To the Editor:
I read your May 15, 2003, "Frontlines" column ("Grid Glut?") and have to respectfully take issue with a couple of your thoughts.
First, the lack of strategic transmission enhancements is one of the root causes of an energy crisis we are beginning to experience in the United States. With natural gas prices above $5.00/mmBtu since February and currently over $6.00/mmBtu through March of 2004, U.S. gas and electricity customers, whose prices are meaningfully impacted by gas prices, are about to receive a real shock for the rest of this year and through the heating season of 2003-04.
This, as well as future gas price spikes, could be muted by having additional transmission capacity in place from the coal generation-rich middle United States to the East and South, thereby reducing the amount of gas used for generation in the off-peak periods and likely reducing gas prices. The soon-to-be-released Midwest ISO (MISO) transmission plan, as well as the just-released Department of Energy standard market design study, show significant electricity consumer savings if the middle United States to the East and South areas are reinforced strategically. The MISO study points out that enhancements would pay for themselves in one to four years, depending on your gas price assumption, with the shortest payback if gas prices were roughly $5.00/mmBtu.
The payback would be even shorter at today's higher gas prices.
The second issue you raised is why there are few transmission expansions going on. I would suggest many of the current transmission owners who also own generation have a significant disincentive to invest in transmission, since it may likely devalue their generation asset. This is especially the case if the shareholders are a different set of stakeholders than the customers. It is a difficult argument for the CEO of a generation company to make its board of directors strategically enhance its transmission system to allow more low-cost generation (mainly coal) into the area, which will decrease market prices in the area and presumably decrease the value of the existing generation in the area (and possibly the stock value as well). This would be akin to believing a local store owner would want to fund an interstate to come near town so Wal-Mart could put up another SuperCenter in the area and take advantage of Wal-Mart's large-scale, low-cost operation. It will not happen.
The transmission system enables affordable electricity and energy. Transmission and generation are not equal options. Strategic transmission enhancements are far more valuable, for they are the insurance policy against fuel price spikes, low hydro output, catastrophic events, and market power abuse. Gas generation at load cannot do that. Strategic transmission enhancements enable various fuel sources to compete to supply electricity to consumers at the lowest cost.
The merchant model of transmission will not work, much the same way the United States did not develop the interstate system using a merchant model. If we had developed the interstate system that way, we would have fewer good highways, and consumers would be paying significantly more for many products. Simply put, Wal-Mart's low-cost system does not work without a good interstate system, and most consumers like the benefits the transportation-dependent Wal-Mart system provides.
The lack of grid enhancements is hurting consumers today. Fortunately, the analysis is finally being done by the RTOs and others to show the value of transmission.
To the Editor:
Your discussion about the capacity of the transmission network (as expressed in MVA-miles per megawatt) in your editorial "Grid Glut" (Public Utilities Fortnightly, May 15, 2003) shows the common misunderstandings of the applicability of this model. As the original author of the concept, I would like to explain how it came about and what it can be used for.
As an executive of a large transmission materials manufacturer in late '70s, I was interested in developing a model for forecasting demand for transmission line materials. One of the elements of the model was growth of network capacity (expressed in gigawatt-miles) divided by peak load of the system in gigawatts. There were a number of other key elements in the forecast model, such as cost of utility funds, planned generation startups, etc. In the relatively stable regulatory environment of late '70s and '80s the model was quite satisfactory.
I dusted off the model in early '90s and presented reports based on the model in three IEEE conferences.
At that point my interest was mainly to study if the differences of the ratio could explain some of the known congestion problems in different regions of the United States. Note that the ratio serves as a proxy for the trade radius of a generating plant under peak load conditions. Not surprisingly, the highly congested regions such as New England and Florida, have low "ratio miles," while the situation is quite different in the Pacific Northwest, for example. Similarly, the model indicates that there should be essentially no congestion in the United Kingdom, which is a known fact.
The model has been misunderstood and misapplied. Naturally, it should not be applied without consideration of the regional generation patterns, etc. But it clearly shows the folly of assuming that the U.S. transmission system is an unconstrained "network."
Issue of May 15, 2003:
In the "Business & Money" column, we erred when we selected a title and lead sentence for the sidebar on page 21 that misrepresented the position of the article's authors, Raymond Hill, George J. Benson, and Al Hartgraves-all from Emory University's Goizueta Business School. We had added the sidebar to the author's article on how cash flows alone can give an inaccurate picture of the financial performance of energy companies.
Using Mirant as a case study, the authors explain that they cited two reasons why cash flow might distort financial performance-(1) understating performance where Mirant bought power plant capacity and resold the output at a discount to the seller, and (2) overstating performance where cash flow reporting failed to reveal a decline in commodity power prices in the PJM regional spot market.
We seized on the second effect (overstating performance) in crafting the headline to the sidebar, whereas the authors want readers to know that the first effect (understating earnings by failing to amortize the sale at a discount) was the more important and driving factor.
Thus, the headline to the sidebar should have emphasized that relying only on cash flow reporting would likely understate Mirant's financial outlook.
The editors regret the error.The editors regret the error.
Issue of June 15, 2003:
In the "Business & Money" column, highlighting legislative moves to repeal income taxes on corporate dividends, we reported a proposed reduction in the tax rate that turned out to be greater than the size of the reduction as stated in the final version of the bill that was eventually passed by Congress and signed by the president (after the magazine had gone to press).
The final legislation would freeze the tax rate on corporate dividends received by individual taxpayers at 15 percent, for anyone in any of the four top tax brackets, which now carry marginal tax rates running to as high as 38.6 percent. The freeze would start this year and run through 2008.
Individual taxpayers in the 10 percent or 15 percent brackets would pay a 5 percent tax on income from corporate dividends for the 2003-2007 tax years, but then would pay nothing for 2008.
For each group of taxpayers, the tax rate would revert in 2009 to the current marginal rate for the bracket in question.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.