The market speaks but we don't listen.

Will someone please tell me: Where is the proof that the electric utility industry needs more investment in electric transmission? Is it not possible that we already have enough miles of high-voltage line?

I can scarcely turn around but see a new conference or workshop on how to encourage the electric industry to invest more in transmission infrastructure. The Federal Energy Regulatory Commission (FERC) leads that charge, though as a regulator it ought to stay neutral.

Yet most still agree that anyone who would want to invest in transmission must be crazy, since after the line is built, a merchant can come along and build a power plant at a fraction of the cost and relieve the congestion that made the new line worthwhile.

All this has encouraged some to favor physical flowgates instead of financial rights to manage grid congestion. They criticize a bid-based, security-constrained, PJM-style market for producing locational marginal prices (LMP) at the nodal level because, while LMP tells merchant generators exactly where to build new power plants, it offers no help in figuring out where to add new grid capacity.

(The problem lies with the mathematics. Using the equations used to calculate LMP, it turns out that any number of different combinations and patterns of physical grid constraints can operate to produce the same set of LMPs. You have multiple simultaneous equations for which the variables cannot be solved. You can never know for sure where lies the transmission constraint that is absolutely responsible for causing a price spike at some weird location.)

So the industry continues to attack FERC's standard market design, arguing that because it gives us prices that fail to encourage the new grid investment that we so obviously need, the prices must be flawed-along with the model.

I remember a time, not long ago, when some rogue scientists asked for room on an orbiting satellite to study ozone depletion in the upper atmosphere above the poles. When the data came back the experts rejected it out of hand. The numbers could not possibly be true, they said. Otherwise, we would face a global catastrophe.

I've heard also of other examples of truths debunked: How in the 1920s it was calculated that growth in telephone use eventually would force our entire population to work as switch operators to clear the traffic. Or how 19th century London would end up putting millions to work at the end of a shovel, to clear the manure from streets increasingly jammed with horses and carriages.

These predictions all came true. But they were also dead wrong.

FERC'S MISTAKE LIES IN THINKING THAT ELECTRIC RESTRUCTURING STARTS AND ENDS WITH TRANSMISSION REFORM.

That is a red herring-a lesson that FERC thinks it learned from natural gas-when, in fact, it is price discovery that really matters.

While FERC cites the differences between gas and electricity (contrasts in jurisdiction, vertical integration, storage capability, etc.) as why it can't manage to duplicate its gas industry success on the electric side, the irony is that the gas success is transferable. But you've got to transfer the actual cause of victory, not simply the effect.

With its Order 2000, and with the concept of regional transmission organizations (RTOs), FERC seeks to make the grid independent from the commodity. That's what it did with natural gas in Orders 436 and 636, by forcing the interstate pipelines to unbundle transportation from the gas itself.

But that's not the reason why gas restructuring worked. No, the secret to success in gas stemmed from the creation of regional hubs and markets to reveal the true commodity price. That helps reveal a true basis differential to measure the cost of product transport to downstream consuming areas, and it fuels the engine driving investment in new pipeline construction. It's the price, stupid (to recall the political argot of the time). Make a market with an honest price and everything falls into place. Investors don't care if a pipe or line is "independent." But in our case, the pipeline unbundling that occurred at the same time under Order 636 tends to obscure that fact. It has led FERC to the faulty assumption that it will duplicate the gas victory in the power industry if only it can repeat the trick of unbundling the transport function.

HARVARD PROFESSOR WILLIAM HOGAN ALLUDES TO FERC'S CONFUSION IN A PAPER HE PRESENTED LAST MONTH IN TEXAS.

In that paper (Transmission Market Design, Apr. 4, 2003) Hogan takes FERC to task for waffling on whether transmission should remain regulated, with a top-down resource planning process run by RTOs, or whether to count on participant-funded merchant transmission as playing a significant role in an SMD world.

As Hogan explains, the problem stems from the two-sided nature of transmission: essential for reliability in some cases (and deserving of regulation), yet sometimes indistinguishable from a generation resource, as where reliability is already assured, but a new line is built to import lower-cost power from a distant source.

Hogan calls this the "slippery slope" problem-the impossibility of drawing a bright line between merchant and regulated transmission-between purely economic projects allocated by capital risk, and projects needed for reliability and thus made subservient to RTO-imposed resource planning.

On that score, Hogan praises the New York ISO for adopting a tariff that would distinguish between economic and monopoly investment in RTO processes. But he castigates FERC for pushing PJM "towards the precipice of the slippery slope" by adopting a central planning process for grid investments undertaken primarily for economics. "Initially," says Hogan, "PJM was inclined towards an approach similar to the New York model."

Above all, Hogan warns, "there may have been some ambiguity about the degree to which FERC's charge 'to support competition' implied also mandating regulated investments for economic purposes.

"This ambiguity was resolved in a subsequent FERC order that clearly indicates [that] 'to support competition' means investment for economic purposes."

Why have a market if we are going to ignore it and instead impose our own preconceived notions of what investment is needed? Here we see that FERC rejects its own SMD.

ELECTRIC ENGINEERS LOVE TO TELL HOW FERC'S NEW IDEAS HAVE STRAINED THE GRID.

Experts who work with the North American Electric Reliability Council (NERC) will quote statistics for you on how the relative capacity of the transmission system has shrunk over the years, as measured in terms of kilovolt-amp-miles per megawatt-hour of customer load. Those numbers are bulletproof. Any human telephone operator will confirm that-if you can find one.

But tell me how many miles of transmission line it takes to serve an electric customer-a customer with a solar panel on the roof and a fuel cell in the basement-and you can begin to see the irrelevancy of that statistic.

I just love it when I hear an electric utility executive say something like, "We don't need RTOs. What we really need is more transmission investment."

Yet the executive knows full well the dollars won't be there for grid expansion. Because those dollars are listening to what the market is saying, even if no one else is.

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