Scarce Resources, Real Business or Threat to Profitability?

Fortnightly Magazine - October 1 1997
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All three may apply, especially if regulators go wrong and let ISOs make the business decisions.

Electricity transmission is a real business. With more than $50 billion of net plant, another $3 billion annually in capital expenditures and yearly operating income that could reach $5 billion per year under normal circumstances, the power grid is roughly twice the size of the natural gas pipeline industry. One would never know that from current events, however. Utility management treats transmission as an inconvenient stepchild. Regulators view it as a wayward delinquent in need of institutionalization. Investors ignore it altogether.

In truth, transmission affects more than reliability and quality of service. It affects profits. When grid operators set a price and decide which transactions will take place, they influence the value and location of power stations. We're not talking about arcane, opaque, academic, engineering exercises. We're talking about real money.

Nevertheless, the current transmission system was not built to meet the needs of a competitive market nor has it matched pace with shifts in population or the growth in demand for electricity (see Table 1). Environmental restrictions and the limited rewards offered by the regulatory process have contributed to minimal investment in this sector. Current policy seems to assume that transmission investment shows no sensitivity to price incentives. %n1%n New technologies could reduce some transmission bottlenecks, but we have to convince transmission owners to make the investments. %n2%n Without new investment, the scarcity of transmission (em and its pricing at time of scarcity (em could create unpleasant problems.

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