• WisBusiness

Power Line Parcheesi: CUB Leader Says Deregulation to Blame for Power Problems
3/31/2006

By Joanne M. Haas
For WisBusiness.com

More than a few people are angry about utilities' efforts to string high-voltage power lines across the landscape to bolster a strained electric grid that sat dormant for more than two decades.

But a former power industry analyst turned Wisconsin consumer advocate says to look beyond the American Transmission Company and blame the federal government.

Former President Richard Nixon first promoted the idea to deregulate of the power industry in 1974.

The idea then idea sat around for a while until Ronald Reagan took over the White House and started pushing for  deregulation. Twenty years later, here we are – with candles in our cupboards.

Consumer advocate Charlie Higley argues that the federal government’s push to insert free market economic principles into the high-fixed cost power industry is the cause of today’s problems.

He said the free market push, along with the 2005 creation and control of regional wholesale markets, may have more to do with Wisconsin’s debate over energy prices and where to put transmission lines than the perceived clout of any state utility over the rate-paying public.

“The whole deregulation theory was wrong,” says Higley, executive director of Wisconsin’s utility watchdog Citizen Utility Board and former industry analyst for Public Citizen, the national nonprofit consumer advocacy organization founded in Washington by Ralph Nader in 1971.

“It is based upon a fundamentally flawed economic theory.”

What fatal flaw?

According to Higley, it is treating power like food, where supply and demand and competition set prices and producers are forced to sell at marginal costs.

But electrical power has among the highest fixed costs of any industry. That means utilities forced to sell at the margins would have a difficult, if not impossible, task earning enough to pay for investments.

The result could be defunct utilities or merged, unregulated monopolies - bad news for ratepayers and utilities.

Add to this the growing appetite for all things electronic by a growing population living in larger homes.

The situation is intensified by a two-decade drought on any energy-related construction by utilities concerned about revenues in a free market atmosphere and you have Wisconsin – a state that imports nearly 20 percent of its power.

And much of it comes from expensive natural gas sources, on a vulnerable, aging transmission grid in a wholesale market where prices are controlled by the federal government.

José Delgado, the president and chief executive officer of the American Transmission Company, testified in recent legislative committee hearings that Wisconsin has the second most constrained transmission system on the nation’s power highway.

“There is a place in Florida that is worse than Wisconsin,” Delgado has said. “Wisconsin cannot afford the national reputation of having one of the most congested transmission systems in the country. Unfortunately we do.”

Wisconsin has four high voltage transmission lines while Illinois has 24 and Minnesota has 18. Wisconsin’s total will hit five when the Arrowhead-Weston line is completed from Wausau to Duluth, but ATC –- owned by utilities, funded from ratepayers and regulated by the state and federal governments -- says more work is needed to bolster the system as the regional market continues to evolve.

But the owners of ATC disagree about how fast and where to build transmission lines.

“We know a little bit of excess transmission holds prices and a little less can keep the price of energy up,” Roy Thilley, president and chief executive office of Wisconsin Public Power Inc. said at a February hearing held before the state Public Service Commission.

The firm is a statewide power company owned by 40 municipalities operating electric utilities and supplying more than 154,000 customers.

“A robust system increases our options for supply,” Thilley said recently. “Having options is more valuable than not having options…  Doing nothing is a strategic decision, and we think it’s the wrong decision.”

Moving ahead on transmission line projects to strengthen Wisconsin’s aging and overworked system – which may cost more than the price relief and reliability they provide customers - is not the path James Keller recommends.

The director of federal regulatory affairs and policy for We Energies - which serves 1.1 million electric customers in eastern Wisconsin and the Upper Peninsula of Michigan - says he prefers the “no regrets” approach.

“The investment in the transmission system must be prudent and as cost-efficient as possible,” Keller said during the stakeholders’ meeting with the PSC.

That sounds logical, but as Wisconsin Energy Conservation Corp. Executive Director and former Public Service Commissioner George Edgar puts it: “A no-regrets policy may have some regrets.”

Edgar, representing CUB, Clean Wisconsin and RENEW, said the long-term answer to how to best strengthen Wisconsin’s transmission system should include the creation of a public strategic planning process that wouldn’t necessarily provide answers. But it could be a snapshot of the current state of the utility world to use when making construction decisions.

“We’re not just Wisconsin,” Edgar said. “We are in a regional market whether we like it or not.”

And then there is the energy-eating public. The appetite for electricity is growing about 3 percent a year in Wisconsin, and goes for the appliances, home computers and more powered by lines few want to see.

So where are these high-voltage wires – which run 200 or more degrees Fahrenheit and are strung 60 to about 140 feet in the air – supposed to go?

ATC has developed its 10-year plan on how best to meet its legal duty. That means ensuring Wisconsin has a reliable, adequate and cost-effective electricity supply in the regional wholesale power market – Midwest Independent System Operators (MISO) -- so any unexpected equipment problem does not threaten access and, in turn, spike prices.

“ATC is getting kicked around from lots of different angles,” argues Higley, who considers the mighty We Energies as the utility owner he sees with the most clout among ATC’s owners.

“But the feds have a huge amount of influence. Now, through MISO, the states are losing control of their industries to the feds.”

DEREGULATION AND WISCONSIN

  The push for deregulation can be traced back to the 1950s, Higley says, to the University of Chicago, the Chicago School of Economics and then-Professor Milton Friedman.

“The Nixon administration started promoting it in the 1974,” Higley says, adding it gained momentum with the Reagan administration.

Deregulation picked up speed in the 1990s, along with attempts to eliminate price regulations of utility services and planning requirements.

Wisconsin utilities were required to work together on a long-range plan that had to be approved by the three-member appointed PSC.

That requirement – the Advance Plan – is gone. State Rep. Spencer Black, D-Madison, has repeatedly introduced legislation to revive a coordinated planning process, but has had no luck.

Meanwhile, the push to deregulate in states continued but stopped when California’s deregulation nightmare stunned the country in 1996.

“The bottom line was what deregulation was all about,” Higley says. “Utilities had been more closely regulated than any other business because there are natural tendencies for utilities services to be provided by a single company – where it is a natural monopoly.

“And it is better if one provides it. If you have one company, you need to have government regulation – that is the whole foundation of the regulation of the power industry.

  “CUB believes that the industry still requires direct regulation in order for it to provide reliable and affordable service.”

Free marketers thought free market principles would make the industry more efficient and Wisconsin went part way into that area.

One of the outcomes of Wisconsin’s exploration was the creation of ATC, which separated generation owners from transmission, through Act 9 in 1999.

ATC also was created  in response to the energy scare of 1997 when the threat of rolling blackouts was a distinct possibility.

Along with ATC came the loss of the Advance Plan and the arrival of the three-year Strategic Energy Assessment completed by the PSC, blasted as “worthless” by critics.

The deregulators thought in order for there to be competition, the owners of the power plants had to be able to buy and sell power freely. They also feared transmission owners that also held the power plants might make it difficult for some to use their lines to buy or  sell cheaper power. Transmission was divested to create better markets for wholesale power.

In 1992, the Energy Policy Act opened access to the transmission grid for non-utility power generators and that meant for wholesale competition.

The Federal Energy Regulatory Commission (FERC) ordered utilities to offer other energy providers fair and open access to their transmission lines. The commission also created Regional Transmission Organizations to provide independent oversight of the nation’s power grid.

Wisconsin is part of MISO, which handles use of the transmission system in its service area and ensures smooth regional flow of electricity in a competitive wholesale marketplace.

Things changed yet again in April 2005 when MISO implemented day-ahead and real-time energy markets. MISO literally turns off and on the power plants in the Midwest region according to need, while also conducting the market for wholesale electricity using a bid system.

Nobody seems to like it in Wisconsin. Wisconsin Public Power Inc.’s Thilley says MISO has changed things dramatically.

“We have to approach things defensively because things (that) will happen in other states will affect us,” said Thilley. “There is significant delay. The weaker our system is, the more vulnerable we are to being hurt.”

ATC’s Mark Williamson, vice president of major projects, agreed, noting “white knuckle season” hit in February and part of March after a central Wisconsin transformer failed.

“If we get more failures, we’ll have to drop some loads,” Williamson said, adding the loss also translated into price hikes on the MISO-controlled market.

All those years Wisconsin was growing but utilities were not building “led to the problems we are seeing today. That is how deregulation has affected us directly,” Higley says.

“We are in catch-up mode now. Deregulation also put the kibosh on energy efficient programs,” he says.

TWO DECADES OF DUCT TAPE DIDN’T HELP


 From 1998 to 2004, Wisconsin lost its place as having the lowest energy prices among the 8 Midwestern states in residential, commercial and industrial categories to among the highest in the categories.

During the years Wisconsin enjoyed low prices, utilities did not build transmission nor generation.

Williamson, who joined ATC after a career with Madison Gas and Electric, said he personally was among those utility executives who did everything he could to sidestep construction projects.

“I avoided it for 20 years,” he said. “We tried to find Band-aids, scotch tape… It was a good fiscal approach. But now we are behind.”

There seems to be general agreement that doing little for more than 20 years has cost the state, and construction has reignited on the generation and transmission fronts.

ATC has invested nearly $1 billion into the system since its inception in 2001, and has identified another $3 to $4 billion worth of projects in its 10-year plan.

The battle over the 345-kilovolt (kV) transmission line in the northern sector is headed south as ATC has floated a test balloon about building such a high-voltage line between Dane County and the Illinois border.

The project is among a list of possible newer investments contained in what ATC calls its Access Initiative to determine transmission system expansion to boost access outside the service territory and improve the ability to transfer energy within the system to serve retail customers.

It’s all aimed at boosting the reliability and generation interconnection in a vulnerable, 60-year-old transmission grid that the PSC says is vulnerable.

“Our energy is 25 percent more than the average because we have such overloaded lines,” Williamson says of Wisconsin price increases that catapulted in the last decade, angering consumers and frustrating the PSC.

For a few years, officials have said Wisconsin imports about 15 percent of its electricity to satisfy state need. But Williamson said that figure has crept closer to 20 percent.

And the PSC says the state’s demand for electricity increases by roughly 2 percent each year – which is significant on a system that had not been changed since before the Internet and computers became daily fixtures at home and work.

As one utility exec put it, everything at Best Buy comes with a cord on it and it’s got to be plugged in somewhere.

  “Every time we have either a scheduled or an unplanned outage of a system element, the market price goes up – and sometimes dramatically,” Williamson says.

That shows Wisconsin’s system is not robust enough to tolerate even small outages, and also that a little bit of physical transportation is a tremendous hedge to prices in a commodity market.

Case in point: the February loss of a major transformer in the central Wisconsin area. The system was capable of pumping electricity into its area so there was no service interruption.

However, Williamson says ATC remained in a “white knuckle” mode season until the transformer was back on line because another major hit would have meant rolling losses of power in some areas.

FATAL FLAW

“If you try to have competition between the utilities, they’ll ruin each other – or they’ll merge and eliminate the competition that was killing them off,” Higley says, adding huge unregulated monopolies will surface.

“From an engineering standpoint, it makes sense to bring together more and more (utilities) under one organization.”

Wisconsin’s energy patchwork formed from smaller utilities which served smaller communities. Over time, the communities were interconnected.

“Wisconsin’s energy policy is really a three-pronged policy… a three-legged stool,” PSC Chairman Dan Ebert said during that February meeting, citing generation, transmission and conservation as the critical pieces.

Ebert says the state already has made some sizeable improvements in its transmission -- $900 million of authorized projects and 1,000 miles of additional lines.

“Wisconsin is responding – and has responded – in a very aggressive way” to the transmission challenge.

Ebert says there are seven or eight pending transmission projects and expects ATC to come forward with more as part of its 10-year plan.

A mathematician by training, Williamson says he’s seeing signs of game theory at work in the regional market handled by MISO.

Game theory involves the study of strategic situations when different actions attempt to maximize returns. He also suspects chaos theory at play in the market, too.

Chaos theory may sound like it involves systems in disarray, but the theory deals with finding order in what may appear random figures.

The bottom line as Williamson sees it is that Wisconsin needs the physical ability to hedge bets and deliver electricity.

“That’s the dialogue we’d like to have,” he says. “How do we do that in these evolving times?”

POWERING AHEAD

Go underground, critics demand of power lines they say will ruin views. Williamson says the company cannot justify increasing the costs to bury a line that would run along a state highway right of way and is more than 500 feet from a neighborhood.

He said to place lines underground could increase costs of work in the 10-year plan from about $3 billion to $30 billion, placing even greater financial burdens on users.

In the meantime, the Arrowhead-Weston line is under way and is expected to be completed by 2008.

However, there are still fights along the route and some critics are far from convinced an estimated $420 million suspended line crossing all sorts of lands is OK.

After Douglas County Board of Supervisors in February 2005 voted not to allow ATC to build on county lands, the Legislature responded with AB 437. It requires local governments to sell the affected lands to the utility for fair market values.

Gov. Jim Doyle signed the legislation in late July and Douglas County supervisors voted in September to allow ATC to proceed.

Higley praised ATC for changing its public outreach after Arrowhead-Weston, which was a public relations nightmare from the start.

Williamson says in the old days, residents wouldn’t know about a utility’s plans until the project application was filed.

Today, ATC handles it like running for political office, treating the application filing as Election Day. Surveys, open houses and public information campaigns are all part of the process before any official application is filed.

Where lines are placed rests with how much power is being used, Higley says, stressing that conservation is the only way to reduce the need for lines.

“Households are using more power,” he says. “Unless we reverse those trends… we will need more power plants and lines.”

Gov. Doyle recently signed a bill requiring the state to get more of its energy from renewable energy.

The measure was cheered by environmentalists, businesses, Republicans and Democrats alike.

But, as Higley says, unless conservation is part of the plan, more transmission lines still will be needed to carry the power – even from renewables.

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