacity as necessary, the market will design its own incentive,

and, yet, I think you are talking about rates that say, let us use

a market system, but provide incentives on top of it for the buildout. Why would the market, if the market is a good allocator of

goods and services, not assess its own incentives?

Mr. SPARBY. Well, because the marketplace cannot do that, Mr.

Chairman. Government defines every single aspect and facet of this

marketplace that we operate in. It decides where we can spend our

capital. It decides how we can raise it, decides what we can charge

for its cost, and it is going to review our investment for its prudence and its impact on regulators.

In the electric industry government shapes our market, and what

our advice is about is working with government to reshape that

market to address the lack of capital that has been coming into it

because we have not seen investors willing to bring the type of capital to meet the growing demands of customers.

Senator DORGAN. Mr. Humann, your assessment of that, marketbased or cost-based?

Mr. HUMANN. I guess I don’t agree that we need incentive rates

to build transmission lines because the pricing is wrong. Under license plate pricing, you run the risk of building a transmission facility and then someone else using it or upgrading it for their benefit and then you not getting paid for that transmission investment

because someone else is using it.

Under the postage stamp pricing methodology all consumers

would be paying for that transmission investment; therefore, you

are guaranteed a payment of that investment. And, therefore, the

RTO could decide which transmission facilities are required and go

out to the lowest bidder to build those facilities, and because you

are guaranteed payment for those facilities, you do not need incentive rates.

Senator DORGAN. Mr. Humann, I understand from your testimony that you are in the process of talking to entities about an

RTO, but the pricing practices are very important to making a

judgment about whether you join an RTO and under what conditions. What happens if you are not able to resolve that?

Mr. HUMANN. Well, because of the cost shift, we will try to stay

out of an RTO as long as possible because of the cost shift and we

will just continue to operate our grid in the manner that we have

today. We still make the sales across our grid, but we certainly are

not going to join a transmission grid where we have a possible increase to our customers of $40 million a year in transmission costs

because of license plate pricing.

41

Senator DORGAN. Ms. Moler, what is wrong with that thinking?

Anything?

Ms. MOLER. I understand that Mr. Humann is looking out for his

customers, but as long as that situation persists, you will not get

the transmission upgrades. It is one of the holes I described in the

Swiss cheese. There are lots of utilities across the country that are

not participating in this regime, and you have huge increases in

congestion across the country. You are not getting the infrastructure investment, and it is just not working very well. And until you

get everybody singing off the same page, the situation is going to

continue to worsen rather than get better.

Senator DORGAN. Let me just ask, is it not the case that you

could have buildout with a cost-based system if the cost base provided the reimbursement that was sufficient to accommodate the

buildout?

Ms. MOLER. There are ways that you could design the rates. I

mean, regulators do rate design. I used to be a regulator. I did rate

design with the help of a very able staff. There are ways that you

can design rates to enable the recovery of costs. There are also

ways that you can design rates to have proper incentives for constructing new transmission. Right now the situation we face is, we

expect to have roughly $400 million worth of upgrades needed on

the ComEd system, for example, there is lots going on, and no ability to recover. We have frozen rates. We have the rate design that

Mr. Humann described in the Alliance RTO. And we do not have

any ability because of our current rate design to recover those

costs. That is why the situation has to change.

Senator DORGAN. What percent of the delivered cost of electricity

to a customer is transmission of that electricity, roughly?

Ms. MOLER. The national figures are roughly 5 to 10 percent, but

they vary from system to system.

Senator DORGAN. And if I might ask all three of you, as we construct the Senate energy bill, give me again—I think, Ms. Moler,

you outlined the several steps concisely in your testimony, but give

me again exactly the steps you believe we ought to take at the Federal level, in Federal law dealing with the transmission issue, capacity and reliability.

Ms. MOLER. I would put Mr. Humann’s system and my system

under the same regulatory regime so that we get a much better coordinated regime. I would provide innovative incentive pricing.

There are ways that you can do it. You can give special rates, for

example, for transmission upgrades. They do not necessarily have

to go for the basic infrastructure that is there today. You can do

it for capacity expansion. I would encourage utilities to sell their

transmission assets to these transcos, the for-profit companies that

will specialize in transmission. I would do it by changing of the tax

code. And I would have the same traffic cop on the beat for all of

us. It really will not work to have individual State regulatory commissions doing this when you have the interstate highway grid.

Senator DORGAN. Mr. Humann.

Mr. HUMANN. I guess Basin Electric would agree to come under

FERC regulation. As I have indicated in my testimony, one of the

requirements would be that we have a postage stamp rate where

all consumers are on a level playing field. That is why RUS was

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organized in the first place in 1935, because all of the customers

were not on the same playing field. And we need to put the transmission grid and all of our customers on the same playing field,

and we can only do that through the postage stamp rate where everybody is charged the same price. And in that type of pricing I believe we will get the interstate transmission system built that is required.

I compare that to the telephone system. Can you imagine if we

would have deregulated the telephone system and tried to give incentive rates to AT&T whereby as long as you paid for your local

telephone service, anybody from the country could call you for nothing? That is basically how we are trying to design the transmission

grid, and that is not going to work under license plate pricing.

Senator DORGAN. Mr. Sparby.

Mr. SPARBY. Thank you, Mr. Chairman. First of all, we need to

take a whole new look at how we make rates to encourage investment in the transmission network and use innovative ratemaking

not only for that purpose, but to address the R&D questions and

some other emerging issues for our industry. We also need to encourage some innovative organizational structures like independent

transmission companies that can work with RTOs to make sure

that transmission gets built five years down the road and we don’t

have a worse problem tomorrow than we have today.

We agree that nondiscriminatory open access needs to be extended, but with Basin a good customer and supplier of ours, we

would like to see incentives to encourage cooperatives and other

public entities to come into this type of regulatory framework as

opposed to mandates.

We argue for expediting and reforming the siting process, reducing some of the barriers moving into this market. For many companies that includes items like the repeal of PUHCA and also addressing some reliability issues that I think the Congress really

needs to take a look at absolutely as soon as possible. That is our

list. Thank you.

Senator DORGAN. Congressman Pomeroy.

Mr. POMEROY. Mr. Chairman, this is a fascinating panel, deeply

experienced with differing perspectives, and of one accord regarding the existing system, it makes no sense, it is going to get worse

before it gets better unless we turn things around dramatically.

Betsy’s comments about how the thing doesn’t have an overall coherency, Mr. Humann’s comments about how it is not economically

rationalized, and Mr. Sparby’s comments about the dysfunctional

regulatory overlay discouraging new investment all create a compelling picture that it requires fairly dramatic intervention.

I used to be the insurance commissioner, and watching the interplay between regulation and marketplace, not just in North Dakota, but across 50 States, has left me with a keen appreciation of

the public protection regulatory responsibility not getting in the

way of market forces.

On the other hand, I think we can see a much greater appreciation of markets today for the value investment that utilities represent even in a very extensively regulated environment. Even return over long term looks pretty good today as opposed to the gogo, hot NASDAQ market of a couple years ago even. So when we

43

are looking at the long-term investment, providing the long-term

return out of a nation’s transmission grid, clearly a significant regulatory role is going to be part of the picture, but doing so in a way

that does not forestall entrepreneurial activity in getting new plant

built is the trick of it.

What do you think, Mr. Sparby, about this ‘‘postage stamp’’ versus ‘‘license plate’’ rates? It seems to me any system that gives for

free a passage over part of the line is inherently illogical, irrational

in terms of trying to capture costs in the most realistic way under

marketplace dynamics.

Mr. SPARBY. It is an issue that has been vigorously debated within the industry because our systems look so very different. Some

are so very small and compact with very minimal amounts of

transmission, and others, like Mr. Humann’s, and to some extent

ours, are just so geographically dispersed and investments are difficult to replace.

As an industry, I think we come up with a lot of solutions that

include grandfathering and revenue sharing and a lot of other

tools. And there is no, I think, just answer that addresses

everybody’s needs in any particular time. What we need to do is

we need to come together to get that issue addressed, to get it addressed in the short term because the impacts from whether or not

you have a postage stamp rate or some other kind of rate are so

small compared with the generation costs and the costs to our communities and cost to the public of not coming together to having

regional solutions, that there is a long ways we can go to getting

those issues addressed to get to the result we need to.

Mr. POMEROY. Betsy, given your present private experience and

considerable public sector participation on this whole issue, do you

think there is in place yet a model that we ought to be moving toward that puts an adequate national regulatory framework in place

on the transmission question?

Ms. MOLER. Not yet. No, sir.

Mr. POMEROY. How do we develop one?

Ms. MOLER. I have tried in my prepared statement to give some

of the essential elements of it.

Mr. POMEROY. It is one of the more substantive 15-page testimonies I have seen. I mean, that is condensed in very good testimony.

Ms. MOLER. Thank you. That makes the ruined weekend worth

it.

[Laughter.]

Ms. MOLER. There is a lot that needs to be done, and Congress

has been debating these issues for 6 years and has not come to

grips with them. There are differences among the players. But we

have really got to stop having these endless debates and move forward. Everybody has agreed on certain essential elements of a legislative package. We are fighting over the last 5 or 10 percent and

letting the perfect be the enemy of the good, and it really is time

to do something. And I am very hopeful, because I am by nature

an optimist, that Congress will come to grips with this. The California crisis could have been either just, oh, my goodness, it is too

hard or it could be a call to action, and I am hoping it will be the

latter.

44

Mr. POMEROY. You can run, but you cannot hide. I mean, California compels us to move forward no matter how intractable these

problems.

Mr. Humann, just a quick question. Would Basin view favorably

an additional Federal law upgrading the WAPA carrying system so

it might offer more access to additional power you could generate?

Mr. HUMANN. I guess we could not support that because it depends upon who has to pay for that upgrade. Again, there are license plate pricing issues.

Mr. POMEROY. On initial Federal investment, carrying costs recouped over time.

Mr. HUMANN. Recouped by the customers? Right now it would be

the IS customers, and that is what concerns me. If it is recouped

by the IS customers, then our customers bear the brunt of the cost

to somebody else’s benefit.

Mr. POMEROY. I understand. We have got to get the rate base

fixed.

Thank you, Mr. Chairman.

Senator DORGAN. Let me just mention the California experience.

Ms. Moler, you have been previously a chairman of FERC and you

know I have been a rather aggressive critic of FERC, suggesting

that they have done their best imitation of a potted plant for a couple of years in California. And I worry very much. I know they

have taken some action more lately. But I worry very much that

the California experience sends some signals to us that are not

very good signals. And I think it is a call to action, but I think it

also ought to be a call to all of us to be cautious about this notion

that the marketplace, quote/unquote, by itself will resolve all of

these issues, because the marketplace has some wonderful and

some grotesque signals it sends from time to time.

I have mentioned at the Energy Committee that Judge Judy, this

cranky little judge on television, makes $7.4 million a year in income and the Chief Justice of the Supreme Court is paid $180,000,

and so much for the market. Or a shortstop for the Texas Rangers

is paid $252 million. Again, so much for the marketplace and its

excesses. I am a big fan of the marketplace. I think it is a wonderful allocator of goods and services, but not perfect and it needs referees. And so we have FERC.

We need especially in the area of energy to be careful. The ultimate concern of all of us is to have a consumer that has affordable

energy when they need that energy.

And so this is very good testimony. Let me say that Congressman

Pomeroy is correct, I think all three of you presented some interesting testimony for us to consider as we put together the additional

pieces of the energy bill in September.

I have a couple of additional questions I would like to submit to

you perhaps and ask you to send responses to us for the record.

And we thank you very much for being here.

Next, we will hear from Tracy Anderson, program manager at

3M Electrical Products Division; Clifford Porter, Lignite Energy

Council in Bismarck, North Dakota; and James Caldwell, policy director of American Wind Energy Association. If you would come

forward, please, I would appreciate it.

45

Why don’t we begin with Mr. Anderson. Mr. Anderson, you are

representing 3M Company and, I believe, are here to talk about the

new technology issues in transmission. Thank you very much for

being here.

STATEMENT OF TRACY ANDERSON, PROGRAM MANAGER,

3M ELECTRICAL PRODUCTS DIVISION, ST. PAUL, MN

Mr. ANDERSON. Good morning, Mr. Chairman, Representative

Pomeroy and Mr. Lowery.

I would like to thank you again for this opportunity to appear

before you today to talk about this composite conductor technology.

In all of the debate surrounding energy one of the forgotten elements is the cable, itself, and, more specifically, what materials the

cables are produced from.

The composite conductors that are in development by 3M are

made with a new material, not steel like exists in our aluminum

conductor steel reinforcement conductors that are installed in

about 90 percent of the U.S. network. The composite conductors are

reinforced with a high-strength ceramic fiber. This is a technology

built on 3M’s leadership in oxide fibers. Each composite wire within the conductor in fact contains about 25,000 of these highstrength ceramic fibers. The fibers are fully embedded in high-purity aluminum to provide some conductivity.

The material has been developed specifically for this application,

meaning that it is resistant to UV exposure over its lifetime. There

are no galvanic material science issues between the fibers in the

aluminum. And the fact that we have high-purity aluminum inside

embedded fibers essentially gives us some conductivity developed

into the steel used today.

The conductor has been designed with the application of

ampacity increases in mind, where the idea is essentially take

down the existing conductors and install one of these composite

conductors to get more power through the existing corridor, and in

doing that because of the improved performance of the materials,

it is possible to get substantial increases in the amount of power

while still respecting the clearance requirements and not increasing the mechanical or structural loads in the towers.

We have done initial design studies in partnership with leading

utilities throughout the United States, and sponsored by the Department of Energy, to take a look at what the potential would be

for this technology, and we have well-documented ampacity gains—

that is the term that is used to measure the current—of up to 300

percent with a doubling very typical over the conventional conductor technology. In all cases the studies assume that towers were

not modified or reinforced. So it is a very quick solution that has

a lot of other side benefits.

Most importantly, detailed economic analyses were also carried

out as part of these studies in the composite conductor. It was

shown they could offer substantial cost savings at the system level,

even though it might cost more on a per-unit length basis than the

conventional conductors.

Key attributes of this new composite wire that has been developed by 3M is a very high-strength weight ratio, essentially is on

a per-unit weight basis about ten times the strength of aluminum

46

and three times the strength of steel. That is one very important

property.

The second is the fact that at high temperature, it does not expand very much, and that is a very important property for materials because an overhead conductor that expands by about 1 foot

in its length actually sags about 10 feet more by the time you actually measure that, so you want materials that are very stable in

respect to thermal expansion. Then there is a range of other properties that make it very good for this sort of application.

We have been working on this topic for some time and we are

at a pivotal point right now where the conductor has been tested

by a European utility. It is actually a lower-temperature version of

what would be required for the U.S. network. And we have test

data on a small-diameter version of this conductor and there has

been a whole range of properties, such as sag tension, strength,

stiffness, and so forth, that utilities need to have confidence in this

conductor that has been tested, and the results have been very

promising and matched what you would predict from the constitutive properties.

We are at a point right now where we need to have field trials

installed to get that confidence on the part of the utilities, in addition to having available some of the larger-diameter versions of the

conductor, and we also need a version that operates at high temperature. DOE funding and technical support, in our opinion, is

needed to strengthen this technology, the development and the implementation through selected field trials. These are needed to improve and assess the economic and technical benefits of this new

conductor technology and to demonstrate the benefits to the U.S.

utility industry.

The participation and expertise of the Department of Energy’s

National Laboratories are also important to the acceleration of this

technology. Their expertise in selecting utilities for field testing, as

well as designing the instrumentation and monitoring and documenting the performance of the conductor is central to the rapid

deployment of this revolutionary product.

They also play an important role in assessing the national impact of such technology. And a couple of the labs have

groundbreaking technology that could really help out here.

In closing, I would like to thank you for the opportunity and I

will look forward to answering your questions.

[The prepared statement of Mr. Anderson follows:]

PREPARED STATEMENT OF TRACY ANDERSON, PROGRAM MANAGER, 3M ELECTRICAL

PRODUCTS DIVISION, ST. PAUL, MN

Good Morning, Mr. Chairman. Thank you for the opportunity to appear before you

today to talk about 3M’s Composite Conductor Program.

As you may know, 3M is a diversified manufacturing company with sales of just

over $16 billion dollars. The company has more than 40 product divisions and is organized into six market centers: Industrial Transportation, Graphics and Safety,

Health Care, Consumer and Office, Electro and Communications and Specialty Materials. As a result, the broad range of products we manufacture defy efforts to categorize us. From delivering power or communications to your home; transporting

you safely in your automobile to manage your busy schedules with the ubiquitous

Post-it Notes, it is sufficient to say we impact your lives daily.

Generally we can be thought of as a materials company; we are good at focusing

our various technological strengths into new materials and the products that flow

from them. The lifeblood of 3M is this flow of new products. To sustain the flow of

47

critical technologies on which new products are based requires substantial annual

investment in research and development. In 2000, 3M invested just over $1 billion

to this end.

A NEW CONDUCTOR

The Composite Conductors are reinforced with high strength ceramic fibers; a

technology built by 3M leadership in oxide fibers. Each composite wire in the core

of the cable contains thousands of ultra-high strength, micrometer sized fibers. The

fibers are fully embedded within aluminum metal. The 3M composite is resistant

to UV exposure over its lifetime and there is no galvanic corrosion between the fibers and aluminum in high humidity and wet environments. The pure aluminum

matrix enables a high conductivity in comparison with the steel cable or ACSR in

use today.

The Conductor has been designed to substantially increase ampacity for the reconducting of existing overhead transmission lines. Initial design studies done in

partnership with leading utilities, and sponsored by DOE, have demonstrated potential ampacity increases of up to 300% over existing commercial conductor technology. In all cases, the studies assumed that the towers were not modified or reinforced. Most importantly, detailed economic analysis indicated that the composite

conductors could offer substantial cost savings at the system level by increasing the

capacity of existing transmission corridors.

The key attributes of 3M conductor are: high strength (10 times that of aluminum) light weight (1/3 the weight of steel, low electrical resistance (1/4 that of

steel) Low thermal expansion (1/4 of aluminum), retain properties up to 300 degrees

Celsius, low creep (less than steel), good fatigue resistance, high stiffness and it is

sensitive to the environment.

CONDUCTOR QUALIFIED BY EUROPEAN UTILITY

3M development has reached a pivotal point where composite conductor have been

made and tested by a leading European utility for use on the 69-230 kV network

with maximum operating temperature of 150 degrees Celsius. Critical properties

such as sag-tension data, strength, stiffness, thermal expansion, resistance, creep

have been validated for this class of composite conductors, i.e., and (26/7) ROUND

1350 AL-composite conductors.

NEED FOR FIELD TRIALS

DOE funding and technical support is needed to strengthen the technology development and implementation through selected field trials. These are needed to prove

and assess the economic/technical benefits of the new conductor technology and to

demonstrate the benefits to the utility industry.

The participation and expertise of DOE’s National Laboratories are important to

accelerate this program. Their expertise for selecting the utilities and sites for field

testing, as well as designing the instrumentation and monitoring and documenting

the performance of the composite conductor is central to the rapid evaluation and

deployment of this revolutionary product. They also plan an important role in assessing the national impact of this new conductor on the nation as a whole. A couple

of the labs have groundbreaking technology in the wireless instrumentation field

that is needed to monitor and assess the performance of the overhead conductor and

determine such parameters as sag. The lab would also support the standardization

of this new class of conductor and work on identifying potential regulatory and implementation barriers.

In closing, Mr. Chairman I thank for the opportunity to present to you today, I’ll

be happy to answer any questions.

Senator DORGAN. Mr. Anderson, thank you. We will include your

complete testimony in the record. And thank you.

And we ask you again to summarize in 5 minutes. Mr. Caldwell,

we will include your statement in the record in its entirety, and we

appreciate your being here on behalf of wind energy.

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STATEMENT OF JAMES H. CALDWELL JR., POLICY DIRECTOR,

AMERICAN WIND ENERGY ASSOCIATION

Mr. CALDWELL. Mr. Chairman, Representative Pomeroy, Leon.

How about them Cubbies?

At this late hour in this hearing, I would like to take a little bit

of a risk and talk about a subject that we have not broached first

and then, secondly, to take a little bit different view of the planning and regional transmission organization discussion that has

been going forward.

And the first subject I would like to talk about is the current grid

scheduling and settlement protocols and the terms of wholesale

trade and what that is doing to the grid.

Virtually 100 percent of the transactions taking place today in

wholesale transactions are confined to commodity strips and firm

blocks of power that are being traded between and among the 150

control area operators in this country. And that is fine as far as

it goes. And it is being done because it is easy. It is easy to trade

those. It is relatively easy to schedule them. It is easy to settle

them. It is easy to worry about credit terms.

But the problem is that all of the rules and the protocols that

are being put forward are essentially making it impossible to do

anything else but trade those. And that for those resources that are

not firm, that are not commodity strips and are not firm blocks of

power, that are so-called non-firm resources, is today virtually impossible to settle a transaction for physical delivery across control

areas. And this means that something upwards of 30 to 40 percent

of the available resources and the cost-effective resources on our

system are essentially excluded from wholesale trade today.

Wind happens to be one of those. And that is far and away the

largest reason why we are having trouble commercializing wind energy today.

The problem is that these rules have been written, again, so that

only firm blocks of power can be traded. And as I say, if it was just

wind, that would be one thing, and maybe we could deal with that

in some form. But it is not.

As a matter of fact, I can make a case for saying that this was

the triggering event for the California debacle. That in November

1999 the California ISO instituted a whole series of tariff changes

which put severe imbalance penalties on people who deviated from

their schedules. And what the result was was that people who had

been trading power amongst themselves somewhat flexibly and settling their schedules flexibly after the fact, all of a sudden had to

make sure that each one of those schedules was firm. And what

that did is it drained two to three thousand megawatts of reserves

out of the California system to support each individual schedule as

opposed to supporting the system as a whole. So that in April 2000

the WSCC put out a report which said that reserves in the West

would be adequate for the summer of 2000, tight but adequate.

On May 23, right as this report hit the press, then we had the

triggering event that then ended up in the debacle that happened

from there. You can go back and you can look at the some 20,000

megawatts of transactions through the California system and you

can detail out how 2,000 megawatts of reserves were drained from

the system simply to support the imbalance penalty provisions that

49

were installed in November 1999. That is just an illustration of

how some of these terms in wholesale trade and some of these

rules and protocols can really affect a system. And wind in that environment simply gets killed. Wind simply cannot operate under

those conditions.

Now, what should we do about that? We have language in the

Bingaman bill as it exists today, and we can work to see if we can

firm that language up in any way. And what it would do is three

things.

Let us say that none of these things that I am talking about are

inconsistent with either economic theory or current FERC policy.

Current FERC policy and economic theory says that we ought to

be able to do these non-firm transactions, and certainly Order 2000

by the FERC does contemplate these kinds of transactions, in effect

does mandate that one of the functions of an RTO is to ensure that

these type of transactions can take place.

So the first thing we have to do is we have to facilitate the full,

complete and rapid implementation of Order 2000 in its functions,

not so much in its form that we have been talking about today, but

the functions of those RTOs. And we need to encourage the formulation of Order 2002, which will be the inevitable fix or the inevitable follow-on to the Order 2000. This is work in progress, and we

started with Order 888, Order 2000 built on that, and we will have

to build again.

The second thing that we need to do is we need to have an affirmative duty of the FERC to see that the rules, procedures and

protocols of RTOs and indeed each control area operator pending

the formation of RTOs allow and encourage non-firm, intermittent,

as-available transactions.

And the third thing we need to do is we need to provide for exemptions from these kind of rigid scheduling protocols and imbalance penalties pending the institution of the above.

Now, as to the planning and the RTO function, let me take a little different view, and let me illustrate by looking at that chart

there and say that if we take the green region and we drop off, I

believe that is Saskatchewan and Manitoba up there, and we look

at the green that is in the United States there, just for wind alone

we have in that region somewhere around 200 to 300 thousand

megawatts of cost-effective resource, that with all due respect to

my running partner here, Mr. Porter, that we would be perfectly

willing to go toe-to-toe with him on bus-bar energy cost with lignite

with this wind resource if we could develop it at that scale.

And part of the problem that we have in terms of this planning

process and in terms of RTOs is that, first of all, today we have

no planning process. None. And we will not have if we do it this

way and if we do what the rest of the panel has said for at least

5 years. It is going to take us 2 years to form these RTOs, and at

least the first 2 years of the operation of these RTOs they are going

to be so consumed with the day-to-day operations and with getting

the people in place, with getting their rules down. You know, what

happened in Texas last week, the day they opened their market,

and the prices went to a thousand dollars and say, gee, we had a

little software glitch, we had these flux. And we all know what it

takes to get these kinds of systems, these kinds of institutions,

50

these kinds of people in place, and it is going to be 5 years before

they can ever turn their view to the long term, before they can ever

get their head out of all these little transactions and all their computer problems, get their head out from under the desk and look

up and say, what should we do in terms of energy policy? And so

we will not have a planning process if we depend upon just RTOs.

And I contrast the operation here and say in Texas, now in

Texas, we do not have FERC jurisdiction, but what we do have—

and let’s go back to this green here for a second. In Texas, very

similar type of thing. West Texas has about 40,000 megawatts of

cost-effective wind resource. Unfortunately, all of the load or most

of the load is in east Texas. And so that there is no transmission

effectively between west Texas and east Texas.

So what has Texas done? The first thing it did is, this year it decided to install a thousand megawatts of wind in west Texas, essentially mining all of the available transmission capacity from

west to east. And before that is even installed, it has already got

all but one of the major permits for a substantial upgrade that will

allow another thousand megawatts to come on line in about 18

months.

And 2 weeks ago I attended a meeting in Austin that included

representatives from 3M, included representatives from the Texas

PUC, from transmission owners, from virtually all of the stakeholders where we were discussing the technical alternatives for transporting 40,000 megawatts—not 300 or 3,000, but 40,000 megawatts

out of west Texas.

Last Friday there was a follow-on meeting, including members of

the legislature, including people from the Governor’s office, talking

about this same issue, how do we get 40,000 megawatts from west

Texas to wherever it needs to go?

I think the difference that we are talking about between Texas

and what we are talking about RTOs is that in Texas the transmission system, URCOT, is politically anchored. It is politically anchored to the Texas legislature. And that is one of the benefits of

not having FERC jurisdiction, if you will, that there is one political

master, and that political master made some decisions and they

said that we will develop this resource in west Texas, and as a result then the technicians set about taking care of it.

And it is the political anchoring of these RTOs that has been

missing from the discussions so far. I despair of having a Midwest

ISO that goes all the way from Oklahoma up through this region

over into Virginia having any kind of political anchoring. And I

don’t think it is going to happen at the congressional level. It is

certainly not going to happen at the national level.

If it is not going to happen at the national level and is not going

to happen at the State level, where is it going to be? And I think

we need to consider these RTOs as being political bodies or at least

having some political legitimacy to their outcome and to their formation and to their operation. And unless we make those considerations we are never going to get there from here. Thank you.

[The prepared statement of Mr. Caldwell follows:]

51

PREPARED STATEMENT OF JAMES H. CALDWELL JR., POLICY DIRECTOR, AMERICAN WIND ENERGY ASSOCIATION

My name is James H. Caldwell Jr. I am Policy Director for the American Wind

Energy Association (AWEA). AWEA is proud to represent an industry poised to

make significant contributions to the nation’s energy supply and to rural economic

development. AWEA is pleased to be in Bismarck—a place that represents a major

portion of the wind industry’s future—to speak on the timely subject of electric

transmission infrastructure and investment needs.

Before discussing the wind industry’s views on electric transmission policy, a few

words about the wind resource potential and economics are in order. Table 1 below

lists electric generation capacity from wind divided geographically in the same way

as the nation’s electric transmission grid.

Table 1.—ELECTRICITY GENERATION FROM WIND

(Nameplate Capacity, MW)

Region On-line In-development

Economic potential

@$2 natural

gas

@$4 natural

gas

West ......................................... 1,800 3,000 35,000 200,000

Midwest ................................... 610 700 1,000 350,000

East .......................................... 35 225 500 7,000

Texas ........................................ 200 900 1,000 40,000

South ........................................ 2 20 100 600

Total .................................. 2,615 4,800 38,000 600,000

In this table, ‘‘in development’’ is defined as identified projects with identified

sites, owners, and customers who have agreed on price, timing, and quantity. Because the physical construction of a wind project is so quick, this broader definition

is a truer measure of wind projects that will be on-line soon rather than the conventional designation of ‘‘under construction.’’ ‘‘Economic potential’’ is defined as the

amount of wind capacity available at today’s technology and today’s costs that would

yield equal or lower bus-bar energy costs than a new natural gas fired plant at the

stated gas price given reasonable environmental and land use constraints on wind

development.

The fact that almost twice the existing wind capacity is currently under development makes wind the fastest growing electric generating source in the country. Indeed, more wind capacity is under construction in the United States than new coal

and nuclear combined. In a growing number of regions in the U.S., wind is the most

popular fuel diversity hedge against rising natural gas prices. The economic potential columns in Table 1 should be read like conventional oil, gas, and coal proven

and probable reserve statistics. The basic data underlying the numbers is several

years old and the DOE will issue an update later this year. Like oil and gas reserves, the numbers tend to grow as development occurs. The recent rapid development of the wind resource in West Texas has caused more ‘‘potential reserves’’ to

be ‘‘found’’ and the new DOE update will show approximately double the economic

wind resource in Texas as that in Table 1.

What these data show is that there is enough wind resource available at today’s

technology and expected fossil fuel prices in the Upper Colorado and Missouri river

basins plus West Texas to satisfy all the nation’s electricity demands. Indeed it is

realistic to expect that with appropriate public policies, about 20% of the nation’s

electricity could eventually be generated by the wind. Wind could be making a significant contribution to the nation’s energy supply within a decade. Furthermore,

this policy would be in the country’s economic self-interest even before environmental and economic development considerations. The vast majority of the commercially significant wind resource is on land now used for ranching and dry land farming, and harvesting of the wind ‘‘crop’’ does not interfere with these traditional uses.

Royalties to the landowner for leasing space to wind turbines generally return many

times the annual income of the agricultural crop that is displaced. Harvesting the

wind for electricity uses a renewable domestic resource and creates no emissions of

either carbon dioxide or criteria air pollutants. Thus, a multi-billion dollar per year

rural economic development program, a ‘‘no regrets’’ global warming policy, and a

significant acid rain/regional haze mitigation measure come along naturally as

added benefits to the development of wind based solely on bus bar energy prices.

52

Clearly, sound energy policy should include measures to ensure wind’s rightful place

in the suite of electricity supply options.

In order to fulfill this promise, the wind industry must attract significant capital,

and no public policy is more important to this capital formation than electric transmission policy. As folks around here know all too well, only a few hardy people live

where the wind blows hard enough and long enough to be commercially significant.

Unless the wind to electricity ‘‘crop’’ can be efficiently brought to distant markets,

capital will not be attracted to the industry, and the economic, rural development,

and environmental promise of wind energy will not be realized.

Transmission related issues for wind fall into two general categories: grid operation rules that promise fair treatment for ‘‘intermittent’’ and ‘‘as-available’’ resources like wind; and robust, proactive grid expansion planning that anticipates

long term needs for transportation services. Wind is an ‘‘intermittent’’ resource,

meaning that it only produces energy when the wind blows, and its output is ‘‘asavailable’’ meaning that, even with accurate forecasting, the exact timing of its energy output cannot be precisely predicted. These characteristics are not desirable,

but they are not fatal and are shared by many other potentially cost effective resources. Indeed, they are shared by electricity demand itself and are routinely handled in that context without complaint or cost by grid operators worldwide.

Grid operation rules that accommodate intermittent resources like wind include

the following technical features:

• Network transmission access fees paid by load.

• Flexible near real time scheduling.

• Penalty free imbalance settlements in a liquid spot market.

• Long term non-firm transmission rights at volumetric pricing.

• No pancaking of transmission access fees.

• Robust secondary markets in transmission rights.

These features are required for efficient transport of wind energy from its rural

sources to urban load centers over the transmission grid. It is important to point

out that these same features are required by many of the newer non-traditional resources such as as-available cogeneration, distributed generation, run-of-the-river

hydroelectric, demand response bidding, etc. In the near future, as much as 30% of

the cost effective resources on the grid will require these or similar features. If these

features are not offered by transmission owners and grid operators, essential reserves will be drained from the system and cost effective resources will be ignored.

The inevitable result will be higher electricity prices and reduced reliability.

To explain what each of these technical features means and why they are important for efficient grid operation requires fairly detailed technical knowledge of commodity market operations in general and electric grid operations in particular.

AWEA here simply points out that all of the above are consistent with theoretical

economic efficiency, all comport with current Federal Energy Regulatory Commission (FERC) policy, and none are available at most locations in today’s wholesale

electricity markets. Instead, what wind sees in today’s market are the following:

• Rigid scheduling protocols with strong deviation penalties.

• Imbalance settlements in dysfunctional ‘‘markets’’ or punitive non-cost based

penalties.

• Market balkanization with significant ‘‘trade barriers’’ between adjacent utility

‘‘control areas.’’

• FERC Order 888 pro-forma tariffs that presume perfect dispatchability.

• Inflexible requirements for a ‘‘balanced schedule.’’

• A persistent and uneconomic bias toward ‘‘commodity strips’’ and ‘‘firm’’ unit

sales.

• No short term transmission rights. No flexibility for partial resale of long term

rights.

• No politically legitimate regional planning process.

The existing transmission grid was designed and built for traditional large central

station power plants that can precisely predict, and in many cases precisely control,

their output. However, these large power plants are also subject to occasional

‘‘forced outages’’ or ‘‘trips’’ where the electric output suddenly goes to zero and grid

reliability would be compromised if these ‘‘contingencies’’ were not anticipated and

planned for. The considerable costs of planning for these contingencies is not

charged to the individual generating unit but is shared by all users of the grid.

Rules and protocols like the above list that do not affect dispatchable resources but

that are convenient for risk-averse grid operators grew up as a means of simplifying

the difficult job of balancing supply and demand in real time. Wind and many other

non-traditional resources are not nearly as likely to suffer sudden, complete loss of

53

output as, for example, nuclear plants, but cannot precisely predict or control their

output in real time. Yet the current grid operating protocols do not value wind’s re- silience but unfairly punish its variability.

In 1996, when the FERC was writing the initial set of rules governing wholesale

competition in Order 888, it put forth a pro-forma tariff designed on a natural gas

model and meant to serve as a least common denominator for grid operator behavior. Quite naturally, it presumed traditional resources and simply ignored the commercial needs of newer non-traditional resources. Transmission owners and grid operators took this tariff not as a floor but a ceiling that defined minimum acceptable

behavior towards competitors and transmission owners did not take one step beyond

the bounds of that tariff no matter how cost effective. The FERC quickly realized

this limitation of Order 888 and, in late 1999, issued a sequel called Order 2000.

Order 2000 carries an explicit requirement that ‘‘Regional Transmission Organizations’’ or RTOs (the FERC preferred form of transmission provider) offer or facilitate

the offer by third parties of competitive services much like the above list of wind’s needs. Unfortunately, FERC authority to require RTOs or their functional equivalent only extends to less than two thirds of the grid. What has been even more problematic is a ‘‘passive-aggressive’’ attitude by the FERC it has been aggressive about

asserting jurisdiction over the wholesale grid, but passive about regulating grid operators or requiring compliance with its policies once it obtained jurisdiction.

As a result, of all the areas of significant commercial wind potential, only Texas

has a set of operating protocols conducive to the use of the grid by intermittent or

as-available resources like wind. Somewhat ironically, the East Coast ‘‘Independent

System Operators’’ with only scattered wind resource potential have nevertheless

spent considerable time and effort designing rules that can accommodate intermittent resources.

Congress is currently debating major changes to national energy policy including

clarifying and redefining the role of the FERC in regulating wholesale commerce in

electricity. This legislation should include provisions that:

• Ensure complete, rapid implementation of the principles and commercial functions of RTOs as enumerated in FERC Order 2000.

• Define an affirmative duty of the FERC to ensure that transmission providers

design operating rules and protocols conducive to fair, economic participation in

wholesale markets by intermittent and as-available resources like wind.

• Provide for exemptions from restrictive policies like imbalance penalties for

intermittent resources pending maturation of markets and development of institutions capable of efficiently dealing with these non-traditional resources.

Consistent, fair grid operating rules are essential to allow wind to reach its full

economic potential. So too are robust, pro-active grid expansion policies. One of the

principal advantages of wind is that it can be developed quickly in small increments

thereby reducing risks of over-investment in generating capacity or responding

quickly to unexpected shortages. This attribute is extremely valuable as the emerging wholesale market rewards investment flexibility and short lead times. Many unanticipated surprises can occur in the almost ten years it would take to plan, design,

and build a new nuclear plant. Once it begins operation, a nuclear plant’s energy

arrives in one large lump that must be swallowed whole by the market. Wind does

not have these problems. Unfortunately, transmission expansion shares the undesirable characteristics of long lead time and ‘‘lumpy’’ investment.

While the gross quantity of investment in transmission is small in relation to investment in generation, it is essential to have adequate transmission capacity in

place before the new generation can operate. This requires planning and at least

some investment in advance of the need for new generation. These requirements are

particularly acute for wind resources which are generally developed quickly, are remote from load centers, and must be located in specific windy locations.

Here again, Texas serves as a model for transmission planning processes favorable to the development of wind resources. The nearly 1,000 MW of new Texas wind

development this year essentially ‘‘mined’’ all the available West to East transmission capacity in Texas, but even before most of this new capacity is in operation,

planning has begun in earnest for the transmission expansion necessary to serve the

next large increment of wind capacity. Furthermore, mechanisms are in place in

Texas that allow for the ‘‘lumpiness’’ of these investments to be financed by all users

of the grid for eventual repayment by user fees over time.

Texas has the distinct advantage of only one regulatory body with political oversight only at the state level. Texas intentionally avoided electrical connections with

the rest of the country to avoid interstate commerce and attendant Federal jurisdiction. Texas is large enough both geographically and in electricity demand that the

economic consequences of this decision are minimized. Moreover, it is politically and

54

culturally compact enough that policy decisions and regulatory philosophy can consistently and quickly be converted into detailed tariffs, rules, and protocols. The advantages of this political structure are maximized in times like these where shifting

technology and shifting ideas about market structure are much more difficult to implement when regulatory jurisdiction and political oversight of the monopoly transmission system is divided between Federal and state governments and political consensus is difficult to reach among diverse interests.

It is for this reason that the FERC has promoted ‘‘RTOs’’ or regional transmission

bodies as the appropriate scale for transmission planning that neither strictly respects state boundaries nor conveniently fits with a ‘‘one-size-fits-all’’ federal model.

Unfortunately, these new regional organizations will take years to put in place, and

then more years to achieve political legitimacy. Experience to date graphically illustrates the fact that the early years of these organizations will be consumed by problems of day-to-day operations for reliability and development of short-term market

structures necessary to efficiently handle existing resources. If wind’s economic potential is to be realized in a timely way, some jump-start to the long-term planning

process will be necessary.

Fortunately, of the major wind resource areas, one, Texas, already has that jump

start and the others, the Upper Colorado and Missouri basins, have an appropriate

regionally based organization with the charter and expertise to conduct at least the

preliminary planning—the Western Area Power Administration. Congress should require WAPA to conduct a long range planning exercise on technical options for

bringing the vast wind resource potential in the Upper Great Plains to the urban

load centers in both the Midwest and the West. This should be an open process

which includes both resource rich but rural and resource poor but populous states,

environmental interests, existing WAPA customers, Native American tribes, and

other stakeholders in the region. The engineers can build whatever is politically desirable and economically attractive The difficulty is in defining the terms of reference for these concepts. As stated earlier ‘‘economically attractive’’ must include

environmental and rural economic development considerations in order to be politically desirable.

In summary, AWEA believes that wind resources can only reach their true economic and environmental potential if Congress takes this unique opportunity to formulate constructive electric transmission infrastructure policies that accommodate

a maturing wind industry, and serve the nation’s electricity consumers, rural landowners looking for economic development, and environmental interests in a win/win

proposition.

Together with policies such as the production tax credit extension to stimulate

early capital formation, effective transmission planning and grid operating polices

will ensure timely development of the indigenous, environmentally sustainable, and

cost effective energy resource that is blowing in the wind. Thank you for this opportunity to express our views.

Senator DORGAN. Mr. Caldwell, thank you very much.

Mr. Porter representing the Lignite Council. Thank you.

STATEMENT OF CLIFFORD PORTER, DIRECTOR, LIGNITE

RESEARCH, DEVELOPMENT AND MARKETING PROGRAM,

LIGNITE ENERGY COUNCIL, BISMARCK, ND

Mr. PORTER. Thank you, Senator Dorgan, Representative Pomeroy, Mr. Lowery.

First, I am Clifford Porter. I am director of the Lignite Research,

Development and Marketing Program and also director of research

and development for the Lignite Energy Council.

I am here today as a designee for John Dwyer, who could not attend the meeting. He is off on military duty. He does want me to

assure the committee that he feels that transmission is very important to the State of North Dakota and certainly to the lignite energy in North Dakota.

The State of North Dakota through the Industrial Commission

and the Lignite Energy Council have formed a partnership, and the

design of that partnership is to revitalize the lignite industry. The

program that we have right now is called Lignite Vision 21. It has

55

a vision to construct one or more 500-megawatt base-load lignitefired powerplant in North Dakota.

A 500-megawatt lignite-fired powerplant means an increased pro- duction of 3 million tons of lignite annually, $140 million of total

business volume for the State, and $6 million in State tax revenue

on an annual basis. Also, a 500-megawatt powerplant in mind

would create 1,300 new jobs for North Dakota.

The Lignite Vision 21 project is a significant economic development opportunity for the State of North Dakota. The Industrial

Commission has provided over a million dollars for feasibility studies to support this activity. The feasibility studies have identified

transmission issues, as well as potential routes for additional electrical output from North Dakota and has the estimated cost for

seven specific sites within North Dakota.

A potential electrical transmission system option may exist from

North Dakota with upgrades from a site near Beulah, North Dakota, down through Huron and Sioux Falls, South Dakota, and

then on to Lakefield Junction in Minnesota.

Electrical export from North Dakota is currently limited by our

existing transmission system. Interested parties must work together to resolve these existing limits on export. Resolution of these

transmission challenges requires congressional, Federal agencies,

State and government agencies and industry working together. In addition to our over $1 million in feasibility studies, the State

of North Dakota and the Industrial Commission have committed to

provide $20 million to date or $10 million to each of two projects,

Great River Energy and Montana-Dakota Utilities/Westmoreland

joint development. Great River Energy and Montana-Dakota Utilities/Westmoreland have initiated studies that could lead to construction of a new base-load lignite-fired powerplant.

The Lignite Energy Council members have developed the following set of guiding principles to resolve transmission issues, and

these are given in more detail to the testimony that I have provided beforehand.

But in summary, recognize that transmission business is a regulated monopoly and that transmission owners must recover their

cost.

Encourage construction of new interstate transmission facilities

and build a national grid system under FERC jurisdiction.

Support the NERC and North American Energy Reliability Organization and their corresponding regional electric liability organizations, their standards and enforcement.

Establish a regional transportation organization.

Expands research and development for transmission, including

options such as superconductivity.

In consultation with appropriate State and Federal agencies, develop legislation to provide Federal siting authority for rights-ofway for electrical transmission lines similar to the authority already existing for natural gas pipelines.

Support the $200,000 WAPA appropriation for studies and encourage WAPA to join the regional transportation organization.

Ensure that financial incentives exist to build new transmission

capability under FERC jurisdiction and assure that IOUs and

G&Ts are handled equitably.

56

Increase electrical export through expanding existing transmission system is a key element if the State is to acquire the economic development and jobs. Also, transmission is a key element

if the surrounding region is to have access to additional low-cost

base-load reliable electricity.

Again, I thank you for the opportunity to present these comments and, again, I express my regrets for Mr. Dwyer that he is

not able to attend.

Thank you, Senator.

[The prepared statement of Mr. Porter follows:]

PREPARED STATEMENT OF CLIFFORD PORTER, DIRECTOR, LIGNITE RESEARCH,

DEVELOPMENT AND MARKETING PROGRAM, LIGNITE ENERGY COUNCIL, BISMARCK, ND

The Lignite Energy Council is a regional association whose primary interest is the

development of lignite coal as an energy source. The membership of the association

includes (1) the major producers of lignite coal in North Dakota and Montana, (2)

all investor-owned utilities and rural electric cooperatives headquartered in North

Dakota and Minnesota who have interests in plants that generate electricity from

lignite, and (3) over 200 contractors and suppliers who provide goods and services

to the lignite industry.

The Lignite Energy Council is pleased to provide testimony to the Subcommittee

on Water and Power regarding the electric transmission infrastructure and investment needs in North Dakota (ND).

Mr. John Dwyer, President of the Lignite Energy Council, is on a military assignment and regrets that he is not able to be here to provide this testimony. However,

he wants the Subcommittee to know that he feels strongly about the need to expand

the transmission network in ND.

The State of North Dakota and the Lignite Energy Council have formed a government/industry partnership to promote the use of North Dakota lignite and to enhance economic development. In the summer of 1999, the North Dakota Industrial

Commission (Industrial Commission), whose current members are Governor John

Hoeven, Attorney General Wayne Stenehjem and Commissioner of Agriculture

Roger Johnson, and the Lignite Energy Council initiated a partnership between the

state and industry designed to revitalize the North Dakota lignite industry. This initiative is called the Lignite Vision 21 Project (LV21P). The LV21P project manager

is Mr. Tony Rude, who is the former Chief Executive Officer (CEO) of United Power

Association and co-CEO of Great River Energy.

The vision of the LV 21 initiative is to construct one or more state-of-the-art lignite-fired base-load generating stations located in ND that utilize cost-effective generation technologies, the latest environmental technologies and the highest efficiency to meet the reliable low-cost electricity demands in our region.

For North Dakota, a 500 MW plant means 3 million more tons of coal mined annually, 1,300 additional permanent jobs, $140 million more annual business volume

and $6 million more tax revenue annually. Besides meeting our region’s energy

needs, the Lignite Vision 21 Project will provide much needed economic development

for the citizens of ND. The state of North Dakota through the Industrial Commission has provided significant support to promote the project. The Industrial Commission has provided over $1 million for feasibility studies to address environmental, generation, and transmission issues. Additionally, the Industrial Commission has provided up to $10 million in matching grants for detailed feasibility and

permitting assistance for each project. To date, the Industrial Commission has approved funding for two potential projects—Great River Energy for a site to be selected and Montana-Dakota Utilities Company, who is involved in a joint development with Westmoreland Coal Company for a site at Gascoyne, ND.

Black and Veatch, who conducted the generation study, believes the construction

and operation of the plant is feasible and the project can be competitive in the marketplace. ABB Power analyzed existing electrical transmission system, identified

system upgrades and recommended options to increase electrical export from North

Dakota. As a part of their study, ABB recommended a proposed option for an existing transmission route that would increase the electrical export capability out of

North Dakota to 2450 MW. This option included a system upgrade to the Antelope

Valley to Huron line to permit 500kv operation and extending the line to Sioux

Falls, South Dakota, and constructing a 345kv line to Lakefield Junction in Minnesota.

57

The Industrial Commission and industry have provided $300,000 in additional

funding for subsequent transmission studies evaluating the potential and estimated

costs for additional electrical export from seven sites in North Dakota. ABB estimated the cost for upgrading the system from Antelope Valley to Lakefield Junction

at $130,000,000 to $160,000,000. Site-specific cost for each of the seven locations

was estimated at an additional $2,000,000 to $50,000,000.

Additional studies have been proposed to evaluate options for eliminating restraints to the present electrical transmission system and for providing alternatives

to further increase electrical export capability from North Dakota.

The LV21P studies have identified major challenges that need to be solved and

have identified how these challenges can be solved by the interested parties working

together, including Congress and federal agencies, state government and agencies

and industry.

In that regard, the Lignite Energy Council and its members have developed the

following guiding principles to resolve transmission issues concerning our state.

They are as follows:

1. Recognize that the transmission business is a regulated monopoly and as such

transmission owners need to have assurance from the Federal Energy Regulatory

Commission (FERC) that they can recover their cost.

2. Encourage construction of new interstate transmission facilities to build a national grid system under FERC jurisdiction.

3. Support the National Electric Reliability Council (NERC)—North American

Electric Reliability Organization (NAERO) proposed national electric reliability organizations and regional organizations and standards with authority to set and enforce reliability standards subject to FERC oversight.

4. Establish a regional transmission organization (RTO).

5. Direct the Secretary of Energy to expend research and development on transmission superconductivity and other means to increase transmission capacity.

6. Direct the Secretary of Energy, in consultation with the appropriate federal

agencies and state and local governments officials, to develop legislation to provide

federal siting authority and to grant authority to obtain rights-of-way for electricity

transmission lines. Similar authority already exists for natural gas pipelines in recognition of their role in interstate commerce. 7. Support the $200,000 federal appropriation for the Western Area Power Administration (WAPA) enhancement studies and provide the authority and encourage

WAPA to join a RTO. In conducting transmission studies, WAPA must be sensitive

to their limited resources and their primary mission to ensure that the reliability

of the WAPA system is maintained.

8. Ensure the financial incentives to build transmission benefit both utilities subject to FERC jurisdiction as well as those that are not subject to FERC jurisdiction.

Investor owned utilities (IOUs) and generation and transmission cooperatives

(G&Ts) have different regulatory, financial and corporate structures. These organizations must be handled equitably.

The Lignite Energy Council appreciates the opportunity to provide testimony to

the Subcommittee on Water and Power regarding improvement to the transmission

network in North Dakota and the surrounding region. Without these transmission

improvements, the LV21P power plant will not be constructed, North Dakota will

lose out on all the jobs and economic development, and the surrounding region will

not have access to the additional low-cost base-load reliable electricity.

Senator DORGAN. Mr. Porter, thank you very much.

I would ask, Mr. Anderson, you have field-tested your 230-kV

line in Europe, I understand. Have you field-tested your line anywhere in the United States, especially the larger capacity lines?

Mr. ANDERSON. No, we have not. We have actually installed one

span in Europe and also one span in the United States that has

operated under current, but we have not installed a multi-span installation as part of our field tests.

Senator DORGAN. Do you have plans to do that?

Mr. ANDERSON. We would like to do that, yes.

Senator DORGAN. Mr. Porter, tell me what your impression is of

the TAG project, the Transmission America Grid project. Have you

been involved in that and, if so, what is your position on it?

Mr. PORTER. Certainly, Senator. I don’t know if it is appropriate

to say we have been involved with it. We certainly have been folVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
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lowing it. I think the concept of looking at a national grid, however

that is developed, is something that we think is very important and

key to the export of power from North Dakota. Whether that is the

base-load reliable lignite-fired power or whether that is the wind

energy, I think those both have the same requirements.

Senator DORGAN. You talked about one or more powerplants

when you talked about Vision 21. We have talked a great deal

about clean coal technology in conjunction with Vision 21. Can you

tell me, provided we have the transmission capability, what your

expectation might be with respect to the production of lignite in the

future for this State?

Mr. PORTER. I think it is very encouraging to look at these two

Lignite Vision 21 projects that are currently moving forward, and

they are evaluating advanced technologies, including integrated

gasification combined cycle. There are also some recent new developments in Europe looking at super critical boilers that look at efficiencies in the neighborhood of 42 percent. So I think there are

some exciting options for us out there in terms of new production

from the lignite fields in North Dakota.

Again, I just reiterate that getting power out of North Dakota is

key. Certainly we are an energy-rich State and we can produce a

great deal more energy than we can consume inside. I am also encouraged to see that although we have two proposals on the table,

we have other people that are talking and we anticipate that we

will be looking at other options as we go down the road.

Senator DORGAN. Mr. Caldwell, as you discussed your testimony

this morning with us, it occurred to me that much of what you are

talking about could be accomplished by an aggressive FERC. Is

that the case, and, if so, what remains and must be done legislatively, in your opinion?

Mr. CALDWELL. Well, first of all, I think an aggressive FERC is

probably an oxymoron. You know, in terms of the criticism of the

FERC, my criticism of the FERC in the recent past has been that

it is passive-aggressive, that it is very aggressive about asserting

its jurisdiction and very passive once it gets it.

I think that is, first of all, genetic. It is the way it has been for

70 years. It has been in a position of appellate review. It has been

a fairly sleepy place for a lot of years. And to think that all of a

sudden that organization can be the traffic cop on the beat when

I do not think it even knows how to carry a gun, I do not think

it has a permit currently to carry a gun, and I do not think it has

ever been trained in how to carry a gun, and I do not see it being

the cop on the beat and I do not see it being the proactive regulatory commission.

Part of the reason is because it is not anchored politically. It is

sitting off all by itself up there at 888 First Street. It is very close

to the Capitol. But I recall, my wife was working for the EPA about

3 years ago when Order 888 came out, and the EPA had some

issues with Order 888, and so Mary Nichols, the assistant administrator for air and radiation, went to then Vice President Gore to

talk about these issues that the EPA had with the FERC, and Vice

President Gore said, Who are those guys? Who are they? And my

wife’s boss said, Well, you appointed them. He said, Well, why?

What do they do? And that it is just simply not politically anVerDate 11-SEP-98 13:31 Dec 13, 2001 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 J:\DOCS\76-590 SENERGY3 PsN: SENERGY3
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chored. And if we expect this organization to be aggressive, if we

expect it to take all these things to talk about this vision, and with

all due respect, I would say the vision of one or two powerplants

is not a vision, it is small steps by tiny feet. Now, it may lead to

large things down the road, but we need to have the vision. That

vision must come from the political entities, not from the regulatory people.

Senator DORGAN. I got the feeling it was therapeutic for you to

be able to answer that question.

[Laughter.]

Senator DORGAN. I almost felt I should take a microphone to

Betsy Moler because she was probably gritting her teeth through

some of that.

Congressman Pomeroy.

Mr. POMEROY. Mr. Chairman, must be the clear air out here, the

hearings outside the Beltway, at least as evidenced by this one this

morning, are a heck of a lot more interesting than the ones you will

find in any Senate or House office building in a given day. My commendation to all participants. This morning’s hearing has been a

particularly good one. We like straight talk out here, Mr. Caldwell,

and, by God, you brought it.Who imposed that reserving change or

the certainty change that you referenced having an impact on

power available out in California?

Mr. CALDWELL. It was one of those things that had good intentions. I mean, it was intended to correct a problem that existed in

California, and it was referred to as the under-scheduling problem.

And that problem came about because, again, the only way that

people could actually physically transact for effect in the spot market was to deliberately unbalance their schedules and, therefore,

put them in the spot market, and that was beginning to create reliability problems. In order to solve that perceived problem, the ISO

instituted things to make people follow their schedules, and it had

the unintended consequence, as I say, of draining reserves.

I think that is the kind of thing that you are going to see from

these RTOs, is they struggle to come up with the rules and the protocols to govern this thing. It is not easy to figure out how to do

all of these things and how to do all these transactions, and especially if you start off from the proposition that I am independent

and I am outside the market, that I am Zeus, I am not Olympus,

who is going to watch all these people down in the Plains and let

them duke it out in the marketplace, and I am up here just to ensure to keep the lights on. And that is a very, very difficult job.

And it is going to take a long time before we ever get that right,

and it is going to be a continuing problem. And this is just an example of the kind of thing.

So, again, I think the problem with these organizations is more

of governance and how they change and how they can adapt, that

we set them up and we say, okay, we are going to design the perfect system, we are going to design the perfect market, and it never

works, there is always a problem.

And if there is a little problem, the one thing that markets are

good at doing is they are good at driving that little itty-bitty wedge

and driving it wide open. And that is what people are going to do.

They are going to see a slight advantage and they are going to

60

drive it open. These organizations are going to have to be able to

adapt, they are going to have to be able to evolve, and the predators are going to have to—right now only the predators can evolve,

and the prey cannot, and we tie people’s hands.

We say we cannot change the rules. If we go to the FERC, it is

18 months before we can get a tariff change. It is $400,000 and a

year before we can ever get an adjudication of a complaint. We

can’t operate that way with that speed, that clock. And I think that

was what the problem was in California, and we are going to face

that as we try to get our act together in this new market rules.

Mr. POMEROY. Mr. Chairman, I know you want to adjourn the

hearing at noon. We are at the appointed hour, so I will hold additional questions other than just to commend Mr. Anderson and Mr.

Porter for excellent testimony. There is a couple things I would like

to pursue with you as we break up here.

Senator DORGAN. Let me again thank all of those who have come

today. I think that these issues are very important. We are going

through a period of rather profound change in an area that is critically important to our citizens.

We need to make sure that all of these issues work for both the

producers of energy and consumers of energy, and I think the California experience, in which I think the market was essentially broken and the system that was being put together was fundamentally

unworkable as it was constructed, ought to lead all of us to be cautious about this.

It is one thing to not have the capacity on a telephone system.

In that case, as they say, you get a busy signal, you cannot get

through. If you have a lack of capacity on an electric energy system

or a power grid of some type, the problem is a blackout. I mean,

that is a whole different situation.

So I think especially those of us in our region of the country have

a healthy conservatism and caution about these issues as we move

forward. We are trying to do new things in new ways, and in some

ways it makes us very vulnerable. So we need to have thoughtful

analysis of where we are heading and what the consequences might

be, and that is the purpose of holding hearings.

I appreciate very much the testimony that has been submitted.

We will keep the record open for 2 weeks and we would accept testimony from others who wish on behalf of themselves or their organization to submit additional testimony for this hearing record.

As I indicated, in September we will reconvene, myself, Senator

Bingaman and others on the Senate Energy Committee, and we

will continue trying to write the energy bill. We finished the research and development title and we will move to other titles. And

transmission is a very, very important component of the construction of an energy policy so that we have one that works for this

country. We appreciate all of your being here and your patience

and your testimony, and this hearing is now adjourned.

[Whereupon, at 12:04 p.m., the hearing was adjourned.]

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