I have been reading the Transmission Access Policy Study Group (TAPS) June 2004 report, “Effective Solutions for Getting Needed Transmission Built at Reasonable Cost.” [PDF] TAPS is an “informal association of transmission-dependent electric utilities located in 35 states.” The members are primarily municipal and cooperative utilities that may own some generation and transmission resources, but generally are buyers in wholesale power markets to serve retail customers and usually rely on transmission services provided by others to ensure delivery of that power. As such, they have a strong interest in access to transmission service and in competitive power markets.
They begin their report with the mostly conventional wisdom suggesting that greater investment in transmission is needed to improve reliability and provide the infrastructure, and cite to reports that document the decline in investment. Here is how they begin:
Almost everyone agrees that the interstate transmission grid must be expanded to improve reliability and provide the infrastructure needed for competitive wholesale markets. Since 1982, transmission capacity relative to peak transmission use has declined steadily. In the twenty years between 1979 and 1999, transmission investment fell by more than half. According to one widely cited study, simply maintaining transmission adequacy at 2000 levels will require quadrupling currently planned expenditures to $56 billion by 2011. Increasing transmission adequacy to the higher levels that existed prior to 2000 will require even more investment. Investment is needed not only to expand the grid, but for research and development of new technologies, such as superconducting materials, to increase the capacity of existing and future transmission facilities.
I’ve omitted the notes, but the section includes multiple cites to Eric Hirst and Brendan Kirby, “Transmission Planning for a Restructuring U.S. Electricity Industry,” (June 2001). [PDF] EEI has distributed a more recent review of transmission investment trends by Eric Hirst, “U.S. Transmission Capacity: Present Status and Future Prospects,” (August 2004). [PDF]
So far as I know, what hasn’t been made clear from any of these studies is why the ratio of transmission capacity to peak transmission use was increasing up to 1982 and then began to decline afterwards. What happened in the early 1980s to put a break on transmission investment? Currently cited explanations for inadequate investment in transmission include regulatory uncertainty and inadequate returns on investments. My sense is that regulatory uncertainty wasn’t much of a factor until the early 1990s and the Energy Policy Act of 1992, which required transmission owners to provide wheeling services to non-utility transmission customers.
Perhaps net returns on transmission investment fell after inflation rates moderated and stabilized around 1980. I’m just speculating, but if increasing inflation allowed utilities to borrow at relatively low real rates, then inflation could have contributed to over-recovering on long-term capital investments. As inflation rates subsided, so would have one incentive to invest in transmission resources.
Anyone have a better idea as to why transmission investment peaked in the early eighties?