Mr. Kiesner

Eco-Friendly Practices

Blackouts: Environmental Ruling Holds Potential for Far-Reaching Impact

By Steve Kiesner, Director of National Accounts, Edison Electric Institute

Two events in August-the well publicized blackout and a less publicized environmental ruling-will - have a far-reaching impact on the ability of the power industry to serve its customers.

The 2003 Blackout

The August, 2003 blackout in the northeastern United States riveted the nation's attention on how important the electric transmission grid is in enabling utilities to serve their customers. Although the cause of the blackout is being investigated, one potentially positive result is the emphasis the blackout has placed on the need to modernize the grid.

Surging wholesale transactions and rising consumer demand for electricity have pushed the capabilities of the U.S. transmission system to its limits. At the same time, a number of factors actually discourage investment in transmission, including:

It is worth mentioning that electricity competition has been brought up as a culprit in the blackout. This question detracts attention from the need to develop a more robust U.S. transmission grid. Electrons follow the laws of physics. No matter what utility structure model exists-competitive, a mixed model or fully integrated-there must be adequate infrastructure in place and appropriate rules for reliable operation. Sufficient transmission capacity is a critical building block in all of the models. Without adequate transmission, none of the models will work.

EEI has long advocated the following policy proposals to help assure that the U.S. has the mandatory reliability standards and the electric transmission capacity it needs to go forward.

Ensure Reliability Standards are Mandatory and Enforceable -NERC, the North American Electric Reliability Council, was formed in the aftermath of the 1965 power outages in the Northeast. For more than thirty years, NERC set voluntary reliability rules and standards for the operation of the grid. This system has generally worked well in the past, but the number of market participants has increased dramatically, as have the number and complexity of electricity transactions being transmitted. Today's electricity market requires a mandatory reliability system, with enforcement mechanisms.

Grant Backstop Siting Authority to the Federal Government - Traditional state siting processes are adequate for most local upgrades to existing transmission systems. For regional wholesale electricity markets, in areas designated as "interstate congestion areas" by the U.S. Department of Energy (DOE), the Federal Energy Regulatory Commission (FERC) should have limited backstop siting authority if the states involved have been unable to agree or move forward. Unlike the strong federal authority that FERC has to site natural gas pipelines, individual states currently have sole jurisdiction over where to build new transmission lines, a process that often delays transmission building.

Reform the Federal Lands Permitting Process - The federal transmission permitting process needs to be coordinated, simplified, and made to work with any state siting process. This can be accomplished by designating DOE as the lead agency to coordinate and set deadlines for the federal environmental and permitting process. In addition, DOE would be responsible for coordinating the federal process with any state and tribal process.

Repeal the Public Utility Holding Company Act (PUHCA) - The Public Utility Holding Company Act of 1935 (PUHCA) is an outdated federal statute that imposes outmoded restrictions on the business activities of electric and gas utility holding companies. By imposing limitations on investments in the regulated energy industry, PUHCA acts as a substantial impediment to new investment in energy infrastructure, keeping billions of dollars of new capital out of the industry.

Reform FERC Transmission Rate Policies - According to a December 2001 FERC electric transmission constraint study, generation costs make up 74 percent of the current average monthly electric bill for retail consumers, while transmission costs make up six percent. Since increased transmission investment will help to reduce congestion and enable lower cost power to reach consumers more easily, FERC anticipates that the net benefits to consumers of more investment in transmission could be quite large. FERC and the states should use innovative transmission pricing incentives, including performance-based rates and higher rates of return, to attract the capital necessary to fund needed investment in transmission. In addition, transmission users should pay their fair share of the system's costs. Likewise, states should assure that utilities could recover their costs for transmission investments under state regulation, with a reasonable rate of return.

Revise the Tax Code to Encourage Transmission Investment - The U.S. tax code should be amended to provide accelerated depreciation (from 20 to 15 years) for electric transmission assets, similar to the tax treatment governing other major capital assets. Currently, transmission assets receive less favorable tax treatment than other critical infrastructure and technologies. In addition, Congress should ensure that electric companies that sell or otherwise dispose of their transmission assets into a FERC-approved Regional Transmission Organization or Independent Transmission Company do not suffer tax penalties.

New Source Review

Though less publicized, another event in August-a ruling by the U.S. EPA dealing with power plant modifications-will also have a far-reaching impact on the power industry's capabilities to provide reliable and affordable electricity.

To generate the electricity the country demands, electric companies must harness the Earth's natural resources. The power industry recognizes that its operations can have impacts on the environment, and it works diligently to use resources efficiently as it meets the ever-growing demands for power.

Working within the guidelines of the Clean Air Act, the power sector has cut sulfur dioxide emissions by about 40 percent so far, and will achieve a similar level of reduction in nitrogen oxides in 2004. It is important to keep in mind that during this period, the country's GDP has grown by 164 percent, and its energy consumption has increased by 42 percent.

Under the Clean Air Act's New Source Review program, power companies and other industrial facilities are required to install advanced emission controls when undertaking major modifications that would significantly increase emissions. Before now, the EPA had never issued clear guidance as to how these requirements should be carried out.

The agency for more than 20 years implemented and enforced the program in a commonsense manner. Then, in 1999, EPA abandoned its historic enforcement practices and, without warning, reinterpreted the NSR program to prohibit the very same routine activities the agency until then had condoned. Even the most routine power plant maintenance practices or efficiency improvements were called into question.

This unprecedented enforcement action had a chilling effect on power companies. Routine maintenance, equipment repairs, and energy efficiency improvements were delayed, and in some cases, even done without. The August ruling clarified what maintenance, repair, and replacements a power plant can make without increasing emissions.

Now, instead of applying an indeterminate, case-by-case analysis for deciding if a repair would trigger the need for additional pollution control equipment, the ruling states that routine repair and replacement of broken equipment includes only functionally equivalent equipment replacement, which does not create new pollution, and which costs less than 20 percent of a replacement unit.

The ruling on New Source Review will lift a major cloud of uncertainty for power companies. This will encourage efficiency improvements at power plants, allowing generators to produce electricity using less fuel, resulting in lower emission rates.

A reliable and affordable electricity supply. Hotels and all utility customers have come to expect it. Mandatory reliability provisions and expanded transmission investment, along with the New Source Review ruling, will be essential steps in ensuring the power industry has the continued capability to deliver it.

Steve Kiesner is Director of the Edison Electric Institute’s National Accounts Program. Based in Washington, D.C., Edison Electric Institute (EEI) is the association of United States shareholder-owned electric companies, international affiliates and industry associates worldwide. Our U.S. members serve approximately 90 percent of the ultimate customers in the shareholder-owned segment of the industry, and nearly 70 percent of all electric utility ultimate customers in the nation. They generated almost 70 percent of the electricity generated by U.S. electric utilities. Mr. Kiesner can be contacted at 202-508-5000 or skiesner@eei.org Extended Bio...

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