Why A New Power Grid Will Pay
ALEXANDER MISKIN - Forbes

As the Obama administration details its priorities for its $775 billion stimulus package, it should take at least one cue from the Troubled Assets Relief Program.

Officials have thus far dispensed TARP money in ways that make it very likely that private sector recipients of those funds will repay the government over time. As a result, taxpayers will ultimately be responsible for little to none of the TARP expenditures.

As the TARP money has been doled out to banks and other financial companies, the government has taken back preferred stock and equity warrants in these companies.

The Treasury Department can sell these securities or hold them until they are redeemed by the companies that issued them. So in any company that survives--and most will with the benefit of government support--the government should get all its money back with interest.

New Hampshire Sen. Judd Gregg's recent estimate that the TARP funds have earned the government a profit of $8 billion in three months only underscores this point. As the new administration looks for ways to revive the economy, it should favor projects that could be sold or leased to the private sector after completion.

For example, the federal government could rebuild the nation's electricity transmission grid. The project would create thousands of new jobs, many of them skilled. And a modernized grid would have immediate commercial value both to existing power companies and to the new green energy companies that Obama has talked so much about.

Much like the interstate highway system built during the Eisenhower administration, this is a project that the federal government is uniquely well-suited to undertake, given the issues relating to rights of way and interstate regulation.

The current grid consists of 200,000 miles of power lines and is owned by about 500 entities. It was built decades ago by regional power utilities and was designed primarily to deliver power within the region served by the utility.

Today's grid remains congested; it is also unable to connect the entire country. And occasionally, the grid simply breaks down and causes blackouts, such as the one New York and Ohio experienced in 2003.

Private companies that attempt to modernize or expand the grid often face regulatory hurdles, disputes over land use and difficulty getting consent from other transmission line owners.

The antiquated transmission grid is one of the largest barriers to growth in wind power generation, according to a Department of Energy report released last year. The best locations to build large-scale wind farms are in places like North Dakota, where land and wind are abundant. But it simply does not make economic sense to do so right now because the power generated in the upper plains could not be delivered to markets like New York and California where it is needed most. (Solar energy faces similar transmission problems.)

As an investment analyst who has followed the power sector, I have witnessed firsthand the difficulties the power grid presents. About 10 years ago, the power industry began investing heavily in modern gas-fired power plants that produced less pollution than coal plants and were more fuel efficient than existing gas plants.

Major developers such as Calpine focused on building some of these plants in places where natural gas is plentiful and inexpensive, like Oklahoma.

The developers did not initially focus on the transmission grid. But as they realized that they couldn't deliver their newly generated power to, say, north Texas or Chicago, many of these projects were abandoned.

Some, however, were built anyway but remained virtually idle for years after their completion. (Calpine ultimately sold its poorly placed plants in its bankruptcy reorganization.) Power developers have taken these lessons to heart and now look closely at transmission lines before investing in new projects of any type.

The solution--building transmission lines--is very expensive, even though it can yield attractive financial returns. The Energy Department estimated that about 12,500 miles of strategically situated new transmission lines would enable the U.S., several decades from now, to derive 20% of its power from wind turbines.

The problem, however, is that those 12,500 miles of lines would cost $60 billion. Although completing the entire project wouldn't act as a short-term stimulus, a meaningful portion of the upgrade could be done in a few years.

Government-run upgrades and expansions of the transmission grid would cut through the regulatory and other barriers that have limited private sector companies, create jobs across the country and spark privately funded wind and solar farms.

Best of all, the government would recoup much of its expenses down the road by selling or leasing parts of the new grid back to private companies. An auction of the transmission lines would reduce public debt and stave off the risk of inflation.

Of course, instead of paying down the debt incurred to fund the project, politicians might use the money to pay for new spending or tax cuts. If the national debt reaches a point where public borrowing costs and inflation have become uncomfortably high, the public, and future policymakers, will at least be able to consider reducing it without resorting to unpopular measures like tax hikes.

Indeed, the next major economic challenge for the U.S. may well be how to deal with the after-effects of adding several trillion dollars to our national debt. But by spending money today in ways that will make it easier to repay that debt in the future, policymakers may help avert the next financial crisis.