Editorial Board

U.S. Electric Grid Gets Regulatory Jolt Into 21st Century

This week, the Federal Energy Regulatory Commission will begin enforcing Order 1000. Understandably, most readers probably won’t want to inquire further.

Yet before your eyes glaze over, consider that this set of regulations is designed to turbocharge the biggest transformation of the U.S. electricity market in decades, with far-reaching consequences for the economy, consumers, utilities and investors.

Electricity demand is expected to grow by about 1.1 percent a year through 2030. And the nation’s current grid is hazardously out of date. Its basic structure would be recognizable to Thomas Edison, who set up the first commercial electric grid in New York in 1882. Pieced together over more than 100 years, critical elements of equipment and technology are nearing the end of their lifespan.

About 70 percent of power lines and transformers are more than 25 years old, and 60 percent of circuit breakers are more than 30 years old, a study by the American Society of Civil Engineers has found. About $673 billion will need to be invested by 2020 to avert severe breakdowns. The last major U.S. blackout, which turned off the lights in the Northeast in 2003, resulted in $7 billion to $10 billion in economic losses.

Smart Grid

The Obama administration has made an $11 billion down payment (using funds in the 2009 stimulus package) on a more efficient grid. That has included $4.5 billion in grants to develop a so-called smart grid, which applies the speed and power of the Internet to the generation, transmission and distribution of electricity. Among other things, it gives utilities the capacity to instantly pinpoint -- and even repair -- disruptions on their lines from a central monitoring post.

The technology is designed to give consumers and utilities more control over their energy costs and, over time, reduce the need for expensive new power lines. The switch would significantly improve capacity while reducing inefficiencies and failures, which the Department of Energy estimates cost the U.S. economy $150 billion a year.

The program, which is being led by the power companies themselves, is on track to install 15.5 million smart meters in homes and businesses by the end of 2014. These devices enable customers to monitor and control their electricity use and eliminate the need for utilities to send meter readers door to door as they have done for the past century. Interconnected meters would permit consumers to reduce their electricity use at times of peak demand, when power is most expensive, and even sell unused power back to their utility.

is the crucial next step in a separate effort to overhaul the electrical grid. In early 2009, President Barack Obama had identified this vast undertaking as his technological “moonshot.” He soon discovered, however, that the grid is too fragmented to be transformed in a grand gesture. The more than 6 million miles of transmission and distribution lines are owned by about 3,000 utility companies -- all of them subject to varied federal and state regulators.

Obtaining permission to build interstate high-voltage transmission lines from the many jurisdictions, regulators and authorities involved would entail years of bureaucratic delays.

That’s where Order 1000 comes in. It sets out broad guidelines for planning, building and paying for new transmission lines designed to meet growing demand, maintain reliability and, crucially, bring on line remote alternative energy sources such as wind and solar.

Regional Planning

Order 1000 will require grid operators to collaborate on regional planning and allow independent developers to compete with traditional utilities in building new power lines. The order also proposes a way to address crippling disputes over who pays for transmission infrastructure: The cost of new equipment would be apportioned to various jurisdictions according to the benefits it provides. That cost, in turn, would be passed on to consumers.

According to a Bloomberg Government analysis, more than $104 billion worth of new transmission capability will be built by 2022, generating about $6 billion in profit for power-line developers. Order 1000 could accelerate that growth.

Some conservatives decry the “socialization” of transmission-line funding to accommodate supplies of wind and solar energy -- a subsidy for an industry that doesn’t compete on its own. Likewise, some states, including Arizona, Michigan and Nevada, have objected that Order 1000 infringes on their regulatory powers.

There is merit to these criticisms. Much of the cost of building a 21st century grid will be borne by consumers, who could initially see higher rates for power. Ultimately, however, access to cheaper power will lower rates. The long-term payoff will be a reliable grid that will drive stronger economic growth as well as cleaner and cheaper energy. That is well worth that initial outlay.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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