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Frontlines

Gas pipelines compete against electric transmission lines. And the pipes are winning.
Fortnightly Magazine - June 15 2001

Open access is at once the Internet's crowning glory and bed of thorns. Everybody gets it for free. How to generate revenue? By contrast, cable TV and other proprietary entertainment ventures that maintain strict product control (e.g., Disney World) are swallowing broadcasting, which remain tied to open access and the free riders that come with it. In a recent issue of The Atlantic Monthly, correspondent James Fallows highlighted many of the current complaints about hub-and-spoke airline operations, where we have no good way of allocating gate space or creating financial incentives to increase supply. He reports that airline insiders are investing in a new generation of small-scale planes, to make personal aviation a mainstream product, like automobiles, allowing travelers to fly directly to their destinations.

The electric grid suffers similar infirmities. Shippers can't stream packets of product directly to their desired destinations. Maybe George Westinghouse was a century ahead of this time. Maybe a direct current (e.g. Project Neptune) can save the electric grid.

THEY SAY THE CONTRACT PATH IS A FICTION, BUT GUESS WHAT-THE PEOPLE WANT THE CONTRACT PATH. We've been trying to reform business practices in the power industry to conform to the way that electrons behave in a physical sense. But that's counterintuitive. There's a reason why the utilities have embraced the contract path for so long. Business wants chain of custody. Business wants certainty of delivery. And the business model that provides that is the natural gas pipeline, linking upstream physical mineral deposits capable of storage to downstream combustion turbines or fuel cells that will inject power "on demand"-right where it's needed.

I read the docketed cases at the Federal Energy Regulatory Commission. I read all the briefs and comments in the various RTO filings. I can spend hours at it. It's fascinating. But it's a dead end. Everyone is battling over meaningless processes like configuration, seams and governance. As a result, the RTOs are going nowhere. They are too complicated. Nobody can figure out how to define the property rights and the liabilities and yet leave room for profit. And there's no profit at all unless there's congestion-in other words, unless you build bottlenecks into the system.

What happens if you spend financial and political capital to upgrade the transmission network across a recognized constraint, and then someone builds a few well-placed combined-cycle turbines right in the center of the load pocket? The new plants erase the locational differential in the end-use commodity price, along with the constraint. There's no more bottleneck if no one needs to ship electricity across the chasm.

The regulators want to keep the transmission "function" separate and unbundled from the commodity and from the markets. Yet it seems the real financial value lies in the commodity, and in how the markets are organized. The most important job within the RTO isn't running the grid-it's in running the power exchange.

Meanwhile, Wall Street is looking elsewhere. Gas pipeline transportation now competes head-on against electric transmission. It competes not only in the energy delivery business, but for capital investment dollars. And every day brings