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December 20, 2001

Energy Regulators Say Transmission Flaws Added $1 Billion
to Costs in Past Two Years

By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL


Choke points in the nation's electric-transmission system
have added more than $1 billion to consumer power costs
during the past two summers alone. Fixing the 16 major
bottlenecks would cost around $12.6 billion, but the
project would pay for itself in a few years through lower
total energy costs.

That is the chief finding of a much-anticipated Federal
Energy Regulatory Commission report that supports a
widespread belief that new investments are needed to make
the nation's electricity-delivery system better able to
provide the benefits of open markets. But one finding of
the study likely will boost the argument of opponents of
deregulation: FERC found that summer bottlenecks were
worst in those states that had deregulated their retail
markets.

The study found that power-line capacity problems were
least pronounced in the Southeast, where regulated
utilities still dominate markets and supply consumers with
energy from local power plants. The situation was worst in
California and New York, two states on the cutting edge of
the deregulation movement.

In deregulated markets, utilities and big users can buy
their juice from faraway power suppliers. That puts more
stress on transmission lines that must move more
electricity over long distances to satisfy market demand.
This change in sales patterns sometimes causes bottlenecks
when suppliers try to move more energy than the system
physically can carry along certain power-line corridors.

Ensuring that investments are made to upgrade the grid is
a complex matter. Individual states control the siting of
new lines and must give their approval for most upgrades,
since costs are locally borne. State commissions sometimes
are reluctant to approve investments if local ratepayers
appear less likely to benefit than consumers in distant
places. "We need a legislative fix to break the logjam"
between competing interests, says FERC commissioner
William Massey, who wants Congress to give his agency more
siting authority.

The debate, if anything, is likely to become more heated.
FERC Wednesday approved the creation of a new grid-running
organization for the entire Midwest. One of the key tasks
for the organization, which will span 17 states, will be
to develop fair, low-cost ways to grant transmission
access to suppliers while minimizing costs associated with
power-line overloads. That will require a pricing formula
that encourages the most efficient use of the physical
transmission system, while at the same time encouraging
investors to make upgrades where they will do the most
good.

Getting that balance right will be particularly critical
when the economy is roaring, as it was in the summer of
2000 when transmission constraints were particularly
acute. Strong demand coupled with hot temperatures put
inordinate strain on certain parts of the transmission
system. Grid operators found themselves having to pay much
more money than usual to generators located on the needy
side of bottlenecks to crank up their plants to relieve
the stress on power lines. When that didn't do enough,
they were forced to cut voltage levels, in some cases, or
to order utilities to start rolling blackouts.

A weak link between West Virginia and the Carolinas
increased wholesale prices as much as 88% at times, FERC
said, showing how drastically transmission congestion can
pump up prices.

The most costly bottleneck, according to the study, was
the East-Central transmission link that moves electricity
from upstate New York, where there is plenty of power,
downstate to New York City, where there isn't. In the
summer of 2000, that trouble spot created congestion costs
of $724.7 million, partly as a result of an outage at the
Indian Point nuclear-power plant on the New York City side
of the bottleneck. The cost dropped to $64.6 million this
past summer.

Another nagging trouble spot is Path 15, which shunts
power between Northern and Southern California through the
San Joaquin Valley. The FERC study said bottlenecks there
during the past two summers cost consumers an extra $20.6
million.

That is just a fraction of the total cost to consumers,
though, according to a calculation by the grid-running
California Independent System Operator that is responsible
for managing power flows. In a September analysis prepared
for the state utilities commission, the California ISO
said bottlenecks along Path 15 boosted energy costs by
$221.7 million during a 16-month period ending Dec. 31,
2000. It estimated that a $330 million upgrade could go a
long way toward solving the problem and would pay for
itself in relatively brief period of time.

The ISO is pushing for the upgrade, but has hit opposition
from the Office of Ratepayer Advocates at the California
Public Utilities Commission, which believes the proposed
project "is no longer needed for reliability and not
cost-effective at this time," given the recent
construction of additional power plants in the state.

FERC's study is hardly the last word on the subject. The
Department of Energy is expected to release its own
analysis of transmission problems and solutions by the end
of the year.

Write to Rebecca Smith at rebecca.smith@wsj.com