It was no more than a 10-second event.

A tree brushed a power line. Switches failed. Power line operators knew nothing — and did nothing — about an electric current tsunami headed their way.

Thousands of hours are now being spent investigating a few seconds that triggered the nation's worst power outage, paralyzing 50 million citizens over several days in mid-August. The estimated economic cost of blacking out New York, Detroit, Toronto and hundreds of towns and communities in eight states approaches $6 billion.

The power is back on — but those few seconds promise to trigger the biggest shakeup ever in a century-old electric power industry that — it is now readily apparent — is as vital as air.

Those in the thick of the investigation say it may take a year to fully know what steps the industry must take. Congress this fall, in no mood to wait, is expected to take the first important steps of mandating new standards of reliability for those charged with monitoring our nation's long distance power lines.

Ultimately, it may well cost upwards of $100 billion to boost a 1950's era power grid into the 21st century, leading industry researchers said. In exchange, America will get a digital power system that is reliable, efficient and compatible with a wide variety of new power generating technologies now on the drawing boards.

The sheer magnitude of power sector spending — and the new technologies it will spawn — may very well rival the Apollo moon program in its spinoff benefits to our nation's economy. Not only will it end the persistent low grade recession that has mired our economy for several years, but it may well set the foundation for jobs and wealth formation for coming generations of Americans.

Near unanimity is emerging on the need to fix the grid.

Murray Weidenbaum, a prominent economist at Washington University and chairman of President Reagan's council of economic advisors, said, “Transmission has been badly underfinanced. Every study since the August 14 fiasco has come up with that conclusion. It has fallen between the cracks and no one was paying attention.”

“The system was highly stressed,” said Calpine Corp.'s executive vice president, Jim Macias. “Fragmented planning has led to a hodgepodge of connections.”

How bad is it? Power lines built in the 1960s to shoulder loads flowing in one direction 40 years later are carrying power in the opposite direction. Early efforts to document the August outage left investigators incredulous that data lacked an essential time stamp, making it a nightmare to unravel the sequence of events. While the outage was unfolding grid operators' computers were crashing. Technicians overseeing neighboring grids a couple hundred miles away had no clue as to what was transpiring.

Such insanity is about to end.

Thought leaders in the power industry envision the creation of a highly sophisticated grid that will provide power companies and their customers with real-time information about power demand and costs. For the companies responsible for transmitting power, such information will enable them to seamlessly coordinate the use of their resources and make cascading outages like August's obsolete.

New methods of generating power — such as fuel cells sitting atop office buildings and in subdivisions — will proliferate, joining a growing fleet of wind and solar installations.

While the industry may have been slowly, erratically evolving in that direction, many now believe the mid-August outage will hasten capital investment, research into new technologies, new thinking among state and federal regulators and changes in federal utility laws that have been in place since the 1930s.

That is the consensus view of several dozen leading industry experts, regulators and corporate executives interviewed in recent weeks by Transmission & Distribution World. This is a report of their views of the legacy of the August outage.

Capital Investment

Capital investment in the power grid has languished for years.

Clark Gellings, vice president at the Electric Power Research Institute, in Palo Alto, Calif, told the Wall Street Journal, “today we're making the lowest yearly investment in transmission since the Great Depression. Electricity demand has grown 35 percent in a decade but transmission capacity has increased just 18 percent.”

A federal study says that actual transmission construction has declined 30 percent since 1990.

Wall Street concurs that not enough capital has gone into the grid.

“The system is in very serious need of modernization and more efficient operations,” said Leonard S. Hyman, a senior associate of R.J. Rudden Associates Inc., in New York. Hyman, who headed Merrill Lynch's utility research group for 16 years, said that the industry now spends $3.5 billion to $4 billion a year on transmission construction and improvements well short of the $5.5 billion that is needed.

Sounds like a lot, but not when measured against the colossal industry. The assets of investor-owned utilities top $1 trillion, their market capitalization is $300 billion and their annual revenues are about $240 billion.

By the time needed upgrades in the transmission grid are made, typical consumers may wind up spending no more than an additional $50 over five years for their power bills, Hyman said.

Regrettably, a variety of factors have held up needed investments in the grid. For one thing, many utilities in the 1990s agreed to freeze their rates for several years in return for restructuring their business. “They can't get real recovery for new investment, so they stopped making those investments,” Hyman said.

While executives dedicated the smallest sums possible to the transmission grid, they chased glamorous utility deals from Brazil to Australia. For years utility executives have known that regulators offered them dismal returns on money sunk into transmission. Instead, they were attracted to richer profits available in building new generation and through acquisitions and diversification.

Executives in the field closest to the transmission business understand the grid's current appetite for huge investment. Consider the case of the American Transmission Co., which is responsible for 8,900 miles of transmission lines. Jose Delgado, the company's colorful, quotable president, points out that his company plans to invest $2.8 billion on system upgrades in the next 10 years.

Projecting his knowledge of transmission needs in the upper Midwest nationally, Delgado agrees with forecasts that the ultimate price tag could approach $100 billion. But that sum must be put in context. It is a fraction of the trillions of dollars spent each year to fuel power plants around the nation producing 900,000 megawatts of power, Delgado said.

Some observers cautioned that it is too early to say it will cost $100 billion to pay for transmission grid improvements.

James P. Torgerson, president and chief executive of the Midwest ISO, said, “I don't know that we're that far along in the analysis to conclude that. We want to see what the bi-national investigation comes up with,” he said, referring to the joint American and Canadian probe into the outage. The Midwest ISO, an independent transmission system operator, covers much of the Midwest.

Looking to his own region, Torgerson said that the Midwest ISO has identified $1.3 billion of capital investments that need to be made - with $500 million projected just for enhanced grid reliability. The Midwest ISO is comprised of 12,000 miles of transmission in 15 states and the Canadian province of Manitoba.

Communications also must be upgraded so that transmission grid operators are in touch in close to real time, he said.

Dean Oskvig, president of the power delivery division of Black & Veatch, a leading power engineering firm, based in Overland Park, Kan., observed, “We in the industry know the investment in the grid has not kept pace with the increase in load demands.”

Black & Veatch recently did a detailed study that analyzed the power grid's shortcomings in moving vast quantities of power east or west across vast distances.

That is a function of how the power grid has developed. The first transmission lines in the nation were built a century ago to connect power plants with customers. Many such small islands gradually were connected by transmission lines. Power plants were built further from cities, and grids had to carry their load to market.

Meanwhile, the Federal government has taken a series of actions designed to create a wholesale energy marketplace. Grids that were built and controlled by single entities, to carry company-generated power over company-owned power lines to company customers now had a new mission — a mission for which they were not designed. That mission was to carry other generators' power on behalf of yet other company's customers.

Delgado of American Transmission said, “the biggest problem with the transmission grid is that it was designed for integrated utilities with limited trading. There are significant gaps in the network that impedes operation of the system.”

Steven Strogatz, a professor of applied math at Cornell University, recently outlined the gaps that must be bridged in an op-ed piece in the New York Times.

“… Thousands of power plants and substations in the grid need to be able to communicate with one another when any part of the system is breached, so they can collectively decide which circuit breakers should be tripped and which can safely remain intact,” Strogatz wrote.

“The technology necessary to achieve this has existed for about a decade. It relies on computers, sensors and protective devices tied together by optical fiber so that all parts of the grid would be able to talk to one another at the speed of light-fast enough to get ahead of an onrushing blackout and contain it,” he wrote.

The technology exists. The costs of an upgrade - spread over our economy and its enormous power system - are manageable. So what obstacles must be overcome for needed system improvement?

The answer lies in Washington.

New Laws, New Regulatory Outlook

There is nothing like a multi-day power outage affecting 50 million people to get the attention of politicians. In coming days, political careers will be made and unmade as lawmakers attempt to deal with a white hot issue that is the focus of widespread public attention.

However, it is not entirely clear where Congress is headed with energy legislation. Republicans are holding out for a sweeping energy bill that would include allowing for oil exploration in Alaska and other initiatives that would spur creation of a new “hydrogen economy” and lessen American dependence on foreign oil. Democrats in the remaining months of the year do not want to squander time debating huge environmental issues. Instead, they want to work on the passage of an energy bill focused closely on fixing transmission system failings.

What provision must be included in any energy legislation?

Reliability rules must be obligatory, agreed virtually all industry leaders interviewed for this article.

Legislations should eliminate the negative tax impact of divestment of transmission assets on utilities, Delgado said.

Consensus also has emerged around the position that the Public Utility Holding Company Act should be repealed. Holding act restrictions hinder evolution of multi-state transmission companies, Delgado said.

John Weisgall, MidAmerican Energy Holdings Co. vice president, legislative and regulatory affairs, in Washington, agreed that PUHCA must be repealed to spur needed investment in transmission. MidAmerican's financial backer Warren Buffett stands ready to invest $10 billion to $15 billion in the energy arena once PUHCA is repealed, he said.

Todd Raba, MidAmerican Energy Co. senior vice president, delivery services, said, “You'll see the Microsofts, Shells, Bechtels and others looking at buying a utility. About 2,500 utilities in the United States sell electricity. There is room for consolidation.”

While the outdated federal holding act should be repealed, certain protections must remain. Specifically, there must be modernization of consumer protection laws.

“We want responsible investors in the field,” Raba said. “We want strong consumer protection laws. We support expansion that provides access to books and records. ‘Open up your business, guys.’”

The Edison Electric Institute, which represents investor-owned utilities, wants regulators, policymakers and Congress to take practical steps that would spur transmission investment.

The FERC needs to review the 10-12 percent transmission rates to make them “competitive with other segments of business,” said Bill Brier, EEI vice president of policy and public affairs.

“In addition, legislation should allow transmission assets to be depreciated in 15 years instead of 20,” he said.

In event that a needed line cannot win state approval, Brier said, “The federal government should have backstop siting authority

Out in the states, too many utility regulators are paralyzed with fear. “One reason is that profound, complex changes that have taken place in the industry. One Midwest utility board member observed, “We're in the middles of a transition from a regulated state to an unregulated state.”

Deregulation Failure

Many state regulators, however, have largely resisted change. “The consensus is that deregulation was a failure,” said Hyman of R.J. Rudden. “Regulators won't take the initiative. They need to step up to the plate and I don't think they are going to.”

For any number of reasons, state regulators - particularly in regions of the country where electric power is relatively inexpensive - have grown increasingly at odds with federal regulators intent on upgrading the national transmission grid while nourishing a robust wholesale energy market.

In 1992, a federal law first through open wholesale electricity markets to competition. Four years later, the Federal Energy Regulatory Commission (FERC) opened the transmission grid to competing power generators. In 1999, the FERC started pushing utilities to band together in regional transmission organizations to coordinate their transmission lines. Largely as a result of state level opposition, formation of RTOs has been slow to evolve.

Now FERC wants to make formation of the RTOs a requirement. However, it is not clear how many RTOs will evolve. FERC initially wanted five. Now, the agency seems content to push for 10.

Utilities and state regulatory commissioners in regions with relatively low-cost power may resist efforts to loosen utility control over transmission assets.

Macias of Calpine said it is understandable that huge vertically integrated utilities like Southern Co. are “opposed to having anybody playing in their sandbox.”

However, “you cannot have some parties decide which power plants get built and also who has access to grids,” he said. “The solution is to separate transmission from generation.”

Southern is not so sure.

Mike Tyndall, Southern spokesman, said, “Low cost and high reliability. That's something we have in the southeast and do not want to jeopardize.” Southern owns more than 26,000 miles of transmission. Bottom line, he said, “regional grids with adequate generation located close to the load is more reliable and secure. That's just the way physics works.

“Electricity is inherently local,” Tyndall said. “States should regulate all aspects of local rates. The outage hasn't changed our views.” Duke has similar views.

Scott Henry, Duke Power's director of regulatory policy, said, “Duke believes vertical integration can co-exist with wholesale markets.”

Duke supports voluntary RTOs — as a compromise position, Henry said. As a vertically integrated utility in several states, Duke must work well with state and federal regulators. “If state and federal policy conflict, we get caught in the middle,” Henry said.

That is very much the concern of Stan Wise, the new president of the National Association of Regulatory Utility Commissioners and a state regulator in Georgia.

Speaking as a Southern regulator, Wise said utilities in his region fear that in the rush to fix the energy system there may be a “push toward breakup of vertically integrated companies.”

“The individual states will ask the question of their utilities, ‘what protections do we have?’” Wise said.

Utilities in the Midwest - close to the disastrous outage of Aug. 14 — say that immediate steps must be taken to streamline control of transmission as well as to upgrade its performance.

Gary Neale, the chairman of NiSource, said “We have to clarify what we are doing with these transmission grids. We're trying to do something it wasn't designed to do.”

“We need to see generation in load centers, and not such a heavy reliance on the grid. Physics says you cannot get 100 percent reliability by building up the grid.”

MidAmerican Energy Holdings Co., the Des Moines, Iowa energy company that has been snapping up — with the backing of billionaire Warren Buffett — energy assets in a down market, supports formation of transmission organizations. It is planning to join TRANSLink ISO in the Midwest.

To expect the grid to support open wholesale markets it must be upgraded, said MidAmerican executive Todd Raba. “You need to invest to be able to accomplish that.”

Public power entities, however, caution that care must be taken in overhauling the transmission grid.

Glenn English, chief executive officer of the National Rural Electric Cooperative Association, in Washington, D.C., said that he has heard estimates that it may take $100 billion to fix the grid - but he is hopeful the job can get down for half that sum.

The NRECA has more than 900 members in 47 states serving 36 million customers.

If transmission rates must be raised to spur investment, he said, regulators should take care that the new rates only apply to newly built transmission “and make sure that the money doesn't go overseas or to CEO bonuses.”

Bottlenecks

“Many people are going to be trying to make a lot of money in the name of upgrading transmission,” English said.

Transmission system abuses would not be new. “The industry knows where the bottlenecks are,” said Patrick Lavigne, NRECA spokesman. “The problem is that where the bottlenecks exist there are opportunities to make money.”

Turning transmission assets over to transmission-only companies will guarantee that the cost of upgrading the grid is properly allocated, experts said. Why?

When vertically integrated utilities faced the cost of investing significant sums in transmission, they balked. They did not want to impose those costs on their customer base, when the benefits of improved transmission would flow to other companies and their customers, said Delgado of American Transmission.

Some utilities as well as generating companies applaud the renewed push for RTOs.

“Stronger regional planning and control is the answer,” said Calpine's Macias.

However, while much of the attention now is fixed on upgrading transmission, it would be a mistake to fail to ensure that there are adequate generating resources, Macias said. As many as 25 to 30 percent of the generating units operating today were built prior to the Vietnam War and they promise to become increasingly unreliable, Macias said. Upgrading generation — the business Calpine is about — produces real, hard benefits.

“We're 90 percent cleaner than old plants and 40 percent more efficient,” Macias said.

Conclusion

Kurt Yeager, the president of EPRI, the Edison Power Research Institute, in Palo Alto, Calif., has a vision of a digital power grid. His organization is behind the back-of-the-envelope estimate that it would cost $100 billion to upgrade the grid, with under half of it dedicated to transmission and the balance earmarked for the distribution network, which is closest to end-users.

“While the number sounds like a big number, it is really an investment in the economy,” he said.

Over roughly a decade, the mechanical power delivery system must be digitized to carry “smart electrons” bristling with information instead of the “dumb electricity” used today to power the country.

In a digitized power delivery system, today's metering technology would be replaced by a “two-way portal.” Both the power users and the suppliers would be capable of communicating in real time, Yeager said. Once suppliers fully understand power demand, they can more elegantly and intelligently plan for construction of new power generation. Consumers will have incentives to invest in solar power or fuel cell technology to lower their energy costs when system-wide energy prices soar.

“The business of electricity moves away from the bulk commodity business,” he said.

Clark Gellings, EPRI vice president of power delivery and markets, said today we are saddled with “1950s technology that, with some exceptions, hasn't seen modernization.”

For instance, now it takes 50 seconds to assess the system.It should take less than 1 second, he said. “We need time-stamped, real-time data.”

Gellings said that it will take four years of all out research and development to develop the technology needed to modernize the grid. Currently, 65 utilities contributed about $90 million a year for R&D for power delivery technologies. That must be ramped up to $250 million, he said.

“We are four to five years away from having all the technology we need to be put in place,” Gellings said. “Putting it out would take 10 years. It will be a massive effort.”

While the cost would approach $100 billion, the savings and benefits could dwarf that sum.

“We're losing $119 billion a year in poor productivity, poor reliability and poor power quality,” Gellings said.

That problem will get fixed, many executives around the power industry today believe.

The image of tens of thousands of New Yorkers streaming on foot across bridges, of inner city residents huddled on darkened streets, of dozens of idled auto assembly plants will not soon fade from the public retina.

New energy policies, new energy businesses and new ways of doing business all will be the legacy of the Power Outage of 2003.

The power industry will never be the same. Our national economy is up to the task. It too will be brought into the 21st century in the process of guaranteeing that the lights — and our computers — stay on.

What Causes Power Outages

• How can hot weather affect power systems?

• What causes momentary interruptions?

  Momentary interruptions, while annoying, are unavoidable. When a tree limb falls on a wire, sensing equipment will break the circuit for a split second. This break prevents the system from major damage and actually helps prevents outages.

• What causes rolling blackouts?

  On occasion, demand exceeds the amount of electricity that can be produced or delivered. To prevent the whole system from being damaged, electric com panies will shut down one substation at a time, usually for a short duration, until demand subsides.