A few words with Susan Tomasky...

...on the opportunities and challenges transmission companies face in the evolution of a new electricity economy. From her comprehensive perspective as president–transmission, American Electric Power—one of the largest generators in the US—as well as former general counsel of the Federal Energy Regulatory Commission [FERC], Tomasky discusses policy, finance, technology, the state of US regulation, and international energy competitiveness.

You recently made a very interesting observation about the Wyoming–Jackson Ferry transmission line. You said that it took just under three years to build and 13 years to permit.

Correct.

And I wanted to maybe start with that being the emblematic place to begin when we talk about transmission, and to ask you, as the president of AEP Transmission, what is it that has changed in the areas of policy, and in the areas of finance, and perhaps in the areas of technology that make today more propitious for a transmission-focused company than it might have been in the past?

Susan Tomasky

There are a couple of things that are driving policy in favor of new transmission development. One is just trying to deal with the reliability issues and the adequacy of the system that’s already in place. For a long time, we didn’t put a lot of new money into the transmission system, and in recent years you’ve begun to see some utilities begin to put some capital into refurbishing that system. But we think it’s really important and think there is growing public policy support for the notion that we’re not going to be able to meet future energy needs if we simply rebuild what we currently have. There is significant increased demand, and even though this recession reflects a decline in that, if you look at most studies—and with the electrification of the economy—there’s no question that we’re going to see increasing need for electricity.

Second—and I think this is critically important from a policy perspective—we want a different energy production system than we’ve had in the past. We as a nation want a cleaner energy system, and that means the integration of renewables. And transmission is critical to being able to move forward with significant renewables development for a couple of reasons—one of them being that in a lot of cases the renewables are nowhere near the people. And we’re only now beginning to see the need to connect those renewables. So you’re really building and designing new lines and new systems.

The second feature has to do with what you build. When you think about renewables, you realize that they present a challenge in integrating them with the system and using them up to their full capacity, because they can be intermittent. They have lower capacity factors than fossil generation or nuclear generation. Wind power is variable, and the best wind is often at night. These are technical problems that you can address, but they are most effectively addressed by a high-capacity transmission system that permits you to be able to dispatch as much wind as possible when it’s available and then connect to other resources on the grid when the wind is not available.

So transmission is a really important piece of the puzzle if we’re going to go from a country that is 2 or 3 percent wind up to 20 percent wind. So we need to improve reliability, update the current grid, and integrate new resources in an efficient way.

What about financing transmission projects?

I’ve got a shorter answer around finance. Basically, what we’re seeing is that there is appetite among investors, private investors, to support transmission development—again, within the regulated framework. There’s actually some interest in developing smaller-merchant transmission projects as well. And I think it’s really a simple law of supply and demand. People see that there’s a need for these projects; it is a traditional utility-type investment for the most part, so you get a regulated rate of return, and it’s attractive from that perspective.

In addition, the Federal Energy Regulatory Commission [FERC] has identified the need for certain kinds of very significant multistate projects—part of what we call the backbone system. And this is the new approach to transmission build-out that I was talking about. And FERC has provided some incentives, both for these kinds of lines and also for technology innovation.

Now, there’s greater risk associated with that. A lot of times these are the projects that would remind you of the Wyoming–Jackson Ferry project in the sense that they go across a couple of different states. So there’s greater risk involved but there’s also under the FERC rate greater reward. So, really, those are the key financial pieces.

A third piece is that the FERC and some regional transmission organizations have begun to realize that there are projects that really do benefit a broad region, and they have begun to develop cost allocation schemes that socialize the cost to transmission across a region, reducing the cost to individual customers and making sure that people who are going to benefit from the transmission system over a reasonable period of time and over a broader geography—that those costs are all shared. And that’s a really important piece of the puzzle, too.

And technology? How is technology shaping the transmission market?

We really haven’t upgraded the transmission system dramatically in a long time, so there are lots of opportunities to improve. Some of it really has to do with building out a transmission backbone system at an extra-high-voltage level, compared with what we have in most parts of the country, which are really sort of pieced-together transmission systems that were designed to support local need at a lower voltage. And if you look at a country like China or a country like South Korea that is building out a strategic national transmission system more or less from scratch, they are all building at 765 kV and in the case of China even at 1,000 kV and above. They recognize the benefits of these systems.

There’s also a lot of work that goes on on just some of the pieces of the transmission equipment. What kind of materials are you using on the wires? What’s the configuration of the bundle of the wire? And they all achieve different purposes, but the kinds of things we’re going after in that kind of innovation—we’re looking for significantly lower line loss. We have a FERC-approved project—the Potomac-Appalachian Transmission Highline, a 765-kV line extending 275 miles from West Virginia to Maryland—where we expect line loss to be less than 1 percent.

Then there is the smart grid. I always hesitate to call smart grid anything but that, and prefer “customer interfacing.” But we are talking about increasing the information quality that we get off the transmission system for purposes of improving reliability so that we can know more effectively where problems are and we can communicate and make decisions more effectively—and this tends to be very reliability focused.

So, there are lots of opportunities to improve the transmission system, to improve the security of the grid. And, again, driven by this desire to tap new resources and the desire to improve the reliability and security of what we already have, that is also driving technology innovation. Not everyone is prepared—not all regulators are prepared to reward this with special returns, but most regulators do see the advantage of this technology.

Last year, nine or so federal agencies signed a memorandum of understanding [MOU] to help expedite these transmission projects that go across different regions in various jurisdictions. Is that a policy move that is headed in the right direction?

It is headed in the right direction. When you look at the Wyoming–Jackson Ferry line, it would be wrong to say that the delays there were all about the state. In fact, when you cross federal lands—and sometimes we’re even talking about federal entities like Bonneville or TVA crossing federal lands, it doesn’t matter who it is—it can take a very long time to work your way through the environmental impact statements that need to be done sometimes, even if you’re using existing rights of way. So there is a lot of inefficiency, there are multiple federal agencies, and so an MOU is a good start.

I will say that it’s only a start. I do think that it’s really important that the federal government stay focused, that we get a single decision maker, particularly on some of these multistate lines.

But who’s going to do that?

We need something where, if states fail to act, then FERC can step in and authorize a permit. What you really need is what they have for the natural gas pipeline industry, whereby FERC convenes all the interested parties, gives them all an opportunity to participate, and then comes up with a solution that satisfies as many concerns as they can. You’d still be giving somebody the authority to say “Yes.” This wouldn’t be something you’d need for every transmission project, because we have many, many projects that move very effectively under state law or within a single state or sponsored by a regional transmission organization [RTO], but there is a category of projects, particularly these backbone projects, that are just going to be controversial. They need to be paid for across regions. And they need a decision maker to be able to say this project is a “Go,” this project is “Not a go,” so that we can put our efforts into building the lines.

So, we need to prioritize building the big transmission backbone, big lines crossing regions. That’s a high priority you would say?

I think it’s a very high priority. I would not want to say that it’s more important than some of the smaller regional projects that are needed to reinforce the system.

The next question is, how do we become more like China—in our decision-making process?

Well, I don’t know if I want to advocate that!

I mean, China is just leaving us behind. And we have to figure out a way to compete, do we not?

Exactly. We really do. They are leaving us behind. I was there last spring, and I saw them constructing things that we’ve been talking about for years and we’re still just talking. So, it’s really important. Obviously, we ought not to leave all considerations that we care about in the dust. We absolutely need to think about landowner interest. We really do want to route around a wetlands and other special areas if we need to. But we need someone to convene all those interests within a reasonable time frame and then just be able to call balls and strikes.

So that entity would be in FERC somewhere and it would be called something?

We think the right way to put it is in FERC, but quite frankly, I’m willing to entertain any number of suggestions. I just don’t think it needs to be 12 agencies.

What would something like that be called?

Well, I think that it would be FERC and it would be just FERC Siting Authority.

What were you doing in China?

Two reasons—to see the technology and also to see their manufacturing capability and some of the things that we might need just to sort of see where they’re going more than anything. We do have technology exchanges with State Grid, for example.

But I really did want to see the 1,000-kV substation because there’s really nothing like that anywhere. And it just is interesting to see how they’re putting things together. And it was a very eye-opening trip. They decide they’re going to build something, and then they go out and develop the manufacturing capability to do it. I’m frequently asked about manufacturing capability in the United States, and the answer is that I would love nothing more than to have the manufacturing capability for transformers, lattice steel towers, and things like that to be within the United States. But that manufacturing capacity in America is actually quite limited because we haven’t ordered much of that in recent years, and so there’s not that same capacity.

So, you say you were looking at manufacturing capabilities in China for this very thing? The lattice steel towers and transformers?

We haven’t made purchase decisions or anything like that, but I like to see what people are doing just so I know what the equipment looks like and what their issues are, and that sort of thing. It’s just a very useful thing to do. But I really did want to see the technology applied.

And the 1,000-kilovolt substation?

It was really big. It’s not terribly exotic, to tell you the truth. I mean, it’s not as if they had to transform the technology in order to build this. What is dramatic about it is the statement of their appreciation of the need to build a significant EHV backbone system in a country where they are really going about electrification from scratch. They’re going to it with knowledge of technology, they’re going with maximum flexibility to build in renewables. And they actually are going after a lot of renewables.

And so they’re sort of designing the system. They’re designing in extra-high voltage because that’s where you start. You have that overlay, and then you decide over time where you want to go from there.

Can you tell me a little bit about the business opportunities for AEP in the US market?

We kind of put them in three buckets. We are already moving forward through a joint venture with MidAmerican Energy on a substantial transmission commitment in Texas. Texas is a perfect example of a place where you have a single decision maker. Texas is—at least the ERCOT [Electric Reliability Council of Texas] is not electrically interconnected with the rest of the US—so they’re the single decider. And they undertook a program to figure out how much wind they wanted to facilitate and what transmission was required, and they made opportunities available to a wide variety of developers. So we’re moving forward with that.

We also have transferred to that joint venture a number of opportunities that grew up just out of the incumbent utility business in Texas, the franchise business. And so we really project over time that we could have $3 billion in Texas between now and 2017. And a good chunk of that, a billion or so, you’d see in the first half of those years.

The second piece is Transco. And what Transco is is really an attempt to take advantage of this financing opportunity I was talking about earlier. There’s a lot of need for transmission investment on our system because we do have a significant transmission investment already, a lot of it at 765 kV; and there’s a lot of replacement and redesign, and things like that are needed on that system.

And then the third piece is the multistate projects that we have talked about. They’re longer-term and harder to get done, but they do enjoy the premium FERC returns and they are part of the build-out of the Southwest Power Pool.

So those are the three buckets. The sort of immediate, well under-way right now; the Texas near-term Transco, and we’re currently putting the corporate structure in place to move forward with that investment starting this year and through the first half of the decade; and then the JVs, which are in the Southwest Power Pool—and PJM right now, and those will sort of go into service in 2012 and beyond.

It sounds like transmission is coming into its own.

I do agree with that. I think there’s a great deal of interest among investors. I think investors appropriately ask about time—rollout and implementation—because it does require some time to get these regulatory issues resolved. And that’s the reason we have responded by trying to take advantage of the near-term opportunities that have minimum regulatory hurdles to set the stage for what tend to be larger scale, but longer-term investments in the latter half of the decade.

Are there other issues before Congress that you are watching carefully?

Yes. The Senate energy bill that got reported out of the committee I guess late last year did have transmission legislation. And Senator Bingaman, very much to his credit, saw the essential link between renewable portfolio standards and being able to expedite transmission development. So he has sponsored legislation that really addresses three critical issues: Planning, which asks basically, what is it that’s going to get built? Who pays? And then siting, along with an enhanced backstop siting authority so that when a project gets stalled, FERC can step in and solve those issues.