The Business of Politics
Patrick Henry Wood III stepped into the chairmanship of the Federal Energy Regulatory Commission (FERC) in 2001.
Wood arrived not long after California's deregulation attempt collapsed in a series of power outages that required continued oversight and intermittent intervention. He is known for diving into critical issues and is obsessed with improving the health of our electric infrastructure.
A native Texan, Wood arrived in Washington with a strong set of skills honed when he served as chairman of the Public Utility Commission of Texas, where he spearheaded the movement to open up the state to choice. Wood is committed to completing what he started in Texas.
The following are excerpts of an exclusive interview with T&D World.
T&D World: The FERC had to cap rates in the California market. Won't you need some kind of market monitoring or market power mitigation to keep us from suffering the same fate on the national level?
Wood: The three things I'm about are efficient infrastructure, balanced market rules and vigilant market oversight. You get all three with our approaches on wholesale markets with the regional transmission organizations (RTOs) and the Standard Market Design (SMD) rule. But, clearly, the third prong — market oversight — is critically important. Even though markets are usually a better way to go, we need to admit that we don't have a market in every corner of this country. So in the Boston area, or New York City, or the Upper Peninsula of Michigan, or San Francisco where we have load pockets, we've got to provide a little more regulation than some parties may want. This is the approach that we've endorsed in the SMD rule. We probably need different approaches in different parts of the country depending on market concentration of generation ownership or on the type of retail regime in place. To answer your core question, yes, we do need market mitigation where appropriate that is sufficient to solve the problem — but not so much that it kills investment.
T&D World: Won't we need some flexibility? We saw that when things weren't working in California, there was no Plan B.
Wood: Clearly, this is an iterative process. We've encouraged the formation of regional state advisory commissions to work with stakeholder groups, independent transmission provider boards and regional market operators. The big picture is out there, but if you need to customize it or rethink a major plank, this system is able to do that, just as our gas agenda has been adjusted over the last 15 years with competition in gas as a dominant paradigm.
T&D World: How much transmission will we ultimately build? Do you envision a robust national integrated grid or do you see us focusing instead on addressing bottlenecks and smaller regional issues?
Wood: I'd say we will probably have five regional grids — the West, the Electric Reliability Council of Texas (ERCOT), the Northeast, the Midwest and the Southeast. You'll clearly see stout investment evolve around those regions. The bigger question is, “What about between regions?” Today, we have 140 or so individual utility control areas, and the real rub is that utilities are not building that much to connect with each other, just enough to meet the basic minimum need for reliability. With five large regions, it becomes easier to see more transmission getting built to interconnect within these regions.
T&D World: What about the seams issues that crop up between operating regions? In talking with Paul McCoy, senior vice president of Transmission Systems Operations for Trans-Elect, the seams issues didn't seem to bother him. He thought we've already gone a long way to resolve them.
Wood: I see quite a few issues to address between control areas, but they may not be real deal breakers, just tariff issues and gaming opportunities.
T&D World: McCoy focused more on financial issues like, “Who would actually pay for what and why in transmission?”
Wood: I agree. If on a scale of one to ten the finance issue would be a nine, the seams tariff issues would be about a four. The regions will be sufficiently large enough that we have our work cut out just getting the regions beefed up internally. That's why we need to get regional transmission planning processes in place.
T&D World: When I talk with transmission vice presidents, they say the No. 1 issue is to figure out how to pay for new transmission in an area where most of the value goes to people in other states.
Wood: That is a participant funding issue. As recently as last week, we had a proposal from the utilities in the Southeast concerned about significant potential export from the region of power generated along the Gulf Coast. They feared that local customers would be paying for all the transmission but getting no benefit. That certainly resonated with the commission, and we agreed that, while a departure from our long-standing pricing policy, it was time to start thinking through the process that could provide a disincentive to generators from building where needed. I think harmony can be achieved.
T&D World: Who would pay for this transmission to export power out of the region? Would it be the load or the generators?
Wood: Ultimately, the customer pays for everything. You can allocate the costs to the generator and let him recover it in his costs, or you can allocate it to the load and the adjacent RTO and let them recover it in their costs, or you can put it on the individual transactions serving the end-use customer and recover it that way.
T&D World: Which way will you go about it?
Wood: We are looking to the regional state advisory commissions to provide advice on that. We pretty much need to make it consistent across the country.
T&D World: The NERC Reliability Assessment states that we only plan to build 10,000 miles (16,093 km) of new transmission 230 kV and higher over the next 10 years. We need to do better than that.
Wood: And how much of that's in ERCOT?
T&D World: A very significant percentage. Do you think we could possibly double or even triple the new transmission built in this country once utilities have more incentives?
Wood: I hope so. I've heard from the transmission owners and the EEI crowd that we need to make it absolutely clear how cost recovery works so these guys can get their money back. I'm going to make sure of that. But recognize it is a delicate jurisdictional balance between us and the states as to how that money gets collected and how facilities get permitted and built.
T&D World: The states will still take the primary responsibility in permitting and siting transmission?
Wood: Correct.
T&D World: You're not looking to get federal eminent domain or some type of backstop provision?
Wood: Congress would have to do that, and I don't see them moving that far, although they've made some attempts in that direction. We have to work with what we've got.
T&D World: The Recent National Transmission Grid Study by the Department of Energy states that there's US$500 million in extra value if we can maintain an upgraded transmission system. It seems like we could do a lot with that amount of money.
Wood: Clearly. We've talked a lot about around building new transmission, but there's a lot we can do to soup up existing rights of way with new technologies or better operational techniques that somebody would use if they were a transmission-only business. Independent transmission companies like Trans-Elect, the American Transmission Co. (ATC), TRANSLink and National Grid focus just on transmission. They'll find ways to efficiently use the system. We've got to be smart enough to give them incentives to make them work for those efficiencies.
T&D World: Will we see this trend toward transmission-only companies accelerate as players whose hearts aren't in transmission either throw their transmission into a pool or sell out?
Wood: Yes, if this Congress passes tax legislation encouraging such activity. Some companies, particularly those trying to clean up their balance sheets, are looking for a good business opportunity to sell at perhaps a slight premium while desiring to delay taxes on mark up to book. Make no mistake, the formation of transmission-only companies is a desired endpoint for everybody here at FERC.
T&D World: In regards to your regional state planning commissions, can you give me some more details?
Wood: I'm inclined to let you do whatever you legally want to do on the regional level. We'll have some panel sessions at a meeting with utility commissioners in Chicago in November to flush this out with the states. I'm breaking FERC precedent here to go out and say, nothing's sacred to us, we just want to solve the problem. We need to get past this jurisdictional standoff. If you want to do rate cases, we'll do market monitoring with you. I certainly need help overseeing the independent transmission providers and the RTOs. No one is better than the state regulator for looking at costs and making sure that they're prudent.
We've got to create something between the state and the national government that is suited to a regional need that reflects the way these transmission grids are being used and these energy markets are being developed.
T&D World: Don't the states realize that, ultimately, if we can't resolve transmission issues regionally, it will have to be solved nationally?
Wood: Honestly, I don't play that kind of ball. But as a practical matter, yes, we've got to provide some leadership and FERC has to be the catalyst for local and regional solutions to market issues.
T&D World: So when you combine this participant funding approach with state regional planning commissions then you might actually have a solution that will work?
Wood: Bingo.
T&D World: Pat, what kind of responses are you getting from Tennessee Valley Authority (TVA), Bonneville Power and public power in general.
Wood: I think they're all pretty traumatized by the broader events of last year. TVA's new chairman, Glen McCullough, is a great guy. I've met with him several times. They've signed a memorandum of understanding with the Midwest Independent System Operator (MISO) and with Southern and Entergy to basically interconnect their large control area pursuant to FERC's market design. That's a positive move. BPA is a filing member with the RTO West filing, which we approved last month. It was actually a very well-done proposal that sets the mark for the country.
T&D World: The FERC is hosting meetings all around the country. Is that to put more detail into the NOPR?
Wood: Yes, it's really to hash out the details on the outstanding five issues that have been raised. One of them, I mentioned to you, is a meeting in Chicago on the role of the states. One is a meeting in Portland to talk about the Western issues. The West is one large interconnected grid, and we've got to make sure that we work it out just right. Participant funding is another issue we are addressing. We met on software market monitoring several weeks ago. We have another meeting in December — this will be interesting to your readers — on liability limitations that the IOUs have proposed, which mirrors state protections embodied in state law for owners of transmission. They want liability limitations incorporated into federal regulation as well.
T&D World: I notice that you require generators to provide extra capacity. Doesn't that bother the generators to have more capacity than they can typically sell?
Wood: Heck no. They love it, because they can get the money for generation in advance of when they actually need to build their plant. A long-term-capacity market is a much more comfortable way to make your return than depending on the volatile energy market.
T&D World: It seems intuitive that generators would make more money if generation was scarce.
Wood: Well, that's true, but it depends on the kind of generator you are. If you're one that's totally speculative you wouldn't like it, but most of those guys are now gone. The ones around now want some stability, want some kind of anchor in their portfolio.
T&D World: Can you explain marginal cost pricing and congestion revenue rights?
Wood: Basically, we have just so much capacity on the transmission system to handle buyers' and sellers' transactions. When you hit the 100% point, anything over that is going to require the system to be redispatched in a different order than good economics would otherwise require. The cost of going out of merit to make that 101
T&D World: Who will decide what strategy makes the best economic, sense whether you put in new generation, transmission or demand side?
Wood: The marketplace. That's the whole point.
T&D World: Will it be the marketplace assisted by this regional state planning commission?
Wood: Yes. The point of the commission planning process is to give visibility and transparency to the choices that exist or could exist out there. We saw the value of an open process in Texas. Generators said, “Rather than you build a big transmission line there, I might put a generation plant right here,” a decision that everyone agreed was the better solution. The public process lets people see the needs and the analysis that go into operating the grid, enabling the people to respond on a market basis.
T&D World: Now that you've approved the RTO West and the Midwest ISO, what is the status of the rest of the country?
Wood: In the Southeast, SeTrans RTO was a declaratory order, so it's earlier in the phase, but it was a positive order as well. We've given conditional approval to West Connect, out in the desert Southwest, and to PJM. The only one that has final approval is MISO. We've given conditional approval to Grid Florida and Grid South. California is an ISO, so it's going through the RTO process as well. So, we've got three in the South and three in the West that are done. And then you've got the New England and New York ISOs that have recently filed for a merger of their ISO operations.
T&D World: To make an RTO?
Wood: To make an RTO, yes.
T&D World: Why did you let ComEd into the PJM?
Wood: Transmission-wise it is very interconnected with American Electric Power (AEP). We had to draw the line somewhere. I think our preference would have been to have them and Illinois Power be a part of the Midwest grid. But we were able to work through the reliability issues with the companies, with North American Electric Reliability Council (NERC) and with our staff. Quite frankly, we've moved pretty far down the path that RTOs be voluntary associations.
T&D World: You seem to be a little more flexible than your predecessors.
Wood: This FERC is committed to getting these problems resolved. If that means a different strategy and style then, “guilty as charged.” But we've got a pretty clear vision of what needs to be done here, and we adopted our strategic plan, which you can view on our Web page. We try to tell the world what we're up to and that we understand where we're going and why we're going there. Our staff is pretty energized. Leadership is meant to get people a game plan, get them on board and then start executing. It's not a whole lot deeper than that.
T&D World: What are the biggest hurdles facing your SMD strategy?
Wood: Just the amount of detail to be mastered. We're past the big-picture issues like independence, governance and scope, the easier parts of Order 2000. We're now into the details: How do you make sure that market power mitigation is appropriate? How do you get congestion management cost allocated to the right party, the LMP issue? How do you make ancillary service markets work effectively and avoid the opportunities for gaming within those markets? How do you get transmission expansion and planning right so that transmission owners have an incentive to build? How do you resolve the reticence to build when you know that the construction is going to benefit somebody in a distant state?
That's why we're going back out on the road for more feedback on those particular issues, because the details matter so terribly much. I learned that when we put together ERCOT, so now I'm going back to get the other ones done. Our biggest challenge is to keep focused on the game plan here, and master the important details that make the markets work.
Patrick Wood III
Patrick Henry Wood III is chairman of the Federal Energy Regulatory Commission (FERC). He was nominated to the commission by President George W. Bush and confirmed by the Senate in 2001. His term expires June 30, 2005.
Prior to joining the commission, Wood, a republican, was chairman of the Public Utility Commission of Texas. He has worked as an engineer with Arco Indonesia and as an attorney with the Baker & Botts law firm in Washington, D.C. He also served as legal counsel to the chairman of the Texas Railroad Commission. In the early 1990s, he was legal advisor to FERC Commissioner Jerry J. Langdon. Throughout his career, he has worked to advance a pro-customer, market-oriented vision of utility regulation. Wood has a BS degree in civil engineering from Texas A&M University and a J.D. from Harvard Law School.
Federal Energy Regulatory Commission
The FERC is an independent regulatory agency, which succeeded to the regulatory responsibilities of the Federal Power Commission in 1977. The commission's responsibilities include licensing of non-federal hydroelectric facilities, certifying natural gas pipelines, regulating the rates of natural gas pipelines and pipelines transporting crude oil and oil products, and regulating the rates and other aspects of electric-utility activities.
Since 1935, the FERC has regulated certain electric-utility activities under the Federal Power Act (FPA). The FERC oversees the rates, terms and conditions of sales for resale of electric energy and transmission services in interstate commerce by public utilities. The FERC ensures that the rates, terms and conditions are just and reasonable, and not unduly discriminatory or preferential. The commission reviews mergers and other asset transfers involving public utilities.
The FERC may not regulate retail sales or local distribution of electricity.
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