The staff of T&D World, along with Black & Veatch LLC (B&V, Overland Park, Kansas, U.S.), convened a group of experts to discuss the future of the electric-transmission industry. B&V's Dean Oskvig kicked off the day-long event, welcoming participants and stating the importance of understanding the direction in which our industry is headed and the changing needs of our customers. What follows is an edited version of the day's discussion that highlights the most prevalent issues.

T&D World: Let's begin the discussion on the deregulation and competition issues in California. Why didn't this work? What stage is it in?

Jose Delgado: I think that in California, they had a gift for screwing up that was unique. The California Public Utilities Commission (CPUC) prevented the state's largest utilities from hedging their bets in the market by locking up generating assets and limiting the ability to move the energy. We [the transmission industry] thought from the beginning there were some very failed concepts. California has some real problems. From my perspective, the components for a continued failure are there, everywhere. Frankly, I wonder when the next shoe is going to drop in California. There are lots of shoes in this sucker, and from my perspective, they're just getting set up for the next difficulty.

Paul McCoy: In California, they [CPUC] separated the ownership of the natural short — the load — and left it with the utilities. They then pulled away the natural long — generation — from the owner, thus preventing the owner of the short from covering his position. They still haven't fixed that problem. I agree with Jose. The likelihood of some form of reoccurrence is still there, whether it's in the form of outright shortages and blackouts, or it's in the form of sky-high prices again.

Glen Ross: We [transmission industry] can learn from what California did and did not do. Virginia contemplated a seven-year transition period of which we have used two years, leaving five. All retail loads in Virginia have the opportunity to choose because of its zonal approach to retail load choosing.

Roberta Brown: If you think about the trip to the moon, a slight deviation in your course and you might end-up at Mars. Relating this to California, when the politicians finished, their actions took us straight to Mars. You can't legislate electrons. You can't legislate economics. If you don't have a feedback loop and no transition period, you have no demand response. All the regulations in the world are not going to make up for bad supply, bad model and bad luck.

Nick Winser: I'd like to highlight the vital role of transmission in making wholesale markets work. There was a major lack of transmission infrastructure in California. This is quite prevalent in the United States as a whole.

Don Mundy: In California, the implementation of market regulations didn't take hold fast enough to keep with the lack of power and the lack of transmission. Within a year, the energy crisis was gone, and the regulatory process is again being dragged out when installing new facilities. So we're going to repeat this roller coaster again and again. In Texas, we need to synchronize planning, regulation and construction. We can't put the system together independently and make it work.

T&D World: With regional transmission organizations (RTOs), it looks like we're moving to create areas where we can execute as regional entities, crossing state borders. John, you just entered into an agreement to function as PJM West. What impact will this decision have on your utility's ability to place new transmission?

John Ahr: By expanding our footprint, we will have easier access to bring resources to the table. That would include Allegheny's present generation resources within our footprint, as well as the future generation we are looking to site in that territory. This depends on the ISOs and RTOs to provide fair and unbiased access to existing transmission.

Roberta Brown: How many times have I sat and listened to the Virginia Corporation Commission staff make statements such as, “FERC thinks they're going to order us [Virginia] to build stuff. Ha, just let them try and get a building permit.”

Whenever you try to build anything, you have to focus on local politics since the construction is happening locally. The simple reality is that the U.S.'s existing transmission system was built to bring vertically integrated company generation to load, not to facilitate multiregional, multistate transfers of power. However, people are more likely to listen to the need for additional transmission lines or power plants when they see huge price increases or bigger and sustained outages.

Andy Dearman: I think the question is who pays. We [Southern Co.] build multistate transmission lines on a fairly regular basis and have done it with state eminent domain. But that is for the purpose that this system was built, to serve native load.

So, when we get to the point of building transmission for a wholesale generator for a wholesale transaction in someone else's territory, who pays? This concept that we're proposing of participant funding, where whoever needs the transmission pays, is one solution to that problem, but obviously it will be viewed as problematic from the people that are having to pay the money. We don't want the retail load in our service territory to have to pay for transmission that does not serve them.

Glen Ross: I think under Pat Wood's leadership, we're creating what I'll call — I hate to throw a new acronym out there — but a wholesale market institution. He's looking for four wholesale market institutions in the country, not four RTOs in the country. If you back away and look at what has recently been said in speeches, Wood is a little less concerned about how the market works on the transmission side as long as we get the standard market design (SMD) correct. It's the key to wholesale competition, which I describe as a key to retail competition. Four RTOs under Order 2000 definition didn't get it for me. It didn't get to where we needed to be. And, I think FERC has rethought that process.

Brad Vaughan: Remember, the FERC's method in its madness is the formation of RTOs to affect a competitive wholesale market. It's not just the creation of new boundaries and new control areas. The FERC wants a standard market, and once that's in place, we should have the proper market signals that will lead to investment in infrastructure.

T&D World: Won't you get compensated by the market design for building as directed by the RTO, ISO or whatever?

Andy Dearman: What the market design will do is send the correct signal for generator location decisions, which will provide the lowest total cost to the consumer, if I understand how the market design works. What that doesn't do is address merchant plants under construction today with the absence of a market design. What does it say about that energy and how its cost is transferred to the customer?

Brad Vaughan: To comment on generation, there are four elements that are necessary to build a generation plant. Beyond the economic, political and social issues, you need a good fuel supply, access to transmission, an ample water supply and suitable environmental air-quality features.

Increasingly, we're seeing regions that will restrict the building of generation because of the lack of one or more of these four elements. Just adding generation is not always an alternative at every location. We have constraints in the system to add new generation capacity. We have similar or different constraints on the transmission side. So, it's not really a free market where you can build generation or transmission assets. You have constraints. While locational margin pricing (LMP), congestion, demand response and all the buzz words provide pricing signals, the truth is you're not free to build wherever you want.

Jose Delgado: I want to point out an interesting finding, certainly within ATC, that even within the footprint of something as relatively small as ATC, there are very significant points of congestion. These congestion points were always there, but the moment we separated generation ownership from transmission ownership, we found ourselves needing to redispatch generation to address congestion, and we're redispatching a lot.

The integrated utilities have always redispatched generation to account for transmission limitations, but the cost of that redispatch was hidden by the huge fuel budgets of the utilities. The lack of transmission was met by redispatch, and no one thought much about it. But now that we are out of the integrated companies and everybody's paying for redispatch, it becomes very apparent when it's up front and has been added to the bill. And so now we're recognizing that the transmission system cannot adequately support the open-access mode of operation.

Nick said that we're going to have to do construction here to close some gaps to allow for the creation of some energy markets to. Now, the question that is often asked is, “Who's going to pay?” And the answer I give is, “Those who benefit.”

Nick Winser: We have a grid that's dramatically ill-designed for wholesale markets. And, again, the difficulty of siting lines is a huge one. I think we are five years behind with construction of grids that are appropriate for wholesale markets. That means we have to make the most of what we've got. We need a different brand of transmission engineering. We need an active management of transmission assets that takes existing rights-of-way (R/W) and existing assets and improves them. You can get an awful lot more out of the system that's out there with relatively modest investment, and it's very quick.

I agree that those who benefit from the investment should pay. That seems absolutely sensible to me, and that's all about tariff. Still, since tariff spans quite a wide area, we probably need to identify where some elements of the cost of transmission could be socialized. We also need to address where new transmission benefits merchant generation coming in.

Paul McCoy: When you talk about participant funding, I don't care whether the generator pays or the load pays directly. The load always pays. It either pays for transmission service directly or it pays through it, for transmission in the form of the megawatt hours that come from the supplier. The load always pays. There's no free lunch.

T&D World: There has been a real undertone to all this that we have inadequate transmission.

Jose Delgado: Most companies cannot afford the transmission their customers need. The reason is that they had to recover 90% of that construction from their retail customer base. While the whole region shared the benefit from a transmission project, the bulk of the project costs was borne by their native customers.

Paul McCoy: Today, there are a lot of companies, mid-sized and smaller, that, given the cost of construction in the 21st century, can't afford new transmission. It's common to see a three- or four-year program to upgrade incremental capacity with a cost close to the book value of the plant. That gets the attention of executive management and the board of directors.

David Mohre: The answer is simple economics. If you're a vertically integrated utility, and you have sufficient generation and transmission to meet your customer's needs, are you going to build a “road” to let somebody come in and compete with you? Of course not.

Steve Kozey: Capital is allocated to where there is an opportunity to make the best return of investment. Vertically integrated utilities always testify that they design and build a reliable system that meets state statutes that govern what they have to do. But you don't see much money allocated to new transmission.

Nick Winser: You need more transmission capability to facilitate wholesale markets. I think the consensus is that we probably didn't have enough.

Glen Ross: I agree with Nick. From this point forward, we are making a case for larger regional grid management and larger regional grid planning. You need scale because of the capital allocations you talked about. You probably need divestiture, although many companies — including mine — have not gone that direction. And then you need to look at the footprint. If you don't work virtually county by county, but certainly with local politics and state politics, and work hand in glove with your existing regulation, you're making a big mistake.

T&D World: Investment in transmission is declining. Corrected for inflation, annual investments in new transmission have been declining by about US$100 million a year for the past two decades. The regulatory uncertainty, low return on investment and public opposition to siting new facilities are forces that keep utilities from building new transmission lines and expanding capacity of existing lines.

Paul McCoy: I think the problem is going to get worse before it gets better, but I think that the tools exist to make it better, if you want to call it buying some time. You might more preferably call it optimizing reducing infrastructure, but I think that the advent of properly concentrated RTOs plus people whose focus is transmission, does harbor well for increasing utilization-resisting assets.

Roberta Brown: I'm reminded of a problem that's going on in PJM right now. Something that has never happened before has occurred. The load analysis committee has not approved the load forecast for the next year. Now every company is swearing that what they're putting in is right for their company, but in aggregate, it shows load going down for the next year. And that just isn't going to happen. We know somebody is playing fast and loose with their numbers, but of course everyone says they're not.

Jose Delgado: We [ATC] have 70- and 80-year-old lines, and the stuff looks like barbed wire. And although it is not falling apart, it just can't do the job. It doesn't have the ability to support the system today. We are going to have to replace it. Somebody's betting good money on the congestion rights, and I'm going to go out there and build something and blow congestion rights out of the water.

David Mohre: Do we have enough transmission, or are we building enough? Maybe yes and maybe no. The maybe no part I think is important because we have a bunch of aggregate statistics that have been used on Capitol Hill to say, we need to triple the incentive rates on transmission. Excuse me, but I think the reality is that you don't know from aggregate statistics because you don't know where generation is being built. If it's being built close to the load, you may have a very different situation.

Paul McCoy: Most utilities on the regulated side and most commissions in this country would argue that they don't have the authority on the regulated side to build something that isn't required to meet its utility obligations and its franchise territory.

T&D World: The National Grid really took the lead in getting extra capacity out of the U.K. system.

Nick Winser: We added about 22% without any interruptions by using construction, asset management and control measures. We used a fair amount of innovations — static var compensators (SVCs) — that were designed to be relocatable. We put in some sophisticated, expensive new conductors, named gap conductors, that carry about 30% more load. Utilities often don't understand what they've got out there and what condition the assets are in. There is an awful lot we can do: placing strain gages on overhead lines, running equipment to capacity, flying lines with helicopters with computer-controlled lasers and plotting the exact sag of every span so that you know exactly how much you can load up the equipment. In the control phase, we spent a lot of money modeling the transmission system more accurately and trying to predict what sort of flows we could count on.

Robert Brown: We've [Conectiv] done these things but on the crudest basis. I'm sure John remembers a time when we were having trouble with system transfers. We went back and said, oh, could you look at re-rating this line, and we went out and looked at temperature in an area and transfers between what's now PJM West and PJM. We could do more, especially with the control functions and monitoring functions that exist today.

T&D World: Regarding staffing, is technically trained and competent staff available to operate these transmission systems? If not, can some or most of this work be outsourced?

Paul McCoy: The answer right now is no. If you're looking in the marketplace for control center operators, those may be the single hardest jobs to fill in the country right now. Can they be created? Yes. But again, it requires, it requires an investment in training. The things that we feel aren't outsourceable are asset management and system planning. Granted, the RTOs have a regional planning responsibility, but you have to be able to understand your assets, how they're being used, what their capabilities are and what the network is likely to evolve to over the years because you've got to satisfy the owners of your company.

Nick Winser: Outsourcing control room functions certainly would be a step, too, in an operating sense. Outsourcing provisions of ISO control rooms may well be a possibility. Asset management seems to be absolutely core to any transmission company, and by asset management, that's the nerve center, the records of exactly what's been done on all the equipment. When you get our asset management to look into field force, yeah, there's lots of outsourcing that could be done, and it comes down to basic economics.

Jose Delgado: Well, we chose not to insource a lot of functions, and we signed agreements with the original owners to work for us and those agreements had three-year terms. We have done an analysis and come to the conclusion that we want to continue contracting this work.

I resonate to what Paul and Nick are saying, that we intend to manage the maintenance of our equipment, but we intend to get others to do it. It is not that it's not important; it's terribly important. It's that we are convinced that somebody can do it even better than we can.

John Ahr, Director — System Operations, Allegheny Power: I have responsibility that resides in the regulated side of the electric utility business. I'm in the system operations group of Allegheny Power.

Roberta Brown, Vice President — Business Development, Conectiv: I'm currently on the energy generation side of the business, dealing with the citing and interconnection of our [Conectiv's] generation facilities. I guess I'm living proof that those who help make the rules will then be condemned to live by those same rules. I helped pull together what is now the existing PJM system and its rules.

Andy Dearman, Chief Transmission Officer, Southern Co.: My responsibility involves the design, construction, operation and maintenance of the transmission systems of the five companies — Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric — that make up the Southern Co.

Jose Delgado, CEO, American Transmission Co. (ATC): ATC owns, operates, maintains and builds transmission lines in the upper peninsula of Michigan, most of Wisconsin and a small part of Illinois. ATC was formed from the divested assets of 25 companies. My current job is to meet the needs of our customers.

Steve Kozey, Vice President & General Counsel, Midwest Independent System Operator (MISO): I've had varying duties with the electric-power industry from a brief stint right out of law school at the North Carolina PSC to working for a premier law firm in Washington, D.C. I left Washington about 10 years ago to work for PSI Energy (now Synergy), which I left for my current position at MISO.

Paul McCoy, Senior Vice President — Operations, Trans-Elect: I spent some time on the North American Electric Reliability Council (NERC) board chairing the task group that set up the new NERC government structure, which has an entirely independent board. Trans-Elect just announced the transactions involving utilities in Alberta, Canada, and in the state of Michigan.

David Mohre, Executive Director — Energy & Environment, National Rural Electric Cooperative Assn. (NRECA): I'm responsible for regulatory policy, environmental policy, energy policy, legislative and regulatory issues as they apply to the needs of the NRECA. Our focus right now, and for the past three years, is helping the Federal Energy Regulatory Commission (FERC) get it right.

Don Mundy, Vice President — Power Delivery, Black & Veatch: Presently, I'm involved with business development, performing project duties and helping clients from Canada to Mexico.

Dean Oskvig, President — Power Delivery, Black & Veatch: My main reason for being here is too learn about the issues that are driving the further development of the transmission infrastructure. This information will aid us [B&V] in providing the correct counsel to our existing and future clients.

Glen Ross, Director — Delivery Policy, Dominion-Virginia Power: I primarily have been involved in the conversion of our contractual relationships with our suppliers and with the LDE and interconnection organizations so that all generator interconnections come through my group for bulk merchant plants, as well as for a lot of our non-utility generators. I'm involved in the regional transmission organization (RTO) decisions for our company. I am the current chairman of the Southeastern Electric Liability Council Engineering Committee and past chair of the PJM members committee.

Brad Vaughan, Vice President — Power Delivery, Black & Veatch: My current responsibilities are the promotion and hopefully project development of the trans-market generation grid, which is a HVDC line linking Chicago to Los Angeles with a loop through the upper Midwest to pick-up some prime coal, lignite and wind resources. We're [B&V] trying to solve an energy problem with a combination transmission and generation solution.

Nick Winser, Senior Vice President, National Grid USA: I have the responsibility for transmission strategy and development of National Grid's interest in the United States. Previously, I was director of engineering for National Grid in the United Kingdom responsible for the National Grid transmission system as well as for National Grid's telecommunications joint venture in Poland.

Roundtable Attendees

Utility Executives

John Ahr, Director — System Operations, Allegheny Power

Roberta Brown, Vice President — Business Development, Conectiv

Andy Dearman, Chief Transmission Officer, Southern Co.

Jose Delgado, CEO, American Transmission Co. (ATC)

Steve Kozey, Vice President & General Counsel, Midwest Independent System Operator (MISO)

Paul McCoy, Senior Vice President — Operations, TransElect

David Mohre, Executive Director — Energy & Environment, National Rural Electric Cooperative Association

Glen Ross, Director — Delivery Policy, Dominion-Virginia Power

Nick Winser, Senior Vice President, National Grid USA

Black & Veatch

Dean Oskvig, President — Power Delivery

Don Mundy, Vice President — Power Delivery

Brad Vaughan, Vice President — Power Delivery

T&D World

Brian Agnes, Vice President — Electrical, Utilities & Public Service Division

Barry LeCerf, Group Publisher

Rick Bush, Editor in Chief

Jerry Borland, Executive Editor

Phil Musser, Chief Technical Editor