Discussion

MODERATOR: WHEN I WAS IN CONGRESS IN 1995, A bus pulled up to the Rayburn House Office Building fueled by clean natural gas. Our discussion quickly turned to the availability and affordability of natural gas. The country could even run bus fleets with it, we said. In the past year, however, natural

BIE: Over the last couple of years, we have certainly seen our dependence on natural gas increase. We found ourselves with a demand increasing at least 2 percent per year, and we have recognized that the demand is going to continue to go up. But the supplies are not as adequate as people thought in the past. If we are going to continue to use natural gas the way we are using it, we're going to see that it's going to be harder to get, and we're going to have to drill deeper. It's going to be costlier to bring to the marketplace, and therein lies the significant problem.

That's why diversified portfolios are going to be critical, because natural gas prices are going to continue to remain high. I don't think there's really an end in sight for those prices.

POTTS: Everything I've seen in my life in the energy industry which has been about 16 to 18 years - is either boom or bust. We're complacent when things are good. When prices arc low, we forget about it.

It's not going to be fixed by governmental agencies. It has to be fixed by everyone that consumes it, and customers are starting to realize that. We need to start looking at more of a portfolio approach to all our energy needs and continue to stress that. Whether we head toward natural gas or we head toward a transmission line or we head toward a coal plant, while all of them work independently, we need to continue to have them work as a whole, and that's what's going to help keep costs as low as possible. But costs are not going to come down.

WILLIAMS: The deregulation of natural gas brought about something more like a commodity market for the gas industry, which allowed prices to spike, creating the gas bubble of the '80s and '90s, which resulted in this projection of cheap gas forever. The marketplace for commodities is a spiking marketplace. We don't sit around the table and talk like this about paper or sugar or oranges or even gasoline. We all speculate about how troublesome gasoline is, but the price of gasoline fluctuates 100 percent over 10-year cycles. If the price of natural gas fluctuates 100 percent, we sit in rooms like this and begin to get political intervention because we can't tolerate that kind of price spike.

RECK: I think the volatility that we're seeing today is a result of a close matching between supply and demand. If we don't do something to get more supply, then we're probably going to be moving into an environment of higher unstable prices, which is what I'm hearing from the group here.

MAINI: We are at a steeper end of the supply curve where a small change in demand is going to create a lot of change in gas prices. I think its going to take a lot of time, actually, for prices to stabilize.

Aluminum companies and steel companies shut down their plants in response to these price spikes earlier in the year, and the weather was fairly mild. If it's too late to manage a risk, people just shut down the plants. But the downside of that is all that production goes overseas, and that has a trigger effect on the economy. So that's not a very good way of solving the problem. To date, what seems to have worked well is having good risk management strategics, such as Kiel switching and a diversified portfolio.

It's getting harder and harder to get the same amount of gas from any particular well, so it costs more. The exploration and production companies are also having a harder time getting capital because their credit ratings arc not good and their price-to-carning ratios arc not good. And once they do get capital, they're very conservative about trying to figure out where to invest that - in what kind of wells.

WILLIAMS: I think the shortage is more driven by pipeline capacity to regions than it is by production at the well head and the ability to create new gas supplies. Gas supplies are driven by the reward, and as the price spikes, the reward for production and discovery will increase. We'd continue to have substantial reserves of gas.

The three things that a marketplace uses for regulation are shortage pricing, surplus pricing and business failure. So far, all we've seen in the United States, in terms of the reaction to the use of the marketplace for political necessities, is political intervention with shortages and great consternation about business failures.

DRABA: In my previous life, I worked for a gas company. I had a fellow - this is about 10 years ago - to whom I gave an unlimited budget and I told him to develop a natural gas-vehicle market for my gas company. He exceeded his budget, first of all, and second of all, he never developed a natural gas-vehicle market, although he identified some areas that had some potential, like buses. One of the problems was that gasoline is simply too cheap.

NEITZEL: I think customers, utilities, regulators and politicians are all going to have to at least look at the natural gas market, and get more comfortable with people using financial instruments. When you start talking about hedging and derivatives, I think people get uncomfortable, but the fact is, you're in a volatile market and you want stability of prices.

MODERATOR: THAT'S FINE IF YOU'RE A MAJOR manufacturer. You can do that. But, if you're a small plastics manufacturer in Baraboo, where are you going to go to trade in the market?

THILLY: You have to have the availability of service, and that's a major issue for an electric utility that's a purchaser, because we have to supply the energy. Diversity is the key. We know gas is going to be volatile, and we know Wisconsin has availability issues because of lack of pipeline capacity. So we depend on natural gas to an extent. That's fine if you're burning in a plant that runs 5 percent of the time, because if you get a price spike, that's something it can handle. But to depend on it to burn around the clock for electricity is a high-risk strategy.

SWAN: We developed a program last year that we're calling a worry-proof bill, where customers can enter into a contract with us that sets the cost for their natural gas at a given level. As a utility, since we're much larger, we can do the hedging and use the financial instruments to try to make sure that we can even out that cost. The customers take a bit of a risk if, in fact, we do better and the price goes down. They're still paying a bit more than they would have if their prices were fluctuating. On the other hand, if the prices go up, we're the ones that are taking that risk.

WILLIAMSON: The thing we wrestle with in my current life is the security of our system. When we look at inventory, you can run a coal plant for 90 days without the railroad showing up, because the fuel source is sitting there in a pile. You can run a nuclear plant for maybe a couple of years. When a single point of failure on the gas system can shut off half of the state's electric supply facilities, it's probably not a real smart planning effort on the part of state utilities. So besides the price, using gas to heat houses at three times the price of electricity, the pointof-failure problem with the gas system is a real concern to us. We're going to have to somehow physically hedge that if we're going to rely a lot on gas for electricity.

MODERATOR: SO WHO GOT IT WRONG? EVERYBODY was encouraged to make these changes seven or eight years ago.

NEITZEL: I don't think anybody made a mistake. It was just that everybody loved natural gas. It was cheap to build. It was easier to build than anything else. Environmentalists loved it. Gas producers loved it. Everybody thought it was a win-win, but nothing is ever quite as good as its proponents would want you to believe, or is as bad as its detractors would have you believe.

It seems like in public policy, the only time we're in the center of the road is when we're moving from ditch to ditch.

Under public policy, we had a lot of nuclear plants built. Then, energy was going to be too cheap to meter on the electric side and we started seeing those costs come through, so all of a sudden, we said, "Well, this regulatory scheme doesn't look too good. Let's go over to the markets, because that looks better over there." So we went over to the markets and, Io and behold, like everything else, the grass wasn't greener over there either.

DRABA: You need an infrastructure that you can fall back on. If I draw anything from the cautionary talc of the natural gas business, it's to invest in infrastructure and new supplies. You can't do anything, in terms or helping customers save money or lower costs of energy, without a solid infrastructure.

MAINI: I think one of the other problems is that the pipelines in the industry are mandated by the Federal Energy Regulatory Commission while, on the generation side, the gas-fired units that are coming in response to price spikes in the market are mostly a Public Service Commission issue. I think that creates some kind of a disconnect.

At this point in the natural gas market, the question is going to become more of a cost-avoidance issue than it's ever going to be a cost savings from a retail customer perspective. Before, it was always a costsavings issue.

RECK: For years and years and years, all the utilities in the room had full-scale programs to encourage conservation. Now, we have a combination of utility programs and state-run programs on energy efficiency, but there arc other things that customers can do to control their bills that aren't particularly new or attractive.

These arc basic common-sense items, such as higher-efficiency appliances, higher-efficiency manufacturing processes or insulation. A lot of that was done in the mid-'70s and through the '80s, hut it was done up to a certain price level. With prices at a higher level, you have a whole new plane of cost-effective conservation that can he attacked, particularly on the commercial and industrial sides.

MODERATOR: IF YOU'RE A SMALL MANUFACTURER IN Manitowoc or La Crosse and you made the switch to natural gas boilers, you can say, "Well, sorry, the market's changed." But how do you find the money and how do you recover from that?

POTTS: Environmentally, you can't go back to your boilers, so you're stuck running your boilers on natural gas. There's not a panacea for a customer until the whole industry gets its act together. But while their boilers are going to be running at a higher cost, customers can do other things in their buildings.

I don't see any quick fixes to this situation we're in, but I don't think it's a problem that can't be overcome. It's just a situation we're in, and it's not just here in Wisconsin. It's in the nation as a whole.

MODERATOR: IS THERE A DECLINING SUPPLY OF natural gas in the U.S. and Canada?

WILLIAMS: The basic principle of economics is that to the extent people know where gas is, the cheapest gas gets tapped first, and then you move toward more expensive gas to withdraw. We are always in a situation where, with respect to known reserves, the next unit of gas to be withdrawn from the ground is more expensive than the one that was taken out before it.

NEITZEL: I agree there is gas. The question is, where is it and can you get to it? A lot of the gas is where companies are prohibited from drilling - federal lands in the West, off the West Coast, off of Florida. Basically, you can drill where you've drilled before, and when you do that, you're going to get fewer big finds. And the finds you do get arc going to be consumed a lot faster than finding another giant someplace. This is a long lead-time industry. You can't just bring supplies online overnight, and it's an even longer time in the industry on the electric side.

RECK: We've had public policies at the state and federal levels for years and years that have led to the situation that you described. You can't just go and fix the problem at the customers' level today. You have policies that have determined that market pricing is preferable to fixed pricing. If public policy and regulatory and customer needs determine that it's more preferable to have a stable price, then we have to move in that direction. It will take a while to get back to that forum of supply procurement.

SWAN: One of the things we have to recognize is that we're at a point in the cycle where we're needing to add capacity and we're needing to add infrastructure. We went back and looked at how our company's prices for electricity have compared when we've been in building cycles. What we found was that the last big building cycle that we went through was in the late '70s or early '80s, and prices went up significantly at that point in time. And for the next 15 years, they stayed almost completely level.

We have to realize that the demand has grown, and we've taken up all of the slack in the system that was there since the last budding cycle. It's going to be expensive, and it's going to result in increases to ratepayers. If it wasn't from the increasing cost of gas right now, it would be from the increases that it would cost us to put the other infrastructure in.

THILLY: In terms of the small manufacturer in Manitowoc, and the concern about what it would do in the future, I would say that the manufacturer better hope we don't, as a state, decide to put all of our new electric generation into gas. When we face the issue of re-licensing the nuclear plants, if that doesn't work out, and we decide to place that in gas, then the company is really in trouble, because the prices can be lower.

MAINI: The time lag that we are looking at, if you want to build something like a nuclear plant or a coal plant, is going to be horrendous, for one. The capital investment is going to be higher and the incentive for utilities to build for this kind of generation would have to be a lot higher. So I truly believe that diversifying the portfolio in the form of nuclear and coal-fire generation is a good idea.

DRABA: There are fuels that are better for base load and fuels that are better for people. It's not a matter of whether it's gas or coal or renewables. The answer is yes to all of them, in their proper place in the system. What we're seeking here is the diversity of the system, in terms of meeting and matching the fuel that we need and going after any source.

RECK: The diversity of the portfolio is the key. At Xcel, we do a sort of bidding process for new generation and find what type of resource is most economical to meet that need.

What we're finding is wind and renewables are cost-competitive and are winning bids on their own merits, just because of the overall increase in prices of other fuels. But that in and of itself is not enough, because you need a base-load type of plant that's going to supply enetgy when there's no sunshine and there's no wind blowing. You can't control when you need or when you produce wind, so it doesn't lend itself to economic dispatch or peaking. But there's definitely a place for renewables in a portfolio. The key is to have a diverse mixture.

DRABA: I don't think we've nearly scratched the surface of the demand side. And we have to line up all the little things that we can do and not just dismiss any one of them. When we start talking about solar power in Wisconsin, everybody rolls their eyes and says, "Well, that's good with Arizona." But when you look at the peak hours for utilities, I think the sun is shining something like 90 percent of the time. It makes sense.

RECK: There are ways to use energy more efficiently - load management, customer demand, reduction options. We are already doing a lot of the things that our customers and regulators are asking of us.

SWAN: Just in the last six years, our Shared Savings program has saved more than 600 million kilowatt hours of power, which is the equivalent of a 200-megawatt power plant, and that's as a result of our customers entering into these energy-efficiency programs. I think that's a very important source for us as a state, in terms of our ability to meet our energy needs. We really need to have those kinds of programs in place.

MODERATOR: LET'S TALK ABOUT WHAT HAPPENED IN the Northeast in August. Lots of fingers are being pointed. Feel free to point the first, Ave.

BIE: Actually, I think that what we saw was something that some people are very surprised at and other people are not surprised at. It shows, certainly, the vulnerability of our infrastructure. It shows the vulnerability of the security of what we supply to our consumers out there. And I think that as they try to reenact and piece together what has happened, it really gets back to a number of very basic points - that you have to have a transmission system that supports the infrastructure that is needed.

The system that we are dealing with today nationwide, not only in Wisconsin, was not designed to handle the kind of flows that arc taking place. We have to have a diversified mix of energy and we have to make sure that these markets and dialogues are developing across state lines.

WILLIAMSON: I agree that the basic problem is that the system was designed to handle local loads that were built up carefully with generation of transmission matched. It grew into this national carrier system where we take flows from regions that we've never designed for or never really evaluated.

The infrastructure just hasn't caught up with the demands we've put on it. Now industry is trying to catch up with the political reality of how the energy flow has changed since the mid-'90s. But we're not there by any means.

THILLY: The infrastructure and the communications equipment arc not adequate. I saw a quote stating that in the Midwest and in the areas where the blackout originated, we continue to rely on an antiquated telephone system to communicate emergencies, where they would need to telephone 23 different systems to alert them. That's astounding.

DRABA: Those of us who first sat there and said, "Gee, at least we weren't affected," later found out that we were, in fact, affected. When we looked at the system-frequency charts out East, there it was. We saw our system blink too. Customers, individually, were affected. We didn't have a big blackout, but it certainly did affect us also.

MAINI: I think there are two sides to the issue. One is the equipment problem. Not enough money has been sunk into the infrastructure of the transmission system and it's antiquated. Utilities don't necessarily know where the transmission lines are going to be, or who's going to own them. Therefore they have no incentive right now to pour money into their transmission system because they don't know if theyVe going to realize the benefit ofthat at any given point.

The other side is that, from an overall policy perspective, previously when there was regulation, everybody had their own load and their own capacity. The supply was matched with demand, and they really were not going outside the system too much. Now, even a small imbalance at one point could create a huge imbalance at another point. Either FERC needs to completely figure out the system before the market can rectify itself, or they should go ahead and make the necessary infrastructure improvements so that you can have all the technological infrastructure taken care of before you move on to the policy issues.

SWAN: We do need some policy changes and, hopefully, we can get some of those passed through the energy legislation that's pending before Congress now. I think everybody would agree that we need some more certainty in terms of how we're going to get it done. We need more certainty in how the utilities or the independent transmission companies are going to be able to recover on it.

I think we probably need mandatory reliability rules as opposed to the voluntary ones that we've had in the past. I think we've gotten beyond the point where that system works. And, as Ave said, we need to deal with it beyond state lines.

BIE: You have state regulators who don't want to give up authority. Then there are the federal regulators. You have governors who are involved with what they believe is their role and what isn't their role. And you have a federal energy department that is starting to say, "maybe we need to look at lines of national security." Should there be transmission lines designed as lines of national security that the federal government is responsible for putting in? The infrastructure in this country is not able to handle the kinds of transmission transactions that are taking place.

THILLY: I think the bulk electric market is regional in nature. It's not necessary that it be done the same way in the Pacific Northwest as it is here. It's not going to injure us if they have a different system. In the Midwest, it's pretty clear to me we're moving to a much more competitive electric market. I think that's good for consumers.

But we need to recognize honestly some of the implications of competition and deal with them. One, for instance, is that utilities communicate a lot less with each other. They don't tell each other what's going on. They dont want to tell people that they've had an outage because that'll increase the cost of power in the market to replace it.

WILLIAMSON: I think one of the things we have to do to get on with the infrastructure is improve our education process. Something I discovered again for the umpteenth time is that all politics arc local when it comes to facility siting. No matter how many laws or rules or time frames you set, its chaos. If people want to oppose something because they don't understand it, they'll figure out a way.

We need to try to explain that this is not corporate greed, and that we're in a terrible position these days with all of the things that have happened in the energy world. No matter how many rules you have, you're not going to cut through people's ability to stop you, if they really want to.

NEITZEL: Whether it's high gas prices or a blackout, it's due to the fact that we're in love with energy in this country, but hate the infrastructure we need to get it. That's like saying, "I want to be 150 pounds, but I haven't seen the inside of a gym since grade school." Eventually, it's going to catch up with me. To face these issues as a country, we have to ask what outcome do we want and how do we get there. You can get there through a regulatory process or through a market-type process, but you have to be very aware that they both have benefits and costs.

MODERATOR: BUT DON'T WE, HAVE THE WORST OF both worlds right now? We're stuck in the middle, aren't we, of regulation and deregulation?

WILLIAMS: Isn't Congress all about denial? Congress waves its arms and talks about how we need to solve the energy crisis by finding more gas, but they don't talk about federally preemptive siting rules for building new pipelines. They don't want to come to grips with the debate about taking over interstate siting of transmission lines and solving the NIMBY problem.

We create a whole fabric of individual rights associated with the avoidance of infrastructure, but the reality is that anyone who has a transmission line going over their house isn't getting electricity from that transmission line. It's going over their house. It's going over their farm. It's going someplace else to help someone else.

The burden of our infrastructure, in terms of its physical impact, is always on people who are not necessarily receiving the benefit, which is what government is all about. It's why highways get built by preemptive authority and eminent domain.

DRABA: There are lots of things we can do in the state with streamlining. The issue of NIMBY isn't just related to power plants and transmission lines. It is wind generation also. It's all across the board.

MODERATOR: LET'S SAY I'M A SMALL PLASTICS MANUfacturer in Baraboo, and I'm worried about my natural gas pricing. Now do I have to worry that the lights are going to flicker and go out?

NEITZEL: I don't think we want to throw people into a panic, but the fact is the situation that we face across the spectrum on energy is one that we've been in denial of for a long time. People need to be aware that when there's a debate on energy, it does affect them. It's a series of laws and regulatory changes that happened over the last 20 years that cumulatively end up being a policy. We're now are at a point where we have to ask: Have we ended up where we want to be, and if not, what do we want to change?

WILLIAMSON: I think the plastics manufacturer really does need to worry. And the way we're going about fixing our infrastructure piece-meal and having the same argument about every piece of the infrastructure is going to make him worry for a long time to come. If we keep fixing it one little link at time and take 10 years to get each piece built, that poorguy in Baraboo is going to have trouble for a long, long time to come.

THILLY: I agree that the plastics guy in Baraboo should be concerned. Many of the utilities had peaks this summer, and yet we didn't have sustained hot weather and we had an economy that was not operating at full steam. If you reverse that and you have a really hot summer and your economy is back, our loads are going to be significantly higher than where they've been, which means we need to put in new generation. At the same time, we have a lot of pressure to retire older, dirtier coal plants. That just increases the need for capacity. And we have the nuclear uncertainties. So we need to build new power plants, for sure.

MODERATOR: WILL WE SEE ANOTHER NUCLEAR PLANT proposal in the next 10 years?

BIE: There's a moratorium in Wisconsin. We need to continue to look at balancing coal with the renewables and the nuclear, which will be up for re-licensing in 2010 and 2013. Nuclear still provides the lowest cost fuel for the state of Wisconsin. The issue there has been the storage, and that's a federal issue that the state has had to deal with and struggle with. But nonetheless, that re-licensing issue will be on our plates and will be active in the next couple of years, if it isn't already.

POTTS: I think the collar is going to have to get really tight before nuclear becomes a true reality. I'm an engineer. Philosophically, I think we could do it as a nation, if we really put our minds to it. If we put people on the moon within less than 10 years as our goal, I think we can do it with nuclear. I don't think there's any debate. Will it happen? I don't believe so. I don't believe in our lifetimes we're going to see that as the primary source of power.

THILLY: I think we would all agree that conserving resources should be the number-one priority. In terms of your question, if nuclear is going to be built, it all goes back to this market structure competition issue. Clearly, if we move to a fully competitive market, nuclear is not going to get approval. It will be a 10-year lead time before you can cover all the risks associated with it. Nuclear only works in a regulatory environment, I think.

WILLIAMS: In the past, utilities were stimulated to produce electric generating capacity. They were stimulated to add rate-base assets, physical electric generation, electric transmission and electric distribution. Now we're rebuilding the system. But until we redesign it and say it's cast in stone, this is the game that's going to be played for the next 25 years.

We can all talk about solving the energy problem, but the only solution to it is either less energy use or more energy generation. Simple. Politicians won't face that fact.