Power Lines Blog

From Alex & Gandalf: public power battle wisdom

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I wanted to share a transcript of my address to members at the 2014 APPA National Conference in Denver on June 16, 2014. You can also view a video of my presentation.

Welcome to Denver, and the American Public Power Association’s 2014 National Conference.

As most of you probably know by now, I took over as President and CEO of APPA on April 1. I think handing the leadership baton to me on April Fool’s Day was Mark Crisson’s last laugh. And only ten days later, one of APPA’s founding fathers, Alex Radin, passed away. He was APPA’s CEO for 35 years.

The timing of all this has gotten me thinking. I only met Alex a few times, most notably when he came to speak at an APPA staff luncheon in 2011 about his years at APPA. But when he passed right after I became CEO, I decided to re-read his memoir, Public Power, Private Life. I first read it when I joined APPA in 2004. A copy was put in my hands on my first day. I was told to read it, which I dutifully did. But now, ten years on and having assumed the very position he held for so long, it meant much more to me the second time around. I was struck by how similar the policy battles we are fighting now are to the ones he fought decades ago. And by how relevant the example of his leadership is to the challenges that confront us now. I look at the array of tough issues facing APPA and ask myself “What would Alex do?”

I say this in part because in the months since my promotion was announced, many have congratulated me, and at the very same time given me their condolences. A typical response has been: “boy you are taking the job at a very tough time—good luck because you are going to need it.”

These sentiments reminded me of the wise advice of one of my all-time management role models—Gandalf the Grey, the wise wizard from The Lord of the Rings. He observed that it is not for us to decide what times we get to live in. Rather, “[a]ll we have to decide is what to do with the time that is given to us.”

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I’m sure that Alex sometimes wished he did not have to deal with the issues that were given to him during his 35 years as APPA’s leader. But he did not shrink from the task—he made the most of the times that were given to him. And in so doing, he left you and me with an incredible legacy.

• The legacy of public power—customer-owned and not-for-profit.

• The legacy of a solid infrastructure and business model for public power.

• The legacy of strong and principled leadership for public power through a well-respected trade association—APPA.

As a young boy growing up in Chattanooga during the Great Depression, Alex witnessed the birth of the Tennessee Valley Authority and the positive impact public power had on his hometown. As an adult, he became THE face of public power in Washington for more than three decades. Alex’s experiences as a young man influenced the positions he would later take as a passionate consumer spokesman in critical electricity policy debates. Through some of the toughest battles on the energy and environmental fronts, Alex stood up for the rights of the people—including their right to choose not-for-profit public power systems to be their electricity providers. He believed—as I do—in public power as a force for good in the electric utility industry.

Public power has survived and thrived due in good part to Alex’s untiring advocacy. He worked with Congress and eight presidential administrations to preserve competition and put consumers first. Alex has left us with the legacy of a simple yet exceptional business model for public power. Do what is best for your customers. Do what is right, and be responsible stewards of both the customers’ money and the environment. Listen to your community and give back to it. It’s the business model we need to stick to, even while we reboot it for the changes that are coming.

Right now we are facing substantial challenges, including threats to the federal power system, wholesale market dysfunction, distributed generation, climate change, and grid security. But with every challenge comes an opportunity, if we can identify and pursue it. And as we take these challenges on, we should be guided, as Alex was, by what is right for those we serve. By what will keep the lights on, the rates reasonable, and the environment protected.

Thanks to Alex and our public power forebears, we have a tremendous infrastructure. Alex joined APPA when federal water power development was a hot issue. He led the fight to secure preferential rights for public power utilities and electric cooperatives to that low-cost power, so they could pass it on at cost to their customers. In his book, Alex cautioned us, “At some time in the future, Congress undoubtedly will be confronted with plans to sell the federal power systems or at the very least reorganize them. Supporters… therefore should be prepared to support the continued existence of this program while examining possible structural changes in the power marketing administrations.”

And boy was he prophetic. We all remember the March 2012 Chu Memo proposing to revamp the power marketing administrations and the firestorm it produced—which thankfully has largely subsided. But now the Obama administration for the second year in a row has raised the specter of divesting TVA. The White House in 2013 raised in its proposed 2014 budget the issue of whether to privatize TVA. And in the recently released proposed budget for 2015, the administration called for Congress to explore options that include a transfer of ownership of TVA to state or local stakeholders. This could be state and local governments, utilities, or electric cooperatives.

The preservation of TVA—an organization that works well, not only marketing power on a fully compensated basis, but also providing economic development, flood control and recreation services throughout the Tennessee Valley—should frankly be a no-brainer. And, as the economic analysis TVA recently released shows, there is no benefit to either TVA’s customers or the federal government in such a sale. It is frustrating to have to fight these same battles again and again. But if the future of TVA is going to be put on the table, we need to be there to make sure that the interests of electric customers in the Valley are fully protected. And we will be, as Alex advised us to do.

Another issue that consumed much of Alex’s attention over the years was the federal regulation of wholesale rates that IOUs charge public power utilities for their electric power. Alex rightly pointed out in his book that the vitality of this regulation would ebb and flow. In some parts of the country, we are seeing a real ebb tide right now in the effectiveness of wholesale rate regulation, even while the Federal Energy Regulatory Commission asserts jurisdiction over more and more aspects of our industry. Centralized markets run by Regional Transmission Organizations, and particularly mandatory capacity markets, are not adequate to support needed new generation resources. They especially can’t support new facilities that may be needed to replace older, less efficient fossil fuel units that will likely retire due to EPA regulations. Incumbent generators are seeking new market rules to prop up capacity prices, but there is no guarantee that simply throwing more money at the problem will get us where we need to go.

FERC held a “technical conference”—which is much like a legislative hearing-—on April 1 to examine the performance of RTO markets during the Polar Vortex. That conference was revealing. Under stress, RTO regions showed substantial weaknesses in the existing generation fleet and in the interface between natural gas and electric markets. Some of the generation units that PJM had to rely upon to maintain service are already earmarked for retirement. And at a recent Department of Energy-sponsored public meeting on infrastructure constraints in New England, many of the presenters, including our own John Bilda of Norwich, Connecticut, said ISO New England’s centrally operated markets are unable to address reliability problems, and even cause some of the problems. Most recently, the PJM Market Monitor has said that he thinks some power suppliers took advantage of the Polar Vortex to price gouge PJM and the consumers that PJM supplies.

Nonetheless, we are seeing possible movement towards a capacity market in the Southwest Power Pool, and development of an Energy Imbalance Market in the West. Public power has to be engaged in these efforts, to advocate for policies that minimize harm to consumers.

We have seen far too much “faith-based” regulation in wholesale electric power markets in this new century. It’s time for FERC to think outside the box of the RTO-operated mandatory capacity markets. We need to explore solutions that significantly overhaul the current electric market structure. APPA has long been a critic of these markets, but we have also proposed solutions, in an attempt to foster constructive debate. Bilateral contracts for generation and demand side resources should be supported, not penalized, and public power systems should be allowed to self-supply their own loads with their own resources if that is the local choice they make for their customers.

While advocating for more effective wholesale market structures and regulation has certainly been frustrating, Alex pointed out that the effectiveness of regulation of electricity “will depend on the amount of pressure exercised by those affected by regulation, such as local public power utilities and consumer organizations.”  His words are an important reminder to us that we have to keep the pressure up and stay engaged. In the words of a wise wag, “if you aren’t at lunch, you are lunch.”

Another piece of Alex’s legacy is the formation of our joint action agencies. In the 1950s, power planners promoted the concept of what they called “giant power” to leverage economies of scale in generation and transmission. Small municipal utilities could not individually finance and build such large units. So public power, under Alex’s leadership, formed joint action agencies to take advantage of economies of scale. About 65 joint action agencies now act on behalf of individual systems in wholesale power supply and transmission markets, and they have done a very good job.

But today, many joint action agencies have expanded their scope of activities well beyond wholesale power supply and transmission services. They are assisting their members in diversifying their resource portfolios to add renewables, demand response, and energy efficiency—all sorts of distributed energy resources. We will need to do much more of this as we respond to the changes in our industry. And we will need to respond to and incorporate new technologies into all parts of our operations. Technology, especially at the edges of our distribution systems where we interconnect with retail customers, is rapidly evolving, and we need to keep up. While central station generation is and will continue to be an important part of our electric grid, we need to broaden our thinking and incorporate new kinds of resources, some of which will be customer-sourced.

Most of us lived through the era of “retail access,” when Enron pushed for “customer choice” and many states responded by passing retail choice regimes. Now, we are facing a new form of customer choice in the form of major technological changes at the edges of the distribution grid where utilities interconnect with customers. More and more customers are interested in self-generation and reducing their electric usage through new technologies—like their own smart phones, solar panels and batteries. While some of this is driven by tax, rate and other subsidies, technology is going to continue to advance, and we will see more distributed generation, storage applications and gadgets yet to be unveiled.

We need to understand how this will impact us operationally and financially, and we need to work with our customers to find ways to accommodate their desires. In fact, we should try to anticipate them. We are used to being the exclusive power providers to our retail customers, but in the future, we may find many of them want to supply at least part of their own power. We need to figure out how to make that work for both us and them.

Bill Gates once said: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”  And you should not be lulled into inaction. You should be evaluating your operations and rate structures now to ensure that we are ready for this new type of customer. We have the difficult task of balancing the needs of three constituencies: customers who want these technologies, customers who don’t want them or can’t install them, and those who have lent us money to provide utility service. We need to get this right, and we need to get on it now. Fortunately, as Alex remarked in his book, public power utilities are favorably positioned to promote innovations because they are often smaller and new ideas can flow more easily to the top channels of command.

But the biggest regulatory challenge we face right now is how to comply with the slate of pending and new EPA regulations. The Mercury and Air Toxics Standard, Section 316(b) cooling water regulations, coal ash regulation, reinstatement of the Cross State Air Pollution Rule—all are upon us. And EPA’s proposals for reducing carbon dioxide from new and existing fossil fueled power plants are “on deck.”

Once again, Alex’s example is instructive. In an interview he gave to the National Journal at the time he retired, he said that, given the controversy surrounding the association’s positions, “I tried to be as honest and objective as possible, refraining from invective. I tried to deal with issues on the facts and on reason, rather than emotionalism.”

I firmly believe that is what we need to do with the pending CO2 rulemakings. As publicly owned, not-for-profit and consumer-owned electric utilities, we are uniquely positioned to try to find the reasonable middle ground on the environmental issues facing our industry. As EPA wrestles with its CO2 regulations, the regulatory paths it may follow worry me in different ways. Too much action too soon would lead to an inevitable negative impact on the economy and a possible backlash that will set the industry and the nation back in dealing with these issues. Too little action carries its own set of adverse outcomes.

We have before us two cautionary examples that illustrate too little action and too much action: China and Germany. In China, a policy of full-speed-ahead development and lax environmental protection has covered the land and air with pollution that makes living there a struggle. Thankfully we have sufficient protections in place to avoid the thicket of smog that covers parts of China. The Chinese example, though extreme, highlights what happens when government sacrifices environmental interests to support economic development.

On the other hand, Germany took an “all-in” approach to renewables, especially rooftop solar PV, through feed-in tariffs that it has since learned were too rich. By 2013, Germany’s average retail electric prices were the highest in Europe. The average monthly electric bill for a three-person household was twice the average bill in 1998, while the average residential retail rate was nearly 40 U.S. cents per kilowatt hour. A large portion of the price of energy is due to the renewable energy subsidy. German industrial companies that use a lot of electricity are being given more and more tax breaks to mitigate its high cost. And Germany’s decision to phase out the use of nuclear power means it is now actually increasing its reliance on coal-fired power plants and importing coal from the U.S. to burn in those plants—a truly perverse turn of events.

These two realities from very different parts of the globe point out what could happen if we get this wrong.

So how do we find a “middle path” policy on CO2 emissions? Many public power utilities depend on fossil-fired generation units for their power supply. These utilities need to be able to continue to use those units for their remaining useful life. This is especially true for newer, more efficient units and those that are now being upgraded and retrofitted to deal with current EPA regulations. Current and anticipated EPA regulations both have to be considered comprehensively. Otherwise we run the risk of high electricity rates for customers, undue revenue losses for utilities, possible reliability concerns and other adverse economic impacts that could hamper or even cripple our economy. This could cause an unintended backlash that would help no one.

All of us, including—in its heart of hearts, EPA—know that using Section 111(d) of the Clean Air Act to attempt to regulate CO2 emissions is a very suboptimal way to proceed as a purely legal matter. EPA is effectively “retrofitting” the law to try to deal with an issue it was never intended to address. The better way to deal with greenhouse gases would be for Congress to enact legislation that is specifically tailored for this challenge. Such legislation should comport with the principles we have long espoused. Legislation should be economy-wide, consider the financial impacts on consumers and the affordability of electricity, recognize regional differences, allow credit for early action, and avoid overreliance on a single fuel.

But Congress shows no signs of acting, and EPA clearly intends to do so. So, hearkening back to Gandalf’s advice, we must deal with the times we are given. APPA will participate actively and constructively in the EPA’s rulemakings. We will do our best to protect our members’ interests and support sound public policies, both before the agency and, if need be, in the inevitable court appeals that will follow. We will advocate for reasonable, middle-ground solutions to address climate change that attempt to avoid the kinds of outcomes we have seen in Germany and China.

We should also follow Alex’s advice on how to deal with controversial issues: we must be as honest and objective as we possibly can, refraining from invective, and deal in facts and reason, rather than emotion, politics, or philosophy.

And as we do so, we should recall our history. In 1984, on Alex’s watch, APPA became the first electric utility association to call for enactment of federal legislation to address acid rain. This move, while controversial at the time, gave us an opportunity to advocate for pollution control measures that would not create an unreasonable cost burden for electricity consumers. No doubt taking a fact-based, middle ground approach to the CO2 rulemakings will bring with it some arrows—probably from both sides. Politics have gotten more polarized since Alex’s time, and it will be harder to find consensus. But we need to remember we are in this for the duration, not just for the next year or two.

Finally, I want to discuss an issue that Alex luckily did not have to deal with—grid security. This issue reminds me of the old joke—you are not paranoid if they really are out to get you. And these days, amateur hackers, outright criminals, and even nation-states are indeed out to get us and our cyber assets. Physical assets have also been viciously attacked, and more detailed information is being shared about all this in the media than seems wise. Public power utilities are also being asked to respond frequently to severe weather events that impact electric service, at a time when the public has less and less tolerance for extended outages.

Public power, and the electric utility industry as a whole, has responded to these grid security challenges. The electric utility sector, including nuclear plants, is the only critical infrastructure sector subject to mandatory, enforceable cybersecurity standards. We are now on Version 5 of the CIP standards, and are still making changes to them. In the wake of the Metcalf substation incident, FERC in March instructed the North American Electric Reliability Corporation to develop standards for physical security at critical facilities within 90 days. NERC actually turned in its homework assignment early, taking fewer than 90 days to complete a standard to present to FERC. APPA will be actively involved in the FERC proceeding to consider the new standard.

The Electricity Subsector Coordinating Council, a CEO level group composed of IOU, public power, co-op and trade association executives, is meeting periodically with high level officials from Department of Energy, Homeland Security and the White House to address grid security issues. The ESCC is working on increased information sharing between government and industry, and dissemination of tools and technologies to address system threats.

And in the wake of Superstorm Sandy, APPA formed a Mutual Aid Working Group. This group has made great strides in upping public power’s game when it comes to providing mutual aid to restore service after storms and natural disasters.

This is not to say that we have our grid security problems licked—far from it. The nature and sophistication of the attacks and threats on our systems are increasing, and we will be hard pressed to keep up. All public power systems, large and small, should be assessing your own cyber and physical security posture, determining what gaps you have and how you can fill them. It has been said that the price of freedom is eternal vigilance-—now it seems that same price has to be paid just to maintain reliable electric service. And if that is what it takes, that is what we must do.

In 2009, TVPPA News interviewed Alex and asked him “what sort of future do you see for public power?” His answer: “I see a great future for public power, provided that public power acknowledges the vast changes that must be made in the way electricity is produced and used, and demonstrates leadership and innovation in adapting to such changes.”  We need to have a vision that spans not just the next two or even the next ten years, but beyond, to future generations of public power customers. We need to continue to diversify our generation and demand side resources to ensure a sustainable future—sustainable in both the environmental and the economic senses of that word. We need to plant seeds, as Alex did, for the long term.

Doing this will take intestinal fortitude—and even some [c]hutzpah, as Alex’s own forebears might have said. But we in public power have a strong history of taking on tough issues and punching above our weight. While it is rare in Washington for any one voice or constituency to win the day, we can influence the debate and the outcome if we are unified, and believe in what we are doing for the customers we serve. That alone will take us a long way.

So I want to close on an upbeat note. We in public power have much to be proud of. We tend to hide our light under a bushel. We tell our customers about ourselves and all we do for them one week a year—in October, during Public Power Week. It is easy to concentrate only on the big challenges we face, and forget how much we have accomplished and the good works we do in our communities every day. Alex led a long and full life, and handed on to us a great legacy. We should use this time together to honor him, celebrate the good we do in our communities, and recommit ourselves to our mission as we deal with these big challenges together.

Thank you for your time and attention, and welcome again to APPA’s National Conference. Take advantage of the educational sessions and the opportunity to meet with your peers from around the country. And please feel free to catch me if you have thoughts on the challenges we face—I will be here for the duration!

Sue Kelly

Sue Kelly

President and CEO

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