March 29, 2024

Building a Stronger Grid
The Energy Policy Act of 2005

by By: Russell Tucker, Director, Federal Regulatory Affairs, Edison Electric Institute, www.eei.org
America’s electric companies welcome the Energy Policy Act of 2005 (EPAct). It is long overdue legislation. During the past four years, the industry has advocated the need for a comprehensive package of electricity reforms. Both to meet the demands of today, and to prepare for the challenges of tomorrow.

A steadily growing population and economy, coupled with the expanded use of electric technologies, has led the U.S. Energy Information Agency (EIA) to predict that America’s electricity use will increase around 2 percent annually through 2025, representing a 50 percent increase over today’s electricity use.

The new law recognizes that the electric power industry must keep pace with this growth. It will modernize U.S. electricity regulation. It will help the industry to maintain a diverse fuel supply and to build more environmentally-sensitive generating plants, both of which will be vital for meeting the nation’s continually growing demand for power. The legislation will also contribute to much needed flexibility in corporate structure and business models. And importantly, it will reinforce the reliability of the power grid. Each is essential for generating and delivering the power that has long been the cornerstone of America’s well-being and economic growth. Taken together, these measures will result in an industry suited to the future needs of its customers. Now that the bill is law, we are confident that the nation’s transmission network will meet the challenges of the 21st century.

Maintaining Reliability
The energy legislation will help to ensure that the U.S. electric transmission system remains
reliable. This task gets bigger and more vital each year. Today, electric utilities deliver almost
4 billion kilowatt-hours of electricity to more than 290 million Americans nationwide. And they do it with over 160,000 miles of high-voltage transmission lines.

Beyond the need to accommodate this growing demand for electricity, the nation’s transmission network must also contend with the country’s evolving wholesale electricity markets. These are changing the way the grid is operated and used. Together, these changes have made it apparent that the grid needs to be managed in new way. Congress recognized this need and included in the EPAct measures to create a self-regulating electric reliability organization (ERO). The ERO will enforce reliability rules that are mandatory on all users, owners and operators of the nation’s transmission system. The Federal Energy Regulatory Commission (FERC) will have oversight in the United States. By February 6, 2006, FERC must complete its initial rulemaking to establish the requirements for the ERO, and its related regional organizations. Major stakeholder groups have been working together since before the Act became law to help expedite these proceedings and clarify the critical issues that still need to be resolved.

Given today’s wholesale electricity markets, maintaining reliable service also means having a transmission siting process that can consider regional and even national needs. The Act recognizes this and grants FERC the authority to approve the siting of electric transmission facilities located in “national interest electric transmission corridors”. The Department of Energy (DOE) must identify such corridors by August 6, 2006, and then again every three years thereafter. These corridors may include any geographic area experiencing electric transmission capacity constraints or congestion.

Traditional state siting processes focus only on local upgrades to existing transmission systems. Before states will grant utilities siting permits, utilities typically must prove that the new facilities are needed.

This determination of “need” often focuses on service to in-state consumers. Most state siting laws do not allow for the consideration of regional, or out-of-state, benefits of new transmission lines. If states consider only intrastate benefits and not regional benefits, they may have little choice under state law but to reject the proposed line, even if the benefits to the region are significant.

The new backstop siting provisions in the EPAct will continue to give states the first opportunity to site new transmission lines, which we believe will continue to be adequate in most cases. FERC, however, can use its new authority if states cannot or will not act in a timely manner to approve the siting.

The federal permitting process to site energy facilities, particularly those concerning transmission lines across federal lands, can also be a necessary but difficult multi-jurisdictional process. In some areas of the country with extensive federal landholdings, the broad scope of federal approvals needed for transmission facilities is the principal impediment to building new transmission. The EPAct streamlines the process for siting on federal lands by designating DOE as the lead federal agency to coordinate all federal approvals and related environmental reviews. A related provision in the reliability section of the EPAct assures that federal land agencies will expedite approvals to transmission and distribution facilities when necessary to comply with reliability standards, or in situations that imminently endanger the reliability or safety of the facilities.

Another siting measure in the Act requires FERC to exercise its Federal Power Act (FPA) authority to facilitate planning and expansion of transmission facilities to satisfy distribution utility service obligations to retail customers. FERC must also enable such utilities to secure firm transmission rights or equivalent tradable or financial rights on a long term basis to meet such obligations.

Strengthening Transmission
Beyond supporting measures that will help to maintain reliable electricity service, the energy legislation will encourage critically needed investment in the grid. These infrastructure measures will have the effect of strengthening wholesale competition as well.

The nation’s electric transmission network was built in large part over 50 years ago to reliably serve local demands for power, and interconnect neighboring utilities. It continues to do these jobs, but the country’s continually growing demand for power is making it harder for the existing system to keep up. The grid is also now being asked to support an increasing number of wholesale electricity transactions.

Just in the last five years, for example, the volume of these deals has increased by 300 percent. This has left the grid at times facing more requests for transmission than it can handle. Last year, the North American Electric Reliability Council found that the number of transactions that could not be completed because of congestion had increased to more than 2,300. This compares with 300 uncompleted transactions in 1998. Grid congestion limits, and in some cases denies, access to less expensive power that may be available to utility customers. It also hinders the development of the country’s competitive wholesale electricity markets.

The nation’s electric utility companies have long recognized the growing demand being placed on the grid. They are investing to expand transmission capacity. Between 1999 and 2003, for example, shareholder-owned utilities increased their annual transmission investment by 12 percent annually, for a total of nearly $18 billion. Looking ahead through 2008, preliminary data indicates that utilities have invested, or are planning to invest, $28 billion more—a 60 percent increase over the previous five years.

The EPAct contains a number of transmission-related components that will help to ensure that this money, and more, gets invested in the grid, including repealing the outdated Public Utility Holding Company Act (PUHCA). This will broaden the pool of potential investors to include non-utility investors, such as other energy and industrial groups, financial institutions, private equity groups, and foreign utilities. The result will be more choices and lower costs for consumers.

PUHCA had imposed geographic integration requirements on both registered and exempt holding companies, which ironically promotes market concentration. For the approximately 30 companies registered under the Act, the U.S. Securities and Exchange Commission (SEC) must approve corporate structure, the purchase and sale of securities, the purchase and sale of assets, and the acquisition of other companies. The Act also specified that any acquisition of another company by a registered holding company must meet certain criteria before receiving SEC approval. Registered holding companies also needed prior SEC approval before they could establish and finance a subsidiary.

The repeal of PUHCA will lead to greater competition and as a result, more services and choices for consumers. Other changes that are expected as the result of repealing PUHCA include:

• A greater flow of capital into U.S. energy markets and faster development of new generation and transmission capacity.
• More suppliers in electricity markets by allowing exempt wholesale generators to sell directly to retail consumers.
• Fewer hurdles to forming regional
independent transmission companies.

The EPAct will also help to encourage more transmission investment by reducing the depreciable lives for electric transmission lines (at 69 kilovolts or higher voltage levels) from the current 20 years to 15 years. It will also extend a tax provision for one year to allow companies that sell transmission assets to a FERC-approved transmission organization to defer the gain on the sale of those assets through 2007. And EPAct requires FERC to provide transmission investment incentives and assure cost recovery for reliability investments.

In the past, FERC has supported rate incentives for entities that join regional transmission organizations (RTOs), contemplate construction of new transmission, or deploy new transmission-related techniques. FERC had delayed finalizing its policies in this area pending passage of the energy legislation. Now that the bill is law, the Act grants FERC the authority to stimulate more investment in a number of ways.

Importantly, the Act requires FERC to provide incentives for transmission investment and to assure investors that they will be able to recover their costs. By August 6, 2006, FERC must establish rules that provide rate incentives for the enhancement of the transmission system aimed at improving reliability and enhancing generation by removing congestion. Incentives are also provided for participation in transmission organizations.

We are encouraging FERC to be guided by the following principles as it carries out the responsibility of establishing incentive-based rate regulations for transmission facilities:

• Allow for cost recovery of fixed and variable costs and a reasonable return on
transmission investment.
• Eliminate the ‘pancaking’ of rates within an RTO.
• Ensure that cost responsibility follows cost causation.
• Minimize the potential for cost shifting.
• Permit the recovery of all prudently incurred transition costs.
• Aim these incentives at all transmission models—integrated utilities, independent transmission companies, and merchant transmission.

More transmission means a stronger electric system and a more affordable power supply. The Energy Policy Act of 2005 has created a welcome set of guidelines for achieving both goals. EEI and its member electric utility companies are dedicated to continuing to work with federal and state regulators to see that the full potential of the new energy legislation is achieved, and with it, a grid that can satisfy the country’s power needs well into the 21st century.

—EEI—