WASHINGTON, D.C., Sept. 4, 2003 - Regulatory certainty for transmission siting and cost recovery is needed if America’s electrical grid is to be improved, the head of one of the nation’s largest utilities told the House Committee on Energy and Commerce in testimony today.

E. Linn Draper Jr., chairman, president and chief executive officer of American Electric Power (NYSE: AEP), also told the committee that communications between transmission grid operators must be improved and that the U.S. needs to resolve the continuing debate about regional transmission organizations.

Draper, who was among the witnesses testifying on the second day of a two-day full committee hearing titled "Blackout 2003: How Did It Happen and Why?", didn’t speculate on the cause of the Aug. 14 blackout, preferring to wait for the results of the investigation by the Department of Energy and the North American Electric Reliability Council (NERC). He focused his testimony on what is known - noting that the blackout stopped at the northern edge of AEP’s transmission grid - and on policy needs.

“The AEP system held together - a point of pride for us,” Draper said. “Our protective systems performed automatically as they were designed to perform, our operators performed and communicated as they should and our load and generation remained in balance throughout the day.”

AEP owns the nation’s largest transmission grid with 39,000 miles of transmission line in 11 states. AEP’s 2,100 miles of extremely high voltage 765-kilovolt (kV) transmission lines is considered by many to be the backbone of the Eastern Interconnection.

Had AEP’s automated controls not responded as they did, equipment could have been damaged and kept out of service for an extended time, “further burdening other lines that are, as we all know, already stressed,” Draper said. He also noted that the action by the automated controls to isolate AEP’s transmission system from the blackout likely “avoided cascading outages across the AEP system and probably far beyond, given the central role of AEP’s transmission grid in the Eastern Interconnection.”

“AEP’s system was not the only one to respond this way,” Draper said. “The transmission system serving Consumers Power’s load, among others, also isolated from the problem during the event, and their system held. I don’t know why all systems didn’t perform in a similar manner.”

Draper noted the dramatic - and rapid - change in use of the nation’s transmission grid.

“The electrical grid in this country was designed in large part to get a local utility’s generation to its customers - not to carry thousands of cross-country and regional transactions, as the grid is now called on to do,” Draper said. “In the five-year period during which wholesale electric competition first gained momentum, the number of wholesale transactions in the U.S. went from 25,000 to 2 million - an 80-fold increase.

“Needless to say, transmission infrastructure expansion - which is an expensive and time-consuming prospect at best - did not increase 80-fold in that time frame. In fact, very little expansion has taken place. Clearly, there is a need to strengthen the grid through greater investments - new equipment, new lines and new technologies - to support the grid for the manner in which it is used today.”

Draper outlined factors that would hasten grid improvement:

• Creating regulatory certainty for transmission siting and cost recovery.

• Improving coordination and communication among entities that oversee the grid.

• Resolving the debate over the role of regional transmission organizations (RTOs).

• Building consensus on an appropriate use of the grid.

• Enforcing mandatory reliability standards.

Regulatory certainty
“If we need to build new transmission facilities today, we must navigate through multiple state and federal regulators to get that done,” Draper said. “Processes vary in every state. For permits and siting, for instance, we must get approvals from multiple state regulators, and probably multiple federal regulators as well.”

Draper noted that AEP received final clearance this year for the construction of a 765-kV transmission line in West Virginia and Virginia, 13 years and $50 million after the line was proposed in 1990. “While we respect the interests of all jurisdictions in siting decisions, we’ll never get where we need to be if it takes 13 years to get permission to build a power line,” Draper said.

Recovering costs for a transmission project requires a similar regulatory trek.

“For every dollar we spend - and the National Transmission Grid Study quoted a price of $1.8 million per mile for a new 765-kV line - we must go back to those multiple state and federal regulators to receive full recovery,” Draper said. “In this context, it is difficult to understand recent actions by the Federal Energy Regulatory Commission (FERC) to eliminate transmission revenues from third party or wholesale customers. If what FERC is proposing comes to pass, power can move from St. Louis to New Jersey for the same fee as moving power from Pennsylvania to New Jersey. Such scenarios not only jeopardize existing investments, they create a disincentive for future investments since full and fair cost recovery is even more difficult.”

Coordination and communication
Continuous improvements in coordination among various grid operators are necessary to ensure coordinated planning and operations, and quick emergency response, Draper said.

“The reality is that we don’t have one single transmission grid owner and operator throughout the country, nor would it be feasible or wise to do so,” Draper said. “It’s a given that there will always be seams - or boundaries - between various grid operators. … Those who are using this event to promote their desire for a single RTO administering a spot market are not only missing the boat, but misleading you and others into thinking that simply installing such an RTO would answer the reliability issues that have been raised by this event.”

Role of RTO
The ongoing debate over the role of RTOs is hindering progress toward an environment conducive to transmission investment, Draper said.

AEP is at the center of the current debate “largely because of the quality and scope of our system, which is at the crossroads of many markets,” Draper said. “That’s one big reason we’re coveted by market stakeholders in their attempts to expand.”

Energy policies should balance both generation and transmission, Draper said. Transmission owners must receive sufficient revenues to assure adequate investment. Parties that benefit from competitive markets should bear the costs. Those that use the transmission system to receive those benefits should pay for it.

“While some have even suggested splitting up the AEP system (between RTOs), that’s unacceptable and counter-productive,” Draper said. “AEP’s system has been touted as the backbone of the Eastern Interconnect. Splitting it apart amidst efforts to increase the nation’s electric reliability flies in the face of reason.”

Appropriate use of the grid
“If we focus solely on competitive markets and economics, serious implications for reliability and security arise,” Draper said. “We need a balance, but that balance must be tipped toward reliability - the fundamental foundation of the transmission grid. Without reliability, we have no market to structure.”

Draper also noted that the benefits of competitive markets should not only flow to generation owners or electricity users, as seems to be the present policy, but also to the transmission owners “who need to receive a sufficient share of benefits to assure investment in the transmission infrastructure necessary to support competitive markets.”

Reliability standards
Draper recommended approving NERC as the enforcement entity for mandatory reliability standards.

“Our grid is interconnected,” Draper said. “We must all play by the same rules, and we must have a knowledgeable independent entity - such as NERC - empowered to enforce such standards.”

Read the entire text of Draper´s testimony.

American Electric Power owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets and is the largest electricity generator in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s 11-state electricity transmission and distribution grid. The company is based in Columbus, Ohio.