Boris
08-27-2003, 08:15 PM
Here's more from my man Holman Jenkins at the WSJ. He advocates getting the gov't completely out of regulation of the transmission infrastructure and leaving capital spending decisions at pricing to vertically integrated power companies (meaning companies that own both the power generation plant and the transmission lines). I have to say I'm not completely sold on this idea. I think the resulting power companies would have way to much pricing power and that monopoly inefficiencies could be worse than the almost guaranteed inefficiencies created by gov't bureaucracies. But you never can be sure.
.................................................. .........
Ahem, Before We Spend
$100 Billion on the Power Grid . . .
Like or loathe California's recall, it represents an extraordinary departure from the stately precession of the heavenly bodies that make up the democratic firmament. Dud governors are supposed to be turned out by voters on a strict four-year schedule. But look at it this way: Gray Davis was reelected by a fluke, the Enron scandal, which allowed him to fool voters about his pathetic response to California's blackouts two years earlier.
There was never any shortage of power. Once a solvent buyer (the state) was willing to enter the market and sign long-term contracts, prices fell back to normal. Mr. Davis dragged his feet for months, though, because he didn't want to be seen bailing out the unpopular utilities from the consequences of the state's botched deregulation. Result: billions of dollars in damage to the state budget and a deep suspicion of anything labeled "deregulation" in the electricity business.
Now we have blackouts across the Northeast, a part of the country that has most fervently embraced deregulation, wholesale power markets and long-distance transmission. And yet the region still suffers from high electricity prices and now is patching up after a blackout that began in an area under the suzerainty (however lame) of the very first federally blessed "regional transmission organization."
No, the lesson isn't that deregulation causes high prices (high prices cause deregulation) or that regional grid management creates blackouts. But, like California, the episode invites a mid-course reassessment.
Notice, first, how much the state of play has changed. Once, the key opponents of reform were utility monopolists trying to stop customers from escaping high rates to pay for "stranded investment" in boondoggle power plants. Nowadays the footdraggers are states with low electricity rates that don't want to open their markets to consumers in other states. When such barriers drop, guess whose prices rise and whose falls?
Notice, also, that the deregulators have been high-cost states that use transmission as a substitute for power plants they don't want to build. Things will look quite different when they begin to weigh the cost of upgrading the grid (totally regulated and paid for by ratepayers) against the cost of building more local generation (totally deregulated and funded by private investors).
Last week an aide to Mayor Mike Bloomberg was busy embodying all the rethinking going on: He said the city blackout was entirely a failure of transmission, not a failure of generation, and yet the city was now looking for a place to site a new power plant.
Exactly.
Three years ago Gray Davis and his worst enemies were agreed that California needed an emergency program to build more power plants. Now instant wisdom blames the blackouts on inadequate investment in transmission. But there's another term for increasing output from the same assets: productivity.
Many a pre-blackout quote has been recycled about how "the cushion" was used up, but we hear this after every air crash too: The airlines are broke, competition is intense, maintenance is taking a whack. Yet since the modern industry was born in 1938, there have been 10 years in which passenger deaths fell to single digits or zero, nine of them since deregulation.
Few onlookers doubt that digital technology could improve real-time management of grid system propagating complexity out the wazoo. But demanding more investment is meaningless without a mechanism to guide it to where it's needed. The "grid is overloaded," after all, is another way of saying "we want power without power plants" (especially in the Nimby-prone Northeast).
As for those who lay the problem of lagging grid investment to "regulatory uncertainty," nobody should kid themselves that a cloud will lift and private capital will pour in. The grid being devised by federal restructuring czars is a giant old-style utility; its only incentives are those regulators prescribe for it.
Oddly, given their baroque planning of every other aspect of our electricity future, officials only began scrambling to fill in the blank last year. In a switch, regional operators were now urged to take ownership, not just control, of the grid. Extra regulatory profits on new investments were even dangled to lubricate compliance.
Of course, we're rolling toward a recapitulation of the old utility model: Regulators saying yea or nay to transmission projects, funded by a captive rate base. But won't this raise the new-old problem of private generators, big electricity users and even whole communities making inefficient choices because others pay part of the bill?
In turn, some clamor for "participant funding" of grid investment: Only those upgrades aimed at boosting reliability should be funded by all ratepayers. All other investment should be billed to those who benefit directly.
How to guide transmission investment, in other words, is the mystery meat in the electricity reform hoagie. One thing is clear: The system will be rife with the same regulatory incentives that went badly awry in power plants in the 1970s.
Details to be filled in later, but the grid operator will be a political beast, its decisions shaped by federal bureaucrats and state politicians posing as the "voice" of ratepayers. No wonder when the industry released its post-blackout "investment" wish list on Monday, it took the $100 billion prospectus straight to the media rather than to Wall Street in a road show.
Prediction One: Looking at this mess in light of this month's blackout, many users will put more faith in local power plants than long-distance transmission.
Prediction Two: The vertically integrated utility will make a comeback. Bad regulation doesn't mean a bad form of industrial organization, and some sort of integrated business model is likely to appeal to customers shopping for reliability.
Updated August 27, 2003
.................................................. .........
Ahem, Before We Spend
$100 Billion on the Power Grid . . .
Like or loathe California's recall, it represents an extraordinary departure from the stately precession of the heavenly bodies that make up the democratic firmament. Dud governors are supposed to be turned out by voters on a strict four-year schedule. But look at it this way: Gray Davis was reelected by a fluke, the Enron scandal, which allowed him to fool voters about his pathetic response to California's blackouts two years earlier.
There was never any shortage of power. Once a solvent buyer (the state) was willing to enter the market and sign long-term contracts, prices fell back to normal. Mr. Davis dragged his feet for months, though, because he didn't want to be seen bailing out the unpopular utilities from the consequences of the state's botched deregulation. Result: billions of dollars in damage to the state budget and a deep suspicion of anything labeled "deregulation" in the electricity business.
Now we have blackouts across the Northeast, a part of the country that has most fervently embraced deregulation, wholesale power markets and long-distance transmission. And yet the region still suffers from high electricity prices and now is patching up after a blackout that began in an area under the suzerainty (however lame) of the very first federally blessed "regional transmission organization."
No, the lesson isn't that deregulation causes high prices (high prices cause deregulation) or that regional grid management creates blackouts. But, like California, the episode invites a mid-course reassessment.
Notice, first, how much the state of play has changed. Once, the key opponents of reform were utility monopolists trying to stop customers from escaping high rates to pay for "stranded investment" in boondoggle power plants. Nowadays the footdraggers are states with low electricity rates that don't want to open their markets to consumers in other states. When such barriers drop, guess whose prices rise and whose falls?
Notice, also, that the deregulators have been high-cost states that use transmission as a substitute for power plants they don't want to build. Things will look quite different when they begin to weigh the cost of upgrading the grid (totally regulated and paid for by ratepayers) against the cost of building more local generation (totally deregulated and funded by private investors).
Last week an aide to Mayor Mike Bloomberg was busy embodying all the rethinking going on: He said the city blackout was entirely a failure of transmission, not a failure of generation, and yet the city was now looking for a place to site a new power plant.
Exactly.
Three years ago Gray Davis and his worst enemies were agreed that California needed an emergency program to build more power plants. Now instant wisdom blames the blackouts on inadequate investment in transmission. But there's another term for increasing output from the same assets: productivity.
Many a pre-blackout quote has been recycled about how "the cushion" was used up, but we hear this after every air crash too: The airlines are broke, competition is intense, maintenance is taking a whack. Yet since the modern industry was born in 1938, there have been 10 years in which passenger deaths fell to single digits or zero, nine of them since deregulation.
Few onlookers doubt that digital technology could improve real-time management of grid system propagating complexity out the wazoo. But demanding more investment is meaningless without a mechanism to guide it to where it's needed. The "grid is overloaded," after all, is another way of saying "we want power without power plants" (especially in the Nimby-prone Northeast).
As for those who lay the problem of lagging grid investment to "regulatory uncertainty," nobody should kid themselves that a cloud will lift and private capital will pour in. The grid being devised by federal restructuring czars is a giant old-style utility; its only incentives are those regulators prescribe for it.
Oddly, given their baroque planning of every other aspect of our electricity future, officials only began scrambling to fill in the blank last year. In a switch, regional operators were now urged to take ownership, not just control, of the grid. Extra regulatory profits on new investments were even dangled to lubricate compliance.
Of course, we're rolling toward a recapitulation of the old utility model: Regulators saying yea or nay to transmission projects, funded by a captive rate base. But won't this raise the new-old problem of private generators, big electricity users and even whole communities making inefficient choices because others pay part of the bill?
In turn, some clamor for "participant funding" of grid investment: Only those upgrades aimed at boosting reliability should be funded by all ratepayers. All other investment should be billed to those who benefit directly.
How to guide transmission investment, in other words, is the mystery meat in the electricity reform hoagie. One thing is clear: The system will be rife with the same regulatory incentives that went badly awry in power plants in the 1970s.
Details to be filled in later, but the grid operator will be a political beast, its decisions shaped by federal bureaucrats and state politicians posing as the "voice" of ratepayers. No wonder when the industry released its post-blackout "investment" wish list on Monday, it took the $100 billion prospectus straight to the media rather than to Wall Street in a road show.
Prediction One: Looking at this mess in light of this month's blackout, many users will put more faith in local power plants than long-distance transmission.
Prediction Two: The vertically integrated utility will make a comeback. Bad regulation doesn't mean a bad form of industrial organization, and some sort of integrated business model is likely to appeal to customers shopping for reliability.
Updated August 27, 2003