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WebMemo #338 on Energy and Environment

September 23, 2003

Electricity Policy: Short-Term Solutions, Long-Term Considerations

By

Increases in electricity demand have strained the nation's transmission system. The recent blackouts - leaving millions in the Midwest, Northeast, and Canada without power - underscore the need for capital investments in transmission lines.

Regrettably, current policies actually discourage the necessary investment. However, Congress has the opportunity - with the energy bill in conference - to implement short-term solutions and begin debate over longer-term electricity policy issues.

Demand Outpacing Capacity
While the exact cause of the recent electricity blackouts is not yet know, most agree that the nation's transmission system is strained and needs "fixing". Transmission capacity has been insufficient to support the increased demand and the infrastructure that transports the electricity is inadequate and antiquated. In fact, data shows that:

  1. Demand for power has risen 30 percent in the last decade, but transmission capacity has only grown by 15 percent;
  2. Energy Information Administration (EIA) projects that consumer demand for electricity is going to increase by about 50% over the next two decades.

Short-Term Policy Recommendations

Grant FERC Limited Backstop Siting Authority. Getting transmission projects approved by the states is a difficult and cumbersome task and has delayed the building of new and critically needed transmission lines. In fact, many state siting laws prohibit consideration of regional benefits of new transmission lines-even if the regional benefits are substantial. As competitive wholesale electricity markets continue to develop, however, an improved and upgraded transmission infrastructure will be needed to support regional wholesale electricity markets. To help assure that sufficient transmission capacity is developed, FERC (Federal Energy Regulatory Commission) should be given limited backstop transmission siting authority. This authority would apply only in specially designated "interstate congestion areas" and only if the state lacks authority, or the state has withheld approval, or placed conditions on approval that would not reduce transmission congestion, or, the state has delayed final approval for more than a year. Unlike the authority that FERC already has to site interstate natural gas pipelines, this authority would be narrowly restricted. Given that without adequate transmission capacity the system will not work-leaving consumers without electricity--a policy to allow FERC limited backstop authority to develop a sufficient transmission infrastructure represents sensible and practical public policy.

Reform Federal Lands Permitting Process. In addition to siting delays, an unnecessarily complicated, time-consuming and difficult multi-jurisdictional federal permitting process, including authorizations for siting across federal lands, represents another disincentive to building new transmission. The conference committee can streamline this process by designating the Department of Energy (DOE) as the lead agency to coordinate and set deadlines for the federal environmental and permitting process.

Repeal PUHCA. Repeal of the Public Utility Holding Company Act (PUHCA) is long overdue. PUHCA is a New Deal-era statute that makes it difficult for firms to acquire and divest power assets and interferes with the ability of firms to enter new markets. In fact, the SEC, which administers PUHCA, has been recommending its repeal since the 1980's. Repeal of this antiquated law would help attract new investment capital to the industry.

Reform FERC Transmission Rate Policies. Owners of the transmission "wires" are unable to recover their costs. This drives capital to other areas of the economy. To attract the capital necessary to fund needed investment in transmission, FERC should utilize innovative transmission pricing incentives, including performance-based rates and higher rates of return. Revise the Tax Code. Under existing law, transmission assets receive less favorable tax treatment than other critical infrastructure and technologies. The House version of the energy bill "levels the playing field" for major capital assets by giving electric transmission assets tax treatment similar to other major capital assets. Specifically, the House bill amends the tax code to provide enhanced accelerated depreciation (from 20 years to 15 years) for electric transmission assets. By following the House's principled lead the conferees can increase investment in the nation's transmission infrastructure.

Long-Term Considerations

Reliability Standards. The North American Electric Reliability Council (NERC) has set voluntary reliability rules and standards for over thirty years. During this time, however, the number of market participants has increased, as have the number and complexity of electricity transactions being transmitted. Given the recent blackout, Congress needs to examine whether today's voluntary rules and standards are adequate. If not, why? Depending upon the answer to that question, then Congress and policymakers should assiduously examine what measures are needed to assure reliability. A thorough review of options should be scrutinized and debated, however, before hastily replacing the current voluntary structure with mandatory and enforceable standards.

Transmission. Transmission and distribution remain "natural" monopolies because economically it would be difficult to provide competing service and because all competitors require open and nondiscriminatory access to them. Some policymakers are calling for deregulation of transmission. Given that transmission is an "essential" facility, however, Congress needs to first review and vigorously debate the consequences - intended as well as unintended-under such a policy before taking a firm position on deregulating transmission.

Regional Transmission Organizations (RTOs). Given that electricity market boundaries transcend franchise territories and state boundaries, and trading across control areas is much more complicated than trading within a certain area, in 1999 FERC issued Order No. 2000 directing investor-owned utilities IOUs) to join RTOs and place their transmission facilities under the control of RTOs. Technically, Order No. 2000 calls for voluntary compliance. Some are calling for mandatory RTOs. Similar to transmission, the pros and cons of such a policy need to be debated before taking a firm position on this issue.

Dilatory tactics. Even if regulatory barriers are removed, opponents of new facilities can needlessly delay the building of additional transmission lines by tying up the process in court. Given the economic and national security importance of assuring sufficient and reliable supplies of electricity throughout the country, the public interest must be weighed against the need to seek a legal remedy. Congress and policymakers need to examine and adopt policies that adequately balance these interests.

Federal ownership of power production/municipal and cooperative power. While the House bill brings federal power, municipally owned utilities and cooperatives utilities partially under FERC jurisdiction by subjecting them to open access requirements similar to those that apply to IOUs, it fails to otherwise reduce the subsidies and preferences they receive. Measures to privatize federal power and to eliminate the preferences they and munis and coops enjoy should be adopted.

Towards A Brighter Future
The recent blackout was inconvenient and disruptive to millions of consumers. Congress could make matters worse by passing an energy bill -- any bill -- for political favor. If Congress truly wants to assure consumers that there will be no more massive blackouts, it needs to pass a balanced bill that promotes sound market based policies -- not legislation that simply adds layers upon layers of mandates on an already overly regulated energy sector.

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