ON THE GRID OR OFF THE GRID
Bigger Is Better
An interstate electricity highway
could leverage economies of scale to keep the lights
on
WE COULD HAVE left it to the states. When the Interstate
Highway System was proposed nearly 50 years ago, we
could have said, "Leave it to each state to decide
on its roads and to pay for them, or leave it to private
enterprise to build toll roads wherever it is profitable."
Fortunately, we didn't.
Today, vehicles can travel throughout the country
on a system of integrated high-capacity roads that
crisscross the nation. There are many differences
between the flow of cars or trucks and the flow of
electricity. But just as the Interstate Highway System
ushered in a new era of easier movement of people
and goods across the states, allowing enormous economic
and social gains, so, too, do we now need to overcome
the obstacles to the easy flow of power across state
lines.
Many forces are at work contributing to California's
electricity crises, and power shortages in other parts
of the country also are quite possible. The growth
of population and industry in California has expanded
demand for electricity. Legislative constraints, reflecting
environmental protection and other concerns, have
discouraged construction of electricity-generating
plants.
Periodic shutdowns of generation plants for maintenance
have caused short- term power shortages. And, in an
oddity of California law, the prices that power producers
can charge distributors are deregulated, while the
prices that those distributors can charge consumers
are regulated and restricted.
But largely missing from the debate of what can
be done to balance supply and demand is discussion
of an effective national power grid that would permit
substantial amounts of electricity to flow, as highway
traffic does, from one state to another.
Interstate transmission connections do exist now,
but are limited in capacity. They were primarily designed
to meet temporary needs associated with local power
emergencies, not for sustained use. If those interstate
lines were upgraded to greater capacity, then we could
move toward actually creating a national power grid.
An effective national power grid could result in
far more competition among producers of electric power
across the nation, and far more options to meet demand
in any local area. No state or region would need to
depend simply on a small number of generating producers
within its borders, and the increased number of interstate
competitors would bring greater assurance of supply
and lower prices.
The underlying problem is basically one of incentives.
With the maze of state, and federal regulations on
the production, distribution and pricing of electricity,
there is great risk and little incentive for private
construction of costly transmission lines that cross
multiple state borders.
Imagine a power plant in state A, but near state
B, with that plant occasionally having excess production
capacity. There is no market for the power in state
B, but there is demand for it in state C, which is
adjacent to it. In a smoothly functioning, efficient,
power transmission system, power would move from the
generating plant in state A, across the border for
use in state B, thereby permitting deals so that power
produced in that area could be sent to state C. Through
such a domino-like process, power available in one
region effectively can help alleviate a shortage in
another area - with only a series of relatively short-distance
transmissions.
Development of such an integrated electricity transmission
network is what the federal government can and should
foster. It would strengthen the nation; it would expand
options for users; it would increase competition among
suppliers, to the benefit of consumers; it would overcome
the multiplicity of state regulations that have the
effect of restricting incentives for profitable interstate
power transmission.
The Interstate Highway System did not solve all
the problems of the nation's escalating population
of cars, and it was not cheap. But, designed to maximize
interconnections between metropolitan areas, with
ample systemwide capacity to spare, it did transform
the country, binding the 48 contiguous states into
an integrated whole.
The effect: reduced costs and increased "exports"
of California fruits and vegetables to the Midwest,
and reduced costs, along with increased exports of
Midwest manufactured products to the West.
Just as it does not make sense for every state to
act like a separate country, building roads just for
its own residents, or growing all of its own food
supply, it is equally inefficient for each state to
independently develop its own power supply. It is
foolish to find electricity producers in one state
claiming that they should not "help out" consumers
in another state.
A nationwide system would take better advantage
of differential electricity demand in various parts
of the country, seasonally and even in the course
of a day.
To consumers and industrial users in California,
the effects of a national electricity transmission
grid would be real and enduring, but not spectacular.
It would, however, go far to achieving the quiet result
that every consumer seeks - lower prices, more reliable
electric power supplies.
There is no single solution to California's energy
crisis, but developing a national interstate electricity
highway system would go far toward addressing it.
Local power distribution within a state would remain
a matter of state control. The federal government's
role would be largely to provide financial incentives
for constructing additional interstate transmission
capacity, and to establish standards for its design
and utilization - just as is the case with the Interstate
Highway System.
A survey of history and government professors conducted
by the Brookings Institution last year identified
the Interstate Highway System as one of the Top Seven
governmental achievements of the last 50 years - along
with rebuilding Europe after World War II and expanding
the right to vote. An interstate electricity highway
system could well be among the top achievements of
government in the next half-century.
MACRO POWER TRANSMISSION
WE HAVE AN ELECTRIC power crisis in California.
In fact, we have two problems: a short-term problem
and a long-term problem.
Short term, the problem, from the consumer perspective,
is:
- Soaring electricity bills.
- Fear of paying the mounting debts being incurred
by electricity distributors such as Pacific Gas
and Electric Co. either in rate increases or higher
taxes.
- The threat, and to some users the reality, of
no lights, no refrigeration, no heat.
These concerns are real and severe. But they are
merely symptoms of a serious long-term crisis: Incentives
to the power industry are wrong!
As Adam Smith reminded us over two centuries ago,
we do not look to the good intentions of sellers to
get them to serve the public interest; we look to
their self interest. Then, as today, wise public policy
calls for aligning the two, by providing incentives
for the development of an electricity system that
provides power that is dependable, is produced efficiently
and is distributed competitively, so that prices are
low.
This long-term problem will not be solved by the
series of Band-Aids that governmental officials and
power producers and distributors are skirmishing over.
Now is the time to develop a long-term plan.
Two elements of a long-term plan for efficient and
reliable electricity are clear:
- Electricity self-sufficiency for each state is
bad policy. It is easy to think that dependency
on power imports from other states is a root problem.
It is not. Trade and competition mean access to
more producers, and that can bring efficiency in
electricity no less than in food, electronics or
autos, as low-cost sources are utilized. (Promoting
more interstate options does not preclude building
more local generation, and small, "micro" electricity
generating units do have a role as part of an overall
electricity policy. However, the advantage of their
flexibility must be balanced against their generally
higher cost for meeting predictable long-term demand.)
- Incentives are needed to encourage investment
in electricity transmission. It does no good to
have low-cost power production unless the power
can reach users. This is why the federal government
has such an important role to play in financially
encouraging and supporting a national interstate
power highway system.
--Burton A. Weisbrod and Glen E. Weisbrod
Burton Weisbrod is John Evans Professor of Economics
and Fellow, Institute for Policy Research, Northwestern
University, and a former senior staff economist on
the Council of Economic Advisers to Presidents Kennedy
and Johnson. Glen Weisbrod, his son, is president
of Economic Development Research Group Inc. in Boston.
©2001 San Francisco Chronicle Page WB1
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