Generation: Big orDistributed power may turn
heads, but economics points
to central plants.
By Joseph F. Schuler, Jr.
By 2010, distributed power...
The T&D grid, once deemed a bottleneck, will now face pressure from both ends. Is it still the same old monopoly?
Some 30-odd years ago physicist and philosopher Thomas S. Kuhn coined the phrase "paradigm shift" to describe a radical change in a mental framework for interpreting facts. His key work, "The Structure of Scientific Revolutions," published in 1962, focused on the role of paradigms in scientific thought - such as the Copernican sun-centered solar system or Planck's work in quantum mechanics. In the energy industry, however, the notion of shifting paradigms gained popularity only during the 1980s. Analysts began to use the phrase to communicate the profound changes in regulation and industry organization brought about by fostering open access to the natural gas transmission and distribution system, a process that began in 1985.
Nevertheless, while the idea of mandating open access to interstate transmission networks often is referred to as a "paradigm shift," it is easy to overlook the extent to which this seemingly new approach shares certain fundamental assumptions with the preexisting regulatory paradigm. Both assume there are rising economies of scale in transmission and distribution lines, and that supply - whether gas production or central station generation - is located a fair distance from the point of sale.
These two assumptions, in turn, presuppose that transportation facilities tend to be bottleneck monopolies (or oligopolies, at the least). Control of the bottleneck is thought to yield considerable revenues in excess of cost-revenues that regulation seeks to control. The traditional regulatory paradigm restricted entry by defining "service territories," and then set prices based on the monopoly seller's cost. The new, open-access model maintains much of the traditional regulatory approach for the transmission component of the industry while opening transmission access for supply of the transported commodity.
In natural gas, open access worked to lower city-gate gas prices and expand markets. By the 1990s, the success of the open-access model for gas encouraged regulators to adapt it to the electric power industry, a process still underway.
But a funny thing happened on the way to the new paradigm for the power industry. While everyone focused on rearranging the ownership structure for generating assets and new pricing and transmission institutions to address the bottleneck T&D lines, the basis for the paradigm already was shifting. Changes in consumer demand for power quality were combining with new generation and power management technology to begin to upset the underlying economic geography of the industry.
Imagine for a moment: How would the gas industry model have fared if, back in 1989 or 1990, some new technology had come along, allowing industrial and commercial customers to drill gas wells on their property and feed gas back into the lines on the coldest days of the year?
On the electric side, that scenario now threatens, putting the "what if" question squarely before the industry in the context of regional transmission organizations. As a result, several questions arise about T&D assets:
* Will the assets be bottlenecks or rather bottlenecked by price pressure from power supply at both ends of