Transmission: the Critical LinkDelivering the Promise of Industry Restructuring to Customers

Janet Gail Besser, VP, Regulatory Affairs, TransmissionPresentation for MA DOER RoundtableBoston, MASeptember 23, 2005

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Transmission and Long-Term Resource Adequacy Transmission often left out of resource

adequacy debate* Role of transmission is misunderstood Therefore, potential contribution of

transmission to resource adequacy is overlooked

*Though it’s subject to much debate on its own

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Transmission’s Role Transmission is the critical link for delivering

the benefits of restructuring to customers Transmission is a market facilitator, not a

market product Reliance on market mechanisms to induce

transmission investment will lead to inadequate system

Niche role for merchant transmission Policies that recognize role of transmission

as market enabler must be implemented to ensure reliable and economic system

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Benefits of Restructuring Undermined by Insufficient Transmission Investment Insufficient transmission preserves

protected power markets, diminishes competition, and threatens reliability

Such conditions… Increase congestion Create opportunities for market power Restrict customer choice Lead to higher costs Increase need for regulated intervention

in the market to avoid reliability problems (and mitigate prices)

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Transmission Enhances Long-Term Resource Adequacy Transmission connects capacity and load

(with help from distribution) Larger, more integrated markets / electricity

systems enhance reliability Diversity of loads and load shape Diversity of generation / capacity

resources and availability Transmission can also lower overall costs of

electricity and reduce locational capacity cost differences Transmission cost is small % of total bill

Robust transmission system is especially important in market context

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Inadequate Transmission Produces Market Problems

Transmission constraints preserve protected markets and create opportunity for exercise of market power.

This prompts need for mitigation which, in turn, prevents some generators from recovering costs.

Retirements in constrained areas are a concern. RMR contracts used to preserve reliability Regulated generation undermines market NYPSC proceeding to explore

policies/requirements governing generation retirements

Inability to recover capital costs leads to dependence on capacity market designs that are often very expensive for customers.

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Transmission – The Path to Successful Markets Enhances reliability Enables trade Facilitates fuel diversity, including renewable

energy Reduces load pockets Increases customer choice Reduces need for regulatory intervention into

markets Leads to lower and more stable overall

electricity prices

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The Roadblocks to Adequate Transmission Planning and pricing policies that view transmission

as a market product vs. market enabling infrastructure Ignore the “Commons” nature of transmission Rely on voluntary participant funding Attempt to identify specific beneficiaries

Fragmented nature of transmission ownership / operation

Lack of independence of transmission from generation Lack of adequate financial incentives State vs. federal jurisdictional issues

Siting Cost recovery

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Policies That Support Transmission Robust regional transmission planning

processes for reliability and economics Fair and workable cost allocation processes,

recognizing transmission as market enabler Federal and state cooperation on cost

recovery and siting Incentives to induce adequate investment

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Regional Transmission Planning A robust planning process should:

Identify reliability and economic needs of the system

Contain well-defined timelines for approval of cost-effective regulated transmission remedies to identified needs

Fully value the benefits of transmission, including enhanced reliability, reduced market power, lower overall electricity prices, environmental improvements, and facilitating energy policy

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Upfront Cost Allocation Mechanism Should be clear, well-defined, repeatable Avoids case-by-case allocation that invites

endless debate and litigation Costs should be allocated broadly to reflect:

Transmission’s widespread benefits That transmission’s beneficiaries change

over time Regional cost allocation should include

reasonable costs incurred to site projects New England is a good example

Caution on regional v. local allocation

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Federal/State Cooperation FERC and states must work together to

provide certainty of cost recovery to transmission owners. Including incentives for cost-effective

transmission investment States should adopt siting policies that

recognize broad benefits of transmission Contribution to resource adequacy

– Delivery of low-cost remote generation – Access to renewable resources– Greater customer choice– Enhanced reliability

Federal backstop authority may be required in some cases

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Conclusion Transmission is market enabler, not market

product Inadequate transmission investment is key

obstacle to delivery of restructuring’s benefits to customers

Policies must recognize role and importance of robust transmission infrastructure To ensure reliability and long-term

resource adequacy To reduce customer costs In both organized and traditional

electricity markets

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Questions?Find Transmission: The Critical Link at: www.nationalgridus.com/transmission_the_critical_link/