Statement of Dr. Alan Schriber
Senate Committee on Governmental Affairs
"Keeping the Lights On : The Federal Role in Managing the Nation's Electricity"
September, 10 2003
Mr. Chairman, Members of the Committee, my name is Alan R. Schriber. I am the Chairman of the Public Utilities Commission of Ohio and the Ohio Power Siting Board and I am here today to offer a response to the Federal role and response to the Blackout of 2003. I appreciate the opportunity to appear before this Committee, and I respectfully request that the written statement submitted under my name on behalf of the Public Utilities Commission of Ohio be included in today's hearing record as if fully read.
The Public Utilities Commission of Ohio is charged with the duty of regulating the retail rates and services of electric, gas, water and telephone utilities operating within our jurisdiction. Specifically, with respect to electricity, we regulate the distribution of power but not transmission. Additionally, since Ohio has restructured the industry, we no longer regulate generation. We have the obligation under State law to assure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions which are just, reasonable and nondiscriminatory for all consumers.
We are all deeply immersed into the factors and events that led up to the outages that occurred on August 14th. I am personally honored to be able to serve on the Bi-National Task Force on the Power Outage, and I am certain causes will be identified as expeditiously as possible. Following that, recommendations as to remedial action will undoubtedly be forthcoming.
To this point, many of the events that took place in Ohio have been documented via timelines. However, the entire picture of what happened August 14th will take serious analysis well beyond the scope of Ohio alone. The effect of the outage on the citizens and businesses of Ohio were documented by Governor Taft before the House Commerce Committee last week. In the aftermath of the outage, the Governor charged my Commission with the challenge of scrutinizing events as they occurred in Ohio and our review will complement those of the Bi-National Task Force.
As we pursue our quest for causes and solutions to the outage, I think we will find that the electrical system in this nation is by no means "third world". It is a very complex, interconnected system that has in fact worked very effectively. The system operated as it was designed to operate on that unusual day in August. Lines tripped, plants tripped, and systems were isolated to prevent further blackouts, just as they were designed to perform. If the systems had not operated as above, not only would the loss of power been far more extensive, but severe damage would have resulted to our infrastructure.
While it is reassuring that the situation was "contained" to some degree, and that remarkable restorations were implemented, we cannot ignore the fact that weaknesses exist that call for repair. Much like the interstate highway system, traffic patterns on the wires have changed, congestion has increased, and wires need to be fixed. Above all, we learned how vulnerable we are, and how dependent we are on our electric system.
You will undoubtedly hear from opponents of deregulation that states such as Ohio that have promoted retail competition collectively contributed to the 2003 outage. I must take issue with this stance. The type of competition that has been promulgated at the state level is one of retail competition, wherein end users purchase their power from marketers who, in turn, buy in the wholesale market. The grid as we know it today has always been the vehicle over which wholesale transactions take place. It was built to accommodate transactions between utilities. This is nothing new.
Nothing has really changed that principle except for the number of wholesale transactions that travel the wires, which is a measure of the overall increase in the demand for electricity. The electrons know nothing except that the quickest way to get somewhere is along the shortest path. Therefore, if you are a marketer in Illinois and buy electricity wholesale from New Jersey, you'll write a check to the generator in New Jersey. However, the electrons that you end up with will come from a generator close by, while the New Jersey generator's electrons will stay closer to home. That is the difference between the contract path and the physical path. All of this is to say that retail deregulation, which has been adopted by less than half the states with a modicum of success, should not be a relevant consideration.
The real challenge that lies ahead, and one that Congress must confront, is molding the electric grid into one that can accommodate the economic realities of today. The reality is that demand has shifted and so to have the suppliers. Parenthetically, one should note that, in the aggregate, generation supply is sufficient to meet demand. The problem is that supply and demand for electricity are not adequately converging through the grid. The reason for this misalignment is a patchwork of overseers of the grid; regional transmission systems, private transmission systems, and systems within the vertical structures of utility companies are accountable to no single boss even though they all interconnect at some point.
If we had many discreet, non-interconnected systems, I suspect we would have more blackouts than fewer, although of less duration, since there would be no interconnected neighbor to help out on a hot day. On the other hand, a regionally coordinated transmission system with a super-large geographical footprint would enhance the ability to work through all kinds of contingencies, some of which are simply beyond the scope of smaller control areas.
Everyone should want to see our transmission resources allocated in an optimal manner. I am prepared to argue that its achievement is predicated on the super-regional transmission system alluded to above. To this end, FERC is the federal agency endowed with the authority to make it happen. Congress should support FERC's efforts to enlist participation by all transmission owners into a regional grid that recognizes the economies of centralized management.
I do not know how many billions of dollars it might take to upgrade the grid, but I do fervently believe that whatever dollars are expended are done so most economically when the needs of the grid as a whole are evaluated as objectively as possible. Given the myopia associated with the fragmented systems of today, dollars may be thrown at "fixes" that often do nothing but add an asset to the utility rate base; not only are the needs of the region ignored, but the utility that has determined to fence itself in does very little at the margin to benefit its own customers. Regional approaches must be adopted to appreciate the needs and recognize the benefits.
An independently administered regional transmission system, on the other hand, could prioritize its investments based upon marginal benefits. Dollars would flow to the points on the grid that would yield the most benefits, for example, the amount of regional congestion that is relieved, regardless of whose "backyard" it resides. Why would a single state permit the construction of a high tension wire within its boundaries if there were not a single "drop" along the way? The answer would be that it probably would if it understood that the congestion relieved by the line significantly increased the level of unobstructed power flows within the state. The problem is in the "understanding". The manager of an independent, integrated, profit maximizing transmission organization understands the resource optimization process because it has the bigger picture.
In addition to rational planning, the aggregated grid system is also more likely to attract capital. Investment dollars move to the places where the potential yields are the greatest given the risks. We might conjecture that the greater the number of electrons that flow, the greater the dollars that flow to the construction of wires that carry those electrons. A unified super-regional grid maximizes power flow through the grid and should be politically indifferent as to the points of need located within. In contrast, sub-optimal investments in electric facilities are made when a single entity, without regard for the region around it, is more interested in closing itself off from the greater good. Those who provide the dollars are more likely to follow the path of investment with the greatest potential for risk/return optimization, which from my point of view resides with the regional grid.
One great challenge to enhancing the system is the ability to site large transmission lines across states. Large towers with conductors capable of carrying hundreds of kilovolts are generally not a welcome sight in most areas, and resistance to their construction is something that we'll live with indefinitely. The authority to site power lines today lies with the states, and therein lies a source of debate for the Congress.
Arguments break both ways with respect to federal-versus-state siting. Most states stand firm in their belief that power siting is strictly a state issue, and some good arguments are made on their behalf. First, the state decision-makers know their constituents. They are most familiar with the local contacts that so often weigh in on siting issues. Second, the speed at which certificates are granted most certainly exceeds that accomplished under federal jurisdiction; our experience with pipelines underscores the point. Finally, state officials will bear the brunt of unpopular decisions regardless at what level those decisions are made.
In Ohio, the legislature has given the Power Siting Board, which I chair, broad powers. Affected parties are afforded hearings, and certificates are granted only after a extensive range of issues are examined. These include environmental, health, agricultural, and others. Our siting process compels us to take into consideration the effects on the region, not just the state. All told, Ohio is among the most progressive states in getting utility facilities up and running.
Unfortunately, other states do not move swiftly as does Ohio in siting electric or pipeline facilities. Furthermore, some states are dominated by Federal lands. As a result, some argue that federal preemption of state siting decisions is appropriate. In a series of meetings under the auspices of the National Governors Association, it was decided that, at least in the Midwest and the East, states could agree to work together to site interstate transmission lines. As a compromise, the Electricity Title of the Energy Bill under consideration provides that the FERC shall provide a "backstop" in the event of a
recalcitrant state. This is a logical, progressive outcome.
I have been talking to this point about the physical conditions that bind the grid for better or worse. However, the economics of all of this must not go unmentioned. Different transmission systems, as fragmented as they might be, often employ pricing strategies that are inconsistent with one another. When the price of moving electricity a number of miles across different operating areas varies according to whose area is being crossed, the outcome can be quite confusing for those paying the freight. Without belaboring the point, another strong argument that favors super-regional management of the grid is pricing consistency and the concomitant higher level of economic certainty conferred upon users of the grid.
This aggregation of transmission systems or control areas is the cornerstone of the FERC's endeavor. To be thoroughly effective, however, it must also draw lifeblood from Congress as Congress deliberates its Energy Bill. It is antithetical to our interests to delay FERC's attempt to implement its design for a rational transmission market.
If Congress must do any one thing immediately, it must address the issue of system reliability. While the states have the authority from their legislatures to set and enforce rules for distribution systems, the federal government must confer power upon someone to do the same for the transmission system. Whether it be the North American Electric Reliability Council (NERC) as currently proposed in the Energy Bill, or whether it be the FERC, the rules of the road must be mandatory. Once in place, the enforcement of the rules can follow the course taken by other federal agencies.
A unique and efficient means of enforcement of some federal rules has evolved over the years. Ohio, as well as other states, undertakes a number of such tasks on behalf of federal agencies. For example, the US Department of Transportation has very specific rules that speak to natural gas pipeline safety. Ohio's Public Utilities Commission receives funds from USDOT to inspect and enforce those rules within the state's borders. Ohio also participates in the inspection protocols for the transportation of hazardous materials. The same process has evolved with the Federal Railroad Administration which has prescribed rules for rail crossings. The Ohio Commission has personnel evaluating and prioritizing grade crossings for the purpose of supporting communities with safety devices. Given the fact that Ohio and other states already support federal agencies in rule enforcement, does it not make sense to consider the same for the transmission of electricity?
The events of the past couple of weeks speak clearly to the need for Congress to do two things. First, Congress must focus on endowing some agency or organization, e.g., the FERC or NERC, with rule-making authority that locks-in our quest for a reliable grid.
Second, it must enable the FERC to move forward in its initiatives to bring about a physically and economically rational structure and governance to the transmission system.
I appreciate the opportunity to have appeared here before you today and look forward to clarifying anything that I have said.
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