EELECTRICLECTRIC PPERSPECTIVESERSPECTIVES MAY/JUNE 2011

Cybersecurity: Protect the Grid DTE Energy’s Tony Earley: Powering Innovation Commissions and Concerns Rebalancing Risk Are Your Strategy and Capabilities Aligned? Earning the Right to Win Performance leaders establish comparative For more information: advantage by aligning their strategies with a limited set of relevant and differentiated Jim Hendrickson capabilities. But, success requires more than Partner being a fast follower—it demands foresight, Washington, DC discipline, and continuous renewal. 703-905-4007 [email protected] Drawing on deep industry and functional understanding, Booz & Company works Todd Jirovec with many of the world's leading power and Partner gas companies translating strategy into Dallas capability and performance priorities, 214-746-6525 designing innovative operating models, [email protected] and achieving differentiated leadership. EELECTRICLECTRIC PPERSPECTIVESERSPECTIVES THE MAGAZINE FOR MANAGEMENT IN AMERICA’S SHAREHOLDER-OWNED Features ELECTRIC COMPANIES MAY / JUNE 2011 • VOLUME 36, NUMBER 3

22 A Matter of Balance Innovative regulatory practices can adapt to new technologies and new investment realities.

BY ERIC ACKERMAN AND JOHN CALDWELL 22 34 Protect the Grid Tasked with securing their utilities against potential cyberthreats, chief information offi cers rise to the challenge.

BY JIM NASH

44 Power & Innovation Electricity drives new technology, and electric companies are leading the way to a new, stronger economy. 34

BY ANTHONY F. EARLEY, JR.

54 Decisions, Decisions The industry is on the brink of major change, say regulators, who face tough calls on a host of issues. BY DENNIS J. WAMSTED 54

44 ELECTRIC EELECTRICLECTRIC PERSPECTIVES Jane S. Nunnelee PPERSPECTIVESERSPECTIVES Editor & Publisher, 1981-2001 THE MAGAZINE FOR MANAGEMENT IN AMERICA’S STAFF SHAREHOLDER-OWNED ELECTRIC COMPANIES Eric R. Blume Editor & Publisher [email protected] Bruce Cannon Associate Editor [email protected] William Bickel Art Director/Production Manager [email protected] LaVonne M. Rose Departments Subscription Coordinator MAY / JUNE 2011 • VOLUME 36, NUMBER 3 [email protected]

EDITORIAL BOARD Edward Comer Vice President, Law, 6 82 and General Counsel President’s Message Distribution Lynn LeMaster Senior Vice President, Policy, Innovation. With 95,000 miles of underground and Chief of Staff Richard McMahon electric cable, Con Edison’s New York Vice President, EEI Alliance of distribution Energy Suppliers David Owens system is the Executive Vice President, 8 perfect test Business Operations Quin Shea Powering Change bed for new Vice President, Environment A New Design. distribution Brian Wolff Senior Vice President, External Affairs automation technologies. CIRCULATION LaVonne M. Rose 202/508-5584 10 [email protected] Subscriptions: $100 per year. EE at Work 86 REPRINTS Meeting effi ciency goals through Diana Sholl Regulation Reprint Management Services codes and standards. 717/399-1900, ext. 162 UtilityU attempts to iimplement adjustment ADVERTISING SALES William Mambert mmechanisms and infra- Electric Perspectives 12 structure investment were 600 Cameron Street Alexandria, VA 22314 News & Trends the main drivers of new general rate 703/751-9864 [email protected] Safe and reliable nuclear cases fi led in fi rst quarter 2011. energy…smart meter radio fre- quency 92 exposure... Credit Ratings home energy man- agement…transmis- The relatively low number of ratings sion investment…and changes in 2010 refl ected, in part, Mailing label corrections: send old a balance of negative and positive label and correct title and address to more. Subscription Coordinator, forces. Electric Perspectives at EEI. Allow 12 weeks. Postmaster: send address changes to Subscription Coordinator, Electric Perspectives, EEI, 701 Pennsylvania 67 Avenue, N.W., Washington, DC 20004-2696. Periodicals postage paid at Washington, DC, Electric Utility 100 and additional mailing office. Another Perspective Electric Perspectives (ISSN 0364-474X) Marketplace is published bimonthly by Edison Electric Institute, Inc. New standard for nuclear energy 701 Pennsylvania Avenue, N.W., safety. Washington, DC 20004-2696. www.eei.org The title is a registered trademark of Edison Electric Institute. Statements of fact and opinion are the responsibility of the author(s) alone and do not imply an opinion on the part of EEI, its employees, or members. Each advertiser and advertising agency On the cover: Protecting the grid from cyberattacks requires a coordinated effort among electric com- assumes full liability for all contents panies, the federal government, and suppliers of critical electric grid systems and components. Utilities of advertisements printed. Copyright © 2011 work closely with the North American Electric Reliability Corporation and federal agencies to enhance by Edison Electric Institute, Inc. the cybersecurity of the bulk power system. (Photo: Masterfi le) EEI Publication No. 43-11-03.

WWW.EEI.ORG/EP ee at work Where electric efÀ ciency and efÀ cient regulation meet.

of the total savings depending on the scenario. An underlying Meeting Effi ciency assumption in the forecast is that states and local govern- ments will adopt the most recent set of building energy codes Goals Through Codes and that the building industry will fully comply with the most recent code. Empirical evidence suggests otherwise—state and Standards and local governments have struggled to attain high compli- ance rates with the prevailing code. By Lisa V. Wood Given the challenge of developing and implementing new executive director of the Institute for Electric Effi ciency and more stringent codes and standards, the roles of cus- tomer engagement and stakeholder education become ever more important—utilities have a vested interest in providing he nation’s electricity use continues to grow. But a those things. recent study by the Institute for Electric Effi ciency (IEE) found that an increase in energy effi ciency Expanded Utility Role T standards for new appliances and a tightening Indeed, utilities have a demonstrated track record of achiev- of residential and commercial building energy codes could ing energy savings through energy effi ciency programs, and help offset that anticipated growth over the next 15 years. such savings continue to trend upward. More than half the The study, “Assessment of Electricity Savings in the United states have some form of energy-effi ciency resource standard States Achievable Through New Appliance/Equipment Ef- with annual increases in energy-effi ciency targets. Codes and ficiency Standards and Building Efficiency Codes (2010- standards programs can help meet long-term savings and 2025),” developed its moderate and aggressive scenarios effi ciency goals cost-effectively. In fact, when utilities can using as its baseline the Energy Informa- integrate codes and standards into their tion Administration’s “2011 Annual Energy existing energy effi ciency portfolios, they Outlook,” which incorporates the latest ap- create a win-win for consumers by pursu- pliance effi ciency standards and building ing the most cost-effective approaches to energy codes. saving energy. In the moderate scenario, tightening In many cases, however, codes and stan- those codes and standards could cut overall dards are not included in the portfolio, nor electricity use by up to 9 percent or about are utilities actively involved in using them 350 terawatt-hours (TWH) by 2025. EIA proj- to their best effect with governments, build- ects an increase of 364 TWH of electricity ers, inspectors, and customers. As a result, demand during this period. Further, under it becomes more diffi cult and expensive for the aggressive, no-holds-barred scenario, the utility to achieve the state’s effi ciency the strongest codes and standards actually goals. could reduce the nation’s overall demand. Codes and standards are not new to utili-

But only a few states include codes and Images.com ties—15 years ago it was not uncommon for standards, which can be highly cost-effec- a utility to have its own codes and standards tive, in their overall energy effi ciency goals; and utilities, group working in conjunction with state governments. Today, which currently administer energy effi ciency programs in only a handful of states have a codes and standards process most states can play a vital role in the codes and standards with a clear role for the utility. In those states, utility-funded process. When the utility plays a role, everyone wins. codes and standards development efforts yield large energy savings at very low cost. For example, California projects A Diffi cult Proposition that roughly 10 percent of its energy-effi ciency goals in the Of the two scenarios, the moderate one is the more likely, as 2010-12 program cycle will come from codes and standards it projects future energy savings based on top-of-the-line, programs—at very low cost. high-effi ciency appliances that are currently available in the Given the enormous savings potential from codes and market, such as those with the ENERGY STAR label. Reaching standards, the time is now for the electric utility industry the full energy-savings potential of codes and standards is to work with state regulators, consumer advocates, state a diffi cult proposition, because it requires a high degree of offi cials, and regional energy-effi ciency organizations, to coordination among many energy-efficiency stakehold- integrate codes and standards into existing utility energy ers—manufacturers, utilities, standards-setting organiza- effi ciency portfolios. Helping stakeholders understand the tions, builders, the government, and customers—who have potential for an expanded utility role in the codes and stan- priorities in addition to effi ciency, like cost and appliance dards process and taking advantage of existing state models performance. for accomplishing this can deliver substantial cost-effective The majority of savings in both scenarios result from ap- energy savings nationwide and help to meet energy effi - pliance effi ciency standards—from 65 percent to 76 percent ciency goals. ◆

10 ELECTRIC PERSPECTIVES Utilities rely on SAIC to help solve their most complex energy, infrastructure, and environmental challenges. Getting the most out of people, processes, and technology requires an integrated path forward. SAIC’s full project life-cycle solutions enable utilities to plan, implement, and operate vitally important systems. The result is a smarter grid and greater efficiency in an ever-changing marketplace. Smart people solving hard problems.

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Energy I Environment I National Security I Health I Critical Infrastructure

© Science Applications International Corporation. All rights reserved. NYSE:SAI a MATTER of BALANCE BY ERIC ACKERMAN AND JOHN CALDWELL

INNOVATIVE s more and more utilities embark on pilots and full-scale grid modernization REGULATORY projects, the concept of a “smart grid” has become more comprehensible. PRACTICES The regulatory community seemed to CAN ADAPT embrace the smart grid initially. But there has abeen some backlash, among both customers and regulators. TO NEW On the customer side are concerns about costs and the tech- TECHNOLO- nologies themselves, such as whether they pose threats to privacy and human health. Regulators, on the other hand, tend GIES to focus on the value proposition underlying smart grid invest- AND NEW ments—and they view the cost-recovery methods proposed by utilities with growing concern. In some recent cases involving INVESTMENT automated metering infrastructure, the commission either re- jected proposals or deferred its approval on the grounds that REALITIES. they placed too much risk on customers or that the utility did not demonstrate the cost-effectiveness of the new technologies. Why this apparent reluctance by some commissions to embrace grid modernization? In large part, this is because the smart grid’s value proposition differs from the industry’s tradi- tional justifi cation for capital investment. Historically, regulators approved such investments based on need: They allowed new generation, transmission, or distribution facilities because the utility made a successful case that the investment would meet growing electricity demand or maintain a level of service quality and reliability. Bigstock

22 ELECTRIC PERSPECTIVES MAYM AY / JUNEJ U N E 20112 011 23 Delays—regulatory lag—often occur between the start of construction and when the costs fi nally go into rates.

higher compared to traditional ones. How should regulators deal with that? The basic question is how the elec- tricity provider and the customer share risk. If electricity providers bear too much risk, the investment in grid modernization will stall or be aban- doned completely. On the other hand, if customers bear too much risk, the result may be investment in unproven technologies or technologies that ulti- mately deliver less value than antici- pated. Traditional regulation may have diffi culty in fi nding the right balance. Nontraditional benefi ts require fresh approaches—innovative regulation— to allocate and compensate for risk.

The Utility’s Risk Cost-recovery risk is not new to the electric industry. Delays—regulatory lag—often occur between the start of construction and when the costs fi- nally go into rates. And there is an even greater risk that regulators will not al- low full recovery of a capital invest- ment—a commission might determine that the facility is not necessary to serve existing or anticipated electric- ity load or that costs associated with it were not prudently incurred. This was a problem in the early 1980s and 1990s, with plants that

Dreamstime were planned in the 1960s and 1970s to meet what seemed to be ever-rising Grid modernization supports those Just how would the electric customer demand. Demand growth, however, things, too, but the promise of many benefit from the investment? Could plummeted in the wake of the 1970s new technologies is outside the tradi- you measure and verify the benefit? energy crisis. At the same time, costs tional business case. They provide a When will it occur? How exactly will and construction times ballooned, different spectrum of benefits—cus- it get to the customer? And, if benefi ts mostly due to new regulations. Many tomer savings and more choice, for extend to other recipients—that is, state commissions balked at putting example—as well as collateral ben- others in society who would share in a those costs into rates and disallowed efi ts for the environment and the lo- cleaner environment or a job-creating cost recovery on the grounds that the cal economy. As regulators face smart economy—then to what extent should plants were not really needed. The cost grid investment proposals supported ratepayers have to pay? If they are truly to utilities was high: Between 1981 and in whole or in part by nontraditional “societal” benefi ts, then shouldn’t soci- 1991, regulated electric utilities in- benefits, they have realized that the ety as a whole have to pay for them (for curred a total of more than $14 billion criteria for evaluating them have be- example, in taxes, rather than electric in prudence disallowances. come more complex. rates)? In light of that experience, utilities There are challenges on the cost may be reluctant to take comparable Eric Ackerman is director of alternative regulation and John Caldwell is director of side, as well. The probability of cost risks to modernize the grid. As with economics at Edison Electric Institute. overruns for new technologies is nuclear power in the 1970s, some of

24 ELECTRIC PERSPECTIVES Yesterday’s electric distribution grids were designed, maintained and operated

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BUILDING A RENEWABLE FUTURE

AT BECHTEL we realize that building the future means building cutting-edge renewable power facilities. And when it comes to building, no other company can match the experience and expertise of Bechtel. We provide our customers solutions for the 21st century by raising the bar with innovative designs and quality work-delivered on time and on budget.

BECHTEL Frederick, Maryland USA San Francisco Houston London Brisbane bechtel.com the new technologies under consid- terest and principle. Utilities were able nology doesn’t live up to its promises eration today might have unforeseen bear these risks because they were or a competing technology has wider costs. And, as with nuclear power, much stronger financially than they adoption? If another technology be- there is the risk that regulators, after are today. In the 1970s most utilities comes the industry standard, then the the fact, will question the prudency of had a credit rating of A or better. To- utility’s choice might become obso- implementing them. And the fi nancial day, the average electric utility rating lete. Even worse, a losing technology consequences are as big as or bigger has declined to BBB or BBB-. From this could make the utility an “island” in than those incurred in the wake of the position, if utilities fi nance and build the electrical system, hampering the nuclear building boom. infrastructure as they used to, many company’s ability to interact with other Also, the investment world has could fi nd their debt downgraded to energy providers and systems. Also, changed significantly since the last below investment grade—helped by the right technology doesn’t guarantee major construction cycle. Today many the combined effect of capital spend- that it will deliver as expected. An in- electric utilities cannot afford to fi- ing, regulatory lag, and declining or vestment that supports plug-in vehicle nance and build new infrastructure as negative energy growth per customer. recharging stations, for example— they did in the past. Traditionally, utili- It is not a stretch to say that in to- in anticipation of growth in electric ties fi nanced large multi-year projects day’s markets, traditional regulatory cars—risks having the forecasts be in- and deferred rate recovery until the practice can be a barrier to new invest- correct. What if customers do not em- facility was in service. Some commis- ment. Utilities may require new rate brace the concept of managing their sions granted utilities construction- policies that allow them more current load in response to real-time pricing work-in-progress rates, which allowed cost recovery so they can maintain information, despite all the smart me- the companies to recover interest ex- their interest coverages and their credit ters the utility has installed? In addi- pense as they incurred it. But many ratings. Strong credit means utilities tion, new market players may disrupt were forced to defer all recovery—in- can borrow capital on the most reason- the business model that underlies the able terms possible, which is in cus- way electricity is purchased, produced, The average electric utility credit rating tomers’ long-term interest, as well. and delivered. has declined from A or better in the 1970s Also, new investments today face a There are not only more risks, but to BBB or BBB- today. broader range of risks. What if a tech- also a whole new level of complexity. 123rf

MAY / JUNE 2011 27 And Where Are the back quicker after an outage, and see regulators, on the other hand, always Customer Benefi ts? a general increase in quality of cus- have seen a delicate balance between It’s a new level of complexity for cus- tomer service. They actually may see providing reliability and the invest- tomers, too. Traditionally, they have their electricity bills reduced, as sav- ment necessary to maintain it. With expected reliable electricity service ings in operations and management the smart grid, customers, consumer provided at reasonable rates, rates that expenses due to grid efficiency are advocates, and regulators must go be- compensated electric companies for passed through to rates. But how can yond this trade-off and consider new providing that reliability. But the ben- a typical customer measure how these types of risks. If one expects a smart efi ts customers receive by supporting benefi ts are occurring? grid investment to result in customer (through rate increases) grid modern- In general, electric utility customers savings due to reduced operating ex- ization go beyond reliability in elec- have not considered their service as in- penses, regulators, customers, and the tric service. Customers may be able to volving a “risk/reward” trade-off—they utility must come to an understanding take a greater role in managing their simply expect reasonable reliability at about when savings will be received. electricity consumption, get electricity a reasonable price. Utilities and their If the regulator decides to adjust rates only after the next rate case, when will this case occur? What if reductions in 123rf expenses don’t occur or don’t meet expectations? And if the rewards are less tangible—a cleaner environment, say—the regulator must decide how to quantify that. There are also operational risks with the new technologies. They may not perform as intended. The cost of im- plementing them may be higher than expected. Will customers have to bear the consequences of this, in either ser- vice quality or rates? This is where innovative regula- tion—focusing on sharing the risks— comes in.

Sharing There are different extremes in how to compensate for risks. At the low end of the utility risk spectrum, smart- grid expenditures would be collected from customers as the expenditures occur—probably in the form of a spe- cial charge passed on to customers— without the utility having to verify that the project’s promised savings or other benefi ts have been realized. (See Fig- ure 1.) At the upper end of that spec- trum, the utility recovers investment only after project completion and, in the most risky scenario, only after the company has verified the customer benefi ts. In the low end of their risk spec- trum, electric customers have guaran- tees that they will see the benefi ts of

Innovative regulation approaches can help rebalance risk in ways that are fair to both customers and investors.

28 ELECTRIC PERSPECTIVES If you’re there, we’re there. For over 100 years Platts has been the world’s leading global provider of energy and metals information. You can rely on Platts for business-critical market news and data, benchmark price assessments, insightful newsletters, and leading conferences to help you drive your business decisions with confidence. www.electricpower.platts.com

OIL NUCLEAR METALS RENEWABLES PETROCHEMICAL Develops | Constructs | Owns | Operates

49 projects - 5,255 MW (constructed and/or under construction)

One company – many capabilities Founded in 1997, Systems Americas Inc. (RES Americas) is a fully-integrated renewable energy company. With our in-house expertise, we offer resource analysis, development, site design, procurement, engineering, construction, through to operations. RES Americas can • Sell its developed and constructed projects to others • Construct projects developed by others • Own and operate projects

Caught from the headlines:

Renewable Energy Systems Americas Inc. (RES Americas), has announced that it will transfer ownership of the Crossroads Wind Energy Project to Oklahoma Gas & Electric (OG&E). RES Americas has developed andThe will owners construct selected Crossroads RES Americas Wind as the general contractor Energy Project, which OG&Efor will BOP own of and Harvest operate. Wind after the company had successfully delivered BOP for a similar project in 2007, White Creek Wind. "RES [Americas] always exhibits a very strong commitment to site safety and to the protection of the project environment, coupled with a focus on quality assurance, schedule manage- ment, and permit compliance," said Project Construction Manager and Owner's Representative for Harvest Wind and White Creek Wind.

RES Americas’ experience with Utilities RES Americas’ Power Purchase Agreements with Utilities

Utility Project MW RES Americas Role Utility Project MW RES Americas Role Energy Northwest Nine Canyon I 48 EPC Contractor Public Service Co. Energy Northwest Nine Canyon II 16 EPC Contractor of Colorado (PSCo) Cedar Point 250.2 Developer & EPC Contractor Energy Northwest Nine Canyon III 32 EPC Contractor Ontario PowerAuthority Talbot 99 Developer & EPC Contractor Nebraska Public Ontario PowerAuthority Greenwich 99 Developer & EPC Contractor Power District Ainsworth 59 EPC Contractor Austin Energy Whirlwind 60 Developer,EPC Contractor & Owner Oklahoma Gas Austin Energy Hackberry 166 Developer, EPC Contractor & Owner and Electric Crossroads* 227.5 Developer & EPC Contractor So.California Edison Cameron Ridge 60 Developer & BOP Constructor Pacifcorp High Plains 99 BOP Constructor TXU Energy Woodward Mtn. 160 Developer & BOP Constructor Pacifcorp Marengo I* 140 Developer & BOP Constructor Reliant Energy, Pacifcorp Marengo II 71 Developer & BOP Constructor Austin Energy & TNMP King Mountain 278 Developer & EPC Contractor Pacifcorp McFadden Ridge 29 BOP Constructor TXU Energy Lone Star-Post Oak 200 Developer & BOP Constructor Corp. TXU Energy Lone Star-Mesquite 200 Developer & BOP Constructor of Jamaica Wigton* 21 Developer & BOP Constructor EPC – Engineering, Procurement & Construction Public Utility District #1 Harvest Wind 99 BOP Constructor BOP – Balance of Plant Puget Sound Energy Hopkins Ridge* 149 Developer & EPC Contractor * Project was sold to the named Utility Puget Sound Energy Hopkins Ridge 7 BOP Constructor Puget Sound Energy Lower Snake River* 343 Developer & BOP Constructor Puget Sound Energy Wild Horse 229 BOP Constructor Visit us at Booth #4101 Puget Sound Energy Wild Horse Expansion 44 BOP Constructor ® Westar Energy Central Plains* 99 Developer & EPC Contractor at WINDPOWER 2011 For more info, scan the QR code with your smartphone. If you don't have a QR code app, it can be downloaded for free.

Renewable Energy Systems Americas Inc. 11101 W. 120th Ave. Suite 400 Broomfield, CO 80021 303.439.4200 res-americas.com the smart grid (such as savings from re- Naturally, they may want to revisit the average deviations in voltage. A bench- duced O&M expenditures) refl ected in original benefi t estimates and compare mark for outage management could be lower rates, whether savings have oc- them to actual cost and performance average duration of outages. According curred actually or not. At the opposite results. Regulators can incorporate to the performance, judged against the extreme, customers receive only the benchmark incentives for utilities to benchmarks, regulators may apply re- benefits that have materialized, and wring the maximum benefi ts out of the wards or penalties. even then only after rates have been smart grid. For metering, benchmarks Innovative regulation can go beyond adjusted to account for them. Here, might include unit metering cost, regulatory lag works to the customer’s number of billing inquires, and average A cost tracker or “rider” allows a utility disadvantage—seeing the benefi t of re- time for resolving billing inquiries. A to recover its actual costs in the periods ductions in O&M expenses would have target for voltage monitoring might use between rate cases. to wait until the next rate case. More- over, customers have no guarantee that they will receive the benefi ts. If results fall short, it is the customer’s loss, not the utility’s. Risk is inherent in the traditional regulatory process, whose premise is that investors in electricity compa- nies are allowed a reasonable return on their investment, but they are not guaranteed it. The traditional rate case approach for recovery of capital invest- ment in smart grid is a higher risk sce- nario for both utilities and customers. In practical terms, the risks begin in the construction phase. Here, innova- tive regulation approaches can help rebalance risk in ways that are fair to both customers and investors—pre- serving utility creditworthiness while providing strong incentives for effi- cient construction and operation. For Bigstock example, a cost tracker or “rider”—a mechanism for the recovery of a util- FIGURE 1 ity’s actual costs in the periods be- WHO BEARS THE RISK? tween rate cases—can incorporate construction performance incentives: High risk No cost recovery until The tracker can provide automatic benefi ts verifi ed in rate case. fl ow-through of costs up to an annual budget, after which shareholders and customers share costs according to a ratio (say, half of annual overages ab- sorbed by shareholders and half fl owed into rates). In addition, there can be Utility an annual review of cost and schedule performance, with the option of delay- ing or scaling back the project if costs Customer Immediate benefi ts are grow too much. That harmonizes the cost recovery guaranteed needs of both utilities and customers. through and fl owed Only realized benefi ts are Innovative regulation can help man- automatic through in passed through after next rate case. age risk in other project phases, as well. rate tracker. lower rates. Once the technologies to modernize High risk the grid are in operation, commis- Low risk sions may be concerned that a smart Customer grid operate as effi ciently as possible.

MAY / JUNE 2011 31 managing construction and opera- third parties while giving utilities an mize the risk to customers of cost over- tional risk and address a longer-term opportunity to supply services on the runs or performance shortfalls. concern—whether the smart grid really customer side of the meter. If utilities Commonwealth Edison took this does stimulate the service innovations have earnings from the sale of value- approach last year in its proposal to everyone expects. This public-policy added services and have financial the Illinois Commerce Commission challenge has received little attention controls to ensure that costs are not for recovery of the utility’s planned in- to date. The success of the smart grid shifted to standard services, then they vestment in smart grid technologies. hinges on market rules that are fair should be allowed to keep those earn- ComEd proposed to recover the car- to both utilities and third parties and ings. To impute those earnings against rying charges for its investments on a that provide appropriate incentives revenue requirements (that is, to take quarterly basis until the investments for each. Third parties (software fi rms, them away at the next rate case) would became part of the rate base and the energy management services, and so quickly undermine utilities’ interest commission incorporated a return in on) have new information technolo- in finding new services for custom- rates. As an incentive to manage the gies that may be essential for providing ers. But if utilities have an incentive to costs effectively, ComEd would not col- new services on the smart grid. Suc- develop new services, they gladly will lect carrying charges for cost overruns cessful innovation on the smart grid partner with third parties. above 5 percent of the original budget will require the skills of third parties (unless the commission thought the and the power-engineering know- Performance Incentives overruns were prudent and reason- how of utilities. Innovative regulation For regulated utilities, the principal able). If investment expenditures fell can help create new market rules that incentive to adopt an innovative regu- below the budgeted amount by more ensure nondiscriminatory access by latory mechanism for smart grid in- than 5 percent, then the utility and the vestments is to reduce cost-recovery customers would share the savings Energy management. With incentives to risk. But to make that mechanism (e.g., that were beyond that lower thresh- develop new services, utilities also have a rate tracker) palatable to regulators, a old. The commission also would have an incentive to partner with third parties. utility can include incentives to mini- a two-year review process as part of Courtesy: Tendril

32 ELECTRIC PERSPECTIVES this mechanism, so regulators periodi- viable solutions for the historical chal- eration, transmission, and distribution cally could evaluate success and reas- lenges that utilities have faced in get- infrastructure while simultaneously sess program parameters and targets. ting recovery for their investments for contending with declining growth in ComEd also proposed an additional providing reliable electricity service electricity sales and low credit ratings. incentive: The company offered to re- in a timely manner. Timely recovery As the electricity industry prepares duce recovery of actual O&M costs by has become much more critical in re- to reshape the grid, it may be creating a up to 5 percent beyond the reductions cent years, as utilities face the need catalyst for reshaping regulatory mod- already projected, with the company for significant amounts of new gen- els and methods, as well. ◆ keeping the savings that were beyond this amount. Another example of an incentive ap- proach is the plan approved last year by the Massachusetts Commission for NSTAR’s smart grid pilot. If customers participating in the utility’s dynamic pricing program reduce load and by 10 percent and 27 percent, respectively, the company would re- ceive an incentive payment of up to 5 percent of its forecasted spending on the program. NSTAR also can use an annual tracking mechanism to recover costs associated with the pilot through its basic service rates, provided that it continues to demonstrate prudency.

New Horizons for Technology and Regulation As they modernize the grid, utilities can use such programs for accelerated capital cost recovery and help ensure that they do not face excessive risks. In- novative regulatory mechanisms also provide incentives to keep costs down and produce the expected outcomes for the customer. These benefi ts will carry over to the customer as well. Ide- ally, of course, customers would prefer the certainty that anticipated savings and benefi ts associated with the smart grid will actually occur, but offering that certainty is practically impossible. This is particularly true given the fact that many of the smart grid programs are pilots or involve cutting-edge tech- nological developments. The next best thing to certainty, however, is a regula- tory arrangement in which energy pro- viders share the pain of performance that falls below expectations, but also share in the rewards of exceeding ex- pectations. Such arrangements really are win-win for everyone. The movement toward a smarter grid has highlighted the value of in- novative regulation. Indeed, there are

MAY / JUNE 2011 33 3434 ELEEELELECTRICL E CTRCT R ICI C PEPPERSPECTIVESEERR SPESPS P E CCTTTII VESV ESE S 123rf TASKED WITH SECURING THEIR UTILITIES AGAINST POTENTIAL CYBERTHREATS, CHIEF INFORMATION

OFFICERS RISE TO tilities are prepared for and THE CHALLENGE. block millions of cyberat- tacks per day. And just like BY JIM NASH U the continually morphing cyberthreats they face, utilities—and in particular,

their information technology (IT) depart- ments—change and evolve to keep their systems safe and manage security-re- lated compliance issues. Rigorous sys- tem access regimes are obvious steps, as are changes in corporate culture. As some companies create new cyberse- curity departments, newly empowered

chief information offi cers (CIOs) meet directly with their boards to discuss cy- bersecurity issues and represent their companies before government agen- cies and standards bodies. The “sys- tem” involves the entire industry, and so utilities push hard for more collabo- ration among fi rms, standards groups, government agencies, and regulators. Security of critical infrastructure al- ways has been a priority for utilities, but this step-up in activity has resulted from a security environment that has

MMAYAY / JUNEJJUNU N EE2 20112 00110111 35 The test Electricity Infrastructure Opera- tions Center at Pacifi c Northwest National Laboratory. Increased digital integration raises the cyber stakes. grown less predictable. And then there are the much-debated opportunities and challenges of smart-grid services to complicate the situation further. Several years ago, most people out- side of the industry considered non- nuclear electricity generation to be a mechanical manufacturing process that was insulated from cyberattack by virtue of its relative lack of digital systems. And to the extent that a utility automated parts of its grid, the com- plexity and custom nature of those sys- tems added another layer of security. However, as generation and delivery depend more and more on digital con- trol in a tremendously interconnected environment, the fear is that the sys- tem may be more vulnerable to attack from unfriendly governments, terrorist groups, or rogue individuals.

Standards and Compliance It is unlikely that anyone in the indus- try would revert to a passive posture, compliance programs in order to adapt “Compliance is focused on preventing even if standards bodies and govern- to the many NERC CIP directives. And the recurrence of a known problem,” ment agencies weren’t trying to re- there is high demand for people who she says. “The intent is to make the make utilities into digital fortresses. can coordinate cybersecurity compli- industry secure, but compliance ac- The North American Electric Reliabil- ance matters enterprisewide. tivities could keep utilities so busy that ity Corporation (NERC) is never far from The standards approach is best, says they can’t anticipate new threats—and the thoughts of utility executives. For Doug Myers, vice president and CIO for new threats are arriving every day.” cybersecurity, NERC, which creates and Pepco Holdings. “It’s not the fastest ap- If nothing else,, NERC CIP enforces reliability standards for bulk- proach, but it’s a holistic approach” as has helped thee power generators, collaborates with opposed to scattershot leg- and polices the industry through its islation and unconnected TABLE 1 critical infrastructure protection (CIP) industry measures. If Myers NERC CRITICAL program. (See Table 1.) NERC also has comes across as an optimist, INFRASTRUCTURE the authority to fine utilities that it it might be because Pepco PROTECTION considers aren’t adhering to standards. has been active in crafting STANDARDS And utilities consider that standards smart-grid standards with CIP-001 Sabotage Reportingrting are necessary, and they understand the the National Institute of CIP-002 Critical Cyber Asset Identifi cation need to coordinate proactively with Standards and Technology CIP-003 Security Management Controls NERC—utility executives rotate into (NIST). He says the experi- leadership roles within NERC’s many ence may have “allowed us CIP-004 Personnel and Training sub-groups. But the rap on NERC, as a to better predict the poten- CIP-005 Electronic Security Perimeter(s) standards-setting organization, is that tial impact of standards un- CIP-006 Physical Security of Critical Cyber Assets it doesn’t move fast enough and, at the der development.” CIP-007 Systems Security Management same time, is too quick to levy fi nes. Lynne Ellyn, DTE Energy’s CIP-008 Incident Reporting and Response Planning Ultimately, utilities are beefi ng up their senior vice president and CIP-009 Recovery Plans for Critical Cyber Assets CIO, doesn’t have the same Jim Nash is a freelance writer living in York- Source: North American Electric Reliability Corporation town, NY. feeling of predictability.

36 ELECTRIC PERSPECTIVES compliance improves security, but Companies talk about funding the op- for some, the issue is all but settled. erations through effi ciencies and cost- Regulations from government agen- cutting in other places. cies have driven Southern California Practically speaking, return on in- Edison’s (SCE’s) creation of a compre- vestment is diffi cult to measure, and hensive cybersecurity framework, says efforts to ward off unpredictable at- Mahvash Yazdi, the company’s senior tacks yield few innovations that add to vice president for information tech- the bottom line. “The industry’s get- nology and business integration and ting smarter in mounting defenses and CIO. “That allows us to track how our we’re doing more amazing things,” says compliance work behind one regula- Ellyn. “But I see no ‘gift’ in this at all.” tion may support other regulations It’s like building a moat around a and laws. Developing the cybersecurity desert citadel—a precious resource framework enabled tighter integration is poured into a ditch that executives within IT and across our company,” hope will never be needed. But it does says Yazdi. serve as an effective deterrent. Ed Schweitzer, president of Sch- Moats of a different sort—new cor- weitzer Engineering Laboratories and porate cultures hyper-focused on se- a long-time veteran of the utility indus- curity—are common throughout the try, cautions utility executives not to industry. However, the fact is that most obsess only on compliance. “Fines can intrusions are the result of internal be onerous,” which commands atten- carelessness and mistakes. A major tion, says Schweitzer, “but education threat is social engineering—a cyber- trumps compliance every time.” security term applied to a hacker’s “It’s pretty easy to be pretty safe,” approach that, instead of using tech- says Schweitzer. “While the core nology, obtains critical information power system itself is not highly de- and access by using people’s trust or pendent on the internet, the system their faults. And, at least until Stux- Courtesy: Pacifi c Northwest National Laboratory Courtesy: Pacifi as a whole can be vulnerable in places net (a computer worm that began to industry to focus on “simple and stra- when people are complacent.” That’s spread in mid-2009) came along and tegic” steps, says Rilck Noel, Verizon where organizations need to focus, he showed the danger in using the manu- Business’ energy and utilities practice. says. He also believes that much of the facturer’s default security settings for “We’ve got a long ways to go. People rulemaking has grown onerous, too. electronics, too many people did just have to be a little patient.” “Our company is following 27 entities that. Now, everyone at a utility plays In another sense, the relationship in Washington, DC” involved in utility defense at potential entry points. has changed a lot. “Five years ago, the cybersecurity matters. “From an organizational perspec- NERC reliability standards were volun- Ellyn says the federal government tive, you have to recognize that cy- tary,” says Carol Chinn, vice president needs to coordinate its many arms: bersecurity cuts across every single and chief operating offi cer of American “The Department of Defense has its function,” says Chinn. “IT no longer Transmission Company. “Since 2007 point of view. Homeland Security has a owns information security. We all own they’ve been mandatory, with penal- point of view. We even have the Federal it, and the organizational structure has ties for noncompliance. CIP standards Communications Commission getting to refl ect that.” Increasingly, cyberse- have been in place for less time and yet involved.” curity is part of new employee training the CIP violations are outpacing those and is often repeated at least annually. generated by the rest of the standards.” A New Corporate Culture For example, awareness messages are Still, Chinn understands that there When it comes to cybersecurity staff- found on posters, bulletin boards, and may be growing pains. “It’s premature ing and budgets, utility executives are internal social media. to say these standards do not work be- hesitant to get too specific. “While I As a result, IT interfaces with every cause they have not fully matured yet,” will not quote the budget dollars we corner of the enterprise, and cyber- she says. Her company is engaged in are spending on cyber matters, suffi ce security accelerates the process of the standards process and is part of it to say it is substantive,” says Chinn. aligning IT with the corporate mission. a number of task forces and commit- Expenditures occur in both capital and Chinn says cybersecurity can’t be only tees that share best practices and help operations and maintenance budgets about regulatory compliance and fol- guide cyber policy development. associated with the infrastructure, lowing the rules. “It has to become, There still is debate in the indus- staffi ng, practices, and procedures re- simply, the way you do business,” she try about how this level of mandatory lated to protection and compliance. says. “That’s a big cultural shift.”

MAY / JUNE 2011 37 In a similar vein, decision makers effi ciencies, the move sent an unmis- Oracle have to be clear about the business takable message internally and exter- value of cybersecurity standards. Too nally: We’re taking this seriously. 400 Crossing Boulevard often the dynamic is: “I want to do this, There are “coaching opportunities” 6th Floor Bridgewater, NJ 08807 and IT is not letting me,” says Pepco’s for managers dealing with “uninten- www.oracle.com/goto/utilities Myers. “If the rationale for this gov- tional mistakes,” says Becky Blalock, ernance is not fully understood, this senior vice president and CIO at South- Contact can happen. We need to change the ern Company. That said, she says that Tracey Mitchell, Vice President, concept of ‘governance’ to ‘assurance’.” “when policies are violated, we follow Tax & Utilities Marketing Exposure to cybersecurity risk the policy guidelines for any disciplin- 909-547-6192 should not automatically doom a ary action.” [email protected] project, say utility executives. That ap- Verizon’s Noel cites the example proach is a quick route to corporate of a utility he visited where a CIO was Oracle Utilities delivers proven obsolescence. It’s better to create an poached from an E-commerce busi- software applications that help overall risk profi le that sets out accept- ness in part for the executive’s familiar- utilities of all types and sizes able levels of risk that by defi nition will ity with cybersecurity issues. The same achieve competitive advantage, be higher than zero, which will reduce company also hired a former Central business performance excellence, knee-jerk rejections. Intelligence Agency analyst to find and a lower total cost of technol- threats before they found the utility. ogy ownership. Oracle Utilities Staffi ng and Organization Pacifi c Northwest National Labora- integrates industry-specifi c cus- Efforts are not aimed at back-office tory’s Paul Skare says utilities look to tomer care and billing, network staff alone. “Extensive cybersecurity fi ll a specialized post. Chief cyber pro- management, work and asset training along with enhanced proce- gram manager for the lab’s Energy and management, mobile workforce dures and processes are underway at Environmental Directorate, Skare says management, and meter data American Transmission Company to recruiters are on an almost constant management applications with the change the way we manage and ex- quest for people who can coordinate capabilities of Oracle’s industry- ecute going forward,” says Chinn. compliance across sprawling corpo- leading enterprise applications, business intelligence tools, Training presents a mixed and per- rate hierarchies. middleware, and database tech- haps counterintuitive picture. More- “Our organizational adjustment has nologies. experienced people may be less included the appointment of a central- The software enables cus- informed about newer technology, but ized, senior cybersecurity manager,” tomers to adapt more nimbly to they often inherently know to use it says Chinn. American Transmission market deregulation, meet ever- conservatively in order to maintain se- also has an executive compliance evolving customer demands, and curity. Younger employees, millennials steering committee, which oversees deliver on environmental conser- in particular, often live a second life and approves cybersecurity programs. vation commitments. Additionally, on social media but as a group have Sitting on that committee are the chief Oracle Utilities helps utilities less “natural skepticism or concern” fi nancial offi cer, vice president of con- prepare for smart metering and about its security implications, says struction, chief operating offi cer, and smart grid initiatives that enhance Pablo Vegas, vice president and CIO for general counsel. “Our CEO has the ulti- effi ciency and provide critical intel- American Electric Power (AEP). mate oversight and is a member of the ligence metrics that can help drive Significantly, security lapses don’t NERC Electric Sub-Sector Coordinating more-informed energy and water always result in disciplinary action. Council, so he’s well-versed on cyber usage decisions for consumers “We are focusing fi rst on the education issues at an overall industry level.” and businesses. For more infor- campaign and less on the discipline Southern Company has two cyber- mation, visit www.oracle.com/ side,” says Vegas. “With a stiff disciplin- security teams within the IT organi- goto/utilities ary practice in place from the outset, I zation. “One focuses on strategy and believe you’ll stifl e the reporting of in- the other on implementation,” accord- cidents.” Even minor events that don’t ing to Blalock. She says it is important lead to large failures can teach lessons. for compliance and IT to have a close At the departmental level, AEP working relationship and maintains combined five IT departments nine a great partnership with Southern months ago to launch its Information Company’s general counsel. The two Risk Services Group, led by a director- departments work together to ensure level executive. (See the sidebar, “The that the company has the appropriate Cybersecurity Group.”) While the goal policies in place and that the necessary behind the group was to realize greater training and communication are pro-

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Cisco The Cybersecurity Group 170 West Tasman Drive San Jose, CA 95134 evin Stogran, director of American Electric Power’s (AEP’s) new Information Risk www.cisco.com/go/smartgrid Services, leads a group created expressly to thwart cyber threats. The 45-person K group is a mere nine months old—and was incubated over a startling three months. Contact Information Risk Services has five subgroups: Cybersecurity and Engineering and Stan- Sanket Amberkar dards (performs vulnerability analyses and smart-grid work); Cybersecurity Operations and 408-527-9048 Analysis (a real-time, 24/7 operations desk searching for red flags); Access Management [email protected] Services (change and configuration management); Business Continuity Management (en- terprise disaster recovery); and Compliance Assurance and The Cisco Connected Grid delivers Management (critical compliance functions). proven solutions to secure and au- Four of those five subgroups had been solo areas within tomate your entire energy chain— information technology, but regrouping them served to create from generation and transmission operational efficiencies and showed the emphasis AEP was to businesses and homes. putting on cybersecurity. Substation Automation: Con- Stogran says several business units have analogous solidate services onto a single functional groups, but close relationships between them and network, preventative mainte- Information Risk Services minimizes gaps. nance with remote diagnostics, “We ensure that things have the proper balance,” Stogran and reduce service disruptions. says. “Senior management wants strict cybersecurity, but This solution features a rug- we’re not locking things down. Everyone involved comes to a gedized router and switches to

Alamy reasonable business judgment.” handle the most demanding envi- ronments. Home Energy Management: vided to employees on how to securely Blalock’s statement underscores the Enable utilities and consumers to use IT tools. need for more government coopera- monitor and control energy con- tion. In fact, many utility CIOs want a sumption. This solution features a Changing Roles home energy controller and host- closer, collaborative partnership in ed energy management services Blalock points out that the role of the which companies focus on innovation for simplifi ed deployment and use. CIO is changing because of cybersecu- and implementation and government Grid Security: Provide physical rity. CIOs have become more outwardly makes connections between events and cyber security solutions for focused within their companies and and players. (See the sidebar, “Industry critical infrastructure protection, beyond. As cybersecurity has become Takes Lead on Cybersecurity.”) controlled access to resources, more critical, utility CIOs step forward Granting security clearances to criti- threat mitigation, and emergency to meet and share best practices more cal industry executives is important response. frequently and in greater depth—both if the industry is to hold up its end, Data Center Operations: formally and informally. says SCE’s Yazdi. She is far from alone Enable secure, scalable data col- “Five years ago, no one was asking in the industry in calling for timely, ac- lection and storage solutions for chief information offi cers to go talk to tionable information from “three-letter data analysis, metering, and bill- state and federal offi cials,” says DTE’s agencies.” By the time intelligence is ing systems. Ellyn. “Now, we’re intimately involved vetted today, she says, it is “stale or al- with communications between utili- ready in the public domain.” ties and the government.” In the meantime, one organization For her part, Blalock would like that might help facilitate better infor- to see government be more proac- mation sharing is the recently created tive about sharing vital information National Electric Sector Cybersecurity in a more timely fashion. It was only Organization (NESCO), which serves as in recent years that state and federal a gathering point for utilities, federal governments engaged on the cyberse- agencies, regulators, researchers, and curity issue. Now, she says, they need academics. Partially funded by the De- to take the next step: “There’s a lot of partment of Energy, NESCO will help talk, but government agencies need to focus cybersecurity research and de- work and coordinate more closely with velopment priorities, identify effective each other and with those of us on the common practices, and organize the front lines.” collection, analysis, and dissemina-

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To learn more, visit us at www.cisco.com/go/smartgrid. Enspiria Solutions A Black & Veatch Industry Company Takes Lead on 5613 DTC Parkway Suite 700 Cybersecurity Greenwood Village, CO 80111 he Edison Electric Institute’s board www.enspiria.com of directors approved six Princi- T ples for Cybersecurity and Critical Contact Infrastructure Protection last September Cindy Menon, Marketing Manager at the EEI CEO meetings. 303-520-2513 [email protected] Prioritize assets to ensure ef- www.enspiria.com fective protection. Recognizing that there are a variety of interdependencies, Enspiria Solutions supports utili- and potential consequences associated ties as they deploy the full range with the loss of different facilities, the of smart grid technologies and utility industry supports a risk-based, processes. Our experience spans prioritized approach that identifies assets from developing strategies and truly critical to the reliable operation of business cases, to selecting the 123rf the electric grid… right vendors and partners, to a host of deployment and integra- Threats require emergency action and vulnerabilities should be addressed tion services that ensure utilities more deliberately. In this context, a threat is imminent and requires a rapid response. execute well and “go-live.” More In these instances, the industry is willing to accommodate certain operational conse- than 45 utilities have turned to quences in the interest of addressing the threat. Vulnerabilities, on the other hand, have a Enspiria for help in defi ning and longer time horizon and can benefit from a more measured response… implementing smart grid projects. Clear regulatory structure and open lines of communication. The federal Our knowledge of utility IT sys- regulatory framework and roles for all stakeholders involved in securing the electric grid tems ensures that near real-time should be clear to avoid duplicative or conflicting actions in times of crisis. The electric smart grid information is success- utility industry is not in the law enforcement or intelligence-gathering business, and the fully combined with outputs of government has limited experience operating the electric grid. Thus, each should be con- other systems. sulted, and the flow of information should be regularly exercised, before a threat becomes Offerings include: a crisis. It is critical that the federal government and industry communicate with each other • ESIntialTM —spatially enabled seamlessly… business intelligence and report- ing platform Proactively manage new risks. As the new smart grid develops, it is essential • systems integration and imple- that cyber security protections are incorporated into both the grid architecture and the mentation new smart grid technologies. The electric power industry must continue to work closely • project management and system with vendors, manufacturers, and government agencies and be aligned with emerging and engineering evolving cyber security standards…to ensure that the new technology running the grid • test engineering is, most importantly, secure and reliable. We encourage the development of a security • change management certification program that would independently test smart grid components and systems • visioning and strategic planning and certify that they pass security tests. This certification process would help utilities select • business case development only those systems that provide appropriate cybersecurity. • enterprise architecture and design Committed to protecting bulk electric system and distribution assets. The utility industry understands that cyber attacks affecting distribution systems could have broader implications. Since jurisdiction is split between state regulators and the Fed- eral Energy Regulatory Commission, the utility industry supports enhanced threat informa- tion coordination and communication between regulatory agencies and utilities to protect our systems…while also honoring the existing regulatory model. Cost recovery and liability protection. Costs associated with emergency mitiga- tion are, by definition, unexpected and thus not included in a utility’s rate base. To ensure emergency actions do not put undue financial strain on electric utilities, the industry sup- A BLACK & VEATCH COMPANY ports mechanisms for recovering costs…

42 ELECTRIC PERSPECTIVES tion of infrastructure vulnerabilities which will complicate the build-out, come to utilities for career-defining and threats. he says. opportunities working on complex and In fact, long before the smart grid is sophisticated challenges. Smart Grid and Beyond a reality, it will have had a positive im- CIOs realize that old hierarchies Much of the regulatory and indus- pact on utilities. The smart grid helped may not be up to the challenge. By try heat right now is on the proposed the industry adopt a more active cyber- centralizing the strategy and plan- smart grid system. The smart grid con- security posture, says Pepco’s Myers. ning of security, utilities build a high cept calls for two-way communication Industry and government approaches density of skills and creativity. At the between consumers and utilities that to cybersecurity have changed a great same time, industry executives work could increase operational effi ciencies deal in the last three years or so. The on the assumption that everyone from and network reliability and make new threat is distributed and so are more of the board room to the break room is revenue-generating services possible. the solutions. CIOs acknowledge that equally critical in the battle to prevent It also might give cybercriminals a government has a role to play—indeed, successful attacks. potential new route into utility systems that it needs government help in criti- And in one of the more dramatic ex- and customers’ personal information, cally important tasks like connecting amples of change, CIOs command new which explains the consternation of events and players. visibility within and outside their com- skeptics and opponents. Work being done by the industry has panies. They work with all other de- “Getting the lifecycle of information changed how people view utilities, says partments at all levels to enable tighter and services to fl ow smoothly among Yazdi. “Perceptions of a slow-to-change cybersecurity and represent their all the new components that make up industry are being transformed as the companies in meetings with regula- the smart grid will continue to be a rapid advancement of cyberthreats re- tors, legislators, and standards bodies. challenge for years to come,” says AEP’s quires new levels of innovation and That’s a lot for a profession that not too Vegas. Security will be embedded at leadership.” As one piece of evidence, long ago existed in glass rooms with every turn and in every component, she says, truly top-tier technologists computer components. ◆

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MAY / JUNE 2011 43 Electricity drives new technology, and electric companies are leading the way to a new, stronger POWER economy. & INNOVATION By Anthony F. Earley, Jr.

44 ELECTRICE L E C T R I C PERSPECTIVESP E R S P E C T I V E S Courtesy: Ford Motor Company 123rf

INNOVATION has been the lifeblood of the U.S. economy for more than two cen- turies. From the days of the cotton gin in the 18th century during the fi rst industrial revolu- tion and later the development of the internal combustion engine that made people more mobile, to the mass production of the microcomputer in the 1980s and 1990s, Americans have relied on the ingenuity of innovative spirits like Eli Whitney, Henry Ford, and Bill Gates to drive economic prosperity. Today, much of the infrastructure that supports that kind of innovation is being developed and managed by the electric Tony Earley, executive chairman of DTE Energy.

MMAYAY / JJUNEU N E 20112 0 11 45 utility industry. It is thanks to visionary inventors, entre- fi ed to supply the electricity and let others fi gure out the preneurs, and technological geniuses like Thomas Edison, innovation piece. But today, change takes place so quickly, George Westinghouse, Lewis Lattimer, Samuel Insull, and you can’t afford to ping-pong back and forth between utilities Nikola Tesla that the electric industry has developed into and other industries to drive innovation effectively. We have such a revolutionary force. to work together to bring new technology to market. And yet, electricity remains something that many take for In addition to the investment to bring new technology to granted. For the most part, utilities have been a silent partner market, it will take massive investment just to ensure that we to other more publicly recognized sectors—consumer elec- can maintain the reliability of the electric system. Current tronics, transportation, and telecommunications—in most research already suggests that our nation’s dependence on all innovation over the last century. Much of the innovative reliable electricity will increase by nearly 30 percent by 2035. work that has come out of places like California’s Silicon Val- According to Edison Electric Institute estimates, capital ex- ley, Massachusetts’ Route 128, or North Carolina’s Research penditures for the electric utility industry in the period 2008- Triangle likely wouldn’t be as infl uential to the development 10 were about $235 billion, which included investments in of the U.S. economy were it not for the work of the local transmission upgrades, distribution, advanced metering electric utility. In companies like Microsoft (information infrastructure, generation, and environmental projects. Over technology), NYSE Euronext (fi nance), and AT&T (telecommu- the next two decades, experts project that the industry will nications), which carry the universal message that speed is have to spend $1.8 trillion in those areas—and at least $950 king in the Information Age, the difference between success billion of that for new generation capacity. and failure can come down to how quickly data are moved This is in tandem with advanced electric technologies. and processed in business today. Electricity Ten years from now, it is projected that U.S. provides that speed. Ten years from consumers will be driving as many as 1 mil- But the reality is that many people don’t lion electric cars. In 30 years, electric cars really understand the extent to which elec- now, it is pro- and trucks could be the primary vehicles tricity powers our world. Without electric jected that U.S. on U.S. roads. utilities, for example, there would be no in- consumers will be In our homes, we will be able to make ternet. We are the backbone of technological driving as many informed decisions about our energy use innovation—and the global economy would and increase our overall effi ciency. Smart grind to a halt without this industry. as 1 million elec- meters already are giving consumers the Until now, electric utilities have been tric cars. In 30 power to control their energy usage in ways content to play a supporting role to the de- years, electric that weren’t previously possible. Smart velopment of innovation. We’ve been satis- cars and trucks chips in appliances give consumers the could be the pri- mary vehicles on U.S. roads. Courtesy: General Motors

4646 ELECTRICEELECTRICL E C T R I C PERSPECTIVESPERSPECTIVESP E R S P E C T I V E S

option to take advantage of off-peak power and even self- driver of that need is to maintain the reliability we have come diagnose problems and call for repairs. to expect, that won’t grab many headlines. Now, the electric utility industry has a lead role on the One way to underscore the importance of future invest- forefront of innovation. It has begun to step out of the shad- ments in the nation’s electric infrastructure is to show the ows and into the light of the debate over America’s economic payoff in new economic activity. The advent of a viable elec- future. tric transportation system in the United States could usher in thousands of new, high-skilled jobs to the overall economy Traction over the next several years. In Michigan, for example, we Generally, the only time the American public thinks about expect to have as many as 40,000 new jobs created by 2020 how crucial electricity is to our everyday lives is when we because of the plug-in hybrid electric vehicle (PHEV) industry. have a . The unprecedented blackout of August Electric utilities have formed partnerships, for example, 14, 2003, in which 50 million people across the United States with original equipment manufacturers around the issues of and Canada lost power, put the importance of the electric the price and installation of charging stations. Indeed, our grid in North America in stark relief. It cannot be overstated role as an industry ought to be to work with auto manufac- in discussions about our turers to ensure market and grid readiness. General Motors’ nation’s security and the recent partnership with a number of utilities, including DTE need to address energy General Motors’ Energy, in support of the Chevy Volt launch has led to the demand. recent partner- installation of thousands of PHEV charging stations in homes Still, the industry has ship with a num- and businesses across the United States. The Detroit auto- yet to get real traction in ber of utilities in maker began delivery of the Chevy Volt to customers in Feb- the court of public opin- ruary, which was the same time that we at DTE Energy began ion regarding the value support of the a pilot program to install charging stations for customers. proposition of the future Chevy Volt launch In trying to jump-start the market around the country, investment into electric has led to the utilities have been offering incentives to customers to buy infrastructure. We haven’t installation of electric cars. In Southeastern Michigan, our company is pro- made a case for the need viding free charging stations to the fi rst 2,500 customers in PHEV charging to invest. While the real our service territory that apply for the pilot. stations in thou- sands of homes and businesses. Courtesy: DTE Energy

MAY / JUNE 2011 49

Lead With a Vision The new grid will give the industry nearly real-time situ- The impact of PHEVs could be signifi cant to improving the ation awareness capability. This translates into an increased environment. This is a message that can resonate with ev- ability to ward off both physical and cyber attacks to the eryone. A study conducted by the Electric Power Research system. But, again, all of this requires investment. Institute and the Natural Resources Defense Council demon- strated that PHEVs can reduce vehicle greenhouse gas emis- Jobs, Jobs sions by 30 percent, even when the vehicles’ electric miles are A strong argument for future investment in our industry is fueled using coal. Using renewable energy can reduce carbon that this new wave of innovation will stimulate a multitude dioxide emissions from a PHEV by as much as 70 percent, with of “green jobs” over the next decade to address both envi- the only CO2 coming when the gasoline engine is running. ronmental and capacity needs. Construction of renewable But our grid is already a mix of diverse resources. At the energy assets—wind turbines, , and solar—has be- current blend of 45 percent coal, 20 percent nuclear, 24 per- come required investment for most all electric utilities over cent natural gas, and 12 percent hydro, renewables, and oil, the last 10 years. a PHEV’s total emissions drop by nearly 45 percent. Thus, as Last year’s “Michigan Green Jobs Report,” published by the we diversify our sources of electric power, we can be even Michigan Bureau of Labor Market Information & Strategic cleaner, without introducing the risks of relying on a single Incentives, found that there were more than 109,000 green technology. jobs in the private sector Another rationale for ongoing investment in our electric in Michigan. This rep- infrastructure relates to the promise of a 21st-century grid. Our grid is a resents about 3 percent We think smart grid technologies provide an opportunity to mix of diverse of total employment in manage the more effi ciently and reliably. They resources. At our Michigan. Nationally, the also have the potential to transform our industry by enabling current blend of U.S. Commerce Depart- widespread deployment of —and by ment estimates that there enabling energy-effi ciency and demand-response programs generation fuels, are nearly 2 million green to grow in scope and scale. a PHEV’s total jobs, which is about 1.4 We are modernizing the grid and incorporating telecom- emissions drop percent of the workforce munications and it infrastructure into the industry’s utility by 45 percent. in the United States. operations. We also are creating a platform for new technolo- As we diversify At DTE Energy, we ex- gies to increase system reliability and effi ciency. pect to spend about $2 our sources of power, we can be even cleaner. Courtesy: Agrilek

MMAYAY / JUNEJ U N E 20112 0 11 51 billion by 2020 for the development of wind farms and util- this nation’s future competitiveness and the well-being of the ity-scale solar projects. This amounts to an addition of 1,200 global community. megawatts of renewable energy, or 10 percent of our com- As we look at the horizon of innovation, we know that pany’s annual retail sales. electricity will be in greater demand than ever before. While This means jobs. For example, utility industry experts we understand that, we must realize that virtually no one estimate that 4.8 new jobs are created for every megawatt- else does. Thus, as an industry, we must commit ourselves to hour of installed wind capacity. In Michigan, we believe more educating America about the role electric utilities play in the than 25,000 jobs will be created as a result of the wind energy country’s prosperity. Our traditional humility will not serve market. us well. Every panel discussion on technology, every auto show with electric cars, every expo with smart appliances, Embrace Our Heritage has to be a venue for reminding people that without invest- In 2003, the National Academy of Engineering convened a ments in our infrastructure, that technology won’t work. jury to determine the most important technological develop- As an industry, electric ments of the 20th century. The jury chose the electrifi cation utilities must continue to of the United States. But why should we be satisfi ed with Electricity will push each other and en- being last century’s champion? I believe it is time to ask be in greater de- courage greater innova- ourselves what vision is needed to continue to be on the fore- mand.... While we tion in order to remain front in the 21st century. How will the industry reinvent itself understand that, a significant player in to enable a new wave of powerful technology innovation? the development of the Those questions require our industry to forge strong part- we must realize global economy. Sharing nerships today with the leaders in other industries—con- that virtually no ideas will make our in- sumer electronics, telecommunications, transportation—to one else does. dustry stronger and more meet the needs of consumers tomorrow. Answering those We must educate visible as we lead the in- questions with vision, boldness, and creativity is critical to America about novation economy. ◆ the role electric utilities play in its prosperity.

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54 ELECTRICELECTRIC PERSPECTIVESPERSPECTIVES DECISIONS

The industry is on the brink of major change, say regulators,who face tough calls on a host of issues. BY DENNIS J. WAMSTED

he list of challenges for the electric

utility industry is long and expen-

sive, including: many pending and

impending Environmental Protec-

Ttion Agency (EPA) regulations; absence of a fed- eral carbon policy which increases the risk of

stranded investments and clouds decisions on

the future of the coal fl eet; meeting state renew-

able energy standards and building the required

generation capacity and transmission to bring

renewable power to load centers; managing huge

deployments of smart meters and educating cus-

tomers on the benefits of this new technology;

and last—but not least—providing electricity

Paul Fisch / Images.com to millions of customers at the flip of a switch.

MAY / JUNE 2011 55 Interestingly, many state regulators share these same chal- The regulator’s concern. New lenges, too. Tasked by their respective states to assure reliable cooling water rules, among other utility service at fair, just, and reasonable rates, regulators EPA actions, could increase pres- often fi nd themselves between a rock and a hard place. They sure on rates in some states. understand the value proposition associated with smart me- ters, renewable generation, and infrastructure upgrades, but “The results of this as- they have to fi gure out a way to pay for it. Or not. sessment show a significant Indeed, there is a surprising degree of similarity in what impact to reliability,” NERC concerns the utility executive and the regulator. That doesn’t concluded. “Impacts to both mean smooth sailing for a utility’s next rate case, but often bulk power system planning and operations may cause se- rious concerns unless prompt Some rate industry action is taken… Ad- ditionally, considerable oper- increases are ational challenges will exist in inevitable, but managing, coordinating, and scheduling an industry-wide to keep them as environmental control retrofi t effort.” manageable as A second study by Black & possible, regula- Veatch came to similar con- Garry Brown clusions with respect to retire- tors and utilities ments, projecting that these pending EPA rules could lead will have to prioritize. to the retirement of 52 GW of coal-fi red generation—some it does mean that the company and the commission fi nd 16 percent of the nation’s in- themselves in the same boat. Both sides likely would do well stalled capacity. Of this, 44 GW to remember that in many cases their shared concerns out- would be in the eastern half of weigh their differences. the country. A CRA study showed only Regulations, Retrofi ts, and Rates 39 GW of retirements by 2015. Perhaps nowhere are the shared concerns more apparent Lauren Azar, a member of than in the fi eld of environmental policy, where utilities and the Wisconsin Public Service state regulators alike are trying to fi gure out what impact a Commission, pointed out that series of new rules being drafted by EPA could have on the utilities always ask their regu- industry. lators for certainty—without it, they argue, they cannot plan The rules—covering the use of cooling water in electric properly for the future. The irony here, Azar said, is that state generation facilities, hazardous air emissions from utility regulators now look for certainty as well, pushing the federal plants, ozone transport, and the disposal of coal combustion government to fi nish action on these pending regulations so byproducts—would affect every segment of the generation states and the utilities they regulate can plan for the future. industry. For regulators, rates are a primary concern. New Lowered demand has been on the other side of the equa- strictures, in combination with an aging generation fl eet, tion, and the crushing recession that began in 2008 un- could portend new construction, retrofi ts, , re- doubtedly bought utilities and state regulators some time in tirements, and higher electricity costs passed through to the dealing with these issues. According to the Energy Informa- customer. tion Administration, electricity generation fell 4.1 percent Several studies describe the potential impacts—and the in 2009, the largest drop in demand in more than 60 years. extent of those impacts varies. In a controversial 2010 as- Coupled with a smaller decline in 2008, electric generation sessment of the forthcoming rules, the North American Elec- at the end of 2009 had fallen to its lowest level since 2003. tric Reliability Corporation (NERC) estimated that, under its Edison Electric Institute showed a small output rebound strictest case, up to 78 gigawatts (GW) of fossil-fi red generat- for shareholder-owned electric companies in 2010—but it ing capacity might be “economically vulnerable” for derating tracked the rather anemic U.S. gross domestic product, with or retirement by 2015. Under NERC’s moderate case, the total a normalized growth of 2.3 percent. for derates and retirements might be 33 GW. NERC estimated last fall that national peak demand in 2017 Dennis Wamsted is a freelance energy business writer living in will be some 71 GW lower than the organization had pre- Arlington, VA. dicted before the recession began. “Overall, recession effects

56 ELECTRIC PERSPECTIVES Courtesy: http://philip.greenspun.com account for a deferment of peak demand [by] approximately Rate Pressures four years,” NERC wrote in its October “2010 Long-Term Reli- While delaying the need for diffi cult decisions about future ability Assessment.” “Demand previously projected to be re- generation, the recession has also driven home a lesson alized in 2008 is now not expected to be realized until 2012.” about customers and utility rates—every penny matters and Still, Edward Finley, Jr., chairman of the North Carolina matters a lot. Utilities Commission, is quick to point out that this breather Garry Brown, chairman of the New York Public Service is just that, a temporary reprieve that won’t last long. When Commission, explained that what keeps him grounded is demand begins growing again, he said, we are going to fi nd knowing that in his state alone there are upward of 1 mil- that “all the slack has been taken out of the system.” lion utility customers that are more than 60 days in arrears This is defi nitely the case in North Carolina, Finley said, on their bills. This fi gure counts some ratepayers more than where the state’s utilities have indicated in general com- once, since customers can be late on both their electric and ments and through their offi cial integrated resource plans gas bills, for example, but the scary part of the statistic is that that they believe new construction will be necessary in the the numbers are up 25 percent since before the Great Reces- near future. What is the best option? Do you bring the sys- sion. Clearly, he continued, rates matter. tem’s old coal plants into compliance with the new EPA rules? The problem, Brown said, is that upward pressure on rates If not, what do you replace them with? And beyond that, will grow signifi cantly in the years ahead. For example, in what do you build to keep up with future demand growth? New York there are roughly 7,800 miles of overhead trans- The reality, Finley added, “is that all the options are ex- mission lines and cable at 115 kilovolts (KV) or higher. Of this pensive, and all face criticism. Somebody is going to criticize total, some 30 percent needs to be replaced, he said, and to anything that is proposed.” do so will cost New York ratepayers roughly $12 billion over

MAY / JUNE 2011 57 If ever there were a golden age for regu- lators, those days have come and gone. We are in a much more challenging cycle today.

the next fi ve years—and that invest- ing out that in 2007 the state began looking at ways to make ment simply keeps the system run- the grid smarter. “This was well before it became fashion- ning at current levels. able,” he said. Beyond this, there are a host of Making the grid smarter is a great idea, continued Isiogu, Tony Clark other demands that will add to the who has served on the commission since September 2007. “It upward pressure on rates. For ex- will provide us with a more reliable electric system and defer ample, many are pushing to expand the state’s existing trans- the need for new generation.” It also is essential if electric mission system, which could cost billions of dollars, Brown cars, a hot topic in auto-oriented Michigan, are ever truly to said. Also, ratepayers already are paying several hundred play a major role in the nation’s transportation sector. million dollars annually for New York’s renewable portfolio It is a true win-win situation, Isiogu said. But when the and energy effi ciency standards. economy turned south, he continued, the commission “had Given all this, some rate increases are inevitable, said to temper our vision.” Even though the recession is techni- Brown, who has served on the New York commission since cally over, the state’s unemployment rate is still well over late 2007. But to keep them as manageable as possible, both 10 percent, and both the state government and citizens are regulators and utilities will have to prioritize. There is a big struggling to make ends meet. In that environment, smart difference between a “must have” and a “would like to have,” grid investments require solid justifi cation. and Brown suggests that the two sides focus on the fi rst and “We still think the smart grid is a wonderful idea,” said not worry about the second. Now, he added, is not a good Isiogu, “but it has to benefi t customers.” To this end, the time for utilities to come forward with a wish-list of projects. commission has approved a couple pilot projects and will consider the results carefully before deciding on a full smart A Smarter Grid? grid deployment, the chairman continued. “We are taking a Nowhere is this new attitude toward wish-lists more appar- very cautious approach.” ent than in regulators’ outlook toward the smart grid. “It is a given that the smart grid needs to be done, but that Orjiakor Isiogu, chairman of the Michigan Public Service is also billions of dollars,” said New York’s Brown, and may Commission, is proud of his state’s smart grid activities. “We not be at the top of the priority list for current spending. He have been focused on it for quite some time,” he said, point- added that the smart grid is a classic example of a technology (or group of technologies, in this case) being pushed by developers and other stake- AP Images holders who will benefi t di- rectly from their adoption. Brown sees his role as that of a professional skeptic, and vendors, he said, are not worried about the wel- fare and integrity of the en- tire system—but regulators must be. The story is much the same in North Carolina, where chairman Finley said that while he sees a great deal of potential for the

At a Michigan job fair. State regulators have approved smart grid pilots, but high state unemployment keeps the PSC cautious.

58 ELECTRIC PERSPECTIVES

Courtesy: Oncor

An education drive to demonstrate smart-grid benefi ts to custom- it could mean for them, setbacks or cost increases are less ers—and regulators. Oncor’s Smart Texas Mobile Experience Cen- likely to become major issues. ter provides information to the communities Oncor serves. “We must make sure that ratepayers have bought into whatever we are doing,” said Matt Baker, a member of the smart grid, it faces an uphill battle in such relatively low- Colorado Public Utilities Commission since early 2008. Here, electricity-cost areas as the Southeast. “Until the consumer the example of Xcel Energy’s smart grid city project in Boul- can see economic benefi ts from the smart grid, it is a hard der is illustrative. Ultimately, the initiative can be seen as a sell in our area.” huge success, paving the way for broader implementation Limiting future generating options, as could happen when in Colorado and elsewhere, but cost overruns have colored the pending EPA regulations work their way through the public perception of the project. system or if Congress adopts greenhouse gas restrictions, The utility estimated its portion of the $100-million-plus would give smart grid a big boost, predicted Finley, who has project cost at just more than $15 million when it launched been on the commission since early 2007. But until then, the project, but that amount almost tripled, which led to “you have to show me a cost-benefi t analysis that proves the a contentious regulatory proceeding and public relations technology makes sense,” he added. problem for the utility. The commission approved immediate On this issue, Finley cited the initial decision by the Mary- recovery of about two-thirds from ratepayers—and allowed land Public Service Commission in June 2010 to deny BGE’s the utility to go back to the commission later and justify re- proposed smart grid rollout, despite the promise of funding covering the remainder of its investment. from the Department of Energy. In that initial ruling, the Innovation comes slowly in the utility industry, Baker commission wrote that “a $136-million ‘discount’ on an said, in large part because it is much less risky for regulators $835-million ratepayer investment cannot dictate the out- to stick with the status quo. As such, companies looking to come here. Rather, in order to approve the proposal, we must pursue new programs simply must focus on customer edu- determine that it is a cost-effective means of reducing con- cation. sumption and peak demand of electricity by BGE customers.” Cheryl Roberto, who sits on the Public Utilities Com- The commission and BGE subsequently agreed on a re- mission of Ohio, seconded Baker’s call for more customer vised proposal, but Finley’s point is clear: Without demon- education. There is great potential with smart grid, she said, strable benefi ts for consumers, smart grid investments today but without substantial public education that potential may are unlikely to secure any commission’s support. never be realized. “The possibilities are endless, but the time horizon is murky,” added Roberto, who was director of Customer Education the Columbus Public Utilities Department before being ap- Another issue that utilities and regulators will have to deal pointed to the commission in 2008. with in today’s evolving utility industry is coping with set- As part of this education effort, she continued, it is up to backs, whether on fi rst-of-a-kind smart grid programs or utilities to come up with new rate designs so customers can run-of-the-mill cost increases on conventional generation see the benefi t from the new hardware that they are sup- projects. And here, having customer buy-in is essential: If porting. If the benefi ts are all on the utility side of the meter, customers understand what a utility is trying to do and what customer support is likely to be lukewarm at best.

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Day & Zimmermann: combining diverse capabilities, long-standing industry experience, innovative technology, and expert teams to safely deliver your most complex projects. dayzim.com While many regulators have been involved planned in state to benefi t and be paid for by with public utility issues before being elected or local ratepayers, but times and siting challenges appointed to their respective commissions, their have changed. Now, increasingly, transmission average tenure is only four years, according to decisions are made at the regional level, with Tony Clark, chairman of the North Dakota Public costs passed along accordingly. That requires Service Commission and current president of commissions to think about projects in a dif- the National Association of Regulatory Utility ferent manner—and a regional focus may spark Commissioners (NARUC). That means commis- interstate disagreements about the need for par- sioners face a steep learning curve when coming ticular projects and their cost allocations. into offi ce, added Clark (who clearly is raising the Michigan’s Isiogu points out that the new re- overall tenure average, having been elected to gional dynamic will require changes by state his fi rst term in 2000 and reelected for a second regulators. “We are appropriately focused on our in 2006). Given their generally short tenure, he Orjiakor Isiogu state’s needs,” he said, but transmission plan- continued, regulators understand the need for ning can no longer be done at a state-by-state public involvement and level. For Michigan, this education. means working with the Clark added that util- Transmission planning can Midwest Independent ity regulation—an ar- no longer be done at a state-by- Transmission System cane process in the best (Midwest ISO). “Michigan of times—is often seen state level. Michigan is willing to is willing to pay its fair by the outside world share,” he said, “but we as a way of gaming the pay its fair share, but we want to want to make sure that system to benefi t com- other states are willing to panies and sharehold- make sure that other states are do the same.” ers at the expense of the willing to do the same. “Midwest ISO’s job is public. Given this per- like herding cats,” said ception, the more public engagement there is, the better off Isiogu. “It is very diffi cult.” But the Michigan offi cial is confi - all sides will be. dent that regulators can develop a working relationship that protects state ratepayers while refl ecting the industry’s new Regional Dynamics broader regional planning outlook—despite the clear poten- One area where education will be vital is on transmission tial for disagreement. construction projects. Not long ago, such projects were On this point, Wisconsin’s Azar is optimistic as well. For the fi rst time, she explained, the entire eastern portion of Shifting focus from state to region. Transmission planning is re- the country is being modeled to see where new generation gional—and regulators might disagree about “fair” cost-sharing. and transmission resources will be needed. Funded in part Courtesy: Wilson Construction Company

MAY / JUNE 2011 63 The categories that regulators and utilities have used for the past 100-plus years are changing fast, and we are just beginning to grapple with this.

with money from the American removing the disincentive to promote energy efficiency) Recovery and Reinvestment Act, is the norm in New York. First adopted in 2007, the regula- the goal of the effort is to develop tory approach has done exactly what it was designed to do, a map of needed new generation said Brown: Convince utilities that building new generation later this fall and draft a map of facilities is not the only way for them to make money. The transmission needs by the end attitudinal change perhaps has been slower than hoped, but Lauren Azar of 2012. understandable—corporations do not unlearn 100 years of A related—and still-unresolved training overnight, he said. But executives from the state’s issue—is how far the Federal Energy Regulatory Commis- utilities are warming to the new way of doing business; they sion (FERC, which has authority over wholesale transmis- understand that they can make money by being an effi cient sion issues) will reach into what state regulators see as their provider of services, not just a purveyor of electricity. purview. Some 750 miles to the south, traditional rate-based regu- Already blurry, the line between retail and wholesale lation remains the norm, and with North Carolina’s electric transactions—defi ning state and federal jurisdiction—will rates well below the national average there is no push to become more and more so, said Azar. The categories that change. regulators and utilities have used for the past 100-plus years In North Dakota, Clark said, the state’s utilities operate are changing fast, “and under a well-regarded we are just beginning to performance-based grapple with this.” ratemaking system.

In the future, said Dreamstime And clearly something both Azar and Isiogu, is working there, as the it will be vital for state state’s electricity rates regulators and FERC are among the lowest to come to an under- in the country. Clark standing of where points out. state authority begins Ohio, in contrast, and federal oversight lets its utilities pick ends—or else risk end- their regulatory struc- less unproductive ju- risdictional battles. Where in the rulebook While it is important for is the line between state state regulators to de- authority and federal fi ne their jurisdictional oversight? Regulators say authority, Azar added, they must fi nd it, or risk it also is important to endless battles. reach out and work with the regional transmission groups and FERC. States are no lon- ture, noted Roberto, and the companies have different ap- ger electric islands, she said, but intertwined entities where proaches to the market and distinctly different views on a decision 500 miles away can have just as much impact on its long-term viability. In a recent Ohio Senate hearing on operations as one made in the commission hearing room competition in the state’s electric industry, for example, the across town. panel heard three different views from the three largest utili- ties in the state: State-Specifi c Solutions One utility told the panel that the competitive market While change has roiled the electric utility industry in recent works, fostering lower prices and encouraging new gen- years, one thing that has remained unchanged is the idiosyn- eration to meet future needs. Another said the market is cratic nature of state regulation. badly fl awed, particularly concerning disincentives for new Revenue decoupling (a rate mechanism separating a util- baseload generation. The third said the system needed to be ity’s fi xed-cost recovery from its sales, with the purpose of overturned and replaced with more traditional regulation, or

64 ELECTRIC PERSPECTIVES the state risked losing business to states (such as neighboring ally every business sector in the country except the electric Virginia and North Carolina) whose regulatory structures are utility industry—at least for now. But this will change, Baker more certain. continued, “There are many drivers that the industry is deal- A major concern for Roberto, who did not pass judgment ing with right now that will change that.” on any of the utility views, is how the state’s current structure These changes will occur at the same time the industry could encourage the construction of long-term baseload plunges into a new round of generation construction, which generation. also is bound to strain utility/regulator relations. “There will be greater upward pressure on rates than there Uncharted Waters has been in the past,” said North Carolina’s Finley, and this While coming from different backgrounds and representing will “increase the level of stress on the relationship between states with disparate concerns and traditions, the regulators the two groups.” all agreed on two overarching themes: The industry is on NARUC’s Clark added that he thinks we are entering an the brink of major changes; and those changes will test the “era of signifi cant uncertainty unlike any we have seen in the relationship between utility and regulator in ways not seen recent past.” since the 1970s and 1980s, when the last round of nuclear If ever there were a golden age for regulators—one where power plants were brought online and placed into rate base. they could have needed infrastructure permitted and built, Isiogu, who headed the Michigan commission’s telecom- suffi cient power to meet demand, and even the ability to munications division in the 1990s and early 2000s, says the lower rates—that age is over. “Those days have come and electric industry is “on the cusp of the same kind of transfor- gone,” said Clark. “We are in a much more challenging cycle mation that occurred in the telecommunication sector in the today.” past 20 years.” Despite the challenges, Colorado’s Baker is optimistic. Colorado’s Baker echoed that sentiment, arguing that the Diffi cult situations often make people more amenable to telecommunications and information technology revolution change, he said. “I cannot think of anything that I would that has swept across the United States has reshaped virtu- rather be doing.” ◆

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MAY / JUNE 2011 65 Copyright © 2011 Silver Spring Networks. All Rights Reserved. ELECTRIC UTILITY MMARKETPLACEARKETPLACE www.electricutilitymarketplace.com

Where you can make contact with the technology and service companies that supply the electric utility industry.

Associations / Trade Maintenance / Nuclear Services ...... 75 Organizations ...... 68 Operations Support...... 71 Plant Design / Energy Services ...... 68 Management Consulting. . . . .71 Engineering / Construction . . .75 Fleet Management...... 69 Marketing / Plant Equipment / Communications...... 72 Parts / Systems ...... 77 Information Technologies . . . .70 Metering Products Supplier Diversity ...... 77 Insurance and and Services ...... 73 Risk Management ...... 70 Transmission and Distribution...... 78 Legal / Regulatory Services. . .70 Vegetation Management . . . . .79

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MMAYAY / JJUNEU N E 220110 11 67 ELECTRIC UTILITY MARKETPLACE

ASSOCIATIONS AT&T: A Smart Choice preventative maintenance with remote for Utilities diagnostics, and reduce service dis- TRADE The key to fully tapping the promise ruptions. This solution features a rug- ORGANIZATIONS of the smart grid in the electric utility gedized router and switches to handle industry is highly secure and reliable the most demanding environments. AMERICAN WIND ENERGY ASSOCIATION communications. One company that Home Energy Management: Enable knows a great deal about provid- utilities and consumers to monitor ing such communication services and control energy consumption. is AT&T, offering utilities a trusted This solution features a home energy provider to manage the backbone controller and hosted energy manage- networks that will make the smart grid ment services for simplifi ed deploy- 1501 M Street NW, Suite 1000 a reality. ment and use. Washington, DC 20005 While the smart grid is starting Grid Security: Provide physi- 202-383-2500 with meter reads and outage infor- cal and cyber security solutions for www.awea.org/utility mation, it will soon progress to a critical infrastructure protection, two-way, interactive real-time rela- controlled access to resources, threat Contact tionship with an increasing amount mitigation, and emergency response. Jeffrey E. Anthony, Manager of of data to transmit and manage. The Data Center Operations: Enable Utility Programs management, processing, and storage secure, scalable data collection and 202-870-0273 requirements will create opportunities storage solutions for data analysis, [email protected] for AT&T to assist energy companies metering, and billing systems. in meeting these goals. Toward this is the largest form of end, all of AT&T’s traditional products readily-deployable and utility-scale and services—highly secure com- ENSPIRIA SOLUTIONS electricity generation for clean, re- munications over wireless and wired newable energy. AWEA works with networks, data storage, hosting and utilities throughout the U.S. to share network management—are ready to information on strategies and busi- help meet this demand for secure ness models that electric utilities are communications and effi cient data using to deploy wind power for the management. A BLACK & VEATCH COMPANY customers. The AWEA “Utility Work- ing Group” is the premier organiza- 5613 DTC Parkway tion for information sharing on a wide CISCO Suite 700 range of topics related to wind energy, Greenwood Village, CO 80111 including both strategic and tactical www.enspiria.com aspects including wind acquisition, operations, and maintenance. Contact Cindy Menon, Marketing Manager 170 West Tasman Drive 303-520-2513 ENERGY SERVICES San Jose, CA 95134 [email protected] www.cisco.com/go/smartgrid www.enspiria.com AT&T Contact Enspiria Solutions supports utilities Sanket Amberkar as they deploy the full range of smart 408-527-9048 grid technologies and processes. Our [email protected] experience spans from developing strategies and business cases, to se- 1277 Lenox Park Boulevard NE The Cisco Connected Grid delivers lecting the right vendors and partners, Atlanta, GA 30319 proven solutions to secure and auto- to a host of deployment and integra- www.att.com/smartergrid mate your entire energy chain—from tion services that ensure utilities generation and transmission to busi- execute well and “go-live.” More than Contact nesses and homes. 45 utilities have turned to Enspiria for Rita Mix, Lead Marketing Substation Automation: Consoli- help in defi ning and implementing Manager, Utilities date services onto a single network, smart grid projects. Our knowledge 404-499-5214 of utility IT systems ensures that near [email protected] real-time smart grid information is networkingexchangeblog.att.com successfully combined with outputs of other systems.

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At SAIC we provide innovative, Our professionals defi ne and deliv- PIKE ENERGY SOLUTIONS er complete solutions that benchmark integrated solutions to meet our cus- the intelligent utilities of tomorrow. tomers’ energy, environmental, and Offerings include: infrastructure challenges. • ESIntialTM —spatially enabled By combining science, engineer- business intelligence and reporting ing, and technology expertise with platform business acumen, we know how to • systems integration and implemen- 10101 Claude Freeman Drive address the technical and business tation Suite 100W interdependencies that determine suc- • project management and system Charlotte, NC 28262 cess. From analyzing and integrating engineering 800-424-PIKE leading technologies, to designing, • test engineering www.pike.com/energysolutions building, and operating infrastructure • change management systems, we apply deep domain ex- • visioning and strategic planning Contact pertise to strengthen our customers’ • business case development Jimmy R. Hicks, President enterprises and help them thrive in a • enterprise architecture and design 800-424-PIKE capital-constrained, complex world. [email protected] We do this by bringing the right peo- ple, technology, and systems together PANDA POWER FUNDS Jackie Panos, Proposals Consultant to deliver the innovative, integrated 800-424-PIKE solutions our customers require. We [email protected] solve hard problems to support a bet- ter quality of life for generations to Pike Energy Solutions has decades come. of experience in the siting, en- 4100 Spring Valley Road gineering, design, procurement, Suite 1001 and construction of electric power FLEET MANAGEMENT Dallas, TX 75244 infrastructure and renewable power 972-361-2000 infrastructure. We serve clients from TELOGIS www.pandafunds.com coast to coast and abroad through our national engineering offi ce in Char- Contact lotte, NC, and four other U.S. regional Bill Pentak, Vice President, offi ces. In addition, our corporate Investor Relations and Public Affairs interconnections enable us to manage 972-361-2000 full EPC contracts through our affi li- 85 Enterprise, Suite 450 [email protected] ated construction companies. Regard- Aliso Viejo, CA 92656 less of your next project, you can rely www.telogis.com Panda Power Funds is a private on Pike Energy Solutions to deliver. equity fi rm comprising one of the Contact nation’s most experienced, full- Tim Taylor, Chief Operating Offi cer service power development teams. SAIC 866-835-6447 The Panda team has developed, [email protected] fi nanced, constructed and/or operated approximately 9,000 megawatts of Telogis Fleet gives you real metrics to natural gas-fueled generating capacity optimize your fl eet functions: driver ranging from 180-2,250 megawatts in 131 Saundersville Road safety, fuel costs, maintenance pro- size. The fi rm is focused on domes- Suite 300 grams, vehicle purchase priorities, tic, greenfi eld power development; Hendersonville, TN 37075 and emergency response capabilities. brownfi eld expansion, including 615-431-3200 When you have the location and sta- coal-to-natural gas repowering; and www.saic.com/eeandi tus of every vehicle, prioritized data developing solar projects in select automatically delivered to the right states. Panda Power Funds special- Contact managers, and optimized routing, izes in assuming development and Jacqueline Elliott, Senior Consultant you can get more from your fl eet and construction risk and can partner, 615-431-3228 allow your operations to effectively own, or transfer power assets to its [email protected] improve response times. Manage clients. The fi rm also brings invest- your full fl eet on a single screen, then ment capital to utility-scale power drill-down to vehicle history detail projects of all sizes. with boom activity on a single truck. Optimize resources.

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Solutions to improve your fl eet opera- ments. Additionally, Oracle Utilities LEGAL tions: helps utilities prepare for smart me- • storm response tering and smart grid initiatives that REGULATORY • tracking multiple assets with one enhance effi ciency and provide criti- SERVICES application cal intelligence metrics that can help • GIS data drive more-informed energy and water KELLER AND HECKMAN LLP • routing and navigation usage decisions for consumers and • work order management integration businesses. For more information, • metrics to measure and reduce your visit www.oracle.com/goto/utilities. carbon footprint 1001 G Street, NW • scorecard for driver safety Suite 500 West INSURANCE AND Washington, DC 20001 RISK MANAGEMENT 202-434-4100 INFORMATION www.khlaw.com/telecommunications TECHNOLOGIES UTILITY RISK MANAGEMENT CORPORATION Contact ORACLE CORPORATION Tara Busby, Marketing Manager 202-434-4174 [email protected]

2038 Mountain Road Keller and Heckman LLP’s nation- Stowe, VT 05672 ally recognized telecommunications 400 Crossing Boulevard, 6th Floor 866-931-URMC (8762) attorneys and licensing specialists Bridgewater, NJ 08807 www.utilityrisk.com provide expert, cost-effective service www.oracle.com/goto/utilities to electric utilities, oil and gas com- Contact panies, railroads, and other critical Contact Tyler Mumley, Vice President, infrastructure clients on a host of Tracey Mitchell, Vice President, Business Development regulatory and transactional matters Tax & Utilities Marketing 802-760-4814 before the Federal Communications 909-547-6192 Commission. For almost 50 years, the [email protected] URMC is a technology-enabled fi rm has represented clients on wire- engineering services fi rm providing less licensing and policy matters be- Oracle Utilities delivers proven soft- vital information and analytics to fore the FCC. The fi rm also represents ware applications that help utilities of electric utilities in order to safeguard electric utilities in pole attachment all types and sizes achieve competi- and optimize their transmission and negotiations, as well as dispute reso- tive advantage, business performance distribution infrastructures. URMC is lution and litigation before the FCC, excellence, and a lower total cost of a proven innovator in the fi eld of risk state public utilities commissions, technology ownership. Oracle Utilities management, consistently delivering and courts. Keller and Heckman also integrates industry-specifi c customer high value and innovative technolo- represents a wide range of clients in care and billing, network manage- gies that cater to the electric utility increasingly frequent and aggressive ment, work and asset management, industry’s unique mission-critical enforcement actions initiated by the mobile workforce management, and needs. URMC harnesses disparate FCC. meter data management applications technologies and processes—such with the capabilities of Oracle’s indus- as light detection and ranging (Li- try-leading enterprise applications, DAR), infrared thermography, satel- business intelligence tools, middle- lite imagery, power line systems ware, and database technologies. computer-aided design and drafting The software enables custom- (PLS-CADD) modeling, and geo- ers to adapt more nimbly to market graphic information systems (GIS)— deregulation, meet ever-evolving to provide utility-specifi c analysis and customer demands, and deliver on solutions with unprecedented depth, environmental conservation commit- accuracy, and speed. URMC arms the utility industry with critical insights into areas such as vegetation en- croachment, survey point clearance, sag and tension limits, thermal line ratings, and line capacity.

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MAINTENANCE MANAGEMENT Management Consulting is uniquely CONSULTING positioned to advise on, and subse- OPERATIONS SUPPORT quently implement the concepts and BLACK & VEATCH technologies needed to support your DAY & ZIMMERMANN ECM success. Areas of expertise include: • market analysis and forecasting • strategy consulting B&V Management Consulting • rate & regulatory advisory services 11401 Lamar Avenue • independent engineering Overland Park, KS 66211 • transmission & distribution 913-458-3440 • smart grid services www.bv.com 1500 Spring Garden Street • DSM and energy effi ciency 10th Floor • cyber security Contact Philadelphia, PA 19130 • IT strategy and implementation Mark Gabriel, Senior Vice President 215-299-8000 • SAP and Oracle software implemen- and Executive Director, Strategy www.dayzim.com tation & support 303-838-2493 • renewable energy portfolios Contact [email protected] • variable generation integration Mark S. Minniti, Vice President, • deep natural gas expertise B&V Management Consulting Business Development—Fossil • asset management & optimization combines world-class management Power consultants with the knowledge and 717-391-3140 experience gained in Black & Veatch’s [email protected] BOOZ & COMPANY nearly 100 years of service to utilities. Our industry experience, exclusive Day & Zimmermann’s engineering, focus, Enspiria solutions group, and construction and maintenance (ECM) ability to seamlessly integrate the group is one of the nation’s leading resources and services of Black & providers of total plant lifecycle solu- Veatch when advantageous make us 8283 Greensboro Drive tions for the fossil and nuclear power, unique. The difference you will notice McLean, VA 22102 process, and industrial markets. is how effectively the experienced in- 703-902-5000 With more than 15,000 employees, dustry executives, energy economists, www.bah.com a network of strategic locations, and senior regulatory policy advisors, a proud history of 110 years, Day & renowned futurists, IT specialists, en- Contact Zimmermann ECM has evolved into gineers, and internationally respected Tom Flaherty, Senior Partner, North a diverse engineering, construction, subject-matter-experts at B&V Man- America Leader, Power and Utilities maintenance, fabrication, specialty agement Consulting help you develop 214-746-6553 services, and professional staffi ng effective strategies to meet the future tom.fl [email protected] organization. and do the things that are critical to Leveraging wide-ranging ca- effective day-to-day utility operations. Booz & Company is the world’s pabilities, long-standing industry From addressing the challenges of premier global strategy, operations, experience, innovative technology, implementing transformational new and technology general management and expert project teams, we deliver technologies like smart grid, cyber consulting fi rm. We serve clients complex projects safely, on time, and security, meeting RPS requirements, throughout the power industry bring- within budget. Our unique approach and developing sustainable long- ing clear solutions to their most employs seamless processes that term strategies, to securing fi nancing complex problems. Our consultants effectively manage all aspects of the and containing costs today, B&V continuously develop leading-edge plant lifecycle. Day & Zimmermann’s ideas in business growth strategy, end-to-end approach ensures that M&A, operating model design and projects are effi ciently managed and organizational alignment, process and result in cost-effective plant perfor- performance excellence, and technol- mance. ogy development and adoption. We are recognized for delivering real and enduring results for our clients and for working collaboratively and seam- lessly with client teams.

MAY / JUNE 2011 71 ELECTRIC UTILITY MARKETPLACE

With almost 100 years of expe- sive range of integrated services that Platts, a division of The McGraw-Hill rience working across American address the full spectrum of the en- Companies (NYSE: MHP), is a lead- industry, including all traditional ergy system from generation through ing global provider of energy and utility functional segments, and the to the consumer side of the meter. commodities information. With a merchant and emerging renewables century of business experience, Platts and technology-based segments of serves customers across more than the power sector, Booz & Company PACE GLOBAL 150 countries. From 15 offi ces world- brings deep industry, functional, and wide, Platts serves the oil, natural topical expertise to utilities across the gas, electricity, nuclear power, coal, world. Our energy team serves clients petrochemical, emissions, and met- across the Americas, Europe, Middle als markets. Platts’ real-time news, East, and Asia Pacifi c regions. pricing, analytical services, and con- 4401 Fair Lakes Court ferences help markets operate with Fairfax, VA 22033 transparency and effi ciency. Traders, KEMA INC. 703-818-9100 risk managers, analysts, and industry www.paceglobal.com leaders depend upon Platts to help them make better business decisions. Contact Additional information is available at Jack Nirenberg, Senior Vice President www.platts.com. 703-227-1076 [email protected] 67 South Bedford Street Suite 201 East SNL ENERGY Pace Global is a leading energy con- Burlington, MA 01803-4543 sulting and management company. 781-273-5700 We combine deep industry knowledge www.kema.com with commercial, technical, fi nancial, and regulatory expertise to help orga- One SNL Plaza Contact nizations maximize value and manage Charlottesville, VA 22902 Susan Erwin, Director of Marketing risk in today’s complex energy and 434-977-1600 781-273-5700 environmental markets. For more than www.snl.com/energy [email protected] 30 years and in over 60 countries, we have worked closely with our Contact KEMA provides business and techni- clients to defi ne strategies and imple- Michael Carter, Director cal consulting, operational support, ment solutions. We offer a unique, 303-501-1683 measurement, inspection, testing, integrated perspective our clients [email protected] and certifi cation solutions to more have come to trust, which we call the than 500 energy and utility clients Power of Integration. For more infor- SNL Energy has redefi ned the energy in over 70 countries. KEMA’s mul- mation, please visit our website www. information market by integrating tidimensional approach bridges the paceglobal.com. news, data, research, and analytics gap between the strategists and the in real time. Other providers just give implementers, the engineers, and the you pieces of the puzzle. Only SNL accountants to effect lasting change. MARKETING gives you the full picture on the entire With 1,800 consultants dedicated to industry, encompassing the power, the global utility industry, KEMA con- COMMUNICATIONS gas, coal, and renewable energy mar- sultants include leading authorities kets in one easy-to-use web-based and innovators in energy and utility PLATTS platform. SNL Energy covers more technologies and markets, as well as than 9,000 power plants, 3,000 North in business and management pro- cesses. KEMA’s expertise helps clients make decisions and implement pro- grams that contribute to profi tability, 2 Penn Plaza, 25th Floor enhance reliability, and meet growing New York, NY 10121 standards for sustainability. Founded www.platts.com in 1927, KEMA delivers a comprehen- Contact 800-PLATTS8, 212-904-3070 [email protected]

72 ELECTRIC PERSPECTIVES ELECTRIC UTILITY MARKETPLACE

American energy companies, 1,700 Network system, Aclara TWACS® Business Experience®. It boosts fl ex- active coal mines, and 120 gas pipe- technology, and Aclara Customer ibility, agility, and creativity—the lines. We provide detail on fi nancials, Engagement and Meter Data Manage- cornerstones for your performance. supply and demand fundamentals, ment Solutions to meet the needs of More at www.us.capgemini.com/ hourly market pricing, and rate cases. our utility clients. smartenergy. SNL features daily tracking of new Aclara solutions are ideally suited project build-outs from power to for: transmission to environmental. We • load control for demand response ELSTER offer datasets and analytical tools you • customer care won’t fi nd anywhere else, all in one • TOU/critical peak pricing place. Over the past 24 years, SNL • outage assessment & restoration has perfected a process of gathering, monitoring vetting, scrubbing, and standardizing • prepayment metering & remote data. And as a result, we’re the only service operation provider that guarantees 100 percent • distribution system automation 208 South Rogers Lane accuracy. • theft detection Raleigh, NC 27610 800-338-5251 919-212-4800 METERING PRODUCTS CAPGEMINI www.elster.com AND SERVICES [email protected]

ACLARA Contact Wei-En Tan, Managing Director, www.us.capgemini.com/smartenergy Marketing [email protected] Contact 945 Hornet Drive Jenifer Bush, North America Elster (NYSE: ELT) is the global multi- Hazelwood, MO 63042 Marketing Leader, Energy & Utilities utility smart grid solutions company 314-895-6400 [email protected] that delivers the proven infrastructure www.aclara.com and technologies to satisfy the de- Smart Energy Services— mands of electric, water, and gas utili- Contact Experience Reduces Risk ties. With over 200 million metering Dan Cerrezuela, Executive Director of Capgemini’s Smart Energy Services devices deployed in the past 10 years Sales, Public Utilities is helping over 43 million utility and 80 smart grid systems worldwide, 440-528-7200 customers worldwide with 30 smart Elster is enabling vital connections [email protected] meter and smart grid programs. Our in the energy ecosystem, modern- team has extensive utilities industry izing the world’s electricity, water, and The Aclara® brand represents the in- experience with an unequaled track natural gas delivery systems with ad- dustry’s leading intelligent infrastruc- record for successful innovation and vanced and fully interoperable smart ture technologies for providing device delivery. We support utilities and their grid and metering solutions. Working networking, data-value management, customers by delivering sustainable closely with utilities, we deliver fi eld- and customer communications to energy effi ciency and environmental tested infrastructure and technologies water, gas, and electric utilities glob- solutions—transforming utility op- to create intelligent communities. ally. Over 500 utilities worldwide rely erations and customer fulfi llment. Our Elster posted revenues of $1.7 bil- on proven Aclara solutions to connect commitment is strong with more than lion in 2009 and operates in over 38 with their customers. 7,000 professionals dedicated to the countries. Find out more information A choice for both large and utility sector. at www.elster.com. small utilities, Aclara integrates the As a global leader in consulting, strengths of the industry’s most prov- technology, and outsourcing services, en technologies—the Aclara STAR® Capgemini works with you to unleash your full potential and transform it into tangible results. We work togeth- er to provide insights and capabili- ties that free you to achieve superior results. We call this the Collaborative

MAY / JUNE 2011 73 ELECTRIC UTILITY MARKETPLACE

Landis+Gyr is the leading provider products to customers. These tech- ITRON of integrated energy management nologies include smart grid solutions solutions tailored to energy company such as FlexNet™, the tower-based needs. It provides multi-platform advanced metering infrastructure advanced metering, distribution (AMI) system, distribution automation automation, and personal energy products that provide high-speed, 2111 North Molter Road management solutions to more than real-time, two-way communications, Liberty Lake, WA 99019 550 utilities in North America and and smart meters, all of which allow 866-374-8766 around the world. With a global pres- utilities to intelligently use resources www.itron.com ence and a reputation for quality and with unprecedented effi ciency. Sensus innovation, Landis+Gyr is unique in offers a complete line of intelligent Contact its ability to deliver true end-to-end communication applications that are Itron Inquiries Hotline advanced metering solutions. Today, specifi c to electric distribution system 866-374-8766 the company offers the broadest port- monitoring and control, including www.itron.com/pages/contact.asp folio of products and services in the capacitor control, voltage regulation, electricity metering industry and is medium and low voltage sensors, At Itron, we’re dedicated to deliver- paving the way for the next generation reclosers, remote substations, and ing end-to-end smart grid and smart of smart grid. Landis+Gyr operates in other distribution assets. distribution solutions to electric, gas, over 30 countries across fi ve conti- and water utilities around the globe. nents, and employs over 5,000 people Our company is the world’s leading with the sole mission of helping the SILVER SPRING NETWORKS provider of smart metering, data col- world manage energy better. lection, and utility software systems, with nearly 8,000 utilities worldwide relying on our technology to optimize SENSUS the delivery and use of energy and water. Our offerings include elec- 555 Broadway Street tricity, gas, water, and heat meters; Redwood City, CA 94063 network communication technology; 650-298-4200 collection systems and related soft- 8601 Six Forks Road, Suite 700 www.silverspringnetworks.com ware applications; and professional Raleigh, NC 27615 services. To know more, start here: 800-638-3748 Contact www.itron.com. www.sensus.com Gary Gysin, Executive Vice President of Sales Contact [email protected] Eric Ehlers, Marketing LANDIS+GYR Communications Manager Silver Spring Networks is a leading 919-376-2654 smart grid solutions provider that en- [email protected] ables utilities to achieve operational effi ciencies, reduce carbon emissions, Sensus creates innovative technology and empower their customers with solutions that help utilities around the new ways to monitor and manage 30000 Mill Creek Avenue world conserve water and energy. The their energy consumption. Silver Suite 100 company has been at the forefront of Spring provides the hardware, soft- Alpharetta, GA 30022 advancements in the utility industry ware, and services that allow utilities 678-258-1500 for more than 100 years, consis- to deploy and run unlimited advanced www.landisgyr.com tently delivering new capabilities and applications, including smart meter- ing, demand response, distribution Contact automation, and distributed genera- Gary High, Vice President of Sales tion, over a single, unifi ed network. 678-258-1500 Silver Spring has successful deploy- [email protected] ments with leading utilities in the United States and abroad, including Florida Power & Light, Pacifi c Gas &

74 ELECTRIC PERSPECTIVES ELECTRIC UTILITY MARKETPLACE

Electric, Pepco Holdings, Inc., Jeme- PLANT DESIGN ting support within a spectrum of contracting structures to meet specifi c na Electricity Networks Limited, and ENGINEERING United Energy Distribution, among customer needs. others. For additional information, CONSTRUCTION Market segments please visit www.silverspringnet- • fossil power—solid fuel, combined works.com. BECHTEL cycle gas turbine, emissions retro- fi ts, integrated gasifi cation com- bined cycle NUCLEAR SERVICES • nuclear power—new generations, operating services, major modifi - AREVA cations • renewable power—solar, wind, , desalination, carbon cap- ture, and geothermal 5275 Westview Drive • transmission—transmission lines, Frederick, MD 21703 substations, and distribution facili- 301-228-8609 ties 4800 Hampden Lane www.bechtel.com • Communications—wireline and Suite 1100 [email protected] wireless communication network Bethesda, MD 20814 deployments www.us.areva.com Contact Services Scott Austin, Manager of Business • operations, modifi cations, and Contact Development, Fossil Power maintenance Donna Gaddy-Bowen, Manager, Ahmet Tokpinar, Manager of Business • alternative generation technology Marketing Communications Development, Nuclear Power and fuel conversion studies 434-832-3702 • environmental assessments and Victor Frisch, Manager of Business licensing support, quality assur- Development, Renewable Power AREVA provides its customers with ance, and control solutions for carbon-free power gen- John Stroud, Manager of Business • procurement and logistics eration in North America and all over Development, Communications and • life extension/plant betterment the world. As the leader in nuclear Transmission analyses, plans, and implementation energy and a signifi cant, growing • sustainable design solutions player in the renewable energies sec- Bechtel Power provides turnkey ser- • environmental and worker safety tor, AREVA combines U.S. and Cana- vices to utilities, private clients, and dian leadership, access to worldwide governments. We deliver premier expertise, and a proven track record technical and management services to of performance. Sustainable develop- develop, manage, engineer, construct, ment is a core component of AREVA’s and perform startup and commis- strategy. sion for power generation facilities. Its more than 5,000 U.S. and Ca- For over 50 years we have performed nadian employees work every day to operations and related management make AREVA a responsible industrial services to enhance the sustainability player helping to supply ever cleaner, and viability of the communities we safer, and more economical energy to serve. These services extend to the the greatest number of people. AREVA major modifi cations and repowering Inc. is headquartered in Bethesda, of existing fossil and nuclear facili- Maryland. Visit us at us.areva.com or ties. follow us at Twitter. Bechtel Power can offer any com- bination of these services including program and project management, economic and technical feasibility studies, and licensing and permit-

MAY / JUNE 2011 75 ELECTRIC UTILITY MARKETPLACE

Renewable Energy Systems Americas for over 100 years. We have designed BLACK & VEATCH Inc. (RES Americas) has developed, 902 power generating stations and constructed, owned, and operated re- thousands of miles of transmission newable energy projects since 1997. systems. Our distinctive capabilities RES Americas has constructed (or is provide clients and partners with a 11401 Lamar Avenue under construction) over 5,200 MW, thoroughly reliable source of compre- Overland Park, KS 66211 has over 10,000 MW under develop- hensive expertise. 913-458-2000 ment, and owns 226 MW of operating We offer complete engineering, www.bv.com projects. energy business consulting, and RES Americas possesses in-house project services for power projects Contact expertise from selecting sites, design- and system-wide planning. Areas of Keith D. Small ing projects, through the planning/ service include: Marketing Director, Energy permitting stages, fi nancing, con- • new generation (fossil fuel, nuclear, 913-458-6361 struction, and operation. We ensure renewables) and repowering [email protected] the project is completed on time, • environmental and air quality within budget, and generates power at control Black & Veatch is a global leader in a competitive price. • operating plant betterment and life the consulting, engineering, con- RES Americas: extension struction, and operation of what the • sells its developed and constructed • power delivery transmission and world needs now and in the future in projects to others substation systems the crucial areas of energy, water, and • constructs projects developed by • engineering, design, and analysis telecommunications and in provid- others • EPC project services and program ing up-to-the-minute services in the • owns and operates its developed/ management fast-changing federal and environ- constructed projects • site selection and permitting/ mental markets. Founded in 1915, RES Americas is headquartered in licensing the employee-owned, $2.3 billion Broomfi eld, Colorado, with regional • nuclear power uprate and perfor- company operates out of over 110 offi ces in Austin, Texas; Portland, mance improvement offi ces worldwide and has completed Oregon; and Minneapolis, Minnesota. • transmission system reliability projects in more than 100 countries. Canadian projects are managed by its upgrades and uprates affi liate RES Canada. • grid interconnection and smart grid technology implementation RENEWABLE ENERGY SYSTEMS • owners engineer, due diligence, AMERICAS INC. SARGENT & LUNDY LLC asset transaction support • utility planning and integrated resource analysis & planning • O&M support

11101 West 120th Avenue, Suite 400 Broomfi eld, CO 80021 303-439-4200 55 East Monroe Street www.res-americas.com Chicago, IL 60603 312-269-2000 Contact www.sargentlundy.com Raheleh Folkerts, Marketing/ Communications Manager Contact 303-439-4200 Tom White, Executive Vice President [email protected] 312-269-6137 [email protected]

Sargent & Lundy, a worldwide leader in professional services for the elec- tric power industry, has been dedi- cated exclusively to serving electric power and energy-intensive clients

76 ELECTRIC PERSPECTIVES ELECTRIC UTILITY MARKETPLACE

URS PLANT EQUIPMENT Siemens Energy is the world’s lead- ing supplier of a complete spectrum PARTS of products, services, and solutions SYSTEMS for the generation, transmission, and distribution of power and for the GE ENERGY extraction, conversion, and transport 510 Carnegie Center of oil and gas. The company develops Princeton, NJ 08540-6212 and builds fossil-fueled power plants, 609-720-2000 power-generating components, wind www.urscorp.com turbines, technologies, turbines for use as mechanical drives Contact and compressors for industrial ap- Paula Nelson 4200 Wildwood Parkway plications, and instrumentation and Vice President, Business Atlanta, GA 30339 control systems. Development, Fossil, Power Group 678-844-6000 Siemens also is a leading supplier 609-720-2374 www.ge.com/energy of high- and medium-voltage power [email protected] delivery equipment, energy manage- Richard Wolfe Contact ment systems, network planning, and Vice President, Business Michael Barker power system engineering software, Development, Nuclear, Power Group Marketing Communications as well as technologies and solutions 803-578-7011 Program Leader to transform today’s grid into a living [email protected] 678-844-5782 infrastructure that is smart enough to [email protected] respond quickly, fl exibly, and compre- The power sector of URS plans, de- hensively to society’s energy needs. signs, engineers, constructs, retrofi ts, GE Energy is one of the world’s lead- and maintains virtually every type of ing suppliers of power generation and power plant, as well as the systems energy delivery technologies—pro- SUPPLIER DIVERSITY that transmit and distribute electricity, viding a broad array of product and worldwide. Our full life-cycle services service solutions for traditionally CENTERPOINT ENERGY range from planning, siting, licensing, fueled plants as well as those driven and permitting through engineering, by renewable resources such as wind, procurement, construction, and con- solar, and biogas. GE Energy has the struction management to facility start- worldwide resources and experience up, operations, and maintenance. We to help customers meet their needs also provide decommissioning and for cleaner, more reliable and effi cient P.O. Box 4567 closure services for facilities no lon- energy. Numerous GE Energy prod- Houston, TX 77210-4567 ger in use. ucts are certifi ed under Ecomagina- 713-207-1111 Our expertise encompasses fossil tion, GE’s corporate-wide initiative www.centerpointenergy.com fuel, nuclear, and hydroelectric power to aggressively bring to market new generating facilities, as well as alter- technologies that will help customers Contact native and renewable energy sources. meet pressing environmental chal- Jewel Smith, Manager, We develop and install clean air lenges. Supplier Diversity technologies that reduce emissions 713-207-6951 and help power-generating facilities [email protected] comply with air quality regulations. SIEMENS ENERGY, INC. We also perform major component re- CenterPoint Energy is the third largest placements, such as steam generators publicly traded natural gas delivery and reactor vessel heads, for nuclear company in the U.S. with nearly 3 power plants. 4400 Alafaya Trail million metered natural gas custom- Orlando, FL 32826 ers in six states. We’re also the third 407-736-2000 largest energy company employer in www.siemens.com/energy Houston. We are one of the nation’s

Contact Barry Nicholls, Vice President, Power Systems Sales 407-736-5820

MAY / JUNE 2011 77 ELECTRIC UTILITY MARKETPLACE

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10101 CLAUDE FREEMAN DRIVE SUITE 100W CHARLOTTE, NC 28262 800.424.PIKE PIKE.COM/ENERGYSOLUTIONS DISTRIBUTION Con Edison Builds a Smart Distribution Grid By Thomas Magee

ew York City temperatures and people move through a hot day with head into the upper 90s for the little indication of disturbances in their Nfourth weekday in a row. Power power grid. demand on the Con Edison system is Con Edison’s vision for smart grid predicted to hit an all-time record. Sys- encompasses this scenario. Smart grid tem operators in the control center take is about maintaining the reliability of action to ease strain on the grid. Com- our distribution system in a more cost- puter programs contact area businesses effective way. A smart grid makes data to reduce lighting usage, air-conditioner about the system useful using distribu- set points, and elevator use. tion automation. It gets The programs also contact Con Edison the information, analyzes distributed generation (DG) it, and acts on it, reducing resources to send their works with future investment needs, output onto the grid. In 15 suppliers mitigating the impact of minutes demand is cut by that can now incidents, and enhancing 250 megawatts (MW). provide sys- customer service. Suc- Lightning strikes a power tem operators cessful smart grid invest- line in Yonkers, a few miles ments reduce costs and north of New York City. For with the tools minimize rate increases, a moment, 2,000 customers to reduce load and that is good for all are without power. Using when needed. customers. adaptive software commu- The utility’s New York nicating with superfast grid distribution system has technology, system operators restore all 35,000 miles of overhead lines, but but 300 customers within two minutes. most of it—95,000 miles of electric In the end, total outage time for those cable—is underground. The signifi - customers is less than two hours. cance is that operators cannot see what Tapping Into the BMS At the same time, an underground is happening. Add to that a customer Large commercial customers have in New York City signals base that has high reliability needs signifi cant impacts on the grid. Con that it is overheating. Automated switch- and infrastructure that is expensive to Edison works with suppliers that can ing reroutes much of the load away from get to and diffi cult to update. With 3.2 now provide system operators with the it, and system operators “dispatch” an million customers, the service territory tools to reduce load when needed. The aggregation of building management has one of the highest load densities utility could have the ability to control systems (BMSs) in the area to relieve in the world. The region is home for building equipment and other assets, the remainder of the transformer’s load. critical institutions, including the fi nan- such as distributed generation and Total time from fi rst report to load re- cial community in Wall Street, major perhaps and electric duction is less than 15 minutes. A few medical facilities, hubs for national and car charging (which is beginning to smart meters designed to report infor- global communications, and concen- occur in commercial parking garages). mation back to the utility are needed, trated public transportation systems. Some customers are willing to allow Thomas Magee is general manager of the Smart Grid New York City is a vertical environment this control only in emergencies, while Implementation Group at Con Edison. and system failure has severe impacts others allow this as part of demand-side to high-rise buildings where water ser- management programs. vice and access to elevators depend on Smart grid technology can direct a electricity. network of interconnected BMSs to act It is the perfect test bed for new dis- as a and provide tribution automation technologies.

82 ELECTRIC PERSPECTIVES The integration of a building’s energy man- agement system and distributed generation poses specifi c challenges to today’s grid.

There is a great deal of potential. To fi nd out how to tap it, Con Edison de- veloped a pilot program through a part- nership with the City of New York and other building owners, technology ex- perts, and the federal government. The goal is to aggregate 15-20 MW of build- ing load in New York City using a soft- ware platform to facilitate data exchange among all grid assets. The advantage is that the BMSs already exist, and it is only the back end to the system opera- tor that needs to be developed. Because of federal involvement, the knowledge created through this partnership can be applied across the country. Con Edison is conducting six demonstrations to test integration of the new applications with existing utility systems.

Coordinating Power Flows The integration of a building’s distrib- uted generation, including renewable DG, offers specifi c challenges to the current grid. The primary one is that DG does not conform to traditional power fl ow. This change of power fl ow impacts some components and requires system modifi cations to allow for continued reliable and safe operation. Con Edison is testing the coordina- Courtesy: Con Edison tion of DG output and network protector the distribution system with traditional There are more than 61,000 com- (NWP) fl ows by installing secure two- generation products as energy, capacity, mercial buildings in New York City way communications and remote con- and ancillary services. This integration which represent more than two-thirds trol on approximately 180 distribution could enhance the system’s monitoring (34,000 gigawatt-hours) of all electric transformers in its service territory. The and control. Grid operators would have consumption in Con Edison’s service key objectives of the program include the ability to shift customer demand area. Being able to control just 10 per- the development of two-way commu- as system conditions dictate: When cent of that has large benefi ts to grid nication and control between the NWP customer usage is at a peak and criti- operators. Con Edison spends nearly $2 and DG, and testing and monitoring NWP cal resources are required to support billion annually in its capital program, remote operation and control. the grid, or when the operator needs to and a 10-percent reduction in those few Con Edison is investing approxi- relieve congestion on the grid. A virtual peak hours, rather than building new mately $200 million, including support power plant may also be relied on as a assets, could reduce investment needs from federal funding to install hundreds resource to defer costly investment on and save customers $40 million on their of smart switches. This is a real chal- the underground New York City grid. energy bills. lenge for one of the most congested By participating in demand response cities in the world. The most daunting programs, BMS customers have an op- challenge is to make these switches portunity to leverage their investments operate with all the components of a and monetize their assets. Customers can sell energy into the grid at a time when prices are high and power re- sources are critical.

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© 2011 AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property. Courtesy: Con Edison modern energy delivery system. One What are the enabling applications? Overhead display depicts enhanced challenge, due to the city’s terrain, will Operators need to monitor assets, know auto-loop design, which allows automatic be communications among compo- their status, and manage multiple sys- customer restoration and improved fault nents. The buildings in New York City tem notifi cations in an event. Smarter detection. create canyons that make conventional interface tools are necessary—includ- wireless communication diffi cult without ing real-time modeling tools that calcu- design philosophy by deploying distri- signifi cant investment. Another chal- late the impact of removing equipment bution automation. It enhances grid op- lenge for wireless communication is from service, bringing on DG, or operat- erations to leverage all available assets that a vast majority of the electric infra- ing BMSs across an area. The operator through enhanced visibility and control. structure is underground and requires also requires visualization applications Con Edison’s state-of-the-art control rugged equipment. and decision tools that quickly analyze and monitoring equipment and new The development of software to unify alternate situations and recommend underground switches capture data that all the data from diverse systems, a kind commands on the grid. can be analyzed to better understand of master translator, is also a challenge. Con Edison is using a variety of such system performance. Each underground It can be diffi cult to get components tools in its distribution automation switch has sensors that measure in- communicating in various languages projects. These projects will serve as a formation about the distributed power. to work together with precision. Con model to the industry for aggregating A wireless communication system will Edison is developing information BMSs and integrating the distribution enable data collection and control of technology applications to ensure oper- grid into a coordinated, cyber-secure underground transformers and network ability among its distribution system system managed reliably and cost ef- protector switches. This will provide components. fectively. much greater information and will add more fl exibility to the operations of the A Closer Look underground system. Based on this Traditional distribution network designs information, the company will improve focus on simply meeting the highest peak demand. Utilities can change their

MAY / JUNE 2011 85 its work priorities and will proactively address equipment and operational REGULATION concerns. In one New York City project, Con Edison will deploy two underground Adjustment Mechanisms auto-loops—which traditionally have been used in overhead systems to re- duce outage durations—that include 28 Drive Rate Cases smart switches on underground feeders By Cass Bielski that will divide one large network into three coordinated subnetworks. The new hareholder-owned electric utili- Return on Equity switches will have supervisory control ties filed eight new general rate The average awarded return on equity and data acquisition (SCADA) and wire- Scases in first quarter 2011—the (ROE) for fi rst quarter 2011 was 10.35 less communication. same number as fourth quarter 2010, percent. Awarded ROE has been rela- Con Edison also is installing pres- which was the quietest quarter for rate tively fl at for the past fi ve years, remain- sure, temperature, and oil sensors to case activity since fourth quarter 2008. ing near the lows of recent decades. The monitor underground transformers. The (See Figure 1.) However, given the long-term trend of falling interest rates real-time temperature data will provide strong ongoing level of infrastructure and more recent attempts by commis- remote condition monitoring for these investment across much of the industry, sions to restrain rate increases during critical assets and help in staging trans- including automated metering infra- diffi cult economic times are two main former cooling strategies. The sensors structure associated with smart grid reasons for the decline in awarded ROEs will help system planners develop accu- activities and renewable sources of gen- since 1990. Industry analysts also have rate transformer modeling under normal eration, we do not believe the last two cited the more frequent use of riders and contingency operations. quarters represent a lasting break in the and other rate mechanisms to recover Remote devices installed at strategic trend of rising rate case filings, a trend costs outside of base rates as a factor. customer locations provide the data for seen since the turn of the millennium. Rate designers favor adjustment mecha- secondary network load fl ow modeling. Utility attempts to implement adjust- nisms because they promote accurate The improved secondary modeling and ment mechanisms were the main driver and timely cost recovery without the load fl ows will allow for better grid rein- of the quarter’s fi led cases. As is often expense of a rate case. Many commis- forcement, which can minimize the risks the case, infrastructure investment was sions, however, believe such mecha- of secondary cable failures during peak another strong driver, as were attempts nisms moderate risk for the utility and loading conditions and importantly, by utilities to recover pension and other their use should go hand-in-hand with a reduce network outages due to second- post-employment benefi t expenses. reduced allowed return. Yet adjustment ary events. mechmechanisms,a like awarded rates, are subject to disallow- What’s Next? ances, and we caution Harnessing the smart grid’s that tthe decision to reduce power requires smart building rereturntur when such mechanisms integration, advanced technolo-- araree employed may prove to gies, analytics, and smart energygy bbe premature. The average systems. System integration rerequestedque ROE in the fi rst quarter holds the key to the realization of was 111.11 percent. Requested a comprehensive smart grid. Conon ROEROE has followed a pattern simi- Edison’s successful deploymentt lar to that of allowed ROE and for of these projects over the next fewew simisimilar reasons. years will provide the energy indus-dus- try a glimpse of the smart tools necnec-- RegulatoryRegu Lag Issues essary to overcome the challengesges ooff RegulatoryRegu lag in the fi rst quarter managing the 21st-century distribu-ribu- was 1010.8. months, nearly equal to tion system. ◆ the 1010.7-month.7 average lag of the

Dreamstime papastst ttwowo decades. Regulatory lag was esespecially volatile in the years immeimmediatelyd preceding and dur- CassCass Bielski (c([email protected]) is manager of rate andand regulatory bbusiness at Edison Electric Institute.

86 ELECTRIC PERSPECTIVESS ing industry restructuring rates go into effect. That ages, and a distribution asset recovery but was fairly consistent Several perspective would suggest rider that would refl ect distribution- before and has been since. companies average regulatory lag is related regulatory assets. Appalachian Regulatory lag is the time fi led in part closer to twice what our Power in Virginia wants to increase its between a rate case fi ling because their defi nition measures, or environmental compliance rate adjust- and decision (a rough proxy close to two years. ment mechanism to refl ect additional for the time between when a earned returns investments, establish a renewable utility needs funds and when are below Filed Cases rate adjustment clause, and establish a it can recover those funds in their allowed Utility attempts to generation rate adjustment clause that rates). Costs are rising now return, and implement adjustment would refund $4 million to customers for many utilities and are ex- regulatory lag mechanisms were the based on cost reductions at a generat- pected to continue rising for main driver of rate case ing facility. the foreseeable future. Regu- is one of the fi lings in the fi rst quarter. Several companies fi led in part be- latory lag can keep a utility main reasons. Fitchburg Gas & Electric cause their earned returns are below continuously struggling to Light fi led to implement their allowed return, and regulatory lag catch up with rising costs. a storm cost recovery is one of the main reasons. Examples While our defi nition of regulatory lag factor, a revenue decoupling mecha- include Oncor Electric Delivery, which has strengths, some rate analysts argue nism, and a capital expenditure tracker. has an ROE of 8.93 percent while the that it minimizes the actual effect of reg- Columbus Southern Power seeks a company’s allowed return is 10.25 per- ulatory lag because it does not account distribution investment rider that would cent, and Southwestern Public Service. for the time associated with preparing recover incremental carrying charges Appalachian Power fi led its case in a rate case and the time between when for infrastructure investment in distri- response to a state law requiring bien- a case is decided and when the new bution, an enhanced service reliability nial rate reviews for the state’s utilities. rider for vegetation management costs such as tree trimming to prevent out-

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MAY / JUNE 2011 87 FIGURE 1 and they tend to reduce allowed ROEs NUMBER OF RATE CASES FILED (QUARTERLY) to compensate. The fi rst quarter’s deci- (U.S. Shareholder-Owned Electric Utilities) sions were no exception. In awarding Western Massachusetts Electric a 25 9.6-percent ROE, the Massachusetts commission said that it considered 20 the company’s mechanisms, including those for recovery for basic service, 15 supply-related bad debt, demand-side management, residential customer as- sistance, pension and post-retirement 10 benefi ts other than pension, and rev- enue decoupling. The Hawaiian com- 5 mission granted a 10-percent ROE to Hawaiian Electric, lower than had been 0 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 approved for interim rates, because it 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 also approved adjustment mechanisms in the fi nal order. One commissioner Source: SNL Financial/Regulatory Research Associates and EEI Rate Department dissented, saying the mechanisms shift risk to the customer, and the allowed ROE should have been only 9.5 percent. In these reviews, the commission must mechanism) for Delmarva Power. The It is important to point out that cost re- determine a “fair” ROE, which the state New York commission adopted a rev- covery through adjustment mechanisms says can range from equaling to exceed- enue decoupling mechanism for Niagara has essentially the same possibility of ing by up to 300 basis points the three- Mohawk Power but denied the com- disallowance as cost recovery through a year average of ROEs reported to the pany’s proposal to index the mechanism general rate case, and therefore risks to Securities and Exchange Commission to infl ation. The Massachusetts and the utility are not signifi cantly reduced. by a peer group of vertically integrated Hawaii commissions approved revenue In Wisconsin Public Service’s case, electric utilities in the southeastern decoupling mechanisms for Western the commission reduced requested United States with investment-grade Massachusetts Electric and payroll expenses by $5 bond ratings. The commission can Hawaiian Electric. Commis- million by eliminating adjust the fair ROE by up to 100 basis The New York commis- sions gener- costs associated with points, depending on the operating sion gave Niagara Mohawk goal-sharing plans for performance of the utility. If the com- the choice of either a ally think that exempt and non-union mission determines that the utility’s $112.7-million increase adjustment employees and expenses earnings are more than 50 basis points based on a 9.1-percent ROE mechanisms associated with stock below the fair ROE, it must approve a or a $119.3-million increase reduce risk options, restricted stock, rate increase designed to give the utility based on a 9.3-percent ROE and performance shares, an opportunity to earn it. If the commis- (premised on the utility’s and they tend among other items. In sion determines that the utility earned agreement to defer any fu- to reduce al- New York, the commission more than 50 basis points above the fair ture case fi ling until at least lowed ROEs to disallowed $19 million in ROE, the utility must make refunds to January 1, 2012). The util- compensate. variable pay expense for customers, subject to additional condi- ity chose the latter option. Niagara Mohawk Power, tions. Nevertheless, even at the saying such expenses higher ROE level this is the third-lowest should be self-supported by cost sav- Decided Cases ROE awarded an electric utility in a gen- ings generated “through the efforts and Several decoupling programs were ap- eral rate case in at least two decades. programs for which variable compensa- proved during the fi rst quarter. The Del- The commission largely accepted the tion is provided.” aware commission approved a modifi ed commission staff’s ROE calculation, As with the fi led cases, the quarter’s fi xed/variable rate design (which can which doubled the emphasis on the decided cases emphasized adjustment be interpreted as a type of decoupling discounted cash fl ow methodology and reduced the ROE to refl ect Niagara Mo- hawk’s better credit quality than that of the proxy group. Commissions generally think that adjustment mechanisms reduce risk

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The smartest energy source mechanisms, even beyond cost-tracking mechanism. cases. The earnings-sharing mechanism the decoupling mechanisms Utilities In Pennsylvania, the shares incremental earnings at various previously discussed. believe that commission approved levels above the company’s authorized Although the commission higher cus- Duquesne Light’s new return but does not share shortfalls be- approved a decoupling tomer charges universal service rider and low the authorized return. In Washing- mechanism for Western the company’s request ton, the commission ordered Pacifi Corp Massachusetts Electric, it match the to increase the customer to establish a tracking mechanism to rejected company-proposed way costs are education surcharge. return proceeds from the sale of renew- adjustments for infl ation, created by In Hawaii, in addition able energy credits for wind facilities to replacement of aging infra- average cus- to approving the com- customers. structure, storm hardening, tomer usage. pany’s revenue decoupling Utilities generally prefer higher fi xed and distribution automation. mechanism, the commis- customer charges than those approved Part of the commission’s sion approved Hawaiian by commissions because utilities reasoning was the company’s lack of Electric’s proposed cost-of-service believe that higher customer charges funding in these areas over the past recovery mechanism, earnings-sharing match the way costs are created by aver- ten years. The commission said that mechanism, and purchased-power ad- age customer usage (for example, more an infl ation-adjustment factor was justment clause. The cost-of-service re- costs are fi xed than is generally re- not needed in an era of low infl ation covery mechanism recognizes rate base fl ected in the rate structure). Recovering and that the “company’s allowed ROE additions—subject to certain limitations rising fi xed costs through variable-rate provides it with a reasonable means of and variations in operation and main- charges can create inaccurate recovery, compensation for assuming the normal tenance expenses and depreciation and diffi culties in designing rates, and the business risk of infl ation.” The West amortization expenses—between rate encouragement of uneconomic usage. Virginia commission approved a settle- On the other hand, higher fi xed charges ment that requires Appalachian Power to reduce the incentive to conserve and are withdraw its request for a transmission generally less popular with customers.

90 ELECTRIC PERSPECTIVES

In Delaware, the commission ad- opted a partial settlement for Delmarva CREDIT RATINGS Power that implemented a modifi ed fi xed/variable rate design that makes use of higher customer charges. The Balancing Positive Massachusetts commission, however, rejected Western Massachusetts Elec- tric’s proposal to increase customer and Negative Forces charges, commenting that “lowering the By Aaron Trent customer charge so that more revenues will be recovered through volumetric he industry’s average credit rat- outlook among Moody’s, Standard & charges best balances our rate design ing in 2010 remained BBB for Poor’s, and Fitch, and seven had at least goalggoals.”s Similarly, Tthe seventh consecutive year, one negative or watch-negative outlook. thtthe Penn- and the year’s 80 ratings changes, while In 2009, several negative watches relat- sylvania more numerous than the 57 in 2009 and ing to fi nancial crisis-era mergers and commis- 50 in 2008, remained well below the acquisition (M&A) were resolved (for sion did 253 in 2002, 300 in 2003, and roughly example, Exelon, MidAmerican Energy nonoto allow 110 to 120 per year from 2004 through Holdings, and Constellation). However DDuquesne 2007. (See Table 1.) The relatively low in 2010, some watches refl ected a new LLight’s number of ratings changes in 2010 and potentially credit-positive approach pproposalr to reflected, in part, a balance of negative to M&A. inincreasecre the and positive forces. Negatives centered custcustomeromm charge on continuing cash flow pressures from Merger, Regulatory from $$7.007. to $8.50. the weak economy and weak power Risk, and the Economy In TTexas-Newexaa markets. The main credit-positive trend In fi rst quarter 2010, EEI recorded one 123rf MeMMexicoxico PPower’soww case in continued to be the increased focus by upgrade and 17 downgrades. Down- Texas,Tex the ccommissionom many companies on regulated opera- grades related primarily to regulatory allowedll d ththe companycom a tions. challenges, the impact of a proposed 5.3-percent distribution increase. How- Downgrades outnumbered upgrades, merger, weak economic conditions, and ever, the increase is allocated so that with 51 downgrades versus the leverage and execution residential customers get a 10.0-percent 29 upgrades, for the third Downgrades risk related to elevated increase, small commercial customers year in a row—a trend that outnumbered capital spending. The get a 2.0-percent increase, and large is not surprising given the single upgrade centered commercial and industrial customers ongoing scale of capital in- upgrades, on regulatory relations get anywhere from a 2.0-percent to vestment across much of the with 51 down- in Illinois and moderate 6.5-percent increase. This allocation is industry. Weakened fi nancial grades versus capex plans. an attempt to reduce cross-subsidiza- metrics resulting from the 29 upgrades, In February 2010, tion between rate classes (for example, lingering effects of the recent for the third FirstEnergy announced its when some classes pay a smaller-than- recession and weakening intention to merge with appropriate share of costs relative to power markets produced year in a row. lower-rated Allegheny other classes of service). Similarly, in the 51 downgrades—31 in Energy. Shortly thereafter, West Virginia, Appalachian Power’s case the fi rst half of the year and 20 in the S&P downgraded FirstEnergy and its allocates a higher increase to residential second. Increasing focus on regulated subsidiaries one notch, to BBB- from customers than to commercial and in- utility operations, conservative fi nancial BBB, citing a fi nancial profi le (for exam- dustrial customers. ◆ management, and constructive regula- ple, projected credit ratios) that would tory outcomes accounted for many of now be weaker. The move accounted for the year’s 29 upgrades. 10 of the quarter’s 17 downgrades. At Early in 2011, 79 percent of the the same time, S&P affi rmed its existing industry’s ratings at the parent level ratings on Allegheny and its subsidiar- were stable. As of January 5, seven (11 ies, indicating the merger would only percent) of the 68 parent companies marginally improve their credit quality. Edison Electric Institute (EEI) tracks had at least one positive or watch-positive Aaron Trent ([email protected]) is manager of fi nancial analysis at Edison Electric Institute.

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www.siemens.com/energy TABLE 1 continued regulatory challenges at TOTAL RATINGS ACTIONS FP&L; lower operating effi ciency at (U.S. shareholder-owned electric utilities) merchant energy producer and marketer 2003 2004 2005 2006 2007 2008 2009 2010 NextEra Energy Resources; a continued shift of investments toward unregulated Fitch 62 34 22 31 41 17 14 24 businesses; and poor fi nancial perfor- Moody’s 79 42 46 39 32 6 23 20 mance resulting from the weak Florida economy, unfavorable energy markets, Standard & Poor’s 112 34 53 40 48 27 20 36 or poor risk management. For potential Total 253 110 121 110 121 50 57 80 positive drivers, the agency cited “a dramatic shift” in the Florida economic, Source: Fitch Ratings, Moody’s, Standard & Poor’s political, and regulatory environment and actions to reduce risk at NextEra. S&P described several risks arising company and its subsidiaries one notch, S&P downgraded Portland General from the proposed merger and said it to A- from A. S&P began the review in Electric to BBB from BBB+ due to the will maintain FirstEnergy’s ratings at the January 2010 following a negative rate impact on power demand of the weak lower level, even if the merger is not case outcome for FPL’s regulated sub- economic conditions affecting Oregon’s completed, because of the company’s sidiary Florida Power & Light (FP&L). forest and paper products and manu- evidently greater risk appetite and re- The agency announced the downgrades facturing businesses. S&P also cited the duced commitment to credit quality. S&P in March 2010 and cited the company’s company’s need for external fi nancing cited other near-term risks that include growing investments in unregulated and rate hikes to support a high level the potential for an extended merger assets in addition to greater regulatory of capital spending resulting from the approval process and/or concessions risk. state’s renewable standards and other to gain approval that erode the fi nancial Having returned FPL’s outlook to environmental initiatives. Finally, S&P basis for the merger. stable, S&P noted several potential cited regulatory risk as evidenced by S&P completed its CreditWatch re- developments that could lead it to set the company’s persistent under-earning view of FPL Group by downgrading the a negative or positive outlook going of its authorized return. S&P set Portland forward. Potential negatives included

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94 ELECTRIC PERSPECTIVES Courtesy: Seth Tisue

General’s outlook to stable, anticipating its stable outlook on management’s Xcel Energy’s Bay Front plant in Ashland, that the company will sustain its credit continued focus on Xcel’s regulated WI. The company’s strategy of investing in metrics by recovering investment costs utilities and the potential for stronger its regulated utilities deserved a rating up- in its next rate case and fulfi lling state cash fl ow metrics as capital investments grade, according to S&P. mandates in a credit-neutral manner. are completed. S&P’s one-notch upgrade of Westar than increasing its energy marketing Regulated Focus and Energy, to BBB from BBB-, was premised operations to offset reduced utility cash Regulatory Outcomes on management’s success in and com- fl ows. S&P’s stable outlook on Westar Second quarter 2010 produced 12 mitment to its regulated refl ects its expectation that upgrades and 14 downgrades. The operations during a chal- Nineteen credit metrics will slowly quarter’s balanced activity was helped lenging 2009. S&P stated improve as higher rates by several companies’ commitment to that despite the recession ratings ac- are realized and transmis- their regulated businesses. Negative ac- and mild weather, the com- tions affected sion and environmental tions refl ected economic and regulatory pany implemented multiple parent com- investments are recovered challenges, particularly in Florida. constructive rate orders that panies and through rate mechanisms. S&P stated that its one-notch upgrade signifi cantly increased base subsidiaries In April 2010, Moody’s of Xcel Energy to A- from BBB+ refl ected rates and reduced regula- and Fitch followed S&P’s management’s continued commitment tory lag by incorporating duing the third March 2010 action to to a strategy of investing in the com- forward-looking transmis- quarter 2010, downgrade FPL Group pany’s regulated utilities and focusing sion rates, a fuel and pur- including 11 (now named NextEra on cost recovery. The agency noted that chased power energy cost upgrades and Energy) and its regulated despite Xcel’s large capital program, adjustment mechanism, and 8 downgrades. subsidiary FP&L both by operating cash fl ow had continued to an environmental capex cost one notch to A- from A. improve, benefi ting from multiple rate recovery rider. As with Xcel, As with S&P, the agencies’ riders and utility rate case fi lings. S&P S&P commended Westar management downgrades refl ected increased regula- commented that it views most of Xcel’s for maintaining focus on its regulated tory risk following a negative rate case numerous regulatory jurisdictions to be business and long-term strategy, rather outcome in January 2010, as well as credit supportive. S&P also commended growth in the company’s unregulated management for maintaining a strong businesses. liquidity position throughout the reces- Moody’s downgraded FPL Group sion through cash on hand and unused by two notches, to BAA1 from A2, and capacity on credit facilities. S&P based

MAY / JUNE 2011 95 downgraded FP&L Pepco sold its Con- by one notch, to A2 nectiv Energy Holding from A1. Despite a business, including this worsened political 4-MW photovoltaic and regulatory en- plant in Vineland, NJ, vironment for FP&L, to Calpine last year. Moody’s expected the utility’s credit EFH’s corporate credit metrics would re- rating to selective main strong for its default, reevaluated revised rating as the company’s credit- Florida’s economy worthiness following improves. Moody’s the restructuring, and revised its outlook to returned the rating stable from watch- to B- with a nega- negative, anticipat- tive outlook based ing that the size and on its view that the Courtesy: Solar One Vineland diversity of FPL’s exchange did not unregulated portfolio would help to reduction as a key positive catalyst. In reduce refi nancing risk related to sub- offset the negative effects of poor power upgrading Pepco, S&P cited the com- sidiary Texas Competitive Electric Hold- markets and uneven wind conditions. pany’s improved business risk profi le ings’ senior secured debt due 2014. Fitch downgraded FPL Group by one and its view that management would notch, to A- from A, and affi rmed FP&L “unwind remaining merchant operations Weak Economy and at A, for essentially the same reasons as and retail supply contracts in a credit- Power Markets Moody’s. supportive manner.” S&P also noted A relatively light fourth quarter 2010 for that the company’s greater focus on its ratings actions produced fi ve upgrades Asset Sale and Debt Exchange regulated businesses would likely result and 12 downgrades. Economic condi- Nineteen ratings actions affected par- in more steady operating cash fl ows, tions remained a key factor in agency ent companies and subsidiaries dur- further strengthening the company’s decisions, as the continuing sluggish ing the third quarter 2010, creditworthiness. economy and weak power markets were including 11 upgrades and Economic S&P took myriad ac- factors in the downgrades. The primary 8 downgrades. Upgrades conditions re- tions on the various debt driver of upgrades was the stability that securities issued by En- comes with regulated cash fl ows. were supported by the sale mained a key of unregulated assets, while ergy Future Holdings (EFH) Standard & Poor’s followed up on the negative actions included the factor in agen- and its subsidiaries in positive outlook it set on DTE Energy effects of a distressed debt cy decisions, response to the company Company (DTE) in June 2010, upgrad- exchange. as the continu- commencing an exchange ing its corporate credit rating to BBB+ Standard & Poor’s raised ing sluggish offer designed to reduce from BBB. S&P stated that the upgrade its corporate credit rating on the outstanding principal was based on decreasing regulatory Pepco Holdings (Pepco) to economy and amount, reduce interest risk, improved credit metrics that it ex- BBB+ from BBB following the weak power expense, and extend the pected would continue over the medium completion of Pepco’s $1.6 markets were weighted average maturity term, and Michigan’s gradual economic billion sale of its Connectiv factors in the of its long-term debt. S&P recovery. Regarding regulatory risk, Energy Holding merchant downgrades. viewed the exchanged S&P noted that since Michigan passed generation business to offer as “distressed and comprehensive energy legislation in Calpine. The action fol- thus equivalent to a de- 2008, the Michigan Public Service lowed the transaction’s announcement fault” based on its rating criteria. S&P Commission had issued a series of in April 2010 and the agency’s related lowered EFH’s corporate credit rating to credit-supportive rate orders, including decision to change its outlook on Pepco CC from B- and maintained a negative two to DTE’s subsidiaries in 2010 for to watch-positive from stable. At that outlook, noting that: lenders would take more than $335 million. S&P stated, time, S&P had cited Pepco’s plan to use a substantial discount on the original transaction proceeds primarily for debt principal amount of debt exchanged, the maturity of the new debt would be longer, and the exchange was not an “opportunistic” event but an effort to improve EFH’s “very limited fi nancial fl exibility.” S&P subsequently lowered

96 ELECTRIC PERSPECTIVES ®

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DTE Energy’s Willis Avenue 2010 that refl ected its continuing con- Station in Detroit. S&P cited cerns over refi nancing risk associated decreasing regulatory risk with about $20 billion in debt at Energy and improved credit metrics Future Holdings’ competitive subsidiary as reasons for upgrading Texas Competitive Electric Holdings the company’s rating. (TCEH). S&P lowered its corporate credit rating on both EFH and TCEH to CCC+ fl ows from regulated from B-, and it also made myriad ratings utility operations. Prior changes for the issuers’ specifi c debt to the acquisition, PPL securities. Consistent with other ratings generated more than half actions in the merchant sector, S&P its operating cash fl ows cited the reduced cash fl ow implications from unregulated opera- of lower natural gas prices and the roll- tions. S&P set a stable off of current hedges at TCEH beginning outlook on PPL and its in 2013. In maintaining its negative subsidiaries. The agency outlook, S&P stated that it could lower cited as the primary risk EFH’s corporate credit rating further if re- to PPL’s new rating the fi nancing risk rises, which could happen

Courtesy: Ren Farley chance that unregulated if natural gas prices in 2013 and later cash fl ows may lag S&P’s do not rise from current market expecta- “The suddenness of the improved regu- expectations due to weaker demand for tions. ◆ latory environment, even as the Michi- power in the PJM market. gan economy was spiraling into one of S&P took action in fourth quarter the deepest recessions ever, provides a level of confi dence that DTE’s ability to manage its regulatory risk is sustainable ALPHABETICAL INDEX TO ADVERTISERS AND SUPPLIERS over the longer term.” ■ Advertisement ■ Electric Utility Marketplace listing S&P also followed up on the negative outlook it set for Hawaiian Electric In- Company Page Company Page dustries (HEI) in May 2009. At that time, Aclara ...... 17, 73 Landis+Gyr ...... 25, 74 S&P said it expected the next two years American Wind Energy Association...... 68 Mears Group...... 78, 90 to be challenging for HEI’s electric utility subsidiaries because of Hawaii’s weak- Areva...... 47, 75 Oracle Corporation ...... 39, 70 ening economy. Acting in November Asplundh Tree Expert Company ...... 33, 79 Osmose...... 65, 79 2010, S&P downgraded HEI to BBB- from AT&T...... 68, 84 Pace Global...... C3, 72 BBB and cited an “aggressive” fi nancial Bechtel ...... 26, 75 Panda Power Funds ...... 69, 98 profi le at utility subsidiary Hawaiian Electric Company that is “unlikely to im- Black & Veatch ...... 13, 71 Pepco Holdings...... 59, 78 prove meaningfully over the next several Black & Veatch ...... 76 Pike Energy Solutions...... 69, 81 years.” S&P noted that while deferred Booz & Company ...... C2, 71 Platts...... 29, 72 taxes at HEI’s utilities had temporarily Capgemini...... 61, 73 Quanta Services ...... 5, 79 supported cash fl ows, weakened electric CenterPoint Energy ...... 77, 94 sales from the recession and energy RES Americas ...... 30, 76 conservation efforts had contributed to Cisco...... 41, 68 SAIC ...... 11, 69 weak performance. CN Utility Consulting ...... 80 Sargent & Lundy...... 1, 76 S&P upgraded PPL Corporation (PPL) Day & Zimmerman ECM ...... 62, 71 Sensus ...... 15, 74 to BBB+ from BBB in anticipation of the Elster...... 9, 73 Siemens Energy ...... 77, 93 closing of its acquisition of E.ON U.S. and its utility subsidiaries, Louisville Enspiria...... 43, 68 Silver Spring Networks ...... 66, 74 Gas & Electric and Kentucky Utilities, GE Energy ...... 77 SNL Energy...... 72, 89 for $7.625 billion. S&P expects that GeoDigital International...... 80, 91 Telogis ...... 2, 69 the combined company will achieve a GridWeek ...... 97 URS...... 77, 87 stronger credit profi le by generating at Henkels & McCoy...... 48, 78 least two-thirds of its operating cash Utilicon Solutions ...... 20, 80 Itron ...... C4, 74 Utility Risk Management Corporation . . . . .53, 70 Keller and Heckman LLP...... 19, 70 UtilX ...... 50, 79 Kema...... 7, 72 Wright Tree Service...... 16, 80

MAY / JUNE 2011 99 anotherperspective

he United States, like much NEW STANDARD We have all been impressed with of the world, is slowly re- the commitment of the workers at covering from an economic FOR NUCLEAR the Fukushima site. We know that the T downturn, and electric pow- ENERGY SAFETY workers at our sites are as committed er companies face signifi cant regula- to safe operations as workers any- tory and policy-driven uncertainties. where in the world. As we look at the By Marvin S. Fertel, For companies with nuclear energy lessons, we must be sure that we are president and CEO, Nuclear assets, the events at the Fukushima doing the right thing and that we’re Energy Institute Daiichi reactors in Japan are a stark doing it the right way. We must be sure reminder that nuclear energy is one that management attention and re- industry, bound together by a technol- This effort was started within a sources are focused on activities that ogy that is both remarkable and de- week of the earthquake and tsunami have the greatest value to safety. manding. Our commitment to safety that struck Fukushima Prefecture, Finally, we know that we must must be equally demanding, as should and it is being closely monitored by be transparent and credible in our our commitment to international co- an independent NRC review team. The communications with our key audi- operation and assistance. vast majority of the items identifi ed in ences—whether they are government The outstanding safety record of the industry’s initial 30-day review are leaders, customers, or neighbors near U.S. nuclear plants is a testament to our facilities. both the industry’s effectiveness in operating the plants and the Nuclear Meeting the Standard Regulatory Commission’s (NRC’s) ef- Even in the wake of international fectiveness in regulating them. We events, the expansion of nuclear en- are committed to review systemati- ergy in the United States continues cally the evolving lessons from Japan deliberately. Near-term development and incorporate them appropriately of advanced nuclear plants has not into activities across the industry. changed in the past year. We expect to And, where appropriate, the NRC will have four to eight new reactors online incorporate them into the regulatory in the 2016-20 timeframe. requirements. Also, it is essential for Still, progress on some license both nuclear safety and public trust applications has slowed in the past that we have credible, effective regula- couple of years, given the recession tors in every country that has com- and the drop in natural gas prices. mercial nuclear power programs. The events in Japan have added un- American nuclear power plants are certainty as well, but we do not expect well prepared and could withstand them to have a major impact on new signifi cant natural forces here in this nuclear plant licensing. The need for country. We’ll be even better prepared enhancements to existing programs low-carbon electricity from nuclear as we address the lessons learned or procedures: energy is as compelling as ever. from Japan. ■ requiring clarifi cation of workers’ It is important that these licensing responsibilities and improving train- activities continue without delay. We Insights ing opportunities; must learn the lessons from Fuku- As we incorporate those lessons, we ■ enhancing and diversifying storage shima. However, new plant develop- must proceed in a deliberate man- and placement of equipment; ment must continue in this country, ner. What insights can we draw at this ■ enhancing the capability to respond taking into account both the shorter- point? The fi rst thing we must do— to events simultaneously at all of a and longer-term lessons as they apply and are doing—is make sure that the site’s reactors; and to the industry. signifi cant improvements the industry ■ improved coordination of fi rst re- But today, the public wants to put in place to respond successfully to sponders and vendors. know that the nuclear industry’s ap- severe accidents at our sites will work As is our nature and practice, we proach to safety and preparedness as planned. These include everything will ensure full compliance with all embraces a simple concept: Expect from capabilities for coping with the NRC regulations and incorporate les- the unexpected and plan for it with loss of all power to the effi cacy of sons learned across the industry as multi-layered safety features. We will guidelines for managing severe events the fi rst step in a short-term and long- be held accountable for learning the and the equipment, procedures, and term review of enhancements that lessons from Japan and applying them training we’ve put in place at the sites may be made at our facilities in the accordingly. since 9/11. aftermath of the events in Japan. I know we can meet that standard. ◆

100 ELECTRIC PERSPECTIVES

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