Power and Energy Updates
Milbank Energy Update
August 15, 2003
The blackouts experienced in the Northeast and Midwest once again remind us just how dependent our country is on a well functioning, reliable electricity grid. Although the cause of this unprecedented failure of the U.S. electricity grid is not yet fully known, the North American Electric Reliability Council (NERC) has stated that it appears to have been largely caused by the loss of several major transmission lines in the upper Midwestern United States around Lake Erie, which then caused additional lines and major fossil and nuclear power plants to go out of service.
The "Blackout of 2003" will shape much of the debate among energy policymakers in the coming months. This comes at a time when President Bush has urged Congress to enact a national energy policy, the House and Senate are scheduled to negotiate an energy bill in conference when Congress returns to Washington, D.C. in September, and there is an ongoing debate as to whether FERC should be permitted mandate a standard design for electricity markets. House Energy and Commerce Committee Chairman Billy Tauzin (R-LA) has already launched an investigation into the blackouts, and has said that a full Committee hearing will be held immediately when Congress reconvenes. Representative Tauzin stated that the blackouts "highlight the critical need for Congress to enact a comprehensive national energy bill this year. We simply cannot afford to wait any longer -- our economy and our way of life are at stake." Similarly, Senator Pete Domenici (R-NM), Chairman of the Senate Energy and Natural Resources Committee, stated that the blackouts emphasize once again the need for a national energy policy and that he hopes "when Congress returns in September the House-Senate conference on an energy policy bill will make rapid progress." FERC Chairman Pat Wood issued a statement in which he said, among other things, that "if we draw any conclusions from this blackout, it is the urgent need for more investment in the nation's transmission grid to serve broad regional needs. The Energy Department has projected that, over the next decade, transmission investment will grow only 6 percent as electricity demand grows 20 percent."
As evident from these statements, policymakers are certain to focus in the coming months on the need to improve the reliability of, and increase investment in, the U.S. transmission grid. With widespread calls to modernize the grid as a result of the blackouts, Congress will be under considerable pressure to enact energy legislation that includes an electricity title intended to promote reliability and grid investment. Those seeking to advance the cause of electric industry restructuring through the development of regional bulk power markets will argue that a greater Federal role is needed with respect to transmission planning, siting and ensuring reliability of the grid, while others will raise concerns with States' rights and may seek to blame reliability issues on the movement toward competition.
Any energy bill that emerges from the upcoming House-Senate conference can be expected to address transmission investment and reliability issues. For example, the bills that cleared both the Senate and House provide for the creation of a self-regulating reliability organization that would develop and enforce reliability standards, subject to FERC oversight (currently there is no federal regulatory authority over reliability per se). In addition, the House bill contains a provision that would grant FERC authority over the siting of electric transmission facilities necessary to relieve transmission congestion if State regulators either lack such authority, withhold approval, impose uneconomic restrictions on construction of the project, or delay approval beyond one year. Granting FERC a role in transmission siting is very controversial and can be expected to be the subject of intense debate. Tax incentives for construction of transmission facilities may also be considered.
Although Federal/State jurisdictional authority will be one of the key issues in developing an electricity title in upcoming energy legislation, given the obvious regional impact of the blackouts, those arguing for a greater Federal role and regional coordination may now have the upper hand. This may also assist the FERC's efforts to promote the formation of regional transmission organizations and a standard market design for electricity markets.
Other than a focus on grid investment and reliability, it is too early to predict how the Blackout of 2003 will impact energy policy, but energy will certainly be on the front burner now. We will be following developments in Congress, FERC and elsewhere, and will keep you informed.