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Do-nothing regulators scare off investment, raising prospects for yet another large-scale power failure.
Fortnightly Magazine - March 2004

on grid infrastructure held late last year by FERC, Jacob Williams, vice president for generation development at Peabody Energy, said "First of all, we need to look at transmission in a different light. I've heard for the last five years-and I came out of the electric industry-that transmission and generation are interchangeable. That's not true."

Williams believes transmission should be viewed as the ultimate hedge, the longest of "long" positions in the market for electric futures:

"It's an insurance policy against weather patterns, fuel price spikes, market abuse, [and] regulatory and environmental changes," he says.

"I remember when the nuclear units in the Upper Midwest were down back in '96 and '97. What limited transmission we had was the only saving grace we had to serving load. No one would have planned it that way, but a little excess transmission came in real helpful. Otherwise, the lights were out in Wisconsin."

Of course, even Williams admits that power can always be had for the right price:

"There will be no alternative for many parts of the country. They'll just have to run the gas units and pay for the costs. That will hurt both industry, and it will hurt the low-income families."

The answer, as Williams sees it, lies in a re-dedication to system planning:

"I'm not talking about the full-blown integrated resource plans. … But there is some planning of the system that needs to be done because we can't wait until LLPs identify problems and then take seven to 10 years to solve them. We have to see those problems ahead of time and deal with those problems right now."

But planning might lead the industry back down the slippery slope to full-scale, 1970s-style ratebase regulation.

Harvard professor William Hogan is one who warns of such an outcome, especially if regulators cannot decide how to draw a bright line between (A) "merchant" transmission (new lines designed only to link new gen plants to market that are paid for by investors) and (B) "regulated" transmission (lines that remain essential to the overall working of the grid system, and that are added to ratebase.)

In short, Dr. Hogan fears that regulators will take the easy way out and stick it to ratepayers:

"There will be enormous and justifiable pressure on the regulator," he says, "to put generation and demand alternatives on the same playing field of reduced risk and mandatory collection through regulatory mechanisms."

Then it's back to square one:

"The intended modest domain of regulated transmission would expand to include full-blown integrated resource planning. A poor design for transmission investment is a threat to the entire enterprise [standard market design]. The end state could be recreation of the central regulatory decision problems that motivated electric restructuring in the first place."

But Dr. Hogan offers a solution-a possible dividing line between merchant and regulated investment. He says regulated transmission investment would be limited to those cases where the investment is inherently large relative to the size of the relevant market, and inherently lumpy in the sense that the only reasonable implementation would