New Rules for the U.S. Electric Grid Are a Win

While the rest of the investment world focuses on the twin debt crises of Greece and the United States, there has been a very important development for improving the future of the environment.  Specifically, the U.S. Federal Energy Regulatory Commission on 21 July, 2011 outlined principles that would guide new rules for the U.S. electric grid.

Most of the electric grid in the United States is 90-110 years old and is noticeably ailing.  Years ago when I was a co-portfolio manager at the Davis funds I uncovered a shocking statistic, only about 20-30% of power generated at a power plant actually makes it to the end user!  In part, this is because with distance there is power loss, but mostly its because the wires in the electric grid are so damned old.

The next unfortunate situation with the electric grid, and the problem the new principles seek to rectify, is that there are too many jurisdictional issues (read: too many separate owners) regarding the power grid for it to distribute power efficiently.  Because of turf wars a build out of alternative energy sources, like solar and wind, has been difficult.  Why?

The desert southwest, where I live, is an ideal place for generating both solar and wind power.  I can assure you that there is plenty of sunshine and plenty of wind.

Not only that, but there are vast swaths of open space unimaginable to someone from the coastal United States.  This space means that the “not in my back yard” problem that is faced on the coasts is practically non-existent in the southwest.

The problem is getting the power, once generated, to where the people are and to where it is needed.  That requires that various power companies share their grid so that the power can be transported from one place to another.  And that is exactly what the new guidelines emphasize.  Without specifically establishing how this is to be done FERC has stated that those that benefit from the sharing must pay a fair share of the power that they receive.

People and businesses that have been opposed to this rule have said that the generators and users of power will benefit from the new rules, but what about the people in between?  I think that the analogy of the U.S. interstate highway system is appropriate here.  Let’s face it, the primary beneficiary of the interstate system are people on the coasts.  Yet, occasionally that windswept town in the middle of nowhere gets a visitor they wouldn’t normally have gotten.  Not only that, but upgrading the grid in the interior part of the country could lead to new jobs for folks in rural regions.

An integrated grid system will very likely lead to greater competition for electricity around the country and help to cap prices in the future.  Additionally, competition will provide a nice incentive to invent new energy generating and energy distribution technologies.

Another guideline, more like a threat, is that FERC has demanded that energy companies invest in improving the power grid, lest FERC make them do it.  This addresses my shocking statistic described above.

In conclusion, these rules promise to remove one of the impediments to a more efficient energy future.  As I have stated so many times on the What My Intuition Tells Me Now blog, real economic growth is getting more output from the same set of resources, or the same output from fewer resources.  So these new FERC principles promise to increase the gross domestic prodcuct (GDP) of the United States for years to come.  Nice job.

Jason