The Right Side of the Value Chain

In our prescription, the first thing to do is to focus, not on supply vs. demand (or production versus consumption), but on delivery versus supply. Another way I like to state this is, focus on the right side of the value chain—but don't neglect the left side. The left side (no allusion to politics, by the way) is the creation of the electrons. The right side is the delivery and consumption of these electrons (as shown in Figure 2.1).

Fix Transmission Now

The transmission sector was the neglected stepchild of deregulation. Initially, "the wires" were thought to be a "natural monopoly" even by many of the free marketers. Incumbent utilities, forced to divest of their generating assets, had to figure out how to make money from the distribution business that was left to them. Meanwhile, the generation sub-sector went hog-wild building deregulated, competitive gas-fired power stations around the country. Some of these generating plants were in fact substitutes for better transmission facilities. As I explain later, generating units can often be located so that they actually facilitate the transmission of electricity. Electricity markets were also created, usually in the states and regions with the highest priced electricity.

Today, there is a dichotomy. Independent system operators, or ISOs, operate the transmission system. They are responsible for the movement of the electricity through the grid. However, the physical responsibility for the assets themselves—such as who pays for upgrades and expansions—is not often as clear. Some states, Michigan and Wisconsin, for example, went as far as to privatize their transmission systems.

From a regulatory and infrastructure perspective, the transmission grid is like connecting two weighty barbells. It may be difficult to build, own, and operate power stations, but at least it is clear how to do it. There are still utility organizations that are explicitly responsible for "the customer." It is not clear to the industry what to do about transmission. The "bar" between the barbells has to be made stronger, both institutionally and physically. No one will invest in transmission if there is not a clear framework on how to do so and, perhaps more importantly, how to earn a return on investment. This is the first element of worst-case prevention.

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