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A Welcome Truce in the Electricity Wars

Let's enjoy this brief period of diminished acrimony before implementation of this landmark law.

Fortnightly Magazine - October 2005

remains an extraordinary challenge.

The Prospects for Expanding Transcos

Several provisions of the legislation are aimed directly at the alarming decline in the rate of U.S. transmission additions since the advent of competition. The law requires FERC to adopt transmission incentive regulations, streamlines the environmental review of power lines sited on federal lands, and contains a controversial provision allowing for eminent domain over transmission siting, though only after a rather lengthy series of findings and procedures. It also enables interstate transmission siting compacts, allows federal agencies to join RTOs under certain conditions (including an ability to leave them), allows participant funding, and urges regional planning.

There is not a bad apple in this lot, and these provisions should "rev up" transmission investment to a degree. Transcos will receive a new lease on life, while regional transmission planning and siting will make significant progress with little, if any, actual use of the new federal condemnation authority. Just the possibility of invoking this authority may reduce debate. Intermittent generators will get a little more access, too, as net metering becomes universally required.

The reality check here is that, even without these measures, most of the owners of the grid had awakened to the fact that they were going to have to invest in grid expansion. The most recent Edison Electric Institute survey, taken well before the energy bill took form, showed a 50 percent increase in planned grid investment from the IOUs between 2003 and 2005. 1

In this context the bill could have gone much further in the direction of encouraging new technology and a new design of the power grid to become more intelligent and reliable. 2 The grid's underlying design technology is 50 years old, and better designs are on drawing boards (and, in some cases operating) around the world. Yet the act provision on innovative transmission technologies is little more than a list of desirable new technologies and a blessing to go forth and multiply. When contrasted with the billions of dollars of tax credits and investments directed toward coal, nuclear, and (to a much lesser extent) renewable technologies, we recognize an all-too-familiar tilt toward large-scale generation R&D rather than transmission and decentralized resources. 3

The Prospects for Mergers and Acquisitions

Much has been made of the repeal of the Public Utility Holding Company Act (PUHCA). 4 Almost everyone expects the repeal of PUHCA to unleash a large wave of industry consolidations, but many industry participants are not so sure. There undoubtedly will be another wave of consolidation, but it may not be as large as many fear.

First, FERC is now required to prevent cross-subsidization between affiliates much more formally than under PUHCA. Yet many complex issues may arise, especially for the first several mergers between non-utilities and utilities, or between utilities with very disparate geographic features or operating systems. Is it cross-subsidization when a utility centrally funds a common spare-parts pool that is disproportionately used by a subsidiary in a particularly adverse operating climate? And how should an insurance company that owns an electric utility allocate its corporate