Bulk Power Deregulation: 1980 into the 21st Century

In the years after 1980, there was a move toward free market capitalism. The purpose of a utility, under the new model, was to make money for its stockholders. Growth was an important objective. In some states, utilities were forced to divest of their assets, with the idea that the smaller pieces would encourage competition.

Electricity became a commodity like any other commodity, with widespread trading in electricity contracts, futures, and power plants were bought and sold. The new buyers were not necessarily in the utility business — some were hedge funds.

While deregulation enabled competition amongst power producers, there was not enough thinking about the transmission system — the grid. With the emphasis on buying from the cheapest supplier with little regard to what wear and tear transmission from that provider would impose, many utilities “generated” power by buying out of state.

But additional power flowing over lines causes premature wear. What deregulation did for the bulk power industry was, in some cases, to make power generation cheaper. But it ignored the cost of transport. It is as if they mandated competitive pricing for commodity that could be provided from anywhere in the U.S., but gave away use of the Interstate highway system. No one had to pay what it was worth for transport.

At one point, marketing of electrical energy became a huge source of revenue, apart from the actual generation of the revenue. Derivatives were created based upon future energy and capacity delivery.

If this sounds familiar, you probably remember Enron; in 2001 it became the poster child for deregulation-related excess. The result was some pullback on deregulation at the state level. However, the hallmarks of deregulation that raise havoc with the grid are still in place. There is still widespread trading of electricity across long distances, and use of derivatives and other financial instruments.

Today, U.S. states that are some of the largest consumers of electricity are importing over 25% of all their power! These over-25%-importers include California, Massachusetts, Minnesota, Maryland, New Jersey and Virginia.

What we have now boggles the mind. We have a system that was designed in the 1960s as an array of nearly atomic, fully-integrated and self-sufficient utilities, with little thought given to cross-region transmission, now supporting the interstate delivery of a good chunk of all electricity consumed. Most of all, no one entity owns the grid, or even its planning and management, so businesses playing within this setup avoid outlays if at all possible — replacing components only when they fail, rather than replacing near the anticipated end of life.

Precipitous Drop in R&D Spending

First, some background: On average, equipment in the the bulk power industry has a useful life of 40 years. Companies therefore are allowed each year to write off as a expense 1/40 of what it originally cost to buy the equipment. Starting in 1995, the industry-wide total of that write-off of historical costs (depreciation and amortization) has exceeded utility construction expenditures.

In other words, for the past 15 years, utilities have invested less in the grid than required to replace existing equipment at the prices paid up to 40 years ago. The bulk power business has harvested more than they have planted. The result is an increasingly stressed grid. Indeed, some experts say that grid operators should be praised for keeping the lights on, while managing a system with diminished shock absorbers.

Rather than merely replacing equipment with the same technology, one way to work around the problem could be to invest in R&D. For example, existing computer technology could be adapted to build a “smart grid”. Things look even more bleak there. The IEEE Spectrum article says it best:

R&D spending for the electric power sector dropped 74 percent, from a high in 1993 of US $741 million to $193 million in 2000. R&D represented a meager 0.3 percent of revenue in the six-year period from 1995 to 2000, before declining even further to 0.17 percent from 2001 to 2006. Even the hotel industry put more into R&D.

By comparison, the computer industry invests almost 13% of revenue; pharmaceuticals invest over 10%.

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