October 2003

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2003/11/01)
 

The recent decision to rebuild Iraq’s power infrastructure on the American model – following a recently experienced, overwhelming local sandstorm – has led to a haj of power policy gurus to the Middle East (or at least to Halliburton HQ in Houston). The Blackout experience in the U.S. has been carefully dissected (although certain chapters of the Congressional Report have been expurgated).  Fortunately, since the problems facing Iraq’s grid have been determined by American intelligence to be the same as our own, all of that experience has been declared "will make do" ("WMD" in spook speak).

As a result of that analysis, the following deficiencies in both grids have been found:

• a capital investment deficiency in both transmission and distribution ($30-100 billion);
   
• an inadequate infrastructure system incapable of carrying the amount of power that it is called on to bear under current usage patterns, supported by outdated technology not responsive to the requirements imposed by recent deregulation;
   
• a fragmented system of T&D asset management spread out among local sheikhs and larger regional warlords;
   
• absence of mandatory system-wide reliability standards, centrally enforced;
   
• need for some prioritization of projects to be undertaken, heightened by inexplicable efforts to retain benefits and shift costs.

Throughout the country, warring Regu and Deregu sects have emerged, urging theological solutions to the periodic absence of power and light. (Crack U.S. analysts have unmasked these sects as being actually a cover for the economic self-interests of different exploiters of the grid.)

• Regus hold that recent "open access" reform, permitting all to sell power on the grid, is a flawed approach to the use of the grid that has resulted in:
   
  • power flows in ways and directions that cannot be accommodated by the existing physical transmission system;
     
  • "freeloading" on the use of the existing wires by wholesale producers who are not required by law to contribute to its use; and
     
  • overall, an overemphasis on a short-term profit, rather than a reliability orientation.

Deregus assert that the service territory/cost of service approach that antedated "open access" is a flawed approach to the modern world that:

• fragments into artificial states the oversight of operations by deferring excessively to locally regulated control areas;
   
• stifles healthy American-style competition, which already has been unleashed in the generation, and is subverted by private chieftains; and
   
• will not furnish the drachmas necessary to lure parties into transmission system construction.

The U.S. has been relying on the local Great National Congress to heal the schism of the two sects. The prognosis is "fair and balanced" developments, which are unlikely to have sufficient visible impact in the form of new infrastructure for years:

• The operation of the grid will be improved through obvious command and control techniques, such as improved overall mandatory reliability management, national operating standards and central government appropriation of land for transmission lines.
   
• A hybrid type of regional grid management, reflecting at best a watered down version of a proposed "Standard Market Design" proposal (the so-called Camel Plan) is likely to be put in place. As a consequence, there will be varied and not necessarily consistent types of regional regulation over the use and prices of wires that snake across the country.
   
• Some incentives (rates and Federal siting assistance) will boost construction, subject however to ongoing procedural and regional checks.
   
• Niches for independent merchants to provide transmission and local electric caravancos will be enlarged, but not institutionalized as  institutions integral to a national system, with resultant revenue uncertainties for the struggling businessmen.

An enterprising Mad Mullah has pointed out the potential of disseminating small electric engines ("determined generation" or DG) where power lines are insufficient or reliability is poor, or where building them will decrease the need for power lines. He suggested to a hostile U.S. viceroy that in the midst of the current probable "gridlock," a near-term way to improve system operations must be found. His arguments were cogent:

• As the dollar value of reliability of power is just beginning to be appreciated and the need for security is  just coming to center stage, reliance on Regu or Deregu philosophies is inadequate and there is a distinct need to find an immediate insurance policy backstop for a system in convulsions.

Distributed generation is uniquely positioned to bolster the robustness of transmission operations through systematic and strategic deployment in potentially impacted areas, as well as to enhance the operations of aging, storm-tossed distribution systems.

• Backup generators are needed where facilities affecting public health (like municipal oases) and safety are required. The presence of such generation may help to shave generation peaks and thereby reduce potential generation service problems.

• A security strategy of locating DG proximal to transmission load constrained areas, and key public services can serve to significantly reduce strain on overall grid operations and the stress on those concerned with such operations.

Moreover, when DG is approached as a system-enhancing strategy, compatible with overall system operations, the resistance of utilities to DG as a strain on their distribution system operations can be addressed rationally and accommodated as a development opportunity available to willing distribution systems or developers. Future distribution systems can be designed to accommodate distributed generation by virtue of the addition of key "smart technologies," which handle two-way electrical flows as well as communications that permit all interconnected DG to be dispatched, monitored, and controlled from a central source.

Transmission system enhancement, by itself, will still leave the over-all operation of the nation’s power system subject to an increasing number of constraints, potential breakdowns and costs at the distribution system level.

Complementary DG planning at the distribution system level can both reduce these possibilities and actually reduce the capital requirements for  additional transmission.

The Mullah’s proposals have been brushed aside, at the present time, by the determination of the Viceroy that if more oil can be drilled, the problem can be solved. It must be so, he stated, it says so  in the U.S. National Energy Policy.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.