Executive Speeches

Remarks of Eugene W. Zeltmann, president & chief executive officer of the New York Power Authority, at the Forum on New York City Power Supply, New York, New York

June 26, 2003

I’m happy to have this opportunity to talk to you about the power transmission system in New York State and its role in meeting the demands of the competitive era in our industry.

This subject is of particular relevance for me since the Power Authority owns and operates more than 35 percent of the high-voltage transmission lines in New York. In fact, we built the state’s last two major lines—Marcy-South, which we completed in 1988, and the Long Island Sound Cable Project, which began operation in 1991.

That may be a somewhat dubious distinction since it means that the state’s transmission system is essentially what it was 12 years ago, when competition was just a speck on the horizon. Clearly we must focus on providing the regulatory certainty, the investment incentives and the cost-recovery mechanisms that will be needed if we are to upgrade and expand our transmission network.

Sometimes when I look at our transmission problems, I’m reminded of the old days on the railroads—when bottlenecks were a regular occurrence and the tracks often couldn’t handle peak traffic.  To avoid bottlenecks and get the trains running on time, the railroads had to have good signalmen.

Once, when a young fellow tried out for the position, the company gave him a little quiz.

“What would you do,” asked the train inspector, “if you realized two trains were heading for each other on the same track?”

The young man answered:  “I would switch the tracks for one of the trains.”

“What if the lever broke?” asked the inspector.

“Then I’d dash down out of the signal box and use the manual lever over there.”

“What if that had been struck by lightning?”

“Then,” the job applicant replied, “I’d run back into the signal box and phone the next signal box.”

“What if the phone was busy?”

“Well, in that case, I’d rush down out of the box and use the public emergency phone at the level crossing up there.”

“What if that was vandalized?”

“Oh, well, then I’d run into the village and get my uncle.”

“Your uncle?” asked the inspector.  “Why would you do that?”

“Because”—answered the young man—“he’s never seen a train wreck.”

Of course, in the utility industry we don’t have train wrecks.  Instead, our bad moments take the form of blackouts like those of 1965 and 1977.

We all like to think those days are behind us.  But as loads grow and more power transfers take place in the competitive markets, we have to recognize that investment in transmission may not be keeping pace with the new demands.

The difficulties—if it’s any consolation—aren’t unique to New York State.  A national study by the U.S. Department of Energy—released last year but every bit as relevant today—paints a grim picture of a transmission network plagued by congestion and urgently needing modernization.

The DOE points out that the nation’s transmission lines for the most part were built over the past century by vertically-integrated utilities that produced and transmitted power locally—with some connections to neighboring systems.

Today, though, we’re asking the network to serve as an open-access interstate highway for wholesale power transactions. And—despite these expectations—most new transmission currently is being built to serve local load and to connect new generation to the grid—instead of bolstering the transfer capacity of regional electricity markets.

This problem is far less pronounced in countries like the United Kingdom that have developed bona fide national grids and coordinated planning processes.

Indeed, even in the Balkans, the electricity system is less balkanized than in the U.S.

The sixth largest power dam in the world—the first ever built on the Danube—serves the electricity needs of Yugoslavia, Bosnia and Herzegovina and parts of Bulgaria in a unified grid.

The Federal Energy Regulatory Commission has been working to debalkanize the American grid—first with its Standard Market Design proposal of last July and more recently with a White Paper that significantly revamped the original plan.  Whatever the outcome, FERC’s initiatives concerning transmission planning and expansion could carry significant implications for efforts to strengthen our transmission system here in New York.

The revised proposal puts far greater emphasis on regional flexibility—something I view as a welcome change.  One of its few ironclad requirements, though, calls for transmission-owning utilities that are subject to FERC regulation to join a regional transmission organization or an independent system operator.

There’s no question that the success of competitive wholesale electricity markets will depend at least in part on the capability of the transmission interconnections between multi-state RTOs and ISOs.  Such organizations will have to take a larger part in transmission planning and siting, especially since new facilities may well extend over long distances and multiple jurisdictions.

Here in New York, the ISO is working to establish comprehensive planning processes—both within the state and as part of a coordinated regional effort.  And—if FERC’s vision materializes—the regional factors are likely to take on increasing importance.

Meanwhile, we’ll face the continuing need to allocate transmission costs as fairly as possible at the retail level and to encourage the appropriate level of investment in new facilities—both by regulated utilities and merchant companies.

Keep in mind that there are two ways of recovering costs from retail customers.  One is the traditional “socialized” approach of having all customers in a given system share the costs as part of the regulated rates.  The other—so-called “participant funding”—is to pass the costs on to only those customers that directly benefit from a new facility.

Our thinking at the Power Authority is that socialized costs would be appropriate if an ISO or RTO—having the proper authorization—directed a utility or transmission owner to build a new line for reliability purposes.

But if an independent company, on its own, made a business decision to build a line to ease congestion in a particular area, chances are it would be competing against existing or proposed power plants.  In that case, the company should be responsible for recovering costs through the sale of transmission capacity to load-serving entities—or to those power producers that stand to benefit from the project.

The issue of market-based incentives for merchant companies is particularly difficult because there’s a real risk that a new generating plant could impact a transmission project’s value by reducing or eliminating congestion.  In an ideal world, we’d always have just enough congestion on the system to stimulate investment in new lines when needed while not threatening reliability or sending costs through the roof.  But that’s not necessarily how it happens in real life.

An important boost for merchant transmission investment could come through a new incentive that was developed by the New York ISO and conditionally approved by FERC early this year.  This system of Unforced Capacity Deliverability Rights—or UDRs—will reward transmission developers whose projects can carry power that’s available from external sources to transmission-constrained areas like New York City and Long Island.

The UDRs, in effect, will permit the external generation to be counted toward local capacity requirements—and will credit the transmission builder for it.  They’ll be somewhat similar to the financial rights to transmission capacity that give utilities and other load-serving entities a hedge against the volatility of congestion charges.

It’s clear that such charges—resulting from transmission bottlenecks in the state—are now adding significantly to power costs.  And equally clear that we haven’t made much progress in expanding the transmission system.

Overall, 10 applications to build major new transmission lines have been filed under the Public Service Commission’s Article Seven siting process since early in 2000.

Four of these applications have been approved, five others are pending and one was recently withdrawn.  However, only one of the approved projects—a direct current underwater cable from Connecticut to Long Island—has been completed, and it’s been prevented from operating by regulatory problems in Connecticut.  Also, a number of the projects are local ones, linked strictly to individual generating facilities.

So how do we break through the bottlenecks and strengthen the system?

There are essentially four main responses to these challenges:

• Build power plants close to the load centers.

• Use new technology to increase the capacity of existing lines or along established rights-of-way.

• Upgrade the existing system.

• And build new merchant transmission lines.

The first option—building generation close to load—is actually a very important one.  Locational-based marginal pricing seems to be providing adequate signals as to where to site new plants.  And—as I indicated earlier—new local generation in the right places can in certain cases avoid the need to build new transmission.

At the Power Authority, we’ve seen firsthand how new strategically placed generation on even a modest scale can strengthen system reliability and save money for consumers.

Two years ago, we quickly installed a series of small, clean power plants at six locations in New York City.  We intended them mainly to help keep the lights on in peak summer periods.

They’ve served that purpose with striking success—but they’ve also helped to ease the effects of transmission constraints throughout the year.  All of the plants are located on the 138-kilovolt transmission system—which tends to get very congested.  But they’re beyond the bottlenecks, so they can send power directly on to the system for use within a local load pocket.

The plants not only help to stave off power shortages and bring down congestion charges, but—as the ISO’s recent “Power Alert Three” report noted—they also provide important environmental benefits.  That’s because they’re the cleanest power plants in New York City and generally displace generation from older, less efficient plants in the load pockets.

There are limits, though, as to how much generation you can put in populated areas.  And while local generation can help to ease the burden on the transmission system, it might do little or nothing to promote competition.  It’s evident, then, that we have to devote considerable effort to bolstering the transmission network itself through the three other options—technology, upgrades and merchant lines.

Let me begin with an exciting new technology.  At the Power Authority’s Marcy Substation, near Utica, we’re finishing work on the world’s most advanced device for controlling voltage and power flows on existing lines.

The convertible static compensator—or CSC—uses high-speed solid-state electronics rather than conventional, slower electromechanical switching techniques.

By strengthening voltage support, it’s already enabled us to boost capacity on the statewide system by nearly 200 megawatts.  The increase has been about 100 megawatts on just the Central-East Interface—a group of seven heavily congested lines between the Utica and Albany areas that the DOE report identified as one of the nation’s worst transmission bottlenecks.

When the CSC is completed later this year, it will permit operators—for the first time anywhere—to instantly transfer power from a heavily used line to one with spare capacity.

The Power Authority has invested $41 million in the CSC—and the remainder of the total cost of $54 million has come from about 30 electric utilities in the U.S. and abroad and several industry organizations.

We know that it could be a long time before we recover our share through congestion revenues—and that there are no guarantees we ever will.  Nevertheless—as a public entity—we thought it was important for us to be out front in demonstrating this extraordinary technology and encouraging others to adapt it to their needs.

Another emerging technological solution is superconductivity.  New ceramic superconductors—operating at much higher temperatures than before—can carry up to five times as much electricity as regular cables while reducing or eliminating power loss.

The Long Island Power Authority and Niagara Mohawk are each involved in projects to install superconducting lines for short distances within existing underground rights-of-way.  Long-distance applications are probably at least a decade or two away, but research should continue.

Certainly, as the rapid growth of urban and suburban areas increases the demand for electricity—while limiting the space for overhead and underground transmission facilities—the ability to transmit more power on existing rights-of-way could provide an important advantage.

Eventually, superconducting cables could even be used to construct power distribution rings around moderate-sized cities—where distribution lines could tap in and carry power to customers throughout the community.

All of this, as I said, is out in the future. And right now the wholesale market is signaling a pressing need to ease congestion through new transmission—or generation—on the system that carries power to downstate New York.

The ISO has evaluated several upgrades to the existing grid that focus on the corridor between Marcy and Pleasant Valley—in Dutchess County.  This corridor is the source of a hefty share of the state’s congestion costs.

Probably the most promising scenario calls for rebuilding one of the 115-kilovolt circuits between New Scotland and Leeds—in Albany and Greene Counties—to 345 kv and doing the same with one of the circuits between Leeds and Pleasant Valley.  The ISO forecasts that this—along with other improvements—could increase transfer capability by 1,100 megawatts and cut annual congestion costs by up to $150 million.

Some words of caution may be in order, though.

First—as the ISO notes in “Power Alert Three”—the congestion-cost benefits are directly related to the amount and timing of new generation beyond the constraints.  The more new generation, the less potential to reduce the costs by adding transmission.

Also, existing transmission circuits might have to be taken out of service for extended periods to permit completion of the proposed upgrades—and costly measures to address environmental concerns might be required.

Each of these factors could significantly affect the projected benefits—and should be assessed as part of a continuing evaluation.

We also have to consider the fourth and final option for strengthening the transmission system—building merchant lines.

As I mentioned earlier, the one such line that’s already been built is buried under Long Island Sound—and likewise has been buried for more than a year in Connecticut’s brand of red tape.  This Sound Cable saga underscores the fact that siting, building and operating new transmission lines is never easy.

Nevertheless, several other merchant transmission projects are on the drawing board and could be in service within the next two or three years.  Some would carry power underwater from New Jersey to New York City or Long Island, while one would run along railroad rights-of-way from near Albany to the city.

Most of these projects would be direct current lines.  But a little over two months ago, the PSC gave Article Seven approval to a 345-kilovolt AC line proposed by PSEG Power of Newark.  The line would carry up to 600 megawatts under the Hudson River from an efficient combined-cycle plant in Northern New Jersey to Manhattan.

Things seemed on track after the PSC approval.  But less than two weeks later, Con Edison said it would sign a 10-year contract to obtain 500 megawatts from a large power plant proposed for Astoria, Queens.  That was the contract PSEG had hoped to win for its new line.  So now it’s uncertain if the transmission project will move forward—though PSEG has gone out for construction bids and is continuing to assess the situation.

This is a prime example of the competition between generation and transmission that I referred to before.

In the old days—really not that long ago—the two were part of an integrated planning process directed to common goals.  Now, life is a lot more complicated.

We find ourselves dealing with a generation sector that’s competitive and a transmission sector that’s basically regulated, but will soon be bifurcated with the coming of merchant lines.  And somehow—as in the days of integrated planning—we must find a way to make them complementary.

In theory—at least—if you kept adding enough generation in the right places, you could reach the point where you wouldn’t have to build any long-distance transmission at all.  The reverse, of course, isn’t true—an extensive transmission system would be of no use if you didn’t have the power to put on it.

So why should we be concerned about strengthening our transmission network?

As the “Power Alert Three” report emphasizes, transmission—along with clean new generation and an aggressive approach to energy efficiency—must be part of a balanced strategy for meeting our future electricity needs.

Without a strong interregional transmission system, we cannot have a truly reliable power supply.  We cannot have a truly diverse power supply.  And we cannot have a truly competitive power supply.

Indeed, a strong transmission system—configured along free market principles—is about as dynamic a creation as one might imagine.  Here we have an industry whose product is made and consumed in the same instant.  And if power plants can be viewed as a series of hearts pumping out the lifeblood of our economy, then transmission is the vast and indispensable circulatory system.

That system was conceived in an earlier era and in many places has grown sclerotic with the pressures of competition and the new burdens that have been placed on it.  But—with the right initiatives in the right places—I believe it can deliver the promise of competition: the promise of reliable and low-cost electricity for all.