While most agree that transmission investments generally benefit all RTO members, there will be times when specific projects clearly have specific winners and maybe specific losers. Guess what - the losers will scream. Two cases are in the news. First, the Southern Company objects to better transmission links to the Northeast since what Southerner wants a damn Yankee to steal their cheap power? The other case is in Rhode Island where the PSC chairman objects to Rhode Islanders being charged $63 million to improve a link that would primarily (in his opinion) just help neighboring Connecticut. One can similar battles in, say, WSCC when California needs a transmission improvement and those heartless Oregonians object.

It would be easy to see future conflicts where independent power producers overload a link and seek the RTO to pay to bring their power to market. Also, is rapid load growth for one utility is to be subsidized by all RTO members?

Obviously governance of the RTO will be a very touchy subject, just as it was with California ISO when the governor sweep the board and installed his appointees.

Given that, much has been written and spoken recently about providing incentives to utilities over and above their existing rates or offering tax incentives to get transmission built. The reality is that in most cases the concept implies that the investors would receive something similar to existing cost of service revenue security. The suggestion proposed here pertains to the financing of projects determined to be necessary for "the benefit of the grid" and where revenue security is part and pacel of the project investment. In that case the grid operator should act to ensure that the lowest credible pricing structure should be secured. This is an open market pricing mechanism for the cost of service based pricing.

Volatiltiy Managers works to provide incremental improvements in mechanisms. With the caveats noted above, this is an incremental movement towards using open markets to secure lowest cost services for the grid.

Transmission lines have the characteristic that first cost is high but O&M is low. Once in operation, there is little or no management lattitude. That means that everything really depends on the construction contract bidding process and in the financing structure. Both are highly competitive industries already and it seems there is little opportunity for improvement. There also seems to be few technical advances on the horizon. Is anyone ready to put up risk capital for an underground superconducting transmission line?

The only possible improvements in the process short-term are in planning and approval process, really, how to appease or overcome the NIMBYs. Maybe the Mafia would be the organization with the competitive advantage.

However, the core issues remain - who owns and runs the New Mega Utilities -the RTOs - and to what end. In some ways you are just substituting the board of directors of the RTO for the state Public Utility Commissioners.

The referenced white paper pointed out why transmission is higly unlikely to be a viable investment in an opern market pricing structure - it really does require a cost of service based structure. The suggestion in this piece just accepts that as a starting point.

A major shortcoming of electricity markets is in accounting for externalities, both positive and negative. As Mr. Lord has cogently pointed out in prior pieces, someone must pay for reliability or we all pay for the unreliability. If the system develops a reputation for unreliability, if trust in electricity fades, then the social costs soar. Another major blackout (after California and now the Northeast), and major money will flow to backup generators and fuel oil storage tanks. Worst, productive investments in the US will flee to locations with better reliability.

Better to think of our electric infrastructure as a internal cost of doing business subject to management discipline rather than an independent marketplace depending on Adam Smith's "invisible hand" to keep the power lines humming. After all, it fails to meet one major assumption of a free market - the ability to withdraw. The users of electricity have few choices, especially with air pollution rules that limit fuel combustion. The suppliers are certainly not able to defer production, especially when supplies are tight. In California, high state officials where threatening prison to power generators who decided to not generate or who decided to sell out-of-state. If our past internal infrastructure management has slipped, and the former industry structure looks like the good ole days to most people, then the answer is do a better job of management.

Ultimately we have to decide if the $50 to $100 billion needed for upgrading our transmission system is a better investment than the social and economic disruption that a degenerate, unreliable system will yield. It's like a house with a leaky roof - fix it now or spend a fortune repairing water damage and living in fear of a rain cloud.

I wrote a white paper for the Center for Advancement of Energy Markets (www.caem.org) that looked at cost of service and open markets as transaction environments. I agree that the 1940-1970 period of cost of service regulation had massive social benefit to the country. HOWEVER, cost of service regulation requires a regime of low price volatility for the entire economy - not just electricity but also fuels, construction costs, labor costs, debt costs, etc. The paper examines why the cost of service regime becomes untenable in times of high price volatility for the INPUTS to the system. I agree that restructuring - not deregulation - has been a failed model because a.) everyone ignored that cost of service was a trading regime and did not examine the cause for its breakdown and how to manage those issues and b.) the underlying transactions for investment and operaiton of the system were not adequately laid out. This latest go around started by the Giga-NOPR may be the last chance to solve the problem. Volatility Managers has proposed solutions but the common response is that they are too complex or too expensive. The reality is that there is no "silver bullet" but rather a complex system that requires a dynamic and flexible system of managing the market.

Mr. Lord’s use of RTO’s to solve the infrastructure problems is worthy of debate, but I believe regional interests well cause this option to languish. Technology can solve many or all of the problems but investors must have a reasonable level of return and reliability or that return.

One big factor that has hampered the electric industry in recent years is the fact that many regulators don’t feel obligated, morally, ethically, or legally, to abide by or recognize previous “commitments” amongst the players. If existing regulated utilities would be assured their investments in improving the infrastructure would be protected (at least being able to recover the cost of improvements) I am confident the industry will step up to the plate.

My first question is about changing ground rules. SOMEone will be on the hook for construction costs, right? Why would anyone want to take such a risk in this environment of every cost's having a full blown investigation or being disallowed completely? How can a business model be developed when revenue is unknowable? When voters see how much a fair rate of return will cost them, what’s to stop Big Government from throwing armies of lawyers at the risk taker (at taxpayer expense) until the risk taker settles for half a $Billion loss out of court rather than risk losing billion$ at trial? Who would do such a thing when there’s billion$ to be MADE in, say, consumer credit at quantifiable risk? Call me David Robbins, but look at all the money left on the table of cancelled power plant projects. Who, oh, who would take on a huge transmission project in such an environment?

Joseph Somsel brings up some interesting questions. Please excuse my post-8/14 negativity (yeah, it only started then, that’s the ticket). >>…would the capital costs and the operating expenses be shared over all RTO members?<< Of course not. Proportionally large political contributors will not pay their share. EVERY Reregulation scheme is cooked up purely to steal from the poor and give to the rich.

>>Do buyers of electricity pay the same as generators?<< Only if they have the same political clout. Buyers for corporations larger than AEP will pay less than generators. The rest of us will pay more than generators will.

>>California…governor sweep the board and installed his appointees.<< The ISO board that had 3 generator members but only one retail consumer rep and prices quadrupled and the lights still didn’t stay on? Dey oughtta recall da guy.

[Actually we DO leave national defense to the lowest bidder…unless one of President Cheney’s oil baron buddies wants the contract. Is everyone really okay with energy policy that can’t stand the light of day and has to be wonked in secret?]

If a power line builder could freely take it out of service without risk of condemnation, only then could she capture competitive prices. Couldn’t this be a start to a “cost of service” model? Years ago I heard of a company that wanted to build a transmission line along the Rockies almost from Canada to Mexico FOR FREE as a demonstration of their “few technological advances” (composite towers for one) but Big Brother would have nothing of it because the company wanted freedom to operate the line and charge market based rates. Don’t forget California’s plan to replace the Pacific AC Intertie with underground cables. Yeah, right. After the underground was in place I can just see them tearing down the overhead. NOT.

I know the engineering types don’t want to hear about politics, but, hey, that’s the realm into which electric power issues have been placed. Third party marketers brought us to this political place when they couldn’t shoehorn their way in any other way. Now they get a free ride on others’ transmissions lines and free voltage support and free frequency control and free oxygen for their plants and electric rates soar for the little guy.

Why can’t people realize that there is a limit to what small consumers WANT to pay for reliability. If Big Business needs a gold-plated grid, let THEM pay for it.

The future? When the voters finally get tired of this stagnant economy caused by our borrow-and-spend government they’ll elect tax-and-spend types who will build a grid at my expense, then turn it over to Big Business the same way that interstate highways subsidize the trucking industry. Whether it is paid for by middle class taxes or retail electricity, when the bill comes due the voters will oust the tax-and-spenders and elect the borrow-and-spenders who will neglect the whole system until we’re back where we are now.

Also, the grid will be built on a boom-and-bust basis – built on overtime with scarce (premium priced) materials, leaving many without careers when it’s “done” instead of being built economically and steadily with the efficiencies of an ongoing enterprise.

I can already sense eyes glazing over just like they did 20 years ago when I predicted this mess, so I’ll quit typing now.

It is definitely time for something more responsible as regards to regional grid investment and management, compensation for existing structures confiscated notwithstanding. The state PUC’s and existing grid control structures will consolidate and lose management control for the betterment of the whole just as town health boards lost control of meeting health care needs and doctor recruitment to new regional boards. This is what is going to happen because regional populations will not settle for anything less. Massive regional blackouts are not acceptable performance, period. And existing grid management structures have more than amply demonstrated they can’t solve the problem. Therefore, they will be replaced, and new, better, more logical management structures that can get the job done will take their place.

But I am not so sure that market-based systems will not eventually work if locational marginal pricing schemes become widespread. Why won't the cost of congestion revenue rights send appropriate price signals to load centers and trigger transmission (or local generation) investment when it makes economic sense? We may be a long way from that kind of market efficiency today, and NIMBYism may be a wrench in the works, but in theory shouldn't the market self-correct?

There have been hundreds of power engineers who tried to warn the industry, Congress and FERC that deregulation was leading to disaster as it was formulated. The engineers were ignored and often told to shut up or be fired. In frustration I wrote a book in an attempt to educate the American public. In the book "Power to the People" I predicted a wide-area blackout on the east coast before 2005 due to over stressing of the transmission system by deregulation. It took only two years from the publication date for the August 14 blackout to come to pass.

Now the powers will stack the deck with politically correct investigators to say that transmission is problem not electric power deregulation. Technically, they will be correct in saying that transmission failure was the cause of the blackout, but that's like saying that no one dies of aids, that they die of some kind of infection.

Deregulation was an ill-conceived plan that, as formulated, totally ignored the design of the transmission system. The political powers and FERC were warned but they chose to turn a blind eye to the coming problems.

Now the coverup begins.

I retired September 1, 2003 after 30 years as a professional engineer with the Federal Energy Regulatory Commission (FERC) and its predecessor the Federal Power Commission (FPC). I retired so that I might freely speak out against stupidity in the marketplace that masquerades as power engineering.

Jack Duckworth, CEO Expert Systems Programs and Consulting, Inc. and author of "Power to the People, Electric Power Deregulation, an Expose."

Open market pricing for the transmission investment a viable solution in myopinion. The RTO structure makes a great deal of sense for creating regional deicsions, shared cost and engineering efficiency. The generation investment structure is actually efficiently handled as FAR AS RUNNING the plants with an LMP structure. An option market that allows existing generators, potential investors and end users to participate to determine the price that they are willing to pay for and provide energy to the grid also makes sense. I am not advocating - as someone once put it - "competitive regulation". Rather it is importanjt to recognize those components of the infrastructure system that have inherently long lead times and low cost volatility (transmission) and are therefore are more amenable to cost of service regulation and those components with short lead times and high cost volatility (generation and fuels) and manage them in an open market environment.

So your statement "deregulation was an ill-conceived plan that ... totallly ignored the design of the transmission system" would, in my opinion, be more aptly phrased "restructuring was a system that did not recognize the inherently different structures of the transmission and generation investment decisions. As currently instituted, restructuring can not create the investment necessary for a stable transmission grid. Furthermore, incentive structures and other systems that do not recognize the fundamentally different structures of the transmission and generaiton investment structure will, at best, waste a significant amount of money and, at worst, will not correct the problems."

Economic theories taken from other commodities and applied to the electric system as presently instituted have not worked very well. The suspicion is growing amongst the voters that most of this theorizing has been at the service of special interests, bent on exploiting the commonwealth's existing infrastructure for corporate advantage or for ideological power (for the environmentalists.)

I'm as much a general free market believer as the next Republican, but I think I see the limits of markets in the case of electric power. Mr. Lord seems to be coming to the same conclusion for transmission, at least. There will be some economic innovation applicable to electricity supply but so far those sucesses have been few and far between. I will admit that political oversight of electricity has had its problems too but I would chose the devil we know over the one we know not.

Let's stop running social science experiments on our vital electricity supply - the risks outweigh the expected benefits for society.