October 2, 2003

October 2, 2003 | Commentary on Energy and Environment

Ahhh, The Grid

Remember the episode of "M*A*S*H" when Radar was trying to impress a nurse who was a classical music fan? Hawkeye and B.J. trained him to say, "Ahhh, Bach," whenever she mentioned Bach. Inevitably, though, she asked what he knew about Bach, and the truth came out.

A similar thing is going on now in Congress. Mention the recent blackout that turned out lights and-more critically on that day-air-conditioners from New England to the Midwest, and certain members of both houses say, "Ahhh, the grid." But ask them what they want to do about it, and it turns out they're as prepared for that question as Radar was to discuss Bach's "Mass in B minor."

Yes, inadequacies of the grid caused the blackout, which left millions without power for up to a week. But to respond to that crisis as some members of Congress advocate is to ignore almost all of what is actually a big, big picture.

Demand for electricity will climb 20 percent over the next decade and 50 percent over the next 20 years. But, under present policies, transmission capacity will expand just 6 percent in the next 10 years and perhaps 10 percent more in the decade after that, according to the Energy Information Administration. This after a decade in which demand for power rose 30 percent but transmission capacity climbed just 15 percent.

Moreover, most of today's transmission systems aren't designed to deliver large amounts of power over long distances between utility systems. They're designed to deliver power from a utility's generating facilities to its customers. Yet, the movement of power from one region to another will increase as competition increases among wholesalers. The Federal Energy Regulatory Commission actively encourages this.

So, given that saying, "Ahhh, Bach," isn't a serious option, what can lawmakers do?

Grant FERC limited-emphasis on limited-authority to choose sites for transmission lines in designated "interstate congestion areas." A big part of the reason transmission capacity has fallen so far behind demand is that finding a place to build infrastructure has become increasingly difficult, thanks to the powerful Not In My Back Yard, or NIMBY, movement. The problem is particularly acute in areas near state borders, where constituents on each side try to push the plant into the other state. Congress should let FERC break these deadlocks.

Streamline the permitting process for extending power lines across federal lands. Today, the process involves seeking permission from multiple agencies at multiple levels of government. It needs to be simplified, under the Department of Energy, so that deadlines are met and decisions are made in a reasonable time frame.

Repeal the Public Utility Holding Company Act, a New Deal-era statute that makes it difficult for firms to acquire and divest power assets and hampers their ability to enter new markets. The Securities and Exchange Commission, which administers PUHCA, has recommended its repeal since the 1980s. Doing so would attract new investment to the industry.

Allow utilities to depreciate their transmission facilities more quickly. Currently, they depreciate over 20 years. Make it 15, which is more in line with similarly capital-intensive industries. This would encourage them to modernize and expand capacity. And, because this measure would hold down the cost of capital, it would mean utilities could upgrade without significant rate increases for homeowners.

Today, the playing field is tilted against American utilities, which increasingly will face competition for capital from foreign firms. According to the American Council for Capital Formation, U.S. firms recover 29 percent of their investment in transmission lines in five years. Canadian firms recover half theirs during that period, Korean firms nearly 75 percent, and firms in Thailand and the Netherlands recover nearly all their investments in that period.

Worse yet, transmission investments don't compare well even with other similar investments by American firms. For instance, the scrubbers used in electricity plants recover 60 percent of their cost in five years, and engine blocks, factory robots and wastewater treatment equipment for pulp and paper production recover nearly 80 percent of their costs over five years.

Congress need not know the intricacies of utility transmission to help with this problem. Congress needs merely to understand that the cost of capital stands in the way of a modern, resilient, blackout-resistant power grid. And that the time to address this problem is now-before the next big blackout occurs.

Charli Coon is a senior analyst for energy and the environment at The Heritage Foundation.

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