You asked for a discussion of a Federal Energy Regulatory Commission (FERC) study on the costs of transmission line congestion. Your question arose from a December 20, 2001 Wall Street Journal article.

FERC STUDY ON TRANSMISSION CONGESTION COSTS

FERC has not issued the study yet, although it originally planned to do so in November. The article discusses a presentation on the study made by FERC staff at the commission's December 19, 2001 meeting. The presentation is available on the commission's Website, http: //www. ferc. gov/calendar/commissionmeetings/discussion_papers/12-19-01/e-1xproject%20cm_121901_presentation%20v2. ppt. FERC staff working on the study believe that it will be issued soon, perhaps in the next few weeks.

The presentation estimates the costs of congestion during the summer of 2000 and 2001 in 16 areas that have substantial transmission congestion, including southwestern Connecticut. In most areas, including Connecticut, congestion is usually at its worst in the summer, when electric demand peaks. According to the presentation, congestion can arise when (1) there is insufficient generating capacity to meet electric demand within a local area or (2) generators seek to sell more power over a line than it can handle. The presentation notes that congestion varies over time and location.

FERC estimated the costs of congestion on transmission lines in these areas. It selected the lines based on several criteria, including how often they operate close to capacity and the difference in the price of power in and outside of the congested area. Congestion costs money since less expensive electricity cannot flow into a congested area and more expensive local generation must be used instead. According to the presentation, congestion in southwestern Connecticut cost ratepayers $ 8. 4 million in the summer of 2000 and $ 4. 0 million in the summer of 2001. Much of the presentation focuses on congestion in New York and California, where costs were substantially higher. FERC estimated that the cost of congestion in upstate New York in the summer of 2000 was nearly $ 725 million, in part due to the outage of the Indian Point nuclear power plant. The cost fell to $ 64. 6 million in 2001.

FERC estimates that it would cost approximately $ 12. 6 billion to address the congestion by building new transmission lines. It estimates that this expense would increase the average residential customer's monthly bill by 87 cents. FERC believes that in many cases this increase would be offset by lower generation costs.

DISCUSSION

The presentation comes at a time when the Bush administration has proposed expanding the federal government's role in siting transmission lines. The administration has argued that congestion impedes the development of fully competitive wholesale electric markets and threatens reliability, as well as increasing electric prices. Vice President Cheney specifically cited a denial by the Connecticut Siting Council of a proposed transmission line under Long Island Sound as an example of the need for a larger federal role. Subsequently, the developer chose a different route for the line and the council approved the line.

There appears to be a consensus that the transmission system is congested in several parts of the country and this congestion imposes substantial costs. Historically, the costs of congestion in southwestern Connecticut and other parts of New England (principally around Boston) were spread across the region. The Independent System Operator-New England, which administers the transmission system in the region, has recently developed a congestion management system with location-based prices. Under this system, the price of electricity on the wholesale market will reflect, in addition to the underlying cost of generation, the cost of congestion and losses caused by withdrawing electricity at a particular location. This system is described in greater detail in the Independent System Operator's Website, http: //www. iso-ne. com/cmsmss/.

Fundamentally, congestion can be addressed by reducing electric demand (particularly peak demand) in congested areas, building additional generation capacity (either power plants or distributed, on-site generation) in these areas, or expanding transmission capacity. These alternatives are not mutually exclusive. At a recent National Conference of State Legislatures meeting, FERC commissioner Nora Brownell stressed the need to consider all three alternatives in addressing congestion. In Connecticut, Connecticut Light and Power has proposed building a new transmission line in Fairfield County, as described in OLR memo 2001-R-0823. At the same time, the conservation and clean energy funds established under the state's electric restructuring law are investing in energy efficiency and renewable energy projects on a statewide basis. The choice of how best to address congestion in a particular area involves a wide range of energy, environment, economic, and political considerations.

KEM: eh