The Grid Is Dead
Gas pipelines compete against electric transmission lines. And the pipes are winning.
Last month, somebody gave me a copy of what looks likes a purloined private, inside-the-company newsletter put together by an association of power traders. Let me try to share some of it with you.
In one column, the editor reported on a speech he gave at the monthly meeting of the Women of LA, held at the Beverly Hills Four Seasons Hotel, where, as he puts it, the ladies looked like they had just stepped in for lunch after their weekly Bridge or Ma Jong game. The editor saw them as friendly and hospitable, but at the same time, "very pro-Democrat" and "very anti-us." In fact, the editor says that by the time he took the stage, he was put back on his heels, forced to defend power generators against what he described as a lynch-mob mentality.
Earlier, when TV actor Dennis Weaver (Gunsmoke) took the podium, and he urged everyone to embrace conservation and replace fossil fuels with hydrogen (e.g., fuel cells and such), the editors says the ladies just plain broke out in applause. The editor adds that their enthusiasm for Weaver even exceeded their love for consumer advocate (and former Fortnightly author) Peter Navarro, who talked about how the power generators had manipulated prices and pocketed those obscene profits.
Well, I, too, am concerned about runaway electricity prices. But like the ladies of LA, I suspect that the real lesson of the Western power crisis goes beyond price manipulation and obscene profits.
YEARS FROM NOW, WE'LL LOOK BACK ON THE POWER CRISIS AS THE BEGINNING OF THE END OF ELECTRIC TRANSMISSION. You heard right. At the very moment when President Bush is calling for a study of a possible nationwide electric grid, I believe that the power crisis has revealed the truth about the long-haul electric transmission business-it's likely doomed to collapse into a dead-still-breathing business backwater-like the niche occupied today by Western Union or the Postal Service.
How is that possible, you say? Haven't the federal regulators pledged their lives and sacred honor on regional transmission organization (RTOs) to save electric utility competition? And isn't natural gas giving way to electricity in terms of residential energy consumption?
Yes and yes. But consider this: has an integrated electric transmission network improved electric reliability in California? Are Californians better off relying on snow melt in the Cascades as their energy source, delivered by long and delicate electric transmission lines, or on natural gas deposits in the Rockies, the Southwest and Canada, delivered via pipeline? Which commodity market is traded more deeply? Which is the more volatile in price? Which is the most vulnerable to shortage? Which delivery system is more robust? Which system carries the greatest risk from a first-contingency failure?
I believe it's no coincidence that troubles are brewing in all three of the nation's most important network systems-radio and television broadcasting, airline terminal gates, and the Internet. All three suffer from an inability to define and rationalize property rights.
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 a new project to the drawing board to bring gas into this market or that. From where I sit, It looks like gas transportation is winning as a business proposition and as a market substitute.
Do I exaggerate? Of course. The electric transmission grid will survive for a time. We need it to support all the coal and nuclear plants that we can't replace just yet. But as for the nation's long-term need for greater delivery capacity for energy, the gas pipelines-not the transmission lines-are the likely answer. With all the new gas pipeline projects now underway, investors are voting with their wallets.
Now let's go back to that newsletter. In another column, the editor says that despite the urging of the Bush administration and others to build new transmission in California, Pacific Gas & Electric Co. has filed a protested application with the state public utilities commission, arguing that upgrading the infamous Path 15 constraint would not serve the best interest of ratepayers. The editor adds that back on Capitol Hill, trouble is brewing over attempts to amend legislation introduced by Texas Republican Joe Barton that would force the Western Area Power Administration to "coordinate" in upgrading Path 15.
Forget coal by wire. We'll get our electricity delivered by pipe. I place my bet on Dennis Weaver, and his hydrogen-powered future, supported by a gas delivery infrastructure. Those Beverly Hills ladies can't be wrong.
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