Monday, November 05, 2007

Drought

I spent over a decade working in the energy industry, focusing on electric and gas utilities. These utilities have some key similarities and some differences - they both have transmission (pipelines and overhead transmission lines) and distribution (local lines into your home), as well as customer service (local trucks, service, and billing). Gas companies don't have "generation" in terms of power plants, but they do have drilling and gathering (within the US) or entry through a liquefied natural gas (LNG) port from a third countries, then into a pipeline.

Gas can be stored under pressure; in the summer gas companies historically injected gas under pressure into the ground, which they then pulled out of storage in the winter when gas demand "peaks". In the summer, gas prices are at their lowest (maybe $2-$4 / unit) and then they are at their highest in the winter ($8 - $10 / unit). In the olden days (when I worked in the early 90's) gas wasn't "marked to market" every day; the gas company was either short or long gas on a given day, and then they trued-up with their suppliers periodically. In my audit I pointed out that the local utility had been "shorted" gas by their suppliers in the winter (when prices were high) and their suppliers made it up in the summer (when prices were low) - by this I pointed out that the local utility was losing hundreds of thousands / year by trading the same commodity in this unfavorable manner (even though the # of units were the same).

Electricity isn't as widely traded as a commodity because it can't be stored (at least not effectively). Thus its price can range from negative (it can be more expensive to restart a giant plant than to run it and sell the electricity at a loss) to almost an infinite price if it is a hot day and the transmission lines are overloaded so that only local generation can satisfy the demand. The price would need to be determined by location (city) and then by time; thus electricity can be cheap in one location or overnight and then by sky-high at a neighboring city during 1pm during the heat of the day.

Another element that electricity and gas have in common are "classes of service" - they include residents, government (street lighting), small businesses, and large businesses. Each of these utilities have chronic and continuing arguments to determine how to spread the burden ACROSS these classes of customers; government usually pays the least, but then it goes backwards from large businesses to small businesses and then residents, on a per/unit basis. There are convincing arguments for each class; the big business customers put almost no demand on distribution and customer service but put a huge burden on generation (unless they have their own generation); while individual customers go the other way. The "joke" in the industry was that you could raise rates as long as you didn't raise them for their rate class (I never said utility people were particular funny).

The point of this isn't really gas or electricity; it is water. Water is relatively similar to a gas utility with a transmission and distribution network. Water doesn't have generation but is gathered through wells or collection (dams).

I visited most of the electrical and gas utilities in the US over a decade or so, but I only worked with a dozen or so water utilities. Most of the water utilities are government owned and only a few are publicly traded, so their issues are blended into the general financial situation of local government, with very opaque financial statements. The electric and gas utilities need to release results quarterly and clearly follow accounting rules; the water utilities may release results annually (with more delay) and often following the governmental rules makes it harder to see key trends, and they are often "blended in" with other governmental units, to boot.

The water utilities fall into the same general failure to invest in infrastructure as the gas and electrical utilities across the USA. The lack of investment is manifested in leaky pipes (local distribution), incredibly poor transmission networks (canals where water evaporates or is diverted), and increasingly bitter fights over original sources of water.

Atlanta and Georgia is ground zero for the future battles over water. Lake Lanier, the reservoir that serves Atlanta, is drying up for all to see. While the exact timing is uncertain, if the drought continues Atlanta is likely to have a major water problem that could result in significant municipal shortages. Go to the Atlanta Journal Constitution and just type in "drought" and a whole series of articles will come up and photos showing the drying up of their primary water source.

Municipal utilities often have terrible systems for monitoring water use. While electric utilities consider "time of use" meters that they already have in Europe, a lot of water usage is poorly metered if metered at all. The local utilities might bill on a haphazard or fixed basis to try to cover their costs, and underinvestment in the local infrastructure is common.

Another horrendous problem is the mis-pricing of water for agricultural purposes. While water may be expensive in the cities and aggressive measures might be mandated (no watering of expensive lawns, lousy low-flow toilets, etc...) in agriculture often water is wasted through leaky and inefficient transmission systems (canals, pipelines) and priced in a way that is so cheap that there is no incentive for farmers to conserve at all. Crops are grown today where they would never survive "naturally" by relying on rain from the sky; this method often drains the local water sources that also supply the cities.

The lack of market mechanisms makes water utilities even more opaque and hard to understand than electric or gas utilities. While everyone thinks that they have a firm right to cheap and clean water, in unlimited quantities, this goal is not always going to be obtainable due to insufficient investment in local and transmission infrastructure, poor metering, and dirt-cheap pricing for agriculture that can un-do all of the gains that come from conservation measures in the city.

And don't even think of building new infrastructure or dams; that is impossible in America today due to NIMBY's and aggressive lawyers. Like electricity, the best we can hope for is conservation on the demand side and perhaps some sanity for agricultural pricing to avoid massive wastage.

Watch what happens down in Atlanta, and wait for it to happen in lots of areas in the USA that are built on a shaky foundation of water resources. This is one problem Chicago doesn't have due to the nearby Great Lakes.

Cross posted at Chicago Boyz

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