Before Thursday's power surge that turned televisions black from Long Island to the Erie Canal, I was planning to write about the impact of government policy on energy. Today, the topic is even more timely, although power now trumps oil and gas for center stage.
Of course, the power will return, most likely to the majority of customers by the end of Friday. However, what happened could easily have happened last year and, without a new government policy, could happen again -- maybe tomorrow.
There will be plenty of finger-pointing regarding the cause of Thursday's blackouts, but politicians and energy regulators could start by looking in the mirror. All the time that the Federal Energy Regulatory Commission, state public utility commissions and legislative bodies were in a rush to deregulate generation and allow the market to set power prices, most failed to grasp a very important piece of the puzzle -- the impact deregulation would have on the transmission grid.
Remember, for a new generation plant to do a community any good, there has to be a way to move that power from the plant to customers. That takes wires -- meaning the transmission and distribution system. Transmission, in simplistic terms, consists of the high-voltage lines that carry power from the plant to the power substation somewhere near your home. Distribution, again simply, is the lower-voltage wiring that brings that power from the substation to your house.
Political Failure, Power Drain
While companies like
and other generators became synonymous with the new power industry, transmission became the forgotten stepchild, left for regulated utilities to pick up the pieces with little incentive to rebuild and renew an already antiquated system.
Transmission and distribution remains highly regulated and fragmented, with each utility owning the grid that takes power from its plants to substations and on to its customers. However, that grid is also interconnected across the country, with the exception of Texas, so power can be moved from one utility to another to balance supply and demand. (That's the wholesale power market that made up most of the trading and marketing so widely vilified in recent years.)
Interconnection is beneficial, but it also was the cause of such widespread outages on Thursday. Once a "breaker" in the
grid tripped -- be it in Canada or the U.S., and it really doesn't matter -- it caused a domino-like effect to the east and to the west.
The technical nature of the break is less important than the fact that if an investment similar to that made in generation over the past decade had been made in the transmission grid, the outages might have well been avoided.
All levels of government have ignored the transmission problem because nobody wants to pay for it. At the same time, state regulators have refused, for the most part, to provide adequate returns on transmission investments to provide incentives to utilities to upgrade an old system. For over a decade we've taken a Band-Aid approach toward the grid, with the end result being the big blackout.
There are no easy solutions. It will take coordination of the transmission grid, something only FERC can do with the assistance of the utilities. Also necessary is a regulatory response that recognizes market-based rates of return are needed to prompt utilities to invest in new transmission infrastructure. And, importantly, we need an energy policy that addresses the infrastructure needs of the power grid, recognizing that a lack of investment in wires will ultimately mean more events like Thursday.
"Kudlow & Cramer" earlier this week, we talked about the Bush administration's proposal to speed up permitting of drilling in the Rocky Mountains. As we rightfully hailed the move as an attempt by the administration to hasten new natural gas production, I failed to note that this was only the latest step in an emerging trend.
Earlier this year we discussed the fact that the Interior Department was implementing a royalty relief program for deep drilling on the Gulf of Mexico shelf. That was really the first sign of the administration's understanding that incentives needed to be provided to bring more natural gas production to market.
As Jim Cramer noted in a column earlier this week, the latest news should benefit drillers and other oil-service names. Combined with the earlier Bush administration decision to waive certain royalty payments, this is yet another sign the White House may be willing to craft an energy policy, even if Congress chooses not to participate.
But with yesterday's blackouts, the chance of an energy bill this session increased meaningfully. If we don't get a bill this year, it may be Congress that's sitting in the dark come winter.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to