EnergyBiz JulAug2012

PAYING NEW LEADERS

VOLUME 9 // ISSUE 4 JULY 12 // AUGUST 12 energybizmag.com

PEOPLE // ISSUES // STRATEGY // TECHNOLOGY

ºº ºº ºº ºº ºº ºº

HIGH-RISES HOSPITALS BRAZIL BAGHDAD DESERT A GLOBAL RACE

SMART GRID, SMART CITIES

BUILDING SECURITY CHAT WITH GOOGLE’S RICK NEEDHAM

AN E N E RGY C E NTR AL PU B LIC ATION

GETTING FOCUSED ON CUSTOMERS

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Education • Market Intelligence • Solar Strategy

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JULY/AUGUST 2012

38

8

16

41

Features

Departments

16

4

Smart World The smart grid is part of a sweeping change in the way the world’s leading cities take care of their citizens. We look at the role of energy innovation in a revolution in urban management.

16 Smart Grid, Smart Cities 20 Smart High-Rises 24 Smart Baghdad 21 Smart Hospitals 25 Smart Desert 22 Smart Brazil 26 A Global Race

28 Harnessing Disruption

Utility executives focus on how to grow their enterprise in fast-changing times at the 2012 EnergyBiz Leadership Forum.

Read our coverage of event highlights:

32 Getting Strategic // Six leaders and their view of the right strategies for the future.

36 Farewell // John Rowe’s parting comments.

O U R TA K E

Smart World Perspective

6 Letters BUSINESS EDGE

8 Paying New Leaders 12 What It Takes 13 Building Gas 14 Orchestrating the Revolution T E C H N O LO GY F R O N T I E R

41 Building Up Security 42 New Approaches to Grid Defense 43 Operating Safely 45 Pumping Up Pump Storage 46 Batteries Included 47 Storage Plays Pivotal Role INTRODUCING

CUSTOMER CARE

38 Getting Focused on Customers

Utilities are reaching out to their customers more than ever, armed with powerful new insights into energy-user behavior and robust new communications tools.

48 Google Energy/Rick Needham METRICS

52 Good Utility Citizens/ Price Trumps All LEGAL ARENA

53 Solving Dodd-Frank Vol. 9, No. 4. Copyright 2012 by Energy Central. All rights reserved. Permission to reprint or quote excerpts granted by written request only.

EnergyBiz (ISSN 1554-0073 ) is published bimonthly by Energy Central, 2821 S. Parker Road, Suite 1105, Aurora, CO 80014. Periodical postage paid at Aurora, Colo., and additional mailing offices. Subscriptions are available by request. POSTMASTER: Send address changes to EnergyBiz, 2821 S. Parker Road, Suite 1105, Aurora, CO 80014. Customer service: (303) 782-5510. For change of address include old address as well as new address with both ZIP codes. Allow four to six weeks for change of address to become effective. Please include current mailing label when writing about your subscription.

2 E N E RGYB I Z July/August 2012

54 Streamlining Nuclear Regs F I N A L TA K E

56 The Navy SEAL Approach

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» OUR TAKE Smart World Perspective MORE THAN A COLD BEER SMART GRID THIS, smart grid that. One leading industry executive tells me that no one knows what precisely it is and that sharply limits its usefulness in business strategizing. He said that for some, it is merely synonymous with smart meters.

In addition, that executive said, many in the power industry have used smart grid as a generalized platform to overpromise a host of services that would transform the lives of energy users in marvelous ways.

That has not happened. Dick Kelly, the former CEO of Xcel Energy, once observed that most people just want their beer cold and don’t care about what it takes behind the scenes to keep their refrigerators chilled.

Utilities now focus on smart grid as the software and hardware that are enabling them to run their power systems more efficiently and gather detailed information about their infrastructure and customers’ energy use. The new buzzword is analytics — the purposeful mining of that information mountain to cut costs, boost profits and forge a better relationship with energy users.

Utilities’ smart grid play has been largely For industry insights — inward looking, zeroing and my blog — visit in on their own infrawww.energybiz.com. structure and sales to its customers. It is becoming increasingly clear, however, that we have just been experiencing the early stages of a much more significant upheaval in our energy world.

My first glimpse of the revolution came in a recent front-page New York Times article that reported on the smart cities program in Rio de Janeiro. Smart technology there is simultaneously monitoring electricity, water and gas services; along with weather, crime, fires, traffic and other services and conditions of urban life. In fact, a new operation center knits together data from 30 agencies. The goal is to better understand — and manage — modern living in all its complexity.

In this issue, we closely follow the smart cities movement and begin to sketch in some of its profound implications. We are very pleased to carry a guest opinion by Guru Banavar of IBM, which is helping to lead the Rio effort.

4 E N E RGYB I Z July/August 2012

Photo by TZENPHOTOGRAPHY

Arthur Kressner, the former director of research and development at New York’s Con Edison, teamed up with Roger Anderson of Columbia University’s Center for Computational Learning Systems and John Gilbert of Rudin Management to explore how new energy technology can transform the way in which high-rises can be powered.

We take a look at how that technology will radically transform how energy is extracted in a desert environment — and how energy is provided in war-torn Baghdad. Although one of the most devastated cities in the world, it is benefitting from embracing new energy and urban management technologies.

PSE&G in New Jersey is also working hard to get smart grid to work its magic in a hospital setting.

Smart grid and analytics are important and transformative. But an entirely new way of powering our lives and businesses goes well beyond how energy is generated, transmitted and distributed, or how a clever device slapped on the side of a residence or factory monitors energy use. A new urban reality is emerging in the 21st century and it will take smart grid to an entirely new, breathtaking level.

Martin Rosenberg, Editor-in-Chief editor@energybiz.com

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» LETTERS To contribute to the Letters column, please email your submission to editor@energybiz.com.

Provide your name, address and daytime phone number.

Letters may be edited for style and space.

The Danish government recently stepped up its green energy targets in a historic new energy agreement, stating that Denmark will double its energy consumption based on wind power by 2020.

Denmark has a long tradition for exploiting wind power and is today a world leader in the field – 90 percent of the world’s offshore wind turbines are either produced in Denmark A Model or have Danish-devel- Peevey: for the NAtioN oped foundations Co-oPs rise to New erA and components.

Sen. Dorgan’S energy THriller

successful: marketing solar energy to the end user. Delta Market Research has released data that, when the industry looks in on itself, reveals a lack of comprehension and coordination. Growth of the industry will depend not on tech upgrades or government subsidies but airing what resonates with the end users.

Kevin Rosenbaum Delta Market Research Hatboro, Pa.

I very much appreciated being a part of the 2012 EnergyBiz Leadership Forum. I updated my knowledge of the energy sector and enjoyed meeting a number of delegates. I greatly appreciated the opportunity to catch up with Dr. Ray Orbach, who was on your program.

Volume 9 // issue 3 may 12 // June 12 energybizmag.com

people // issues // strategy // technology

THe Cap Pioneering energy efficiency The energyBiz LeadershiP forum 2012 KiTe award winners

Global companies like Vestas, Siemens Wind Power, Suzlon and Envision Energy all have R&D activities in Denmark.

º thomas F. Farrell ii º John W. roWe º chesapeake energy

Texas research Power

º chat With raymond l. orbach

an e n e rgy c e nTr aL Pu B Lic aTion

The new energy agreement adopted by the Danish government means that by 2020, no less than half of Denmark’s electricity consumption will come from wind power and 35 percent of the total energy will come from renewables.

By 2020, 1,500 megawatts of offshore wind turbine parks will be established.

Jon Thorgaard Danish Consulate New York

The plethora of diversions, both political and geopolitical, have made the solar industry lose sight of the very thing that will make it 6 E N E RGYB I Z July/August 2012

Chief oPerAtiNg offiCers fACe New ChAlleNges

He is truly amazing for being 78 years old.

His understanding of the subject and his passion for science are simply infectious.

While I teach at Columbia and New York University, I also support — on a part-time basis — the Franklin Fellows Program at the Department of State. The program is at the cutting edge of citizen diplomacy.

This public-private partnership fellowship program not only serves to promote professional development of the individuals themselves, but also enhances knowledge and contacts for the institution that sponsors the fellow.

Again, I very much appreciate having been a part of this year’s Leadership Forum.

Robert William Dry New York

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» BUSINESS EDGE

Paying New Leaders DIVERSE STRATEGIES FOR SUCCESSION // BY GARY M. STERN THE LAST TWO YEARS marked the changing of the guard at several utilities. In 2010 and 2011, several utilities introduced new CEOs, including Nicholas Akins at AEP, Anthony Earley at PG&E and Thomas Fanning at Southern Company.

Christopher Crane emerged as CEO when Exelon combined with Constellation Energy.

SNL Energy studied the annual reports of energy companies and ranked the highest-earning CEOs named in 2010. David L. Porges of EQT received the highest salary of those newly hired executives in 2011, receiving a package worth $7.4 million. Others on the list and their 2011 income include Fanning of Southern Company, $7.3 million; Gerard Anderson of DTE Energy, $6.1 million; John G. Russell of CMS Energy, $4.8 million; John Braulio Ramil of TECO Energy, $3.7 million; and Patricia Vincent-Collawn of PNM Resources, $3.6 million.

Nicholas Akins worked at AEP for 30 years including stints as executive vice president of generation and president before becoming CEO in 2011. Les Hudson, head of AEP’s compensation committee, said Akins’ salary was at the lower end, compared with CEO compensation at comparable utilities.

“Though we knew him well, he was a newcomer and had never been a CEO,” Hudson said. Setting a lower 8 E N E RGYB I Z July/August 2012

salary enables Akins to “grow and advance and then be evaluated,” he said.

Akins had a base salary of $770,000 in 2011 with $1.1 million in restricted stock options and a full package worth $2.7 million. Hudson said the board would have awarded higher compensation if it had recruited an experienced CEO from a competitor.

Mike Morris, Akins’ predecessor as AEP’s CEO from 2004 to 2011 and currently chairman, said the board considered candidates from competitors but determined that “there was no need to bring in a change agent.” When Morris moved from CEO of Northeast Utilities to AEP, he said it took him 18 months to absorb the magnitude and complexity of the job and the utility’s multifaceted business strategy. Akins could start the CEO job running out of the gate.

Other utilities have lured CEOs from competitors.

After the San Bruno, Calif., pipeline explosion in 2010 damaged the reputation of San Francisco-based PG&E, it brought in an outsider to restore credibility. In September 2011, it reeled in Anthony Earley, who had been

Just because someone did a good job as COO, it doesn’t mean they’ll be a great CEO.

successful as CEO of DTE, the parent company of Detroit Edison and Michigan Consolidated Gas. After Earley was named in CEO, Lee Cox, PG&E’s chairman and interim CEO, said at a 2011 earnings call, “We are all focused on doing whatever it takes to fix our problems and then also to regain the public trust.”

To lure Earley away from DTE, PG&E offered a $1.5 million bonus dependent on his staying three years. Because Earley forfeited stock options at DTE Energy, the board bestowed one-time equity awards of $2.5 million worth of restricted stock options and performance shares worth $3.5 million.

Earley received a base annual salary of $1.25 million and an aggregate salary of $2 million, based on 40 percent restricted stock units and 60 percent performance shares.

When utilities recruit or poach a CEO from a competitor, compensation is higher than for incumbents, explained Chris Crawford, executive director of Longnecker & Associates, a Houston-based executive compensation company specializing in energy and utilities. Crawford points to a 2009 Harvard Business Review study that said recently hired CEOs in all

industries are paid 20 percent higher packages than incumbent CEOs. Incentives include stock options, retirement benefits and relocation costs.

Such bonuses usually don’t apply when utilities hire from within. For example, Southern Company promoted insider Fanning in December 2010. Fanning had worked at Southern for 29 years including serving as its chief financial officer, director of Southern Nuclear and president of Gulf Power. Southern spokesperson Steve Higginbottom said Southern’s CEO “receives grants of stock options representing 40 percent of long-term performance target value and performance shares representing 60 percent of long-term performance targets.”

Another internal hire, John Russell, ascended to CEO from president of Jackson, Mich.-based CMS Energy in the spring of 2010 when former CEO Dave Joos retired and became chairman of its board, explains Jeff Holyfield, its director of news. Holyfield said much of Russell’s compensation package was “at risk and tied to performance. Our board has set executive compensation based on earnings and cash

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» BUSINESS EDGE TOP 10 Highest Paid Power and Gas Utility CEOs // 2011 Change in compensation $

COMPANY/TICKER SYMBOL/CEO

CASH NON-EQUITY TOTAL OPTION EQUIVALENT STOCK OPTION INCENTIVE ADJUSTED COMP.* AWARDS AWARDS COMP. COMP.**

FirstEnergy (FE) Anthony J. Alexander

1,409,035

9,135,872

882,829

2,872,416

14,300,152

NextEra Energy (NEE) Lewis Hay III

1,726,171

7,517,967

928,613

2,018,000

12,190,751

Dominion Resources (D) Thomas F. Farrell II

1,380,854

3,500,006

0

7,297,000

12,177,860

Exelon (EXC) John W. Rowe

1,982,912

4,079,600

1,648,300

2,500,000

10,210,812

Northeast Utilities (NU) Charles W. Shivery, No

1,095,168

5,879,275

0

1,552,500

8,526,943

Duke Energy (DUK) James E. Rogers

412,134

6,439,381

1,600,001

0

8,451,516

Wisconsin Energy (WEC) Gale E. Klappa

1,389,576

3,849,042

341,469

2,724,879

8,304,966

Edison International (EIX) Theodore F. Craver Jr.

1,354,144

2,501,274

2,501,250

1,518,000

7,874,668

Consolidated Edison (ED) Kevin G. Burke

1,324,731

4,337,333

0

1,804,200

7,466,264

968,993

3,516,750

782,642

2,170,000

7,438,385

EQT (EQT) David L. Porges

Change in stock, income and revenue $

COMPANY/TICKER SYMBOL

CHANGE IN STOCK PRICE 12/31/10—12/31/11 (%)

CHANGE IN NET INCOME 2010—2011 (%)

CHANGE IN RECURRING REVENUE 2010—2011 (%)

FirstEnergy (FE)

19.67 21.03 21.67

NextEra Energy (NEE)

17.10 –1.74 0.26

Dominion Resources (D)

24.25 –49.52 –5.26 4.15 –2.65 0.88

Exelon (EXC) Northeast Utilities (NU)

13.14 1.63 –9.10

Duke Energy (DUK)

23.53 29.55 2.08

Wisconsin Energy (WEC)

18.79 15.27 7.23 7.25 –98.39

Edison International (EIX)

2.72

Consolidated Edison (ED)

25.14 5.88 –3.09

EQT (EQT)

22.19 110.70 20.85

* Represents the sum of base salary, cash bonus and other unclassified compensation. ** Represents the sum of cash equivalent comp, stock awards, option awards and non-equity incentive plan compensation. Changes to pension benefits were excluded from total comp.

All stock and option awards are taken at grant date fair value.

CEOs hired after 2010 were not included in the compensation rankings.

As of April 17, 2012.

Source: SNL Energy 10 E N E RGYB I Z July/August 2012

flow, and the focus is aligning compensation squarely with the interest of shareholders.”

When the board promotes a chief operating officer or chief financial officer to the top spot as CEO, pay packages are more restrained. “Just because someone did a good job as COO, it doesn’t mean they’ll be a great CEO,” Crawford said. “There’s a different skill set involved.” Hence, newly promoted CEOs often receive compensation packages in the 25 to 50 percentile, not the top 25 percentile that a more experienced CEO would warrant.

When utilities merge, such as Exelon and Constellation Energy or Northeast Utilities and NSTAR, CEO compensation packages reflect the successful integration and resulting larger company.

For example, Exelon acquired Constellation Energy in a transaction approved in March. At that time, Exelon’s COO Christopher Crane was named CEO, and Mayo Shattuck, the former CEO of Constellation, was named chairman of Exelon.

“The merger did not result in a change in control for Exelon, so there are no merger-related payouts for

Exelon executives,” explained spokesperson Judith Rader. Crane’s compensation was increased because he was moving into the CEO role for the first time, replacing John Rowe, who retired. Exelon bases CEO and executive compensation on “pay for performance that aligns the interests of senior executives with those of Exelon customers and shareholders,” Rader said. She added that post-merger, two new metrics were added. One is for merger integration and the other benchmarks compensation against a peer group that includes larger companies.

Crain’s Chicago Business in April pointed out that both Crane and Shattuck were paid a salary of $1.15 million each, though Crane had 108,000 performance shares compared with 92,000 for Shattuck, and Crane had 285,000 stock options, about 40,000 more than Shattuck’s. Don Delves, president of the Chicago-based Delves Group, said, “Usually, the executive chairman is paid less than the CEO. A rough rule of thumb might be half,” so eyebrows were raised about Shattuck’s nearly equivalent compensation package.

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5/31/12 2:58 PM

» BUSINESS EDGE What It Takes LEADERSHIP, TACT AND ADAPTABILITY // BY DENNIS GOIN WHAT DOES IT TAKE to lead an energy utility?

For the past 30-odd years, the answer was steadiness. The executives who ran large utilities during the latter part of the 20th century did not focus on building new power plants or transporting fuel to far-off places; they concentrated on maintaining existing facilities and ensuring the safe and uninterrupted delivery of fuel to customers.

There were efforts at costcutting and marginal growth, to be sure, but a strict regulatory regime and the prohibitive costs of expansion convinced energy utilities that success rested in consistency and maintenance. Managers were hired to keep things running smoothly, and they built hierarchical, siloed organizations to do so.

All of that is changing. Speak to any industry leader today and you will hear of investment, innovation and large-scale growth.

With the advent of new technologies, the opening of international markets, the proliferation of renewable fuels and a host of other game-changing developments, the most successful utilities will be the ones that are able to transform themselves and seize big opportunities.

Dozens of multibillion-dollar reactors are under construction in China and India alone, pipeline companies are rushing to connect shale fields in every corner of the country, new licenses are once again being issued for nuclear plants in the United States, and billions of dollars’ worth of new contracts are at stake.

Gatherings//Business Edge Sept. 9-12

Transmission Pipeline Projects

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Sept. 17-19

Bioenergy Finance

London

For more information about these and other events, please visit www.energycentral.com/events.

12 E N E RGYB I Z July/August 2012

The energy industry is rapidly changing. To be successful, the men and women leading the industry’s largest companies must change as well. Here are some of the most important skills that today’s new generation of energy utility CEOs require: LEADERSHIP // For decades, the utility industry has relied on individuals who could keep operations running smoothly and keep people focused on what they know best. Those at the helm today must have the courage — and the confidence — to lead their people into unfamiliar terrain. That begins with a compelling vision for the future.

TACT // Oil spills, meltdowns and environmental degradation are potent concerns that can derail even the most promising advances. Leaders must be sensitive to public apprehensions about major energy projects, and they must be open in their communications about both the risks and rewards of new technologies.

ADAPTABILITY // In a more competitive, disruptive marketplace, openness to new ideas is key.

Now is the time for leaders who can identify opportunities in novel areas, generate the urgency and enthusiasm needed to drive change, and build an organization capable of seeing their companies’ transformation through to successful results.

Adaptability cannot only reside in a leader. It must be part and parcel of the organization he or she oversees. Hierarchies, silos and layers of bureaucracy enable consistency. Today, agility is required as organizations must quickly and decisively seize new opportunities. A matrixed organization — with collapsed business units and cross-functional teams — focused not just on what it knows, but on where it needs to go and grow, is just as, if not more important than, a capable CEO at the helm. If I were a CEO, that would be my first order of business.

Agility is required as organizations must quickly and decisively seize new opportunities.

Dennis Goin is executive vice president at Kotter International.

Building Gas GENERATION OF CHOICE // BY WAYNE BARBER SIGNS OF THE RISE OF NATURAL GAS in electric power generation are seemingly everywhere. Each passing month brings news of coal plant retirements and plans for more combined-cycle plants fueled by cheap gas.

Recent conversations with industry insiders also indicate that neither pipeline infrastructure constraints nor potential new regulation of natural gas production — especially hydraulic fracturing, or fracking — SCRUBBER JOBS is likely to thwart this trend.

Construction work on “The generation of choice right now two towering coal plant is natural gas,” Mauricio Gutierrez, scrubbers will create 600 jobs, the Johnstown, NRG Energy executive vice president Pa., Tribune-Democrat and COO, said in an interview. reported.

Non-scrubbed coal units in The $750 million project involves two 15-story the East are being hard hit by the scrubbers at an combination of some of the cheap1,884-megawatt plant owned by General est natural gas prices in years, and Electric. One of the three tougher standards from the U.S. units already is equipped with a scrubber.

Environmental Protection Agency, Gutierrez noted.

“Gas is becoming a cheaper form of generation.”

That probably won’t change, said the NRG executive, “even if gas prices move up a bit.” Don’t expect a return to $8 gas prices anytime soon, Gutierrez said.

“Nationally, we are seeing this great increase in natural gas resources” in terms of shale gas, said Anthony Earley Jr., PG&E’s chairman, CEO and president. “The challenge will be building new pipeline infrastructure” while simultaneously upgrading existing gas lines, he told reporters recently prior to a PG&E shareholders meeting.

Earley, a veteran energy executive, took the top job at PG&E in 2011 during the aftermath of a tragic 2010 gas pipeline explosion in the San Bruno community near San Francisco. Earley notes that PG&E is far from the only company that’s investing in its gas pipeline network these days. Indiana-based NiSource, for example, recently announced plans to expand pipeline infrastructure connecting power generators with Marcellus Shale reserves.

Natural gas infrastructure is an issue that will be “on the agenda for the next decade or more,” Earley said.

The numbers do indicate that pipeline infrastructure is going to be a big deal for years, agrees Jason Davis, a director with ScottMadeen Consultants.

“While the industry has been developing pipeline capacity from shale production areas, we do not believe it is sufficient to support planned new gas-fired generation,” Davis said. “According to NERC projections, up to 93 gigawatts of gas-fired energybiz.com E N E RGYB I Z 13

» BUSINESS EDGE generating capacity — 45 gigawatts planned and 48 gigawatts conceptual — may be added over the next 10 years. To meet the demand of the planned capacity, an additional 24,000 miles of pipeline may be required,” Davis added.

While they probably won’t be a showstopper, new rules on both fracking and pipeline safety will likely increase the time and expense required for natural gas producers to get government approvals, Davis said.

While there could be problems from region to region, Gutierrez is not overly worried about the needed infrastructure getting built in the long run.

Coal plant retirements are tied to implementation of key EPA standards that won’t fully be felt until mid-decade, Gutierrez said. Also, the Marcellus Shale resources are located close to major population centers in the East, he added.

“If the economics exist, infrastructure will be built,” said the NRG official. Unfortunately, power prices in most areas are too weak to support major capital projects. “In most regions in the United States,

prices are not high enough to incent new generation,” Gutierrez said.

The Northeast, for example, has no pressing need for new generation right now, Gutierrez said. The situation is different in Texas where reserve margins are getting thin. Texas could use some new generation as soon as 2013.

Davis, Gutierrez and other industry officials say there are other factors pointing toward a bright future for gaspowered generation. There is potential brownfield development where some old coal units, with existing electric transmission lines, could be repowered with gas.

Also, during the merchant generation boom, many combined-cycle gas units were built alongside existing gas pipelines and transmission lines. Many of these plants remain underused and could absorb the additional loads from coal-to-gas switching.

WAYNE BARBER

Chief Analyst, Power Generation wayne.barber@energycentral.com 703.651.2166

Orchestrating the Revolution HARMONIZING THE NATURAL GAS AND ELECTRIC INDUSTRIES // BY ROBERT W. GEE THE SURGE OF NATURAL GAS made available through advanced exploration and production technologies such as hydraulic fracturing and horizontal drilling has been heralded as a potential game changer in providing an abundant resource to address our country’s future energy demand. Seemingly a fortnight ago, conventional wisdom had the United States relying on greater imports of liquefied natural gas. Today, the outlook is reversed, with qualified support for exporting the commodity, assuming production is sufficient for domestic needs.

While this is good news, attention at home is required to ensure that the lights stay on. Natural gas 14 E N E RGYB I Z July/August 2012

pipelines and electric utilities function separately. They do not, for the most part, coordinate or communicate to ensure continuous natural gas availability for power generation. That responsibility is borne by the gas-dependent power generators who contract for their own pipeline transportation, choosing from the most to least costly of capacity services: primary firm, secondary firm and interruptible.

Eager to avoid higher costs, many choose the least costly — interruptible — since they pay only for what they use. However, this means that they risk losing service during periods of high demand on pipeline capacity and gas supply.

Further complicating the picture, within organized electric markets the operational timelines between

nominations for pipeline capacity and the dispatch of power generation are not synchronized. Specifically, for a power generator, the daily cycle for nominating the highest priority capacity for pipeline gas transportation generally runs ahead of the market-clearing timeline from which the generator learns its bid would be accepted for dispatch. This places the generator at risk of either nominating pipeline capacity that it later discovers it will not need, or waiting until the power dispatch market clears and finding itself lacking sufficient pipeline capacity to fulfill its power delivery commitment.

These issues, among others, were identified as needing remedial action over six years ago by the North American Energy Standards Board. When they asked the Federal Energy Regulatory Commission for

policy guidance, it declined, preferring that solutions be crafted consensually among commercial participants or between the gas and electric sectors.

But these problems are now magnified amid our anticipated gas bounty. In its September 2011 report to the secretary of energy, “Prudent Development: Realizing the Potential of North America’s Abundant Gas and Oil Resources,” the National Petroleum Council pointed to forecasts showing HAWAIIAN WAVES that reliance on natural gas for A test of wave energy power generation in the United generation in Oahu’s Kaneohe Bay will be States could almost double buoyed with a $500,000 by 2030 from 2010 levels if grant from the U.S. Department of Energy. supply growth projections hold The Navy has been true. The council thus recomtesting wave energy technology in the area mended that FERC, NAESB, for a decade and hopes the North American Electric to generate power for a Marine base by Reliability Council and others 2014, according to the continue efforts “to harmonize Associated Press. the interaction of electric and gas markets“ and “develop policies, regulations and standardized business practices that improve the coordinated operation of the two industries.”

We may already have seen a glimpse of the unremediated future. In their joint investigative report identifying the causes of the winter power and gas outages of February 2011 in the Southwest, FERC and NERC staff indicated that while gas shortages were not a significant cause of electric generator outages, “they were a contributor to the problem.”

Opinions on what to do, if anything, are sharply divided. Solutions will need to be explored in individual contracts, standardized business practices, federal or state rules or policy pronouncements, or a combination of them. They might be specific to the region or to the market design. They may even require adding new pipeline capacity or services. But one thing remains certain. There will be little room to hide in the face of catastrophic system failure, and the elected political leadership will show no patience when the hard questions are asked once again.

Robert W. Gee is president of Gee Strategies Group and the former chairman of the Public Utility Commission of Texas. energybiz.com E N E RGYB I Z 15

Smart Grid Smart Citie

16 E N E RGYB I Z July/August 2012

d, es

SMART WORLD

TECHNOLOGY HELPS R EDUCE ENERGY USAGE

BY PAUL KORZENIOWSKI

is transforming the world’s energy delivery systems into a smart grid, one capable of monitoring changes in supply and demand.

Similar concepts, including smart cities, are emerging among municipalities. “A smart city uses information and communication technologies to be more intelligent and efficient in the consumption of resources, resulting in cost and energy savings, improved service delivery and quality of life, and reduced environmental footprint,” noted Craig Foster, senior analyst at ABI Research.

A number of factors are driving such initiatives, including the growth of city populations. The Brookings Institution estimates that by 2050, 75 percent of the world’s population will live in cities. Conventional IT system and planning processes are struggling to cope with the increased demands. Consequently, municipalities have been searching for new ways to plan for and deal with the growth.

Smart city has become an all-encompassing, somewhat amorphous term describing an array of initiatives designed to enable a municipality to handle the growth. The move has a decidedly high-tech edge. It focuses on items like relying on the smart grid to more closely monitor energy usage; installing municipal wireless networks so local businesses can use the Internet; implementing e-government initiatives to streamline business processes and reduce costs; using video systems to ensure that streets are safe; adding intelligence to municipal transportation systems; and developing new ways to cut carbon footprints.

COMPUTER INTELLIGENCE

The smart grid’s inherent intelligence will support selfhealing functions, so there will be fewer outages.

energybiz.com E N E RGYB I Z 17

SMART WORLD

Many cities are forging ahead with such developments.

ABI Research found that there are currently 102 smart city projects worldwide. Europe leads the way with 38, North America, 35, Asia Pacific, 21, the Middle East and Africa, six, and Latin America, two. In addition, Fast Company created a metric to determine the world’s “Top 10 Smart Cities”: Vienna topped the list and New York was the only U.S. city to make the cut.

Smart grids are a key component in these developments.

ABI Research estimated that smart grids accounted for 36 percent of total smart city expenditures in 2011. The investments are being made because they enable municipalities to reduce expenses. “Cities are installing smart street lights and smart traffic light systems that turn themselves off when they are not needed,” explained Allen Nogee, principal analyst at In-Stat.

Cities are also looking at the grid to increase the use of renewables and balance energy supply and demand more efficiently. Stockholm Royal Seaport is home to one pilot project with grandiose goals. The project is being sponsored

by ABB, an automation technology supplier that generated $37 billion in revenue in its last fiscal year and has 133,000 employees, and Fortum, a Nordic energy supplier with 10,800 employees and $6.2 billion in annual revenue.

The seaport district consists of 10,000 homes and 30,000 offices. The project has several goals. Fortum expects to reduce peak load demand and increase energy efficiency by the use of smart meters; integrate renewables into the existing energy system; and support electric vehicles. The utility plans to curb consumption by offering customers incentives to cut usage during peak periods. “Energy network reliability will increase. The smart grid’s inherent intelligence will support self-healing functions, so there will be fewer outages,” explained Gary Rackliffe, vice president Smart Grids North America at ABB. With such projects taking shape, the future of smart cities seems bright. “The smart city concept is gaining significant support. I think over the next 24 months almost every city in the world will deploy some elements of it,” stated Foster at ABI Research, which expects spending on smart city technologies to increase from $8.1 billion in 2010 to $39.5 billion in 2016.

However, these projects face some hurdles, starting with their financing. Putting the necessary IT infrastructure in place requires a significant investment. The Stockholm Royal Seaport project came with a preliminary price tag of $2.9 million. The Swedish Energy Agency kicked in $1.2 million and Vinnova, the Swedish Governmental Agency for Innovation Systems, contributed another $700,000. The remaining fund18 E N E RGYB I Z July/August 2012

ing came from the participating vendors. It is unclear how cities will cost justify programs that lack outside funding.

In addition, municipalities find themselves quite fragmented. “Smart cities require that local government breaks down the barriers that often are evident among different agencies,” noted In-Stat’s Nogee. Given the historic barriers that have existed, agencies may be unwilling or unable to partner with one another and carry out smart city initiatives.

The barriers exist not only among departments but also with their IT applications. Getting the various autonomous systems to interoperate often requires a great deal of time, effort and money. A lack of industry standards compounds the challenge. Currently, cities find themselves developing the specifications needed so one IT application can exchange information with another one. Because the work is at a nascent stage, years may pass before the IT infrastructure will be in place, so cities can mix and match data from different systems.

Consumers have concerns about privacy and security.

In California, a significant backlash occurred after Pacific Gas & Electric customers saw their monthly bills increase dramatically after a smart grid initiative. To get buy-in from residents, cities will need to embark on marketing campaigns that are a big investment.

As for security, the wireless connections that smart meters rely on can be flawed. In fact, security consulting company InGuardians found that hackers could exploit design weakness, break into meters remotely, shut down someone’s power, impersonate meters to the power company, inflate victims’ bills or lower their own bills. A criminal could even sneak into a utility’s networks, steal data or attack its grid.

In March, the National Institute of Standards and Technology released Release 2.0 of the Framework and Roadmap for Smart Grid Interoperability Standards. Included in it were 75 extensions to existing standards and 15 new areas, designed to improve smart grid interoperability and security.

In sum, the smart city concept is taking hold, and along with it come smart grid investments. However, cities face many challenges as they put the infrastructure in place, so its evolution appears to be over the long term rather than the short term.

Cities are installing smart street lights and smart traffic light systems that turn themselves off when they are not needed.

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SMART WORLD

Smart High-Rises OPTIMIZING PROPERTIES

BY ROGER ANDERSON, ARTHUR KRESSNER AND JOHN GILBERT

dominate the skylines of the world’s great cities, and occupants of these structures consume up to 40 percent of the total energy usage of the cities in which they work and live. There is an emerging need to more efficiently manage the energy use of this existing office inventory, as well as new space under construction across the world.

Luckily, a revolution in energy use is under way for the urban or vertical city that combines on-site generation, efficiency and new storage options. Beginning with electricity usage, the smart grid is being extended from utilities into the customers’ premises and end systems. Users are now empowered to integrate the data embedded and collected by the machines that run these facilities.

Total property integration will empower management to operate more efficiently. With innovative information and data management analytics, we are now able to process the terrabytes of data generated by building management systems as well as the other subsystems that perform valuable functions in the operation of high-rise buildings into a complex computer-aided lean management system that we call total property optimization.

This optimization revolution is being driven not just by advanced software, but also by new and innovative hardware such as smart elevator systems, the single most critical transportation system of the vertical city. There are new building sensors that track real-time occupancy on every floor, variable frequency drives for HVAC fans and motors, LED lighting networks where the ballast has been MODERN OFFICE TOWERS

20 E N E RGYB I Z July/August 2012

replaced by chips, and new sensors to measure and visualize the state of the utility supply from outside the building. Even social media are included, connecting the comfort of tenants directly to the energy control systems using natural language recognition technologies. Cyber and physical security are also handled continuously by these new systems. As a result, the intelligent management of energy demand by and for the customer is propagated back into requirements that the electric grid must support to enable vertical cities to become progressively smarter, cheaper and more secure.

As an example, consider the multiple subsystems of today’s commercial office tower. The HVAC chillers and cooling towers maintain the temperature, humidity and environmental quality of every square foot in the building almost autonomously via the building management system. The elevator system assigns people to make each car close to neutral buoyancy so that as little electricity as possible is used. The building security system manages the flow of thousands of people each day flawlessly. The fire system tracks every inch of the building.

At present, each of these smart systems operates completely independently, often using proprietary codes and controllers from a multitude of manufacturers. All these systems act with no knowledge of conditions of the external delivery systems or cost of the electricity, water and natural gas. There are many direct and indirect consequences of the independent operations of each of these systems that impact the operation of the others that should be considered.

These subsystems feed data continuously to a smart property optimizer that senses grid conditions outside the building, as well as incoming micro weather, and business

criteria like lease requirements. Put succinctly, the system proactively senses changing environmental conditions of all critical internal and external factors that affect comfort, safety and economics, and makes anticipatory adjustments automatically. Less and less energy is used as the machine learns from its own feedback how well it is doing so that it can continuously improve its future performance.

The smart building also has new capabilities to ensure that this energy is available, safe and economical, such as storage batteries sized to meet the power needed for flexible operation of on-site resources. The optimization system

learns to use the batteries, along with other available thermal reserves, and even the impact of the occupants and the building inertia itself, to continuously lower energy usage.

What’s more, the integration of these systems reduces stresses on the external electric, water, and gas grids, resulting in lower costs for all. This vision is not some distant vision. It is achievable with existing and soon-to-be available technologies.

Roger Anderson and Arthur Kressner are affiliated with Columbia University’s Center for Computational Learning Systems. John Gilbert is with Rudin Management.

Smart Hospitals UTILIT Y IN V ESTMENTS PAY OFF

BY RALPH LAROSSA

of a sustainable energy future, but it’s not being harvested to anything like the extent it needs to be across our nation.

Utilities are a key to changing this picture. No other industry is better placed to put its strengths to work to help customers save energy and money while reducing pressures on the environment — and providing value to shareholders, too.

While there’s no limit to the ways energy efficiency can be applied, our experience at Public Service Electric & Gas is that a targeted approach works best. We identified hospitals as a high energy-usage sector that faced significant barriers in moving ahead with energy efficiency improvements, yet where doing so would help everyone we serve.

PSE&G’s $129 million hospital energy efficiency program is one of only four of its type in the nation and the only one that doesn’t require hospitals to bear the upfront costs.

Cash-strapped hospitals receive investment-grade audits to ENERGY EFFICIENCY IS THE LOW-HANGING FRUIT

pinpoint improvements that will significantly reduce energy usage. PSE&G then makes the investment to help defray the costs of these capital-intensive projects. This initiative has proved so successful that our regulators gave us the green light to expand it to enable more hospitals to participate.

This effort is creating many wins.

The typical hospital benefits from energy improvements and savings that it wouldn’t have achieved on its own. Our residential customers benefit from improvements that free up resources to support quality health care in their communities. The local economy benefits from additional investment, creating good jobs along with business opportunities. And, our entire customer base benefits from steps that conserve energy and promote a healthy environment.

Efforts like this show the extent to which energy efficiency pays off. The 19 hospitals participating in our energyefficiency program to date are expected to save $8 million a year in energy costs — savings that are anticipated to grow to $160 million over 20 years.

Overall, PSE&G is investing more than $300 million in a range of energy efficiency programs that have produced energybiz.com E N E RGYB I Z 21

SMART WORLD

savings for customers and are expected to create about 1,300 jobs. We tailor our initiatives to expand access to energy efficiency to the fullest extent possible — with a special focus on the needs of our urban communities.

There’s plenty of room for more efforts like these throughout our nation. Public policies that treat investments in energy efficiency like investments in pipes and wires would go a long

way toward helping make this happen. Utility energy efficiency efforts can produce a rich harvest of benefits such as improved reliability, reduced environmental impacts, new jobs, increased economic activity — and high-quality health care, too. That’s a powerful combination of wins for everyone.

Ralph LaRossa is the president and chief operating officer of Public Service Electric & Gas.

Smart Brazil BUILDING SM ARTER CITIES

BY GURU BANAVAR

in the development of smarter cities — they not only add reliability to the critical infrastructure underlying most other city systems, they can also help us understand demand and consumption patterns to optimize the generation and use of energy resources.

With an estimated 1 million people worldwide moving into cities each week, experts predict the urban population to double by 2050 to 6.4 billion — making up 70 percent of the total world population. Already, cities consume 75 percent of the world’s energy and produce more than 80 percent of greenhouse gases.

To address growing concerns about energy consumption, electricity providers are using advanced technologies and devices such as sensors, meters, digital controls and analytics tools to better monitor and manage peaks and troughs in power consumption and generation. With a higher level of insight, utilities can reduce the risk of system failures and blackouts and manage demand more optimally.

Forward-thinking countries like Brazil are making smart grid investments to help improve the reliability of electric infrastructure, and enable economic growth and environmental sustainability. With current electricity demand projections, Brazil’s smart grid investments are estimated to reach $36.6 billion by 2022.

SMART GRIDS ARE A CRITICAL COMPONENT

22 E N E RGYB I Z July/August 2012

In an effort to monitor energy consumption, add resiliency to the power grid, and improve customer service, Brazil is working to deploy approximately 63 million smart meters by 2021. With this goal in mind, CPFL Energia Holdings, Brazil’s largest privately owned energy provider, is working with IBM on a smart meter data management project to identify energy faults and losses, help allocate outages and disconnect services faster.

The meters and sensors, which allow utilities to monitor usage remotely and in real time, can detect peaks in demand that are often indicative of an illegal hookup. In Brazil, it’s estimated that as much as 20 percent of electricity output is illegally tapped from power lines. By tracking consumption, these devices can help to ensure reliability and detect loss or theft.

As host to the 2014 World Cup and the 2016 Olympics, Rio de Janeiro will be welcoming an increased number of people that could put a strain on energy resources and affect the city’s economic sustainability. The Rio Operations Center — a command center

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designed to integrate, share and analyze information about key city systems — will help the city monitor and manage the delivery of energy services to citizens and tourists.

In addition to existing smart grid projects, Brazil is also focusing on changing the way power is generated with a goal to have 75 percent of electricity come from renewable energy sources by 2030.

The future of the cities of tomorrow lies in the hands of those who manage them today. Innovative countries like Brazil are leading the way by integrating advanced technologies to monitor energy usage, changing consumption behaviors, delivering better services to their citizens and improving the long-term sustainability of their economies.

Guru Banavar is vice president and chief technology officer of the global public sector at IBM.

Smart Baghdad TECHNOLOGIES HE AL IR AQ’S POW ER GR ID

BY HIMANSHU TRIVEDI

needs both refurbishment and expansion. Power supplies are currently unreliable and there’s a heavy reliance on diesel generators.

Blackouts can last for six to eight hours and load-shedding is not planned, making it difficult for businesses to operate.

It’s particularly hard in summer, but there are problems year-round and the country has to import electricity from neighboring countries to deal with the shortage.

ABB has been contracted to refurbish two control centers and deliver a state-of-the-art power distribution management system to improve power supplies in the city. The distribution network is the part of the grid that will benefit most from improvements brought by smart grids.

The installations will enable network data to be gathered by remote terminal units at key locations in the grid, to be sent via a supervisory control and data acquisition distribution management system to the control centers using advanced UHF radio communications. This will enable operators and automated systems to identify potential trouble spots — overloaded lines, for example — and take remedial action quickly, before a fault can fully develop. In the event of damage to the network, the THE POWER SYSTEM IN BAGHDAD

24 E N E RGYB I Z July/August 2012

system will help operators to reroute power and avoid widespread blackouts.

Interoperability provides a level of scalability in protection and control solutions as demands on the system change.

The smart grid enablers in this project include UHF and microwave communications systems, which deliver data from remote terminal units to the control center via the distribution management system, a true smart grid technology.

The combination of intelligent electronics, communications systems and IT has become an essential component of the smart grid. With increasing levels of automation and ever-more sophisticated sensors in the grid, the volume of data that must be handled to ensure smooth operation has grown rapidly. Turning data into usable information on which operators and automated systems can act is fundamentally what smart grids are all about.

Himanshu Trivedi is ABB’s project manager in Baghdad.

Smart Desert NEW TOOL AIDS SOL AR PL ANNERS

BY TODD HARDY WHEN YOU VISIT ARIZONA’S SONORAN DESERT,

you are struck by its immenseness, its vast openness and its raw geology. If you are in the energy business, you also immediately recognize the opportunity to harness massive solar resources in Arizona to power the needs of population centers all over the country. There is good reason for this optimistic outlook, and it makes sense that much of this development is taking place in the Southwest desert.

For example, the town of Gila Bend, Ariz., alone is positioned to permit 5,000 megawatts, with 300 megawatts already under development.

According to the Solar Energy Industries Association, the U.S. energy market is on track to install 1,750 megawatts of solar energy systems in 2012. That is double the total for 2011, and the amount is expected to triple over the next four years. But very real challenges to effective and sustainable deployment of the abundant solar resources found in Arizona and the Southwest persist.

Despite its early growth and economic promise, the solar energy market is still in startup phase, and making the right investment decisions is therefore critical. Some existing tools certainly contribute in part to sound decision making.

Modeling of grid capacities based on known or projected demand is routine. Power-flow tools such as Promod, PowerWorld, and GridView allow the industry to model the transmission grid and generator characteristics. Databases list land ownership in the state and measure the amount of solar insolation. However, the industry has lacked an analytical, flexible and integrated tool to consider compelling questions about the potential for solar siting, development, and grid integration.

Arizona’s Solar Market Analysis and Research Tool (Az SMART) is a breakthrough decision-making simulation environment that enables stakeholders to instantly view the interaction of complex policy, economic, energy security, environmental and technical parameters that directly impact solar power innovation and development.

Since 2009, multidisciplinary research efforts at Arizona State University and the University of Arizona, in close collaboration with APS, SRP, TEP and other industry partners, have developed a transformative tool that streamlines the solar planning and siting process. This three-year research project funded by both industry and government offers integrated modeled results that to date have focused on new utility-scale development presented in an immersive sevenscreen visualization environment at Decision Theater at ASU. Az SMART starts with a comprehensive GIS siting assessment, which is subsequently integrated with diverse data sets including environmental impacts, transmission power flow analysis, regulatory requirements and economic analyses.

Using this basic information, decision makers can modify inputs using various policy options, build-out schemes, and financial incentive scenarios. Within minutes, they can see the impact of a potential solar development on existing and planned transmission, instate and export energy markets, as well as environmental impacts and consumer electric prices.

The tool is still being refined and enhanced, with all data inputs continually validated and verified to ensure they reflect current operating information. However, Az SMART’s outputs are already facilitating sound decision making by pinpointing the cost and the geographic, economic and environmental conditions required for solar project viability. Az SMART is helping stakeholders reach consensus, and, above all, it is helping to reduce risks.

Although the total amount of solar energy development is dependent on the availability of markets throughout the Southwest and potentially even the eastern United States, its energybiz.com E N E RGYB I Z 25

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economic promise to Arizona is just beginning to be understood. Arizona State University’s Seidman Research Institute recently completed a study on the economic impact of deploying 1,000 megawatts of utility-scale photovoltaic solar generation in the state for export purposes over the period 2011–2035.

It concluded that this development would provide 45,500 jobs, add $6.3 billion to Arizona’s gross state product and

$371 million in additional state government revenues. With the help of Az SMART, there is hope for Arizona to achieve those results and for the country to enjoy the benefits of the natural energy resources of the Sonoran Desert.

Todd Hardy is associate vice president of economic affairs at Arizona State University’s Office of Knowledge Enterprise Development.

A Global Race AN AMER ICAN LULL?

BY LEROY NOSBAUM

on an international level. This should come as no surprise.

Migration patterns to urban areas are more acute in developing nations than in the United States, creating megacities from Mumbai to Shanghai, across the Middle East and down to Sao Paulo. These cities are becoming economic engines with business as the driver and technology as the fuel.

The cost of energy is higher in these countries than here at home, where we pay on average less than 10 cents per kilowatt hour, providing not only an efficiency incentive but an energy imperative.

Government mandates across the globe are more aggressive, especially where energy, water and environmental management are considered strategic drivers for growth. Brazil committed $60 billion to smart meter infrastructure through 2014.

The European Union’s heralded 20/20/20 strategy to cut greenhouse gas emissions, increase renewables and reduce primary energy use by improving energy efficiency builds demand for a smarter way to manage resources.

The smart city movement is broad and goes far beyond the electricity grid. But the grid is critical. As energy demands increase, utilities are facing complex new changes and need new infrastructure to measure and manage the future. Smart grids underlie smart cities, tying seemSMART CITIES ARE EMERGING

26 E N E RGYB I Z July/August 2012

ingly disparate pieces together into an integrated whole to gather, distribute and act on information that provides the reliability and sustainability citizens will demand.

The societal impacts are profound. More data leads to more intelligence. Done right, this intelligence becomes the strategic knowledge to appropriately manage resources at the utility level and create economic development opportunities on the ground and across the globe.

While a quick glance at the United States shows a lull, going deeper reveals that other countries are catching up to and expanding on what the United States started with the American Recovery and Reinvestment Act of 2009.

While ARRA provided a spark to smart grid advancement, its end doesn’t mean infrastructure upgrades are done. American utilities continue to invest in the future to ensure they manage resources, balance supply and demand, improve cost and service and protect revenue.

Now more than ever, they need full packages of forecasting and analysis, communications systems and software, and measurement and control technologies to ensure the strong and achievable business cases critical for success.

If smart cities are the future, then smart grids are the foundation, everywhere in the world. Effectively and efficiently managing stressed resources is of high importance.

Smart grids help smart cities understand, communicate and react to energy and water use in real time to meet the demands of a growing planet.

LeRoy Nosbaum is president and chief executive officer of Itron.

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Harnessing D i s r u p t ion FOCUSING ON PERSISTENCE AND CAPABILIT Y in the harrowing Navy SEAL training is not when your hands are tied behind your back and you’re thrown into the pool to retrieve your diving mask, or when you have to take your turn carrying a wounded comrade for miles along with your heavy gear, or when you get virtually no sleep through the endless physical trials of Hell Week.

THE HARDEST MOMENT

... create an environment of concensus on energy policy.

CARLOS PASCUAL

No, Eric Greitens told a rapt audience at the 4th annual Energy Biz Leadership Forum this spring, the hardest moment is when they line you up on the beach in Coronado, Calif., to watch a peaceful sunset and tell you that all you have to do to become a normal person enjoying the simple pleasures of life once again is to ring that bell to exit the program.

Many of the trainees succumbed to this “sunset moment,” Greitens, a former Rhodes Scholar as 28 E N E RGYB I Z July/August 2012

well as SEAL, said. “People quit when they thought about how hard it was going to be to continue,” he said.

Of the 200-some participants who began the grueling SEALs training with Greitens, only a couple dozen were left by the end of the 26 weeks.

Persistence was the key to getting through, said Greitens. “I told myself I have to do the hard thing in front of me,” he explained, “and then do the next hard thing in front of me.”

Greitens’ inspirational talk on igniting corporate culture for change was one of two back-to-back keynote speeches opening the second day of the forum. The other was from John Rowe, the outgoing CEO of Exelon, whose valedictory to the industry included his reflections on the nature of change.

Corporate culture, Rowe said, changes much more slowly in the utility industry than in other sectors. “Change comes at a different pace than in virtual businesses,” he said, because of the very longterm nature of the energy generation business. But it does come. “Change comes in degrees,” he said.

The messages from the two men were surprisingly similar. Greitens said that the stages of the SEAL training are called “evolutions” because each trial is supposed to bring some small advance in the individual.

Rowe also spoke of incremental changes in the utility industry leading to an evolution. “You have to be patient and adaptable,” he said.

If Navy trainees are tempted by the beauty of the sunset, one temptation for a utility executive is to hurry the process of change by overpaying for

Photos by Dayna Smith

BY DARRELL DELAMAIDE

an acquisition or investment. “Avoid the ego trip of overpaying,” Rowe cautioned. The utility business is a low-growth industry and the challenge is to get it done without overpaying.

A lack of policy leads to disruption.

NICK AKINS

While Greitens and Rowe talked about how an individual copes with disruption and change, the keynote speaker for the first morning, Carlos Pascual, the top energy diplomat in the U.S. State Department, described the full scope of the global energy challenge.

From the immediate need to stabilize world oil markets with a crisis brewing in Iran, to the longerterm challenges of driving energy investment and

It’s a fragmented, disoriented world ... There’s no energy understanding.

THOMAS FARRELL

taking care of the energy have-nots, Pascual detailed the mission of his department in State, which is being expanded and upgraded.

Oil producers from Saudi Arabia to Libya have declared their willingness to help stabilize the world oil

market if Iranian supplies are disrupted, Pascual said.

“They all have a stake in economic growth,” he said.

For the United States, there are new opportunities in developing natural gas resources at home and in partnering for development of new resources and technologies abroad. The key, he said, is “to create an environment of consensus on energy policy.”

Despite the current polarization in Washington, he added, energy “is not a partisan question.”

A panel of chief executives echoed this sentiment.

“We need to focus on energy policy,” said Nick Akins of American Electric Power. “A lack of policy leads to disruption.” Many projects are on hold because the political parties aren’t working together, Akins said.

“It’s a fragmented, disoriented world,” concurred Thomas Farrell of Dominion. “There’s no energy understanding.” As a result, a “regulatory jungle” makes conditions unpredictable and injects uncertainty into long-term planning. Farrell urged the president to take a leadership role and recommended installing a national energy adviser in the White House like a national security adviser.

“We have to speak with one voice on infrastructure renewal,” said Anthony Earley of PG&E. “We can’t wait until it fails.” The industry needs to partner with regulators and get things done in the breathing space afforded by low gas prices.

Akins agreed. “Energy can lead the way in infrastructure investment,” he said. “It can be a renaissance for the country.”

The chief executives recommended better communication on technological improvements like smart meters, reliance on distributive energy to optimize the entire grid, export of natural gas to keep U.S. prices more in line with world markets, and other changes to promote evolution in the industry.

Chief information officers don’t disagree about moving ahead on technological change, but they called attention to the challenge of actually getting the benefit from advances like smart meters.

“The difficulty is building systems to handle the geometric explosion of data,” Joel Austin, CIO of Oncor, said on a panel.

“Three million smart meters leads to 9 billion bits of information.”

Guerry Waters of Oracle Utilities referred to an “information anarchy,” with some data being reactive, other proactive, and some predictive. energybiz.com E N E RGYB I Z 29

“Barriers are crumbling” between departments, Austin said. Smart meters are not really an IT function, but information officers still need to provide structures for using them.

We have to speak with one voice on infrastructure renewal ...

We can’t wait until it fails.

ANTHONY EARLEY

Another panel agreed that the interface between the new technologies and the customer represented an opportunity for utilities to improve the experience for consumers.

“Consumers will change their behavior if you give them the information,” said Robert Shapard, chief executive of Oncor.

Consumers will change their behavior if you give them the information.

ROBERT SHAPARD

Susan Story, president and chief executive of Southern Company Services, said that customers appreciated the value proposition of smart meters once they saw how quickly it enabled Southern to restore service after a hurricane. “Customers don’t 30 E N E RGYB I Z July/August 2012

want to have to worry about managing electricity,” she said.

But utilities have to change their mentality as well and think more in terms of customer service. “We like to refer to ‘customers’ and not to ‘ratepayers,’” she said.

However, noted Shapard, the current market environment is not necessarily supporting investments in efficiency. “Cheap shale gas is making investment in efficiency and renewables challenging,” he said.

Risk officers discussed the pros and cons of a current energy market skewed by the low price of natural gas from newly developed shale fields.

“The short-term oversupply of gas is causing a lot of pain in coalfields,” said Douglas Esamann, president of Duke Energy Indiana. “There’s still a lot of uncertainty in making a 20- to 40-year commitment on the basis of five years of shale gas production.”

While it’s possible gas prices, now hovering around $2 per million British thermal units, will remain in the $5 to $7 range for the next 10 years, no one can say it won’t go back up to $10, said Mark Kinevan, vice president at The Energy Authority. “The strength of potential demand will surprise people,” he said.

One speaker, however, suggested that the industry needs to slow down. “We need to take a time-out and absorb what we have,” said Bob Foster, mayor of Long Beach, Calif., and a longtime utility executive. There is a lot of work to be done just to catch up with innovations that have already occurred, he said. “We need to stop talking about capacity and start talking about capability.”

But former Democratic Sen. Byron Dorgan of North Dakota cautioned that the assumption of stable prices in gas or any other energy source is “not right,” and both industry and policymakers must work now to adapt to the future and develop cleaner energy. Dorgan is a senior fellow at the Bipartisan Policy Center, where he focuses on issues related to energy policy.

Two policies that he considers paramount to guiding investment in the industry are putting a price on carbon and agreeing on a nationwide renewable energy standard. “Clean energy is at the intersection of both energy security and the environment,” Dorgan said.

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Getting Strategic A CON V ERSATION W ITH INDUSTRY E X ECUTIV ES

BY MARTIN ROSENBERG

Disruption can be unsettling — or it can be an opportunity to transform an organization to better execute its evolving mission. So says a group of diverse executives who took part in an informal roundtable discussion at the 2012 EnergyBiz Leadership Forum in Washington this spring. Their comments, edited for style and length, follow.

As we look at disruption in the industry, we actually look at it as an opportunity. We have largely been an industry that has moved at a slower pace, and change is accelerating for many reasons.

First and foremost is the introduction of tremendously advantageous technologies that are challenging our people to integrate our processes to better serve customers and lower the cost.

POPE

PARTICIPANTS Maria Pope Chief Financial Officer Portland General Electric Susan Story Chief Executive Officer Southern Company Services Marc Gerken Chief Executive Officer American Municipal Power Steve Birchfield Vice President, Chief Risk Officer Tennessee Valley Authority

you review cyber security issues and evaluate all the communications needs and capabilities that give you a competitive edge on customer service, you find they are converging in a way that’s remarkable.

GOLD-WILLIAMS CPS Energy is the electric and gas utility in San Antonio that has been around for 145 years.

We’re moving faster than ever. We’ve changed our direction and pace, but it’s very uncomfortable for the whole organization.

We have had to grow individually and as a team. So harnessing disruption is as much about us being open to changing ourselves right now as it is about being smart about a new strategy — because you can pretty much make most strategies work.

From a regulatory standpoint, we are challenged not just with specific Environmental Protection Agency regulations, but Paula Gold-Williams Executive Vice President, also the magnitude and number of new reguChief Financial Officer BIRCHFIELD There is a substantial shift in lations. It’s a tremendous amount that’s putCPS Energy ting a lot of cost pressures on our customers. the commodities markets that is causing us On the technology front, we are facing to make substantial strategy choices. We’ve a convergence of telecommunications, operations and infor- gone from seeing a coal fleet that was primarily a baseload coal mation. When you consider the huge amount of informa- fleet producing 60 percent of our generation to this year being tion coming from smart grid devices and smart meters, and on pace for coal to provide approximately 30 percent of our STORY

32 E N E RGYB I Z July/August 2012

Photo by Dayna Smith

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generation. We’re continuing to add new nuclear generation.

The workforce has struggled with change, and we’re seeing a significant amount of knowledge and experience leaving the organization. How we manage that process over the next five or 10 years will establish our ability to be successful.

We’ve never had an energy policy and I don’t think we ever will have. The only silver bullet for me is energy efficiency. If you have energy efficiency, you’re not going to be a loser. And so we’ve embarked on a very rigorous energy efficiency program through a third party to offset some of that load that we don’t have to build.

GERKEN

PAULA GOLD-WILLIAMS

ENERGYBIZ

What other ways can you be innovative?

Customers understand that at the end of the day it’s not the rate that they pay, it’s the bill that they pay that concerns them. We are trying to make sure that that bill that they pay on a monthly basis is as low as possible.

We believe that energy supply diversity matched with energy efficiency will provide the flexibility that we need.

BIRCHFIELD

MARC GERKEN

SUSAN STORY

MARIA POPE

STEVE BIRCHFIELD 34 E N E RGYB I Z July/August 2012

Our goal was always to make sure that we’re not overexposed to any single type of regulation. Your customers want you to be in the right spot of having the lowest prices. Right now, we’re making investments. Luckily, gas prices are low, so they are absorbing the cost of those investments. The industry is a lot more complex than your customers have an interest in listening to. It’s even more complex than your regulators care to listen to. We’re selling diversification, we’re selling management effectiveness and being very conscientious in our decisions, and we’re selling a long-term view even though there’s just not a lot of interest in that.

GOLD-WILLIAMS

STORY At Southern Company, we are making sure that we have all of the necessary arrows in the quiver. This not only involves smart diversification decisions made in the past, but also decisions made from now on. Southern Company is building new nuclear. We’re building 21st-century coal with coal gasification units that will capture 65 percent of the CO2 for enhanced oil recovery. We have an unregulated subsidiary that runs a 30-megawatt solar facility in New Mexico. We’re building the largest biomass facility in the United States. One of our subsidiaries just bought over 200 megawatts of wind in Oklahoma at the avoided cost of generation.

In 2008, Southern got almost 70 percent of its electricity from coal. Today, it’s getting less than half as much power from its coal fleet. Natural gas accounts for 46 percent of the company’s electricity, up from about 16 percent four years ago.

That is strictly for economic reasons, but natural gas is not the only answer, forever. A fuel portfolio that is very diverse benefits our customers.

On the technology and information front, we’re almost fully deployed with smart meters. We have more than 4 million installed and we’ll have 4.5 million by the end of the year. We have invested over $1 billion in smart grid devices for the past 20 years. There is a huge amount of information.

It’s great, but it’s almost overwhelming for our employees.

Our Alabama Power subsidiary has been setting up an integrated distribution management system that takes all the SCADA information, electronic mapboard information, all the information we’re getting from our outage management system and integrating all the different pieces of data. We also have schemes for self-healing networks. It’s what you do with the data — that’s the next frontier.

Maria, how has Portland General Electric been embracing new technology?

ENERGYBIZ

We have a very robust planning system where we identify not just one direction but multiple potential scenarios. We also make sure that we have adequately stresstested each one of those scenarios. We have smart meters throughout our entire service area. We are able to know exactly when some of our customers are out. PGE is known for its high reliability. Our customer service statistics are POPE

in the top quartile. We are the launch site for four out of the five electric vehicle car manufacturers. We are spending an enormous amount of time envisioning what the future will look like with pilot projects in a number of areas that touch our customers in terms of how they use our product in energy. The pilot projects also reveal how the grid responds to problems and quickly self-heals. We have a very substantial amount of renewable and distributed generation. So we look at everything combined. Change is moving at a pace that we have not seen as an industry previously.

What are the prospects for a meaningful national energy policy?

ENERGYBIZ

You have to come up with a comprehensive report that has all the players involved. The goal is to get to the point where everybody can buy in, both in timing and limits. We’re all smart enough to get there. Just give us the blueprint and give us enough time. Because we all have huge investments with which you just can’t flip the switch on and say we’re changing the world. I don’t think that the Federal Energy Regulatory Commission and the Environmental Protection Agency are talking with each other, and we’re heading for a train wreck if they don’t watch it.

GERKEN

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energybiz.com E N E RGYB I Z 35

Farewell K EEP THE LIGHTS ON

BY JOHN ROWE

after its acquisition of Constellation Energy ends a 28-year career at the helm of public utilities — half of that spent at Exelon.

For almost three decades, I have enjoyed the very special privilege of keeping the lights on in six states — leading Central Maine Power through a political and financial crisis created by uneconomic nuclear plants; leading New England Electric System through the onset of wholesale and retail competition; and taking over Commonwealth Edison, which had challenges in its nuclear operation, delivery business and financial and political performance.

All of our jobs begin with knowing our work — a utility CEO is no different.

Like other types of businesses, utilities must focus on operations and financial discipline. But unlike other businesses, utilities must pay as much attention to politics and regulations as to markets.

We must run our operations superbly. When I joined ComEd, the operations of the company, on both the wires and generation side, were in disarray. The nuclear fleet was a disgrace and a burden to the state with a 49 percent capacity factor. ComEd’s distribution system collapsed in 1999 and Mayor Daley rightly chewed out my liver on national television. Since then Oliver Kingsley and my successor, Chris Crane, turned around the nuclear fleet from the nation’s worst to its largest and best, with nine consecutive years of capacity factors over 93 percent and a far better safety record.

ComEd has invested $5 billion to bring the system up to date. Last year, despite significant storms, ComEd had the best outage frequency statistic on record. A utility must keep the lights on.

The utility business is intensely regulated and entails constant involvement in politics. I often have noted that the ideal utility CEO has double-jointed knees and no spine at all. For example, Enron persuaded the Rhode Island House leadership to pass a package of legislation that would have bankrupted the New England Electric subsidiary serving the state. The Senate passed the bills without hearing, but the governor vetoed the legislation. After several negotiations, we did make peace.

MY RETIREMENT FROM EXELON

36 E N E RGYB I Z July/August 2012

Interaction with the government and regulators does not have to be this way. Working together, instead of against each other, we can improve our communities, create jobs and invest in the future of our states. With strong leadership from Democratic and Republican leaders in both chambers, the Illinois legislature passed legislation that would give ComEd more regulatory certainty to make significant investments in Illinois’ energy infrastructure and create much needed jobs in the state.

Because of this legislation, the Energy Infrastructure Modernization Act, ComEd will invest $2.6 billion over the next 10 years in its system — creating a guaranteed 2,000 new jobs and thousands more from other provisions in the bill.

Running a utility has always required keeping politics, operations economics and finance tightly together. No one will ever get it just right, but you cannot stop trying.

My wife and I also believe that you cannot lead a utility without doing something yourself, and that is why we are both personally active in education. It simply will not suffice to rely on your company’s money or your company’s work.

The founder of ComEd and my predecessor, Sam Insull, said, “Unless you can so conduct your business as to get the good will of the community in which you are working, you might just as well shut up shop and move away.” A utility CEO must always think about how well they are serving their customers and the community — both through the business and outside of it.

John Rowe, the former chairman and chief executive of Exelon, received the 2012 EnergyBiz KITE Lifetime Achievement Award.

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CUSTOMER CARE

Getting Focused on

CUSTOMERS NEW PATHS IN A SOCIAL MEDIA ERA // BY RICHARD SCHLESINGER SO, WHAT’S THE SECRET to succeeding in business? If you have to ask, you deserve the answer: It’s the customer, stupid.

But that hasn’t always been the case, at least not for electric utilities. Since electrons began moving from generating plants to homes and businesses more than a hundred years ago, there really were no customers for electricity any more than there were customers for water or air. There was no competition and there were no choices to be made. Utilities provided an essential, but essentially transparent, service.

Suddenly, the customer is at the center of almost every utility’s strategic plans, so much so that one utility refused to be interviewed for this article because it is completely revising the way it interacts with customers and the services it plans to offer and is afraid to reveal those plans lest some of them not be realized.

What’s behind this radical change? Competition certainly is a factor, but it hardly explains the new central role of the customer for utilities in still-regulated environments. The advent of new colored electrons, available in green and friendly earth tones, plays a part, but a small one right now. Much more likely, the change in the relationship between utilities and their customers reflects a broader change in the way individuals relate to each other and to the institutions and businesses with which they interact. Two factors, the rise of social media and a new sense of empowerment, have been particularly important.

38 E N E RGYB I Z July/August 2012

“We basically want to position ourselves to be where our customers want us to be, today and tomorrow,” says Marlene Murphy-Roach, vice president of customer relations for Jacksonville Electric Authority, which WHY CUSTOMERS operates in a regulated MATTER environment in Florida. With Utilities are reaping a wealth of new information about just 12 followers on Twitter, their customers. What one would think a part-time opportunities does that receptionist could handle create to grow the business?

Register for the free, the volume during a lunch August 16 noon ET webcast break, but JEA has recently at www.energybiz.com/ hired a full-time social media customers expert, because that’s the path down which customers are inevitably moving. Even now, according to MurphyRoach, many customers rely on Facebook to communicate with the company during severe weather.

Facebook, Twitter and the web are now among the primary tools utilities use to transmit information to customers, and information is what customers are looking for from their utility, just behind reliability and cost-savings. Cathy Engel Menendez, spokesperson for PECO Energy in Pennsylvania, says, “Customers expect us to leverage new technology, and more and more, with deregulation — PECO operates in a deregulated environment — and the availability of competitive suppliers, customers look to us as a

S

source of information to help them make energy choices. They go to their electric company to help them make choices in their daily lives, such as purchasing an electric vehicle.”

Chuck Cloninger, president of Wisconsin Public Service, echoes Menendez’s emphasis on information.

“Customers want information that’s usable to them, communicated in various electronic forms,” he says.

“It goes beyond just billing. They’re interested in how we’re being socially responsible and how they can manage their usage and how their usage compares with that of comparable households. And during outages, they increasingly depend on social media for information. We went from nobody following us on

Twitter in October 2010 to over 600 followers today.

That may not seem like much, but you can see the tremendous power of social media.”

Customers are most concerned about managing their bills, and here again, they turn to the new social media and the web for information they can use. By integrating smart meters with the Web, customers are able to gain easy access to virtually real-time information about their energy use, compare it with what they used yesterday or last year at the same time, and even to what other customers with similar homes are using.

Simply knowing what their usage is helps customers make changes to lower consumption, according to Jacksonville Electric’s Marlene Murphy-Roach. JEA energybiz.com E N E RGYB I Z 39

CUSTOMER CARE uses its website to offer tips to customers on how to save energy under specific circumstances.

Many utilities now offer voluntary programs in which customers allow the utility to cycle central air conditioning units to manage load. During periods of extreme heat, for instance, the utility might cycle off a home’s air conditioning compressor for 15 minutes, not long enough to materially change the temperature in the house, but long enough to reduce load appreciably during peak use. PECO Energy’s Cathy Engel Menendez calls the program a win-win

when they don’t have to rely on often slow and overloaded phone banks, and overworked phone centers get welcome relief when customers receive automatic updates via cell phone, Facebook or Twitter.

Closer relationships with customers can also have a dramatic impact on the bottom line. Gianna Clark of Virginia’s Dominion Power notes that with more responsive communication and increased online transactions, customer satisfaction scores have increased and cost savings, due in part to fewer needs for call-backs, walk-arounds and rework, have been in the millions of dollars. And when it comes to bill collection, Jacksonville Electric Authority has taken an extremely customer-friendly active approach that’s paid off well for both customers and the utility.

Marlene Murphy-Roach describes what she terms a “self-service payment environment” in which the utility allows customers to create as many payment options and extensions as they want, as long as they honor them. “Skeptics thought that would bankrupt the company,” Murphy-Roach says. “Actually, it’s had the opposite effect. Now, customers are giving themselves more extensions, but they’re honoring them in greater proportions than they ever did. As a result, our receivables are more current and our financials are stronger than ever. It’s another win-win situation for us and our customers.

“When I arrived at JEA 15 years ago, customers were ratepayers,” says Murphy-Roach. “That term is now practically extinct. Customers are customers. Our focus on the individual customer is sharper. We know more about each customer and what that customer needs and expects from us. The result is much higher satisfaction rates and an enhanced ability for us to plan for the future. It used to be one size fits all, but that’s not the way the real world works. By getting close to our customers, we can figure out what they really want and how to deliver it without wasting resources.” That kind of close relationship between customer and utility is already paying off in terms of greater operating efficiency. The really big payoff will come as utilities plan for the future in an era of evertightening resources and ecological standards.

Customers look to us as a source of information to help them make energy choices.

for the customer and the company. “We now have almost 95,000 customers signed up. They receive a bill credit of $30 per month during the summer and we’re able to reduce the amount of electricity we have to purchase on the spot market, which helps lower prices for all of our customers and helps us meet our state-mandated goal to reduce demand by 3 percent

by May 31, 2013.” PECO’s customers are actively participating in the utility’s energy efficiency programs, which are available via the web, text messaging and social media. So far, the program has drawn more than 300,000 customers out of a total of 1.6 million, resulting in a reduction of more than 1 million megawatts for a saving of over $146 million.

Combining the capabilities of smart meters, twoway communications within the grid, and mobile phone and text communications with customers also helps utilities manage outages more efficiently. Customers are more likely to report interruptions quickly 40 E N E RGYB I Z July/August 2012

» TECHNOLOGY FRONTIER

BUILDING SECURITY

Building Up Security STATE REGULATORS STAY VIGILANT // BY TERRY M. JARRETT SMART GRID TECHNOLOGY offers tremendous potential benefits to consumers and utilities alike. Improvements in reliability, efficiency, mitigating or reducing the price of electricity, and providing new products and services that give consumers greater choice and flexibility are just a few of these benefits. However, new technology means new security risks to both consumers and utilities.

Recently, author Brian Krebs, citing a May 27, 2010, FBI Intelligence Bulletin, reported that a series of hacks against smart meters over the last several years may have cost a Puerto Rico electric utility hundreds of millions of dollars annually. The FBI is concerned that cyber attacks and crimes will spread with the increase in the deployment of smart grid technology.

Stephen Flynn, professor and co-director of the Kostas Research Institute, testified at an April hearing before the U.S. House Homeland Security Subcommittee on Oversight, Investigations and Management.

Interviewed after the hearing, he said of grid security, “I’m deeply concerned. So many utilities have taken advantage of tremendous technologies to support their operations, the efficiency of those operations, without really being cognizant of the degree to which those systems can be compromised and set off cascading consequences. I think virtually everybody I know outside of industry who understands the threat . . . really has a sense of doom, almost, here. It’s very sobering stuff.”

As smart grid technology develops, the opportunity for hackers with malicious intent increases. Any

vulnerability creates the possibility that hackers could literally wreak all kinds of havoc with the grid. Furthermore, privacy of data gathered by smart meters can be compromised and increase the threat of identity theft, unauthorized access and surveillance of consumers.

Protecting the grid and consumers are important functions for state commissioners. Cyber threats pose concerns because state commissioners are responsible for ensuring that regulated utilities provide safe and reliable service. Moreover, state commissioners must ensure that any costs incurred by utilities for grid security are necessary and prudently incurred. This balancing act can be a daunting task.

To further complicate matters, several government, industry and standards-setting organizations are responsible for issuing detailed and highly technical cyber guidelines that are ever-changing.

There is little, if any, coordination among these entities.

Additionally, Congress is considering several cybersecurity bills that could radically change how state commissions deal with utility cybersecurity matters. It is difficult, if not impossible, for state commissioners to stay current on everything that is emerging in the cybersecurity field.

A secure grid future rests on strategic planning, coordination between stakeholders, and implementation of best practices. The National Association of energybiz.com E N E RGYB I Z 41

» TECHNOLOGY FRONTIER

BUILDING SECURITY

Regulatory Utility Commissioners and its Committee meetings. It provides commissioners and staff on Critical Infrastructure have embraced the role of members with regular newsletter and conference acting as a central repository or hub on all matters call updates on cybersecurity topics and sponsors relating to cybersecurity. monthly, unclassified cybersecurity By leveraging the resources threat briefings for state commisof a national organization, sioners and staff members. We NEW APPROACHES TO GRID SECURITY NARUC is uniquely situated welcome and encourage experts The conversation about to monitor hot topics in cyberin the cybersecurity field to provide this vital national security security, analyze guidelines and guidance and assist us in providing and energy business concern continues. Guest standards issued by the various the most current information to opinion writers Terry Jarrett, responsible organizations, and state commissions.

Terry Boston and Gerry cultivate beneficial relationships The goal of these and future Cauley invite you to listen in on their live discussion with federal partners such as activities is to help state commisof how to protect America’s the Departments of Homeland sioners understand cyber threats power system.

Security, Energy and Defense. and evaluate security tools so Register for the free, July 19 NARUC and the committee are that regulated utilities can deploy noon ET webcast at www.energybiz.com/ developing a best-practices adequate security measures at gridsecurity cybersecurity primer and a puba prudent cost to ensure reliable lication, Questions to Ask Your service. To that end, NARUC and Utilities, for state commissioners to use as a valuable the committee will continue its efforts to stay on the resource in providing responsible oversight. forefront of cybersecurity issues.

The committee invites cybersecurity professionals Terry M. Jarrett is a commissioner at the Missouri Public to educate state commissioners and commission Service Commission and chairman of the NARUC Committee on Critical Infrastructure. staff members at regular sessions during NARUC

New Approaches to Grid Defense ANSWERING CYBER THREATS // BY TERRY BOSTON THE NATION’S ELECTRIC GRID, often called the world’s largest machine, has always faced a range of security concerns. Some are physical, like the thousands of miles of transmission lines, isolated substations and transmission structures that could be vandalized or targeted, and the natural gas transportation system, which electric generators increasingly depend upon.

Today, cybersecurity is the flash point for those of us concerned about the integrity and resilience of the grid.

A successful cyber attack could disrupt our economy and national security. The threat is serious enough that PJM Interconnection, like most transmission operators and owners, is taking actions both to prevent an attack 42 E N E RGYB I Z July/August 2012

from succeeding, minimize the impact and speed up the recovery time should an attack occur.

Frequent examples of hacking incidents and security breaches in the retail, banking and Web sectors have proven that sophisticated protection systems are vulnerable to determined cyber attacks. The power industry is receiving greater attention from federal authorities in part from the 2010 Stuxnet virus, which targeted supervisory control and data acquisition systems that are widely used in the industry. Another alarm was the cyber intrusion into systems at the Pacific Northwest National Laboratory and Oak Ridge National Laboratory.

The industry takes its responsibility to protect the security of the critical infrastructure of the grid very

BUILDING SECURITY

seriously — both the physical assets and the computers, networks, control systems and other cyber equipment that ensure the reliability of the electric system. The industry must comply with Critical Infrastructure Protection standards developed by the North American Electric Reliability Corp. and approved by the Federal Energy Regulatory Commission. It also works in close coordination with the Department of Energy, the Department of Homeland Security and other federal agencies.

Yet, a joint NERC-DOE report warns, “It is impossible to fully protect the system from every threat or threat actor.” Given the scale of the threat, the industry is focusing on a comprehensive, three-part approach to cybersecurity.

First is a set of strategic tools designed to prevent a cyber attack. These strategies cannot be static; they must change constantly to address evolving threat patterns. Such preventive strategies involve not only traditional controls and physical security measures but also must employ new technologies and improved security controls. Security must be considered at the outset; it must be integral to the design of new systems — it must be built in, not bolted on.

Collaboration is the second element of grid security. Given the interconnectedness of the system, a go-it-alone approach is doomed to failure. The indus-

try must share and coordinate plans for responding to cyber events. Best practices that are identified must be shared through appropriate forums in coordination with federal agencies.

And, finally, resilience — how we respond to and recover from a cyber attack — must be our watchword.

No matter how prepared we are, we must acknowledge that a cyber attack might succeed, just as storms and earthquakes can overcome the defenses of the physical grid. As the industry has responded for decades to the worst nature can dish out, we must be ready to respond to the worst-case cyber scenario and quickly and effectively recover.

To increase our resilience, we must realistically assess our preparations and ability to recover from a cyber attack. We must review our ability to respond to a successful attack and use scenario planning to help us identify vulnerabilities and prepare strategies for restoration. We must test our crisis management skills through frequent cybersecurity drills and rapidly understand and apply the lessons learned.

Finally, the industry will continue to stay on the cutting edge of technologies and planning to thwart cyber terrorists. A successful cyber attack is not inevitable, but we will never trust the security of our energy infrastructure to luck.

Terry Boston is the president and chief executive officer of PJM Interconnection.

Operating Safely PROTECTING NORTH AMERICAN POWER // BY GERRY CAULEY THE NORTH AMERICAN ELECTRIC GRID is vital to our everyday lives; therefore it is vitally important that we have a robust set of standards and programs in place to ensure its security. The North American Electric Reliability Corp.’s mission is to ensure the reliability of the North American bulk power system. To do this, NERC uses a variety of tools, activities and strategies to help the 1,895 registered

entities that make up the North American bulk power system develop dynamic cybersecurity programs.

One of NERC’s main functions is to develop mandatory and enforceable standards for the grid.

NERC has nine cybersecurity standards that provide a framework for identifying and protecting critical cyber assets on the grid. In April, the Federal Energy Regulatory Commission approved version 4 of NERC’s energybiz.com E N E RGYB I Z 43

» TECHNOLOGY FRONTIER

BUILDING SECURITY

cybersecurity standards. Because the cyber environment is dynamic, NERC continues to update and improve its cybersecurity standards. An industry drafting team, led by NERC, is already at work on version 5 of the standards, which will build upon the existing framework. NERC audits entities for compliance with these standards, conducts spot checks and cyber risk preparedness assessments, and provides training and education to registered entities.

While NERC’s cybersecurity standards provide a baseline of security, information sharing and analytic activities allow NERC to have insight into the threats and vulnerabilities that impact the grid. NERC uses its relationships with entities and collaboration with government partners to learn of impacts or changes to grid activity. Just as the government may be aware of cybersecurity concerns, entities see fluctuations in daily operations and are best positioned to share information about abnormal activity in their systems.

Whether significant or minor, widespread or limited to one entity, providing operators with actionable intelligence to make informed decisions is a top priority for NERC. To facilitate information sharing, NERC uses mechanisms within the Electricity Sector Information Sharing and Analysis Center (ES-ISAC), including

Gatherings// Technology Frontier Aug. 1-2

PV Manufacturing – India

New Dehli, India

Sept. 19-20

Global Geothermal Energy

Reykjavik, Iceland

For more information about these and other events, please visit www.energycentral.com/events.

44 E N E RGYB I Z July/August 2012

issuing alerts to communicate vulnerabilities and recommend actions to entities. NERC has issued 20 critical infrastructure-related alerts addressing Stuxnet, Night Dragon and other vulnerabilities since Jan. 1, 2010. NERC is currently enhancing its information-sharing capabilities and capacity to further facilitate trusted information exchange. Specifically, the ES-ISAC’s portal (www.esisac.com) will allow for information sharing and the ability to access or submit sensitive information between entities. Also, the sharing center is integrating analytical tools to track and disclose in real time actionable threat and vulnerability insights.

Part of facilitating information sharing is developing partnerships and engaging in outreach and training efforts. NERC’s sharing center maintains an integration capability on the operations floor of the Department of Homeland Security’s National Cybersecurity and Communications Integration Center, a real-time information center that is the hub for classified threat and vulnerability work. In addition, NERC hosts events to promote cyber learning and practices, such as the annual Smart Grid Security Conference that focuses on physical and cybersecurity issues; and the biannual Grid Security Exercise, a sector-wide exercise designed to validate industry’s readiness to respond to a cyber incident. Finally, NERC conducts Cyber Risk Preparedness Assessments to assess entities’ cyber resiliency capabilities.

NERC also manages efforts under the Coordinated Action Plan, which consists of industry-led task forces and NERC initiatives to examine high-impact, lowfrequency issues. Currently, four industry task forces are addressing issues including geomagnetic disturbances, severe impact resilience, cyber attacks and spare equipment concerns. The task forces have developed more than 50 recommendations to industry, which will be implemented over the next few years.

NERC continues to work with industry and the federal government to strengthen the physical and cybersecurity posture of the grid through standards development, information sharing, public and private partnerships, outreach and training. Ongoing efforts in these areas will help maintain a reliable and resilient grid now and in the years to come.

Gerry Cauley is president and chief executive officer of the North American Electric Reliability Corp.

Pumping Up Pump Storage OPTIMIZING TRANSMISSION // BY JASON MAKANSI ALLOWING MULTIVALUE cost recovery for bulk storage similar to treatment enjoyed by transmission project developers under federal regulations could be the final policy piece that unlocks the potential of storage to integrate renewable energy and strengthen the grid.

Large-scale or regional bulk energy storage projects have characteristics similar to transmission projects.

On the one hand, they bring a variety of economic and social policy benefits to a multitude of stakeholders and ratepayers, often across multiple jurisdictions.

On the other hand, for this very reason, achieving adequate cost recovery is difficult.

The Federal Energy Regulatory Commission issued Order 1000 in part to address the multivalue and cost-recovery aspects of transmission, in effect allowing the cost of multivalue projects to be allocated, or socialized, across an ISO, RTO or utility footprint. An earlier FERC ruling allows incentive rates for certain transmission projects.

Bulk storage can be advanced by applying these same or similar principles.

No one benefits when wind energy has to be curtailed or spilled. All electricity consumers are at risk when higher penetrations of renewable energy cause instability with grid operations. Because most of the subsidies for wind and solar are federal, all taxpayers suffer when renewable energy is not well integrated into grid operations.

Reliability risks are typically felt at the regional level.

Daily and seasonally, wind energy is most available when electricity is least in demand. Solar production more closely aligns with electricity demand, but cloud cover causes minute-by-minute, hourly and even daily fluctuations.

Until other technologies are fully commercial and scaled up, bulk energy storage means today, and for the near future, compressed air energy storage and pumped hydroelectric storage. Its role is best understood as a shock absorber for the grid.

Uniquely, bulk storage provides incremental and

decremental reserves to the system. That is, it can deliver a few, or hundreds, of megawatts to the grid or absorb megawatts and give most of them back at a later time. Response times can be seconds, minutes or hours, and daily and even seasonal load balancing may be involved.

In addition to its ability to provide ancillary services to the grid such as frequency regulation reliability reserves, bulk storage helps optimize transmission line loading, shifts off-peak and on-peak loads, avoids or postpones transmission upgrades and investment, reduces emissions and helps attain renewable portfolio standards by displacing fossil unit operation.

Other options provide some of these benefits. Fastacting or flex gas turbine-based units respond faster than earlier models, for example, but can’t absorb megawatts. Synchronous condensers absorb megawatts but don’t give them back. Demand side solutions inconvenience ratepayers. None of them provide all the elements necessary for regional balancing.

This is multivalue in the truest sense of the word.

A new transmission line delivers renewable energy from one area to a dense load center and strengthens reliability of the grid generally. The positive social impact of reliably connecting a wind-rich area with an urban load center accrues to the region as a whole.

Bulk storage offers flexible grid optimization benefits to the entire region.

Fortunately, FERC is establishing a policy framework that removes barriers to storage projects. Order 755 supports the use of storage for ancillary services.

The notice of inquiry on electric energy storage technologies and ancillary services seeks to determine how storage assets should be treated for accounting purposes. Recently, FERC Commissioner John Norris stated publicly that Order 1000 and the earlier Order 890 emphasize nonwire solutions, a good fit with storage. He noted that there’s interest by the commission in having energy storage take advantage of Order 679 and incentive rates.

Jason Makansi is executive director of the Coalition to Advance Renewable Energy through Bulk Storage. energybiz.com E N E RGYB I Z 45

» TECHNOLOGY FRONTIER Batteries Included BUILDING WAREHOUSES FOR ENERGY STORAGE // BY JOHN ZAHURANCIK EXCITING NEW ADVANCEMENTS in power generation and fuel technologies over the past few years have the U.S. electrical sector feeling like a kid on Christmas morning. New combined-cycle gas turbine power plants produce electricity at the highest levels of efficiency with lower overall emissions. Innovative natural gas production techniques have resulted in an abundance of domestic fuel for these plants at historically low prices. Rapid declines in the cost of wind and solar generation technologies have resulted in a boom in renewable sources of electrical generation. What else could be waiting under the tree?

But utilities, commissions and other power sector participants look a bit more like mom and dad at the end of a long holiday season. New power plants have had to be located further from the customers, requiring expensive transmission investments. Retirements of older plants from low market prices or environmental regulations are causing widespread review of grid stability scenarios and out-of-merit, must-run contracts.

Markets that have been the most successful in developing renewable generation are now soliciting for new fast response capacity with off-peak minimum generation management becoming as critical as supplying peak power. And, they face a welter of conflicting policy and economic mandates for reliability, sustainability and prudent financial stewardship.

NUSCALE As utilities and their SCALES UP NuScale Power of commissions consider this Oregon has submitted dynamic environment, they a proposal to take part in a U.S. Department should complement planned of Energy program to build-outs of combined cycle speed development of small modular gas plants and transmission nuclear reactors. with steadily increasing NuScale said that its deployments of advanced technology has evolved over 12 years. energy storage.

Already widely used through older pumped hydro facilities, energy storage acts like an electrical “warehouse” to provide unmatched operating flexibility for reliability and help utilities moderate the impact of 46 E N E RGYB I Z July/August 2012

volatile fuel commodity prices. Without the need for a large reservoir, new types of storage in the form of advanced batteries can be located close to the customer, solving local reliability challenges and eliminating costly transmission upgrades. These electrical warehouses have no air emissions, don’t use water or fuels, and are physically unobtrusive, mitigating many of the challenges to locating power resources where they can do the most good.

Most importantly, these electrical warehouses enable us to make the most of existing power assets to serve the end customer. There are more than 5,000 natural gas power plants in operation in the United States. Among these, the most efficient combinedcycle units run at an average of less than 50 percent of their available capacity. The idle portion of these plants adds up to 250,000 megawatts of generating capability — in effect, the largest unused power plant in the world. When we consider this stranded capacity as well as the addition of renewable sources like wind and solar, which need to be harnessed at the right time, there is an existing enormous resource that should be liberated.

Working with leading power industry customers, AES Energy Storage, a subsidiary of AES, has successfully developed and deployed battery-based advanced storage products at increasing scale. From pilot-level facilities of 1–2 megawatts in 2008 to the 32 megawatts integrated into the PJM market last year, these facilities have years of strong operating performance in some of the most demanding jobs in the industry. These deployments have provided the technical building blocks and practical knowledge of integration into power system operations to drive future warehouses of 100 megawatts, 200 megawatts, 400 megawatts, or even larger. This is just the beginning.

A warehouse of advanced energy storage — rather than another inefficient, low-service-factor peaker — will better serve the need for flexibility, fuel diversity and reliability.

John Zahurancik is vice president of operation and deployment at AES Energy Storage.

Storage Plays Pivotal Role FORGING A MODERN GRID // BY BRAD ROBERTS ENERGY STORAGE IS COMMONLY associated with intermittent renewable energy integration and is too high-priced to be a real factor in the electricity market. But the reality is that energy storage solutions are capable of offering much broader benefits than supporting integration of renewable energy alone. Storage is vital for meeting current energy demands as well as preparing for changes in future consumer behaviors. Many don’t realize that storage in the form of pumped hydro has been an active part of the market for decades with typical sites having capacities of 500 megawatts and larger.

Now the focus is turning to storage in the distribution system as important improvements in battery technology have occurred and barriers to storage development have been removed.

Energy storage benefits aren’t simply hype; they can be validated in practice and are already helping utilities, large power users and consumers alike. By using energy storage to support a variety of goals, utilities can realize a better return on their investment WESTINGHOUSE as well.

TEAM Energy storage improves electrical Three firms have announced plans service reliability for businesses and to jointly pursue consumers served by conventional federal funds to help develop small modular centralized generation, particularly nuclear reactors. those served by weaker grids or with Westinghouse Electric, limited connection to centralized General Dynamic’s Electric Boat and Burns generation, such as islands or remote & McDonnell said they communities. It meets peak demand will pursue Department of Energy support for without the need for investing in adpromising technology ditional centralized generation and that could be in operation by 2022. transmission and distribution capacity, and without consumer involvement as is typically required with technologies like AMI. Energy storage reduces greenhouse gas emissions by using conventional generation resources more efficiently, not just by integrating renewable energy.

It provides frequency regulation for transmission grids, which can reduce the need to rely on centralized, fossil-fuel-fired generation, as well as transmission capacity, for this purpose.

Energy storage supports grid optimization such as volt/var optimization, which allows more efficient use of existing generation and transmission and distribution capacity. It defers capital investments in new or reconstructed transmission lines, as well as new and expanded substations.

The next major step in the process is getting the regulatory rules adjusted to allow all of these benefits to be realized in grid operations. The Electricity Storage Association has played a vital role in this process and has worked closely with the Department of Energy storage programs to help foster this work. The biggest single change is taking place with the passage of a Federal Energy Regulatory Commission order which establishes a pay-for-performance program in the frequency regulation markets. Fast resources such as batteries and flywheels offer precise frequency control over fossil-fuel generators with about 80 percent less energy and no greenhouse gas emissions. The higher price for fast resources results in a major investment opportunity for storage plants.

Development of new storage technologies is occurring across the globe. A fast-growing segment of the grid storage market is small units from 25 kilowatts to 75 kilowatts, referred to as community energy storage, which are deployed to protect the utility circuits feeding individual homes. These units not only provide backup power, they also serve as dynamic load controllers as more solar roofs are deployed.

The future grid will see energy storage at all levels, from gigawatts of pumped hydro to kilowatts on street corners, which will result in a much more efficient grid that maximizes the benefits of renewables and helps control peak power usage.

Brad Roberts is the executive director of the Electricity Storage Association. energybiz.com E N E RGYB I Z 47

» INTRODUCING

Google Energy AN INTERVIEW WITH RICK NEEDHAM // BY MARTIN ROSENBERG When Google speaks — or acts — it commands attention across the American economy. What the iconic company thinks about the future of energy is important to utilities, energy companies, diverse energy users and policymakers. EnergyBiz recently interviewed Rick Needham, director of energy and sustainability at Google. His comments, edited for style and length, follow.

What is Google focused on in the area of energy initiatives?

ENERGYBIZ

NEEDHAM We’re focused on making our own operations as sustainable as possible. We are also supporting programs or efforts that can scale.

Through our energy efforts, we are already a carbonneutral company. We achieve that through efficiency, using renewable resources where we can, and then finally by offsetting whatever is left. We realize that being more transparent about our footprint makes sense because it can help move the conversation forward with other companies in relaying information about their footprints as well. We’ve done very well in maintaining very efficient operations, with our data centers using half as much energy as traditional data centers. These efforts at our data centers have helped us save over $1 billion.

our operations. Our Google Green website includes a section called “The Big Picture.” It relays what we’re doing within our own operations with respect to efficiency and renewable energy. It lays out the impact of some of our services. The short answer is that the energy to run a light bulb for three hours is equal to about a months’ worth of Google usage — but then we even offset that to achieve a zero carbon impact.

ENERGYBIZ Is there somebody who heads up that Google Green effort?

NEEDHAM We have actually several people. Urs Hoelzle is one of our senior vice presidents who heads our infrastructure, including data centers.

Several groups focus on the other areas within our corporate operations and external projects, such as investing in energy efforts.

ENERGYBIZ What share of your energy comes from renewables?

What is the status of your external investments?

NEEDHAM Right now we’re around 30 percent renewable energy-powered. We’re working very hard to find ways to procure more renewable energy for

NEEDHAM We have been making investments in large-scale renewable energy projects. We have committed more than $915 million in nine projects.

48 E N E RGYB I Z July/August 2012

ENERGYBIZ

These efforts at our data centers have helped us save over $1 billion.

// Photo courtesy of Google

We are the first and only, as far as I can tell, nonenergy and nonfinancial company to make tax-equity investments in such projects. We are also investing in very innovative projects like the transmission project off the East Coast that’s going to allow 7,000 megawatts of wind generation to be developed.

ENERGYBIZ What is the status of that project, the Atlantic Wind Connection?

NEEDHAM It’s moving forward and making great progress. It received Federal Energy Regulatory Commission approval for its first submission and also recently received a “determination of no competitive interest” from the Bureau of Ocean Energy Management, an important milestone on the way to obtaining a federal right of way from the Department of Interior.

It continues to meet with a number of stakeholders, such as PJM, the regional transmission organization, because this project would need to fit into the regional transmission plan.

Has anyone announced plans to deploy offshore wind to connect with this system or not?

ENERGYBIZ

NEEDHAM We’re in active conversations with developers, several of whom have expressed interest in connecting with the backbone. The project could help those developers in a number of ways. The Atlantic Wind Connection line would reduce the amount of dollars they need to raise to do their

projects. They’re starting to recognize the benefits of the cost savings and time savings as well as the additional value from a reliability standpoint of aggregating several wind farms.

Is Google planning to invest in other similar large-scale energy projects?

ENERGYBIZ

NEEDHAM Many of our investments are very largescale. We invested $100 million in the $2 billion Shepherds Flat Oregon wind farm that will generate 845 megawatts when completed. We’ve also invested $168 million in what will be the largest solar power tower project in the world, the Ivanpah project in California on the Nevada border. Both of these projects are going well.

We’ve also made an investment of $157 million in the $1.2 billion Alta Wind Energy sector in California that will generate 1,550 megawatts. We’ve invested in SolarCity’s efforts to deploy thousands of residential photovoltaic systems on the tops of homes.

ENERGYBIZ What about using Google’s information resources to alter consumer and industry energy use?

We’ve pushed for making sure that energy information is shared with the residential customers as opposed to just being used by the utility. We think that’s going to open up an entire ecosystem.

NEEDHAM

energybiz.com E N E RGYB I Z 49

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» METRICS GOOD UTILITY CITIZENS Northeast Utilities tops a list of nine utilities that made it onto the 2012 100 Best Corporate Citizens List, published by Corporate Responsibility Magazine. The companies were rated on their actions pertaining to the environment, climate change, human rights, philanthropy, employee relations, financial performance and governance.

Source: Corporate Responsibility Magazine

31 35 Northeast Utilities

Duke Energy

38 PG&E

39 51 66 70 82 84 Consolidated Edison

Constellation Energy

Pinnacle West

Sempra Energy

Wisconsin Energy

Dominion Resources

Overall utility rank [out of 100]

PRICE TRUMPS ALL Six out of 10 consumers believe it is easy to do business with their electric utility. The cost of energy is their most important concern, according to a recent survey of 1,000 consumers interviewed online last fall. Asked to pick their two top factors in determining whether they are satisfied with their utility, 61 percent indicated price and 47 percent cited customer service.

47%

Customer Service

What Customers Care About [Two most important factors]

29%

Ease of Doing Business

61%

Price Source: DEFG and Navigant Consulting

52 E N E RGYB I Z July/August 2012

38% Keeping Lights On

17%

Programs for Customer Service and Energy Management

6%

Environment and Resource Mix

» LEGAL ARENA Solving Dodd-Frank A PRACTICAL AND FAIR APPROACH // BY STEPHEN BARLAS THE DODD-FRANK RULE defining swap dealers frees almost all electric utilities — at least temporarily — from having to register with a soon-to-be-created federally authorized swaps data repository and the substantial costs associated with that registration. The Edison Electric Institute, which coordinated lobbying on the issue, hailed the $8 billion de minimis exemption included in the swap dealer final rule issued in mid-April as “practical and fair” compared with the initial $100 million exemption the two agencies proposed in December 2010. The Commodity Futures Trading Commission — which has authority over energy derivatives — and Securities and Exchange Commission jointly issued the final rule.

But the EEI may have gotten a little ahead of itself in declaring victory, according to others in the utility industry. “Until the CFTC publishes a final rule on the definition of a ‘swap’ — expected later this summer — it is hard to know how many companies will be grappling with the complexities of the ‘swap dealer’ definition, or trying to measure the aggregate amount of ‘swap dealing activity’ to determine whether dealing swaps fit under the $8 billion temporary de minimis threshold, and later the $3 billion threshold,” said Russ Wasson, director of tax, finance and accounting policy for the National Rural Electric Cooperative Association.

In addition, the swap dealer final rule ERCOT SHORTAGES issued in April included a “special entity Texas could face peak demand power sub-threshold” of $25 million for electric shortages in the next and gas utilities doing business with decade, according to the Austin, Texas, municipal electric utilities. If the former American-Statesman. conduct swaps business worth over The Electric Reliability $25 million with the latter, the former are Council of Texas issued the warning as part of considered swap dealers. “That is an its 10-year outlook. issue that the industry agrees the CFTC needs to address promptly,” Wasson said.

So the $8 billion de minimis exemption should be considered an initial victory, not a final one. There is no denying, however, that the exemption was won via a tenacious lobbying campaign. Four separate utility industry trade groups with mostly background support from individual companies turned up the political heat after the CFTC and SEC issued a proposed

rule in December 2010. The four were the EEI, the NRECA, the Electric Power Supply Association and the American Public Power Association. “I had been in Washington for nine years and never witnessed the coming together of the four major trade groups on any one issue,” said Dan Dolan, now president of the New England Power Generators Association. In October 2011, he left ESPA where he was vice president for policy research and communications.

A number of investor-owned utilities such as Exelon, NextEra, American Electric Power, Constellation and Southern sent representatives to meetings with CFTC and SEC officials. None of those representatives responded to emails asking for details on their roles in the lobbying effort. David Brown, senior vice president for federal government affairs and public policy at Exelon, said, “EEI coordinated most of the industry effort on this.”

However, the utility industry didn’t win the victory alone. Other industries, trade groups and companies pressed the CFTC to raise the de minimis exemption.

Those players included the National Association of Manufacturers, the auto companies, rural agriculture trade groups and the National Corn Growers, just to name a few.

Dolan believes the tipping point was the involvement of small rural electric cooperatives in the lobbying campaign. “To define a small municipal electric company as if it were Goldman Sachs made no sense,” explained Dolan, meaning that utility would have been over the $100 million threshold established by the proposed rule. One letter making that point to Congress was signed by nearly 300 companies and trade associations, an unheard of number of signatories.

That kind of grassroots lobbying received Congress’s attention, including the attention of key Democrats such as Sen. Debbie Stabenow (Mich.), chairman of the Senate Agriculture Committee and Sen. Tim Johnson (S.D.), chairman of the Senate Banking Committee. They pressed for an expansive de minimis threshold. Their support was especially important given that three of the five CFTC commissioners are Democrats, and they report to a Democratic president. energybiz.com E N E RGYB I Z 53

» LEGAL ARENA Part of the reason the CFTC upped the de minimis exemption to a temporary $8 billion in the final rule was that, according to the CFTC, “Twenty-eight entities with notional transactions in excess of $8 billion in 2011 account for more than 99 percent of the total notional transactions of all identified entities that year.”

Those 28 don’t include any utility companies. However, it is not known whether any electric utilities would cross a $3 billion threshold, first because a swap definition has not been established, and second because none of the utility industry trade groups presented any data to the CFTC on swap use, nor, apparently, did any individual utility.

So the CFTC decided to err on the side of caution, given the bipartisan congressional pressure to do so, and the argument was made by the utility industry, according to Dolan, that an average electric utility would incur $400 million in costs if it were classified as a swap dealer.

Over the next three years, the CFTC will be collecting more swaps data because every company that uses swaps will have to report those trades to a central swap repository that will be created as a result of Dodd-Frank. The CFTC could readjust the $3 billion exemption up or down based on the data it collects.

Streamlining Nuclear Regs AGENCY SEEKS TO REMOVE IMPEDIMENTS // BY RUSS CHOMA FOR MORE THAN 20 YEARS, the Nuclear Regulatory Commission has been in the process of implementing new, streamlined licensing procedures, and this spring the first new nuclear projects in decades were approved — two new reactors at the SCANA-owned V.C. Summer Plant, and two others at the Southern Company-owned Plant Vogtle.

In an interview with EnergyBiz, the NRC’s Mike Johnson, who took over as director for the agency’s reactor and preparedness programs in May, said these new projects demonstrate how well the streamlining has worked. Licensing is not holding up new development anymore, he and other stakeholders said.

“From a regulator’s perspective, we certainly wanted to make sure the process didn’t impose unnecessary impediments — needless impediments,” Johnson said. “I think the process has improved and I think the fact we’ve been able to exercise the process has helped take a lot of the risk out.”

Previously, construction of new reactors required a two-part process, known as the Part 50 process, wherein applicants would have to apply for a construction permit, and after completion they were eligible for an operation license — which stacked much of the financial risk at the beginning, with the distinct possibility the project could fall apart in the second half.

54 E N E RGYB I Z July/August 2012

The new combined construction and operation license, known as the Part 52 process, condenses the application process into one effort and allows applicants to take advantage of precertified reactor designs.

Besides requiring lots of risk upfront, the old process often meant changes happened to plant design as it was constructed, meaning the nature of reactors built during the first nuclear boom can vary widely, FERC MERCURY Johnson said.

The Federal Energy “We ended up with not very much Regulatory Commission has clarified how it standardization — a lot of different will advise the U.S. iterations and types of designs,” Environmental Protection Agency on how to handle Johnson said. generators’ requests for Both of the new reactor projects extra time to comply with the new mercury and air are using the AP1000 reactor design, toxics standards rule. certified for use by the NRC in DecemEPA gives generators ber, and with the approval of the two three years to comply and a possible one-year projects, newer projects can piggyback extension. An additional on their success, Johnson said. year might be tacked on to address reliability “If plants want to reference those, and concerns, with do the same as SCANA or Southern, FERCs input. because there’s already that certified plan, that process will go much quicker,” he said.

Russ Bell, director of new plant licensing for the Nuclear Energy Institute, the industry’s trade group,

» LEGAL ARENA

Assembly proceeds on Southern Company’s Vogtle 3 nuclear unit. // Photo courtesy of Southern Company

agreed with Johnson’s assessment that for whatever other factors may be putting a damper on a nuclear power renaissance — like the cost — the two new projects show that the licensing procedure won’t be the limiting factor. The agency put the applicants to the test before construction and although it still watches closely, it essentially is stepping out of the way to allow the companies to follow through, he said.

“With the issuance of these licenses, the ball is now in the hands of the two companies building these units — they have everything they need in terms of licenses and permits to proceed,” Bell said.

Bell, who was at the site of the Southern project when he was interviewed, noted that NRC inspectors

Gatherings// Legal Arena Sept. 17-19

Maryland Clean Energy

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Sept. 19-20

Plant Manager’s Forum

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For more information about these and other events, please visit www.energycentral.com/events.

56 E N E RGYB I Z July/August 2012

were at the site and were very hands-on, but that they were letting the company set the construction schedule and then the inspectors were working to conduct their inspections simultaneously.

“It’s truly the NRC matching the pace of the companies that are building, and that’s just another way the NRC has done all it can do,” Bell said.

As a measure of how helpful the new process is proving to be, even opponents of nuclear expansion agree it is efficient and eliminates barriers — although they argue that’s exactly what they have a problem with. David Lochbaum, director of the Union of Concerned Scientist’s nuclear safety program, doesn’t hide his displeasure with how well the combined licensing process and precertification of reactor designs works.

“The old Soviet system was efficient, too,” he said, arguing that the streamlining sets up a system that approves an entire plan’s construction and operation upfront, a step that happens entirely based on blueprints and that offers fewer opportunities to contest a new project.

“It’s a paper battle — you’re looking at things that are done in cyberspace, and there’s no real evidence to point at,” Lochbaum said. “It has the effect of eliminating public participation.”

» FINAL TAKE The Navy SEAL Approach A NEED FOR TEAMS // BY ERIC GREITENS UTILITIES MUST DEAL with a great deal of change. There is the combination of regulatory issues, innovation issues and technology issues, all of which demand that you have solid leaders and capable teams that are able to integrate quickly and respond to change and challenge.

One of the key things that they teach in SEAL teams is that in order to be successful in any operation, you have to be able to react quickly to developing contingencies. In a very complex environment, you want to be able to build a team that understands the overall mission, but is also able to react to chaos, hardship and suffering EDITOR’S NOTE in the moment.

Eric Greitens, Navy SEAL, One of the things Rhodes scholar and author of The Heart and the Fist, that good leaders can was a keynote speaker do is tell the right story at the 2012 EnergyBiz to their teams. That Leadership Forum. After the gives team leaders event, he granted EnergyBiz an interview. The following a sense that what they essay is extracted from are facing — while the that conversation. circumstances might be new – has been conquered successfully in the past by others who have had the same values and training.

Executives could benefit from finding ways to bring people in who can clearly explain the way that challenging circumstances have been handled in the past. When people hear those stories, it begins to give them a sense of comfort to understand how other teams have dealt with similar situations.

I was speaking to Ameren in St. Louis when a major storm came through. They had a number of power outages and were sending teams into the field to try and react to what was happening. One of the points that I made was that just as Navy SEALs have people who are counting on them on the front lines, the people of St. Louis were counting on all of these executives and teams at Ameren to get out there and provide essential power and energy.

In environments like that, one of the keys to success is not just having individual dedicated players, but having a team vision for how you’re going to attack the problem and conquer it. The Ameren team pulled together and did just that.

I was very gratified when Tom Voss, the chief executive of Ameren, told me that the team found the

Eric Greitens meets with Ameren employees in St. Louis. // Photo courtesy of Ameren

experience incredibly energizing and that it inspired all of them to put that extra effort into the operation because they knew that so many people were counting on them.

On another front, I absolutely think that veterans can be extraordinary resources for utilities. Veterans go overseas to fight. They don’t go to fight for the Department of Defense or the Department of Veterans Affairs — they go overseas to fight for communities.

To successfully reintegrate back into communities, it takes a community-based effort that recognizes the veterans for the potential they still have.

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Reliable Quanta Services’ roots in the power industry run deep. For generations, Quanta has been the force behind the development of the power grid. As consumption of electricity rises, so does the demand for transmission and distribution contractors.

Reliability is at stake.

The Power of ONE Quanta designs, installs, maintains and repairs electric power infrastructure. The branches of our network are far reaching and ready to mobilize. With more than 14,000 employees working in all 50 states and Canada, Quanta’s growth has made the company the foremost utility contractor with the largest non-utility workforce in the country.

The nation’s premier utilities rely on Quanta’s expertise to deliver the manpower, resources and technology necessary to meet growing demand, integrate new generation sources and deliver the power and reliability consumers deserve.

1360 Post Oak Blvd., Suite 2100 Houston, Texas 77056-3023 Tel: 713.629.7600 www.quantaservices.com NYSE-PWR