Ken Silverstein EnergyBiz Insider Editor-in-Chief

The recent spate of hot weather is only a reminder of a much broader debate -- the need for more investment in the North American grid. The energy law that passed in 2005 sets out to force utilities and other transmission owners to comply with mandatory rules to ensure more reliability. Federal regulators, meanwhile, are working to establish incentive-based rates and using its newfound backstop permitting authority.

Last week, Ontario, Canada almost broke through its previous peak usage, generating about 26,000 megawatts while Philadelphia-based PECO surpassed its previous all-time high peak set a year ago, using roughly 8,600 megawatts. President Denis O'Brien said the local distribution system performed very well under the extreme heat and unprecedented demand. "Our customers depend on us to provide reliable power when they need it the most, and PECO came through, once again."

The whole scenario stresses the need for ample reserves, or surplus power to meet unusually high demand. Nationally, in the United States, reserves during the heat wave fell to 15 percent. While acceptable, it doesn't allow much room for economic growth.

To plan, the Federal Energy Regulatory Commission is now authorized to ensure new "reliability standards." Generally, that entails motivating investors to put up the capital needed to expand the transmission system. Toward that end, utilities would be able to re-capture their investments at a faster rate. FERC also has the ability now to establish national corridors where transmission is sorely needed.

Transmission investment has declined in real terms -- adjusted for inflation -- from 1975 to 1998. While there have been increases since 1998, FERC says that the level is still less than what was invested in 1975. Over the same time period, however, the demand for electricity has doubled. That's resulted in a significant decrease in transmission capacity, requiring new lines get built.

"Under-investment is a national problem," says Joe Kelliher, chairman of the FERC. "The commission proposes a national solution that encourages investment in all regions of the country." The incentives apply to regional transmission organizations (RTOs), traditional utilities and to transcos, or those that operate transmission lines but do not own any generation.

Optimal Investment

The PJM Interconnection, which is an RTO that serves 51 million people in 13 states and the District of Columbia, is progressive. Its board just approved a 15-year blueprint to construct $1.3 billion in electric transmission upgrades. That includes a 240-mile, 500-kilovolt transmission line from southwestern Pennsylvania to Virginia to be constructed by Allegheny Power and Dominion.

The total plan upgrades are expected to provide grid reliability through 2011 and are estimated to reduce congestion costs by $200 million to $300 million annually. To meet long-term needs through 2021, the RTO is looking at 10 other transmission lines totaling $10 billion, including the high-voltage transmission line projects proposed by American Electric Power, Allegheny Power and Pepco Holdings. Transmission owners for these projects have been authorized to begin the permitting process and undergo environmental impact assessments as well as potential right-of-way acquisitions.

All told, PJM has authorized more than $4 billion of accumulated transmission investment since its planning process began six years ago, resulting in an additional 18,717 megawatts of new generation being interconnected, with 3,777 megawatts of generation now under construction. More than $500 million in transmission projects have been completed.

"Regional transmission planning works," said Audrey Zibelman, PJM's executive vice president and chief operating officer. "It's stimulating the necessary investments in the grid to maintain reliability and to improve economic efficiency." She adds that the planning process has evolved from one that focuses on upgrades to one that concentrates on the long-term and better addresses economic efficiency and major transmission additions.

Elsewhere, four governors of Western states have given their support to the building of 1,300 miles of power lines at a cost of $2 billion. If the projects are constructed and begin delivering electricity by 2011, lines would stretch from Wyoming and into Utah, Nevada and Southern California. The governors say that the new lines are essential: They note that the demand for power has risen by 60 percent in the last 20 years but that the region's transmission system has only grown by 20 percent.

Certainly, the average age of assets along with a growing demand for power and limited capital have combined and sent warning shots across the bow of the American people and their elected representatives. The 2003 Blackout, for instance, is said to have cost anywhere between $4 billion and $10 billion, which includes not only direct losses but also indirect ones such as those tied to lost opportunities.

Industry experts say that the optimal investment in the grid would be $100 billion, paid out in equal installments over 10 years. Progressive technologies exist that would enhance the system and bring it in line with a high-tech society. But transmission lines compete with other capital intensive projects for money. With a new set of federal rules on the books, the hope is that such transmission projects will attract new investment and help usher the nation's energy infrastructure into the 21st century.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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