CHALLENGE AND OPPORTUNITY:

CHARTING A NEW ENERGY FUTURE

APPENDIX A:

WORKING GROUP REPORTS

 MEMBERS OF THE
SMART GRID WORKING GROUP

Chair: T. J. Glauthier

T.J. Glauthier is President and CEO of the Electricity Innovation Institute, an affiliate of the
Electric Power Research Institute, established in 2001 to conduct strategic, breakthrough R&D in
energy-related science and technology. Prior to joining E2I, T.J. was Deputy Secretary and Chief
Operating Officer of the U.S. Department of Energy from 1999 to 2001. From 1993 to 1998, he
was Associate Director for Natural Resources, Energy and Science for the Office of Management
and Budget. Immediately prior to joining the Clinton Administration, T.J. spent three years as
Director of Energy and Climate Change at the World Wildlife Fund. His experience also includes
20 years of management consulting, most of it with Temple, Barker & Sloane. He is a graduate
of Claremont Men's College and the Harvard Business School.

Members:

Scott Bernstein, President, Center for Neighborhood Technology

James L. Dushaw, Director, Utility Department, International Brotherhood of Electrical
Workers
Robert W. Gee, Vice President, Development and Partner Relations, The Electricity
Innovation Institute
Bracken Hendricks, Director, New Growth Initiative, Institute for America’s Future
William E. Muston, Manager, Research and Development, TXU Business Services
David Nemtzow, President, Alliance to Save Energy
Brett A. Perlman, Commissioner, Public Utility Commission of Texas
Jeffrey R. Pillon, Michigan Public Service Commission
Graham Siegel, We Energies
Terry Surles, Director, Technology Systems Division, California Energy Commission

Support:
Douglas W. Smith, Partner, Van Ness Feldman
 Working Group Reports: Smart Grid

REPORT OF THE
SMART GRID WORKING GROUP

The proposals of the Smart Grid Working Group promise important economic, security,
and environmental benefits by promoting substantial upgrades to the performance of the
transmission and distribution network that connects electricity generators and consumers.
A robust, secure electricity grid that can meet customers’ ever-increasing demands is an
essential foundation for the growth of our economy.

These proposals, outlined in detail below, contain three key elements: (1) a national
vision statement of the capabilities that the 21st century electricity network should
deliver, and a program of demonstration projects to field-test those new grid technologies
on an expedited basis; (2) a robust set of technical performance standards addressing
reliability, availability, security, and power quality as a benchmark for implementation;
and (3) a 21st Century Electricity System Security and Modernization Fund and other
federal and state incentives to stimulate investments in deployment of the new
technologies by transmission and distribution facility owners to meet these new
performance standards.

I. Why a Smart Grid?

As the U.S. economy has moved into the digital age, electricity’s role as an enabler of
economic productivity has become even more important. The transmission and
distribution network forms the critical link between electricity generation and consumers.
However, the technological sophistication of the electricity grid has not kept pace with
the growing demand for high-quality, high-value services to end-users.

The potential benefits of an enhanced power delivery system are enormous. An upgraded
grid can support the provision of important new services to consumers, including better
ability to manage energy use and energy costs, and better support for use of distributed
generation. A scenario prepared by the Electric Power Research Institute (EPRI)
suggests that transformation of the power grid over the next 20 years could result in
substantial increases in productivity and GDP growth, reduced carbon emission, and
increased national security.

A. What is a “Smart Grid”?

The term “smart grid” refers to an electricity transmission and distribution system that
incorporates elements of traditional and cutting-edge power engineering, sophisticated
sensing and monitoring technology, information technology, and communications to
provide better grid performance and to support a wide array of additional services to
consumers. A smart grid is not defined by what technologies it incorporates, but rather
by what it can do. The key attributes of the 21st century grid include the following:

3 Energy Future Coalition

 - The grid will be “self-healing.” Sophisticated grid monitors and controls will
anticipate and instantly respond to system problems in order to avoid or
mitigate power outages and power quality problems.

- The grid will be more secure from physical and cyber threats. Deployment of
new technology will allow better identification and response to manmade or
natural disruptions.

- The grid will support widespread use of distributed generation. Standardized

power and communications interfaces will allow customers to interconnect
fuel cells, renewable generation, and other distributed generation on a simple
“plug and play” basis.

- The grid will enable consumers to better control the appliances and equipment
in their homes and businesses. The grid will interconnect with energy
management systems in smart buildings to enable customers to manage their
energy use and reduce their energy costs.

- The grid will achieve greater throughput, thus lowering power costs. Grid
upgrades that increase the throughput of the transmission grid and optimize
power flows will reduce waste and maximize use of the lowest-cost
generation resources. Better harmonization of the distribution and local load
servicing functions with interregional energy flows and transmission traffic
will also improve utilization of the existing system assets.

Without concerted action, the United States will not only forego these types of
performance enhancements, but will also risk deterioration of the current system. In
recent years, investment in transmission infrastructure, for instance, has steadily declined.

B. Reducing Customer Exposure to Costly Outages and Service Disruptions

The National Academy of Engineering has hailed the U.S. electrical system as the
supreme engineering achievement of the 20th century because of its ubiquitous impact in
improving the quality of life down to the household level. In the 21st century, its role as
a key enabler of the digital society promises equally significant implications. However,
the electricity system is in serious need of upgrading if the benefits of interconnection are
to be fully realized at both commercial and individual consumer levels. The potential
benefits of these grid upgrades are illustrated by the cost of power disturbances to today’s
economy: EPRI estimates that power outages and power quality disturbances cost
businesses in the U.S. more than $120 billion a year.

The lack of critical infrastructure investment and the growing demand for high quality,
digital-grade electricity has taxed the electrical infrastructure to its limit. Most credible
forecasts predict that this underinvestment in the transmission system will continue.
Additionally, microprocessor-based technologies have radically altered the nature of the

4 Energy Future Coalition

electrical load, resulting in electricity demand that is incompatible with a power system
created to meet the needs of an analog economy. This has led to unprecedented
electricity reliability problems, as well as inadequate power quality responsible for tens
of billions of dollars in losses to industry and society annually.

Technology upgrades in the areas of transmission system monitors, information systems,

and power flow controls will enable the grid to be “self healing” – that is, grid controllers
will collect diagnostic information about the grid in real time and will be able to use
sophisticated controls to minimize the number of customers affected by any problems,
and minimize the duration of any problems. A self-healing grid integrates real-time
information from embedded sensors with distributed intelligence and automated control,
enabling the system to respond automatically to disruptive events and attacks to the
system. Development of a self-healing transmission and distribution system – capable of
automatically anticipating and responding to disturbances, while continually optimizing
its own performance – will be critical for meeting the future electricity needs of an
increasingly digital society.

C. Increasing Security of the Electricity Infrastructure

In the current environment, the nation’s concern about terrorism is heightened. The
nation’s electricity transmission and distribution system is one of the most essential parts
of the country’s infrastructure, because it supports and powers virtually every other sector
of the economy. It is vitally important that the electricity grid be capable of real-time
management and instant correction in order to minimize the risk of disruption and the
time for recovery, if a terrorist attack on the system does occur. This will require the
ability to monitor the status of the grid on a real-time basis, to instantly recognize and
diagnose any unusual events on the system, and to respond intelligently with adaptive
changes in power flows, generating unit operations, and load management.

The smart grid capabilities described above, including the use of real-time monitors,
power flow control technology, and sophisticated communications and information
technology, will allow grid controllers to rapidly identify and respond to grid problems
caused by intentional damage to facilities or other forces. Sophisticated monitoring will
give grid controllers the information needed to identify and assess multiple simultaneous
problems on the grid in real time. Solid state power flow control devices and fast
simulation computer systems will permit problem areas to be “islanded,” limiting the size
of the area where service is disrupted, and permit power flows to be redirected around
damaged facilities.

D. Supporting Widespread Use of Distributed Energy Resources

The new grid infrastructure must support easy, flexible use of distributed energy
resources – fuel cells, microturbines, and renewable generation – in homes, offices and
factories. Use of small-scale on-site generation (or storage) can be encouraged through
the development of standardized interfaces for both power and communications systems.
Such “plug and play” interfaces (similar to the standardized interfaces that allow

5 Energy Future Coalition

computer and telecommunications equipment to be connected by consumers) will enable
residential, commercial, and industrial customers to use distributed generation for self-
generation or sales to the grid with a minimum of technical or regulatory difficulty.
Standardized interfaces for both power and communications systems will avoid high
costs associated with case-by-case engineering or safety analysis.

A grid that supports widespread interconnection and use of distributed generation by both
suppliers and consumers will lead to improved reliability and power quality, reduced
electricity costs, and greater customer choice and control. Moreover, use of distributed
generation can produce important environmental benefits – distributed generation may
reduce the need for construction of new transmission and distribution facilities, and some
technologies (e.g., renewable energy resources, fuel cells) have emission and climate
benefits relative to typical central station power plants.

E. Enabling Smart End-Use Energy Management

A smart grid will provide both communications and power to enable “smart” buildings,
motors, appliances, and other “smart” loads through a customer portal – a set of devices
and software that enables intelligent equipment within a facility to communicate with
other systems over a wide area access network. Simple, effective interfaces between the
grid and the energy management systems of buildings and other loads will enable
residential, commercial, and industrial consumers to manage electricity use in a manner
that improves efficiency and reduces consumer energy costs, while at the same time
enhancing customer control of electrical equipment. Grid-related communications
capabilities will allow customers to schedule energy use to take advantage of real-time
electricity pricing, incentive-based load reduction signals, or emergency load reduction
signals. For example, sophisticated space conditioning equipment will be able to receive
a variable electricity price signal and automatically adjust the air conditioning or heating
to effectively reduce peak loads and maintain comfort.

Smart grid capabilities are even more valuable to customers who have both energy
management systems and distributed generation resources interconnected to the grid.
They will, for example, be able to reconfigure workplaces with a combination of fuel
cells, energy management systems, and other technology advances to produce economic
gains like those produced by the introduction of electricity a century ago.

F. Cost Savings Due to Greater Transmission Grid Throughput

Enhanced grid operation will give customers access to less expensive power sources.
The smart grid will increase throughput on existing lines by providing more effective
power flow control. This increased line capacity reduces congestion (which requires
more expensive units to run instead of lower-cost units) and thereby lowers generation
costs to consumers.

6 Energy Future Coalition

The ability to increase grid throughput (and the ability to support widespread distributed
generation) also relieves pressure to site and build long-line transmission lines, thus
avoiding the environmental and aesthetic problems caused by such projects.
G. Enabling Productivity and Jobs Growth in the Economy

The combined effect of all the benefits cited above is much more than just the sum of the
parts. Just as the introduction of electricity to the nation’s homes, offices, and factories a
century ago transformed the way we live and work, a fundamental transformation of our
electricity infrastructure will enable significant advances in the nation’s growth and
productivity. These changes can support dramatic new flexibility and benefits, just as the
national highway system has transformed our transportation patterns, and the Internet and
mobile phones have transformed our communications and business practices.

Electricity underpins every aspect of the modern economy. Yet we have allowed a lack
of critical investment and surging demand for high quality, digital-grade electricity to
stress the electrical infrastructure. There are tremendous potential economic and
environmental benefits from the changes described above – from increasing power
quality and reliability to homes and businesses, from implementing a secure, self-healing
grid, from enabling widespread usage of fuel cells, renewable energy and other
sophisticated energy management systems at customer sites, and from eliminating
congestion bottlenecks through real-time dynamic management of the grid.

A scenario prepared by the Electric Power Research Institute (EPRI) suggests that
transformation of the power grid over the next 20 years could support substantial
increases in productivity and GDP growth rates, while at the same time reducing energy
intensity and carbon emissions. These productivity and related improvements depend on
a highly reliable digital power infrastructure in which workers can perform existing and
completely new functions quickly, accurately and efficiently. In this sense, power
reliability and quality are enabling technologies – they are necessary to unleashing and
expanding the digital economy, and to achieving its manifold economic and quality-of-
life benefits for the nation in the 21st century.

II. Proposal

To obtain the benefits of a smart grid, an aggressive research, development,

demonstration, and deployment effort is needed. Deployment will be the biggest
challenge, because deployment will require an extensive investment. The key, therefore,
is to provide ample support and inducement for transmission and distribution facility
owners to invest substantial resources in upgrading the performance of the grid using
smart grid technologies.

To achieve these goals, the Smart Grid Working Group proposes a three-part program:

- A compelling vision statement and demonstration program for advanced grid

technologies. The Department of Energy (DOE) should be charged with leading a
multi-stakeholder process to expand and clarify the vision and goals statement for

7 Energy Future Coalition

 the future system, specifying in clear, customer-oriented perspectives the
characteristics of the advanced electricity grid of the 21st century. To support this
effort, DOE should conduct a regional and local program of demonstration
projects in partnership with the private sector for early deployment of the new
technology components of the smart grid throughout the country.

- National performance standards for the future electricity grid. To guide the
private sector and the regulatory agencies in supporting investments in innovative
technologies, an appropriate technical or reliability standards organization (e.g.,
the North American Electric Reliability Council) should be tasked with
developing grid performance standards that, if implemented, will assure grid
security, reliability, availability and power quality.

- A 21st Century Electricity System Security and Modernization Fund and other
federal and state incentives to promote deployment of smart grid technologies.
Installing these new technologies to meet the recommended performance
standards will require investment of tens of billions of dollars. To support the
initial deployment of these technologies, a trust fund like the Highway Trust Fund
should be established. A process to design the new trust fund must include the
participation of the federal and state governments, the industry, customers, and
other key stakeholders. The resulting trust fund will have to meet standards of
equity in both funding and spending, be competitively neutral, and include a
sunset provision. In addition, regulatory policies at both the federal and state
levels concerning transmission and distribution rates must provide adequate
incentives for investments in innovative technologies.

A. Vision Statement and Demonstration Program for the 21st Century Grid

A key first step in the transformation of the U.S. electricity grid is the development of a
widely shared vision and strategy for the grid of the 21st century – a clear and compelling
statement for customers, regulators, and utilities of what the new, ‘smart grid’ is and what
benefits it will provide. To support this vision, and to build widespread support and
confidence in the component technologies, there should be a public-private partnership
program of local and regional demonstration projects of these new, innovative grid
technologies and systems.

Recommendation – Articulate a National Vision of the 21st Century Grid

The Working Group recommends that DOE coordinate a process involving the industry
and labor, which will have to build and operate the new grid, and customer groups and
other stakeholders, including public officials and regulators at local, state, and federal
levels, to articulate a common vision and strategy for the grid and a clear statement of
system requirements and benefits that will result.

Recommendation – Demonstration Program for Advanced Technologies

8 Energy Future Coalition

A public-private partnership program is needed to support early deployment and
demonstration of these innovative technologies. The Department of Energy should
coordinate this effort, with appropriate Congressional authorization and funding, in
partnership with the utility industry, key customers, labor representatives, and local and
state agencies. The demonstration projects will bring real benefits in power reliability,
security, and system flexibility that will enhance local and regional economic
development. The demonstration program would be designed to field-test the new
technologies that will be the building blocks of the smart grid, train the labor force to
install and work with these systems, and build a broad base of constituents who are
familiar and comfortable with the new technologies and what they can do.

B. National Grid Performance Standards

Establishing a robust set of technical performance standards addressing reliability,

availability, security, and power quality can provide an indirect means of fostering
investment in innovative grid technologies, since federal and state authorities will turn to
these standards in determining the proper measure to embody in pertinent regulations. In
the electric power industry, standards bodies such as the North American Electric
Reliability Council (NERC) and the Institute of Electrical and Electronics Engineers
(IEEE) typically develop such technical standards.

The standards envisioned by the Working Group are performance standards, not
technology specifications. This policy proposal is not based on any predetermination
about which technologies are the most appropriate for further development or
deployment. Those choices will need to be made on a case-by-case basis, with the
investors’ particular circumstances in mind. Instead, the development of performance
standards is intended to specify what capabilities the grid is expected to have, in terms of
interconnectivity with energy management systems and distributed resources, ability to
respond promptly to facility problems, and to optimize throughput in normal operating
conditions.

Thus, for example, a performance standard might require that the grid be able to meet
particular performance standards exceeding those now in existence, or that performance
be measured in a manner that is more appropriate to 21st century needs. For example,
System Average Interruption Frequency Indices (SAIFI) or System Average Interruption
Duration Indices (SAIDI) are utilized in some jurisdictions today to measure
performance, but higher levels of SAIFI and SAIDI - or a measure other than SAIFI and
SAIDI – might be more appropriate for 21st century needs. Some state regulations
currently authorize deviations from the SAIFI and SAIDI within certain levels.
Recalibrating these indices or requiring tighter deviation standards from existing indices
would bolster system performance requirements. The national standards may build on
existing state standards for quality of service.

Deployment of a smart grid may actually enable the cost-effective measurement of grid
performance in a manner that is not feasible today. A smart grid will be more closely

9 Energy Future Coalition

monitored and have an integrated communications backbone, allowing measurements to
be made and reported in a manner that is not cost-effective today.

While the standards developed by NERC and IEEE are not binding as a matter of federal
law,1 they do carry great weight in shaping infrastructure planning within the industry.
As importantly, state and federal rate regulators are very likely to support utility
expenditures to bring its system up to new national performance specifications, thus
facilitating recovery of costs through regulated rates. This approach of NERC-developed
national performance standards avoids state-federal tensions that might be engendered
by, for instance, the establishment of performance requirements in federal regulation.

These organizations use an expert-based consensus process to develop standards,

enhancing the legitimacy within the industry of the standards that are developed. One
consequence, however, is that the process for developing standards can be quite time-
consuming. Also note that NERC activities, to date, have focused on transmission but
not distribution issues.

Recommendation – Develop Grid Performance Standards

The Working Group proposes legislation that would encourage NERC to develop
specifications for grid performance on a specified schedule (e.g., within 2 years), with
input from the National Association of Regulatory Utility Commissioners and its
members. Appropriations would be made available to fund the work by NERC. The
model for the legislation would be the Congressional practice of requesting the National
Academies to undertake analyses with appropriate funding.

NERC is fundamentally a transmission organization today, working with the regional

reliability councils. It is possible that transmission performance standards may be
developed readily through that established system of consensus. The development of
distribution-level performance standards should be accomplished by the same body to
ensure compatibility. NERC, however, may require time to develop collaborative,
consensus-building models for working with states, utilities, and other stakeholders on
distribution issues, and therefore may require more time to develop distribution system
performance standards.

C. 21st Century Electricity System Security and Modernization Fund and

Investment Incentives

To obtain the substantial economic and security benefits of widespread deployment of

smart grid technologies throughout the nation will require tens of billions of dollars in
capital investment in the nation’s transmission and distribution systems. However,
currently the owners of those systems are under financial pressure from their lenders and
shareholders to limit spending and minimize cost exposure, and from regulators and

1
Congressional energy legislation currently under consideration would transform NERC and give the
standards it develops the force of federal law.

10 Energy Future Coalition

ratepayers to concentrate their investments in areas that resolve relatively near-term
concerns.

Given these limitations, which will continue to confront the electricity sector for the
foreseeable future, a major new investment vehicle must be developed to spur the
deployment of the new, smart grid technologies and thereby deliver the longer-term
economic and productivity benefits and jobs that will result from a transformed, 21st
century electricity infrastructure for the nation. In many respects, this priority is
analogous to the circumstances confronting the country in the 1950s when a national
approach to financing the interstate highway system was adopted. That decisive event
transformed the nation’s transportation infrastructure and brought immense economic
benefits to the country. We now need a National Electricity Superhighway and are
proposing a parallel way to begin the investment to deploy it.

Various proposals for specific mechanisms to fund such a trust fund for the electricity
infrastructure have been explored. These have included approaches such as: fees to
electricity customers on the power delivered at the ultimate point of sale; fees on
electricity transported through the transmission and distribution system; funds raised
through emissions fees and auctions; monies raised by special government-backed
financial instruments; and general government revenues.

The Working Group has not recommended any one specific mechanism for financing the
21st Century Electricity System Security and Modernization Fund, but rather recommends
that the key government and stakeholder groups engage to develop the details of a
program that will fulfill the goals of establishing and funding the trust fund that will
benefit the nation. The recommendation below identifies some of the key issues of equity
and administration that must be addressed in that process for the trust fund to ultimately
be broadly supported and successful.

In addition, it is important that other regulatory and economic incentives also support the
widespread deployment of smart grid technologies. In virtually all cases, rates for
transmission and distribution are set pursuant to a cost-of-service regime, under which
utilities are authorized to recoup investment costs and earn an allowed return by
customarily seeking rate authority to reflect substantial new investments in transmission
and distribution upgrades. Despite this authority, however, transmission investment
levels have declined over the past two decades. Accordingly, the Working Group
includes recommendations below regarding federal and state rate incentives.

Recommendation – 21st Century Electricity System Security and

Modernization Fund

The Working Group recommends that a new funding mechanism be established in the
form of a “21st Century Electricity System Security and Modernization Fund” to help
support the costs of initial deployment of the new, smart grid technologies for the
nation’s electricity transmission and distribution system. The new smart grid system will
bring great benefits to the nation in terms of energy reliability, homeland security,

11 Energy Future Coalition

economic development, productivity, and jobs. The deployment costs, while dwarfed by
the benefits, will also be significant, potentially running into tens of billions of dollars.
Hence, this program requires a national priority and broad, public support for its initial
deployment.

The Smart Grid Working Group recommends that federal and state governments work
with the electricity industry, customers, and other stakeholders to develop a specific
funding mechanism for the 21st Century Electricity System Security and Modernization
Fund. These discussions should consider the full range of viable options, including a
customer fee on electricity delivered at the ultimate point of sale, and broader-based
general sources of government funding. The final decisions on a funding mechanism and
on the design of the trust fund must meet a number of tests of equity and fiscal discipline,
including the following:

- The funding mechanism for the trust fund must be equitable in raising funds from
various government sources, customers, or other entities in some general
proportion to the benefits that various stakeholders will ultimately receive from
the new electricity infrastructure and associated economic gains;

- The funding mechanism for the trust fund should be competitively neutral (e.g.,
applying comparably to all ownership classes of utilities or utility customers, and
to wholesale and retail market participants equitably);

- The funding flowing from the trust fund must be available to all types of owners
of transmission and distribution facilities;

- The uses of the fund must be focused on the strategic investments needed to
significantly improve the electricity infrastructure’s security, reliability, and
power quality for customers;

- The use of monies flowing from the trust fund should be overseen by appropriate
State or local officials, so that investments reflect the local and regional needs of
the system;

- The use of monies from this fund should not be impeded by regular budget and
appropriations processes, so whatever funds are obtained for this purpose will be
dedicated and fully available; and

- The trust fund must contain a sunset provision – its purpose is to support the
initial deployment of the new technologies, not to serve as a permanent funding
system.

12 Energy Future Coalition

 Recommendation – Incentive rates at FERC for grid enhancement

FERC, either by direction of Congress or on its own initiative, should adopt ratemaking
standards for jurisdictional transmission rates that provide incentives for investment in
the transmission grid. If feasible, these incentives should be structured as performance-
based rates, with a utility’s return based on specified grid performance criteria. In areas
where such performance measures cannot be developed, the policy could be framed as an
incentive return on equity for grid investments, in the context of a rigorous evaluation of
technology upgrades and demand-side options.

Both FERC and Congress have expressed recent interest in such incentive rates. FERC
has recently proposed to adopt new rate incentives (1% added to return on equity) for
investment in transmission facilities approved through a regional transmission
organization’s planning process. Pending energy legislation also includes a requirement
that FERC conduct a rulemaking on incentive rates for transmission investments.

Recommendation – Incentive rates at State commissions for transmission

and distribution system enhancement

State regulators should adopt ratemaking standards for the transmission and distribution
components of rates under their jurisdiction that provide sufficient incentives for system
enhancements reflecting innovative technologies, using performance-based rates keyed to
meeting specified performance criteria where possible. Congress should enact a new
federal rate standard through an implementation scheme similar to that adopted in the
Public Utilities Regulatory Policy Act (PURPA), requiring each state to conduct a public
proceeding to decide whether or not to adopt incentive rates for transmission and
distribution system enhancements.

13 Energy Future Coalition