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Pastimes : All Clowns Must Be Destroyed -- Ignore unavailable to you. Want to Upgrade?

To: Glenn D. Rudolph who wrote (28435)	4/24/2000 8:13:00 AM
From: yard_man	Read Replies (1) \| Respond to of 42523

there's some inaccuracies in that ... i'll post some comments later the major one has to do with what is preventing investment in the necessary transmission ... growth in TLRs isn't as ominous as they make out. I'll try and post something at lunch time ...

To: Glenn D. Rudolph who wrote (28435)	4/25/2000 3:15:00 AM
From: yard_man	Read Replies (1) \| Respond to of 42523

>>But the restructuring has also created big disincentives for anyone in the industry to invest in the grid, build new capacity or even pay for research on how to transmit power more efficiently. Because of these strains, the nation's power supply is becoming less stable and reliable, even as reliability becomes more important. << Restructuring (i.e. re-regulation) has not properly incented folks to invest in transmission. That much is true. The old "cost-plus" regulation (it was not supposed to be cost-plus; regulation was supposed to allow the utility the oppty to earn a reasonable rate of return on prudently incurred investment, but state commissioners through laziness and lack of vigilence turned the optty into a guarantee) taken together with various regulatory miscues (see the application of PURPA and others in the state of California where utilities were forced to purchase electricity from generators at "avoided costs" which were calculated at unrealistically high values) got some folks interested in a way out of boondoggles that had accumulated dues to poor oversight. Economists to the rescue -- who as you know are very good at dividing the here-to-for indivisible and understanding the inner workings of all schemes of production. The push to de-regulate the generation side of the business was born. The thought was that while distribution was surely, and perhaps transmission was, a "natural monopoly," generation was not one. Regardless of whether they were correct or to what extent they were correct, the idea (dergulating generation) took on momentum and the net effect was a chilling effect on any new investment period, at first. The production and delivery of electrical power is very capital intensive and investment payback periods are long. And since part of the impetus to look at de-reg was high generation prices that some had been saddled with due to poor regulation ... why risk large sums of capital that you might not turn out to be profitable in a new regulatory regime that was coming. Now, we see through the glass a little more clearly. There is recognition that the transmission grid is sort of a "natural monopoly." There was a FERC order a few years ago that essentially required utilities with transmission assets to functionally unbundle transmission service -- i.e. offer the transmission services to others in much the same way they offer the same transmission services to their own generators in the wholesale electricity markets. Some have called this a "chinese wall." This arrangement includes a convenient fiction -- something called a "contract path." Through a system of reservation -- sellers and purchasers of electrical energy arrange for "transport" of that energy over a given line and reserve so much existing line capacity. It is a fiction because power flow is "network flow." You can't send so many Megawatts over a specific line. Most transactions are priced with an adder to cover the transmission cost based on this "contract path." It may be computed differently, but that is how it is applied. (As an aside, PJM is different, and a couple of other pools may be differnt as well, in this regard. Prices there are computed differently, based on a LBMP (locatin-based marginal pricing) scheme.) Regulators are just now trying to come to grips with the fact that the structure they have created does not incent anyone to build transmission. Pools or transmission groups or independent system operators -- whoever the responsibility falls to for the brokering of buy / sells, must have some sort of incentive for building transmission. Right now with the continuing regulatory uncertainty, the preference has been favor the least costly options from the capital side -- i.e. the building of peaker plants over every other kind of investment. Peaker plants (gas combustion turbines most economically suited for meeting temporary periods of high demand) have low capital costs but higher operating costs. In addition the tightness of transmission and the disincentive to invest in baseload units has resulted in a volatile wholesale market for 20 - 40 days of the year. As a result, utilities have naturally started to view owning these peaking units as a hedge againt the prices which can spike 100 - 300 fold in the summer. Turbine mfrs love this and play it for all its worth. Then there are large concerns that buy up large blocks of the units hoping to sell them at huge profit ... But it is like anything that comes into apparent "short supply" -- there will be short supply until the marginal profit or utility had from purchasing goes away. The problem on the demand side is multi-facted. First you have had quite rapid growth in demand in the last couple or years as there has been an economic boom which fostered a very much "off-the-charts" housing boom. Not only has there been a lot of building, but many have been able to afford houses which have a lot more sq feet. The jump in both unit numbers and square feet have had a very large impact on peak demand vis-a-vis the air conditioning demand you mentioned. Utility managers are very risk averse -- some of this is understandable, again -- very capital intensive industry. As such they want to be prepared for worst case and whether they do it "in-house" or hire someone to do it -- load forecasts, now extrapolate this recent growth in demand -- though it certainly will not continue 5 years into the future. Why is this a conservative approach? Being caught short the electricity market is worse than being caught short the stock market -- the volatility (apparent only since '97) can make a winning year turn into a loser in a matter of a few days. Kinda like the dippers of today's market -- many utility execs reason thus: if it turns out I don't need it I can always sell it at a profit on the market. The supply of turbines that can be manufactured for the next couple of years have been bought up even as the mfrs have added capacity -- all on the premise that demand continues growing at very recent historical rates for at least five years into the future. Moreover, easy credit (yes I am in that camp that thinks AG has been far too loose and encourage banks and capital markets in the same) has helped large players to buy up very large blocks of these units pushing the prices even higher. Many are buying now discounting prices for energy and levels of their own system demand that will never be realized. >>Because of these strains, the nation's power supply is becoming less stable and reliable, even as reliability becomes more important. Thirty years ago, when the lights flickered for a moment, hardly anyone noticed. << This article fails to distinguish between generation, transmission and dsitribution reliability. In order to reap economies that the economists tell us were not being realized under the old regime realiability must be degraded somewhat -- that is not necessarily a bad thing. Our lights flicker here occasionally, but it isn't due to insuffient generation or transmission -- it is due to a distribution problem -- a temporary fault of some kind. Economists have pointed out that for the average residential user it is the distribution that limits reliability and that given reliability at that level how much sense does it make to bolster the rest of the system to be ultra-reliable when the end-user doesn't benefit from it. What economists would really like is the electric system to provide products of differing reliability priced accordingly -- i.e. reliability is a whole lot more important to a smelter than to me as a residential customer and the smelter should pay for that -- at least that's the reasoning. The problem is we have an interconnected system -- it is difficult to provide such differing services and more important: it is difficult for that market feedback on how the different customers value reliability to get back to those who actually build facilities. I think some of the rest of the article is pretty good. I'll try and link something a little better when I get it. the overall impression I get(after a 2nd read) is that they are at least focused on the right problem -- transmission and the "imperfect" regulatory structure -- one that has perhaps created more problems than the old one discarded.