Sept. 4, 2003 -- In a letter to the Committee on Energy and Commerce U.S. House of Representatives, Nuclear Energy Institute (NEI) president and CEO Joe F. Colvin shared the organization's views on the reliability of the nation's electric infrastructure following the Aug. 14 blackout in the Northeast.

This letter was in response to a request for the Nuclear Energy Institute's views on a number of issues associated with the reliability of our nation's infrastructure for generating and transmitting electricity.

The committee had asked for information on the causes of the August 14th blackout in the Northeast, and why the disruption cascaded across multiple utility systems. These specific questions are best addressed by others, NEI said.

However, your letter also requested NEI's perspective on key trends in the electric power sector, specifically:

"What efforts have been taken to secure the supply, transmission and distribution of electricity since the blackouts of 1965 and 1977 in the Northeast. ..?"

and...

"How can the nation's electrical system. ..be improved to prevent a recurrence of the events of August 14th...?"

The history of the U .S. electric power industry demonstrates that the public interest in reliable electricity at reasonable cost is best-served by a system that is founded on fuel and technology diversity, and that provides a comfortable margin of reserve generating and transmission capacity, NEI answered. A diverse portfolio of fuels and technologies provides flexibility and the ability to balance economic and environmental considerations. Sufficient reserves of generating and transmission capacity allows us to manage peak demands with minimum disruption.

One of the key trends in U.S. electricity supply since the two major blackouts of 1965 and 1977 was the significant growth in nuclear electric generating capacity. Thanks in part to the expansion of nuclear energy , our nation was able to diversify its sources of electricity supply, and thereby strengthen the reliability of the electricity system.

In the early 1970s, at the time of the 1973-74 oil embargo, nuclear power plants represented approximately five percent of U.S. electricity supply; oil-fired power plants provided approximately 20 percent of U.S. electricity. Today, nuclear energy represents slightly more than 20 percent of U.S. electricity supply; oil, less than five percent. The expansion of nuclear energy in the 1970s and 1980s was a key factor in achieving the fuel and technology diversity that is the bedrock strength of the U.S. electric supply system, NEI said. This fuel and technology diversity reduces the electric system's vulnerability to supply disruptions and price increases.

The growth in nuclear energy production in the recent past is particularly important. Thanks to improved performance of nuclear power plant operations, U.S. nuclear power plants increased their production from 577 billion kilowatt- hours in 1990 to 780 billion kilowatt-hours in 2002. This increase is equivalent to the output of 25 new 1,000-megawatt power plants. More important, this additional output from existing nuclear plants satisfied fully one-quarter of the increase in U .8. electricity demand during that time period.

This substantial increase in productivity from nuclear power plants has succeeded in:

• Meeting a substantial share of the new electricity supply required by a growing economy;
• Providing protection from the damaging effects of price increases that would have occurred if that new electricity demand had been produced by power plants using fuels that are subject to frequent price volatility (because nuclear plant operating costs are stable and not subject to the volatility that characterizes other fuels); and
• Preserving air quality by meeting electricity demand with an emission-free technology, thereby avoiding the air pollution associated with burning of fossil fuels.

These benefits, the benefits of fuel and technology diversity, and the reliability of the U.S. electricity supply system are at serious risk, however. The August 14th blackout in the Northeast was a symptom of a much larger, more deeply rooted set of problems.

Looking forward, NEI said it believes that lack of investment in our nation's critical energy and electric power infrastructure is a major problem. The country is not investing enough in new baseload coal and nuclear plants and it is not investing enough in new electricity transmission.

In the area of electricity generation, NEI's assessment shows that approximately 183,000 megawatts of electric generating capacity in the United States is 30-40 years old; approximately 104,000 megawatts is 40-50 years old. That represents 35 percent of our 800,000 megawatts of installed capacity, and is clear evidence that we are under-investing-relying too much on old, less efficient, more polluting generating capacity and not investing in new, more efficient and cleaner facilities.

In the area of electricity transmission, investment has fallen by $115 million per year for the last 25 years, and transmission investment in 1999 was less than one- half of the level 20 years earlier-despite dramatic increases in the volumes of electricity being moved to market. One analysis (Transmission Planning for a Restructuring U.S. Electricity Industry, Edison Electric Institute, June 2001) shows that simply maintaining transmission adequacy at its current levels (which are widely acknowledged to be inadequate) would require a capital investment of $56 billion by 2010, equal to the book value of the existing transmission system.

Given these facts, the chief purpose of energy policy legislation must be to provide broad-based stimulus for investment in new energy infrastructure, including new nuclear plant construction, deployment of clean coal technologies, new electricity transmission and other energy sources.

Passage of legislation that provides such investment stimulus is essential if we hope to preserve the diversity of fuels and technologies that represent the core strength of our energy supply and delivery system. That stimulus can take the form of more appropriate depreciation periods, investment tax credits and production tax credits, loans or loan guarantees, or research and development support, depending on the conditions and requirements of each energy source.

NEI believes that more appropriate tax treatment of energy investment must be a central feature of energy policy legislation. As a general rule, the electric industry suffers under depreciation treatment that may have been appropriate for regulated companies with stable long-term cash flows and reasonable assurance of investment recovery through rates.

But 15- to 20-year depreciation periods for investments in generation and transmission assets are unacceptable for an industry operating in a competitive commodity market, where cash flows are highly volatile and recovery of investment by no means assured. Current depreciation treatment acts like a brake on new capital investment.

Energy policy legislation should also address another significant factor that tends to inhibit capital investment: Regulatory uncertainty. Regulatory uncertainty has a chilling effect on capital formation and capital investment.

In the nuclear energy industry, uncertainty and perceived risks over the licensing process for new nuclear power plants tend to inhibit capital investment in new nuclear facilities.

In the coal industry, uncertainty over environmental requirements and uncertainty over future limitations on criteria pollutants and carbon dioxide tends to have a chilling effect on capital investment in new coal-fired generating capacity or in upgrading existing capacity. Public policy must recognize the impact of these uncertainties and develop mechanisms to contain them.

In the committee's August 20th letter to NEI, the committee highlights the importance of "ensuring that the events of August 14th are never repeated." Ensuring that such major disruptions do not recur demands that we recognize the risks and uncertainties in our economic and regulatory systems, and also recognize that it is the business of public policy to establish mechanisms to contain those risks and uncertainties.

In the electricity sector, the last several years demonstrate what happens when the markets are left entirely to their own devices without necessary policy and planning guidance. For the last several years, approximately 90 percent of the new generating capacity entering service is gas-fired solely because gas-fired capacity presents the lowest investment risk.

However, as trends in gas prices earlier this year demonstrate, sole reliance on gas for new generating capacity can expose consumers and the economy to punishing price volatility. Excessive reliance on natural gas for power generation also increases prices and limits the supply available to other industries that depend on natural gas as a feedstock.

By themselves, markets have no way of valuing energy security, or fuel and technology diversity, or other legitimate public policy "goods." The number of new coal-fired or nuclear plants that have entered service over the last decade is trivial, even though these plants provide the greatest measure of price stability going forward.

If we do not employ policy mechanisms and investment stimulus to preserve fuel diversity, we run the risk of placing demands on certain fuels that they may not be able to meet. We must address electricity supply and transmission as an integrated system: More coal and nuclear electricity can reduce supply and price pressure on natural gas. More electricity from nuclear plants and renewable sources can moderate environmental pressures and compliance costs that would otherwise be imposed on coal-fired plants.

More information can be found at http://www.nei.org.