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December 20, 2001 Energy Regulators Say Transmission Flaws Added $1 Billion to Costs in Past Two Years By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL Choke points in the nation's electric-transmission system have added more than $1 billion to consumer power costs during the past two summers alone. Fixing the 16 major bottlenecks would cost around $12.6 billion, but the project would pay for itself in a few years through lower total energy costs. That is the chief finding of a much-anticipated Federal Energy Regulatory Commission report that supports a widespread belief that new investments are needed to make the nation's electricity-delivery system better able to provide the benefits of open markets. But one finding of the study likely will boost the argument of opponents of deregulation: FERC found that summer bottlenecks were worst in those states that had deregulated their retail markets. The study found that power-line capacity problems were least pronounced in the Southeast, where regulated utilities still dominate markets and supply consumers with energy from local power plants. The situation was worst in California and New York, two states on the cutting edge of the deregulation movement. In deregulated markets, utilities and big users can buy their juice from faraway power suppliers. That puts more stress on transmission lines that must move more electricity over long distances to satisfy market demand. This change in sales patterns sometimes causes bottlenecks when suppliers try to move more energy than the system physically can carry along certain power-line corridors. Ensuring that investments are made to upgrade the grid is a complex matter. Individual states control the siting of new lines and must give their approval for most upgrades, since costs are locally borne. State commissions sometimes are reluctant to approve investments if local ratepayers appear less likely to benefit than consumers in distant places. "We need a legislative fix to break the logjam" between competing interests, says FERC commissioner William Massey, who wants Congress to give his agency more siting authority. The debate, if anything, is likely to become more heated. FERC Wednesday approved the creation of a new grid-running organization for the entire Midwest. One of the key tasks for the organization, which will span 17 states, will be to develop fair, low-cost ways to grant transmission access to suppliers while minimizing costs associated with power-line overloads. That will require a pricing formula that encourages the most efficient use of the physical transmission system, while at the same time encouraging investors to make upgrades where they will do the most good. Getting that balance right will be particularly critical when the economy is roaring, as it was in the summer of 2000 when transmission constraints were particularly acute. Strong demand coupled with hot temperatures put inordinate strain on certain parts of the transmission system. Grid operators found themselves having to pay much more money than usual to generators located on the needy side of bottlenecks to crank up their plants to relieve the stress on power lines. When that didn't do enough, they were forced to cut voltage levels, in some cases, or to order utilities to start rolling blackouts. A weak link between West Virginia and the Carolinas increased wholesale prices as much as 88% at times, FERC said, showing how drastically transmission congestion can pump up prices. The most costly bottleneck, according to the study, was the East-Central transmission link that moves electricity from upstate New York, where there is plenty of power, downstate to New York City, where there isn't. In the summer of 2000, that trouble spot created congestion costs of $724.7 million, partly as a result of an outage at the Indian Point nuclear-power plant on the New York City side of the bottleneck. The cost dropped to $64.6 million this past summer. Another nagging trouble spot is Path 15, which shunts power between Northern and Southern California through the San Joaquin Valley. The FERC study said bottlenecks there during the past two summers cost consumers an extra $20.6 million. That is just a fraction of the total cost to consumers, though, according to a calculation by the grid-running California Independent System Operator that is responsible for managing power flows. In a September analysis prepared for the state utilities commission, the California ISO said bottlenecks along Path 15 boosted energy costs by $221.7 million during a 16-month period ending Dec. 31, 2000. It estimated that a $330 million upgrade could go a long way toward solving the problem and would pay for itself in relatively brief period of time. The ISO is pushing for the upgrade, but has hit opposition from the Office of Ratepayer Advocates at the California Public Utilities Commission, which believes the proposed project "is no longer needed for reliability and not cost-effective at this time," given the recent construction of additional power plants in the state. FERC's study is hardly the last word on the subject. The Department of Energy is expected to release its own analysis of transmission problems and solutions by the end of the year. Write to Rebecca Smith at rebecca.smith@wsj.com
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