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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.

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Speaker 2: I'm Joe and.

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Speaker 3: I'm Tracy Alloway.

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Speaker 2: Tracy, it's been too long since we've done an electricity

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Speaker 2: great episode.

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Speaker 3: I've been avoiding it on purpose, Joe. I, in all honesty,

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Speaker 3: I really find this particular market slash issue a difficult

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Speaker 3: one to talk about because it's impossible to talk about

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Speaker 3: it in broad terms, and I know on odd thoughts

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Speaker 3: we try to avoid doing that generally, but even in

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Speaker 3: an hour long podcast, even with multiple episodes, we could

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Speaker 3: do an episode for each electricity market in the United

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Speaker 3: States and still only scratch the surface, right, Like you

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Speaker 3: have to talk about regulated monopolies versus competitive markets, and

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Speaker 3: then you have to talk about what's an independent system

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Speaker 3: operator and what's like, well, what's Texas? That's all about Texas?

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Speaker 2: What is Texas?

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Speaker 3: What is Texas?

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Speaker 2: What is Texas? Would be its own episode, but yeah,

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Speaker 2: that's right. You ask a question to a grid expert

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Speaker 2: and their first thing and they're like, wait, are you

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Speaker 2: talking about a competitive market or regulated market here?

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Speaker 3: That's always a meter basis or unmetered or I don't know.

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Speaker 2: Yeah, behind the meter, et cetera. Yeah, But anyway, obviously

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Speaker 2: with the sort of Ian Dunning who we recently had

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Speaker 2: Hudson River Trading, he was talking about how, you know,

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Speaker 2: their main constraint is power and that's just a small,

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Speaker 2: a very small in the grand scheme of things user

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Speaker 2: of AI services. We're talking about using AI and high

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Speaker 2: frequency trading. And he said even more than chips that

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Speaker 2: the power constraints are their biggest constraints right now. And

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Speaker 2: so I do think that one thing we have to

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Speaker 2: think about is, especially how long can this AI boom

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Speaker 2: go on? Is what's it going to get all of

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Speaker 2: this AI activity on the grid, Like how constrained is it?

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Speaker 3: That's right, And we also recorded that episode with Sager

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Speaker 3: and Jetty and we were talking about the political controversy

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Speaker 3: surrounding AI, and obviously power consumption is a big one

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Speaker 3: of those. At a time when electricity prices have already

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Speaker 3: been rising, is AI only going to drive them up further?

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Speaker 3: Although that said, you can't even say that electricity prices

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Speaker 3: have been rising because in certain states they've actually been

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Speaker 3: going down on an inflation adjustment basis. But even that

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Speaker 3: is a nuanced picture.

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Speaker 2: But by and large, especially since the pandemic. Really by

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Speaker 2: and large we have seen faster than normal increase in

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Speaker 2: electricity price inflation, and we have the big AI question.

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Speaker 2: So we really have to figure out a how is

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Speaker 2: all of this new data center capacity going to come

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Speaker 2: onto the market, Who's going to apply the generation? And

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Speaker 2: then who is going to bear that cost? Is it

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Speaker 2: going to be the consumers who are already generally speaking

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Speaker 2: across several markets seeing their bills go up.

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Speaker 3: If we have to talk about this rubber band ball market,

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Speaker 3: then I'm glad we at least have the perfect guest

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Speaker 3: to do.

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Speaker 2: That's im say we do, in fact have the perfect guest.

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Speaker 2: I'm very excited to say we're going to be speaking out.

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Speaker 2: Someone been trying to get on the podcast for a

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Speaker 2: little while, Travis Cavula. He is a VP of regulation

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Speaker 2: at energ Energy. He's also been on a public commission

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Speaker 2: in Montana, so he knows that side of the business

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Speaker 2: in terms of how prices are set in those regulated

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Speaker 2: monopoly markets. He is also an academic. Travis, thank you

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Speaker 2: so much for coming on Outlaws.

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Speaker 4: It's great to be here. Thank you.

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Speaker 2: We're really excited about this one because there's so many questions,

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Speaker 2: why are we talking to you? What do you give

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Speaker 2: us the sort of brief intro of what you do

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Speaker 2: and what your background is, so that our audience has

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Speaker 2: some idea of why are the perfect guest?

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Speaker 4: Sure?

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Speaker 5: So I spend my time on regulatory affairs at a

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Speaker 5: company NRG. We're a big producer of power. We sell

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Speaker 5: power to end use customers. That's permitted by law where

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Speaker 5: competition exists in the power and gas markets. So we've

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Speaker 5: got about eight million end use customers. And previously I

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Speaker 5: was the head of the Montana Public Service Commission, the

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Speaker 5: rate setting body for regulated utilities in the state. I

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Speaker 5: head it up an organization that represents state utility commissions

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Speaker 5: at the national level called NAYRUK, and I teach a

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Speaker 5: little bit on the side at University of Chicago's Hair

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Speaker 5: School of Public Policy, of course on utility regulation and

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Speaker 5: electricity markets. So I spend my time thinking a lot

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Speaker 5: about what goes into customer bills, both the stuff that

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Speaker 5: we can control being a company that is a provider,

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Speaker 5: and also stuff that are sort of upstream costs of

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Speaker 5: goods sold that appear on my company's bills, the sort

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Speaker 5: of polls and wyers charges, that go into people's bills.

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Speaker 5: So basically, you know, there's two parts of people's bills,

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Speaker 5: the commodity and the regulated grid charges that get the

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Speaker 5: commodity to you, and both of those are subject to

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Speaker 5: some form of regulation in this industry.

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Speaker 2: Yeah, Tracy, when we were in Chicago recently for a

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Speaker 2: live episode, I met one of Travis's students there and

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Speaker 2: he's like, you got to talk to Travis. Travis is

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Speaker 2: the man that will explain all these things. So Glamor

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Speaker 2: finally making this happen.

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Speaker 4: I'm high rating for that's important from.

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Speaker 2: Rate by professor.

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Speaker 3: That's right. Okay, so no pressure Travis.

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Speaker 4: All right.

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Speaker 3: So you were talking about the wholesale cost of the

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Speaker 3: thing that goes across the wires and the polls and

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Speaker 3: all of that. So that's electricity versus the actual transmission system.

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Speaker 3: One thing that we hear whenever this topic comes up

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Speaker 3: is it's not necessarily about the wholesale cost of electricity.

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Speaker 3: It's the cost of actually maintaining and expanding the grid.

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Speaker 3: How much truth is there to that? If you're going

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Speaker 3: to pinpoint the dominant factor behind higher electricity prices right now,

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Speaker 3: is it the wholesale price or the actual cost of transmission.

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Speaker 5: Yeah, it's kind of the scope of time that you

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Speaker 5: choose to evaluate, but you know, just to give you

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Speaker 5: kind of a benchmarking. You know, if you looked at,

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Speaker 5: say the New England power market over the last twenty years,

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Speaker 5: which sort of is the beginning point of the restructuring

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Speaker 5: of the industry and the introduction of competition in a

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Speaker 5: place like New England, the actual commodity cost would have

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Speaker 5: fallen by about fifty percent on an inflation adjusted basis,

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Speaker 5: whereas on the same basis, transmission costs would have increased

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Speaker 5: something like nine hundred percent now from a very low

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Speaker 5: level to a much more substantial level. But then if

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Speaker 5: you drew that comparison in another market, say the mid Atlantic,

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Speaker 5: over a shorter period of time, like year over year,

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Speaker 5: you know, the grid costs would not have risen substantially

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Speaker 5: in a year, but power prices would have. And that's

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Speaker 5: really just because the commodity works on more fundamental kind

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Speaker 5: of supply and demand balance. You know, scarcity will drive

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Speaker 5: up prices relatively rapidly, and then an oversupply that occurs

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Speaker 5: when the market is moving back toward equilibrium will drive

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Speaker 5: prices down rapidly. Whereas those regulated set of costs that

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Speaker 5: attached to the transmission and distribution systems. You know, those

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Speaker 5: are still cost plus regulated industries, and they have a

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Speaker 5: funny way of working monodirectionally up over the course of time.

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Speaker 5: But these do things trade off against one another. You know,

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Speaker 5: you need to invest in transmission in order to facilitate

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Speaker 5: the efficient delivery of electricity. You need to invest in

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Speaker 5: it in order to open up regions for low cost

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Speaker 5: renewable energy production. So they do have an interactive effect,

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Speaker 5: but they're regulated in a very different way, and both

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Speaker 5: of those land on consumers bills. I think the easiest

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Speaker 5: way to understand this is that, you know, consumers in

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Speaker 5: a sense had maybe been as a result of the

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Speaker 5: regulated charges the proverbial frog and gradually warming water, and

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Speaker 5: then when you finally enter a commodity supercycle, people can

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Speaker 5: have the sense that, oh wow, someone just ratcheted up

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Speaker 5: the heat on this pot. But both of those are

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Speaker 5: contributing factors and they require sort of different structural approaches

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Speaker 5: in order to reckon with them.

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Speaker 3: Jo, this is my perennial frustration talking about electricity prices

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Speaker 3: and the electricity system in the US, which is you

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Speaker 3: cannot talk in generalities, right, there are different types of

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Speaker 3: regulations for different entities. There are different regulations for each state.

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Speaker 3: Basically there's you know, the New England system, then there's

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Speaker 3: the West Coast, and then there's Texas, which is its

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Speaker 3: own special entity. You kind of have to talk about

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Speaker 3: every single market in isolation, which is difficult even on

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Speaker 3: our long podcasts. So that's going to be the caveat

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Speaker 3: throughout this conversation.

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Speaker 5: I think it's idiosyncratic and it's funny because at the

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Speaker 5: same time restructuring and competition was introduced into this industry,

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Speaker 5: it was also occurring in things like telecom. Telecom, you know,

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Speaker 5: was substantially deregulated and federalized. At the same time, states, however,

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Speaker 5: were left to make their own decisions about the power sector,

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Speaker 5: and as a result, you really have a huge patchwork

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Speaker 5: quilt of state and federal regulation and different industry models.

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Speaker 4: It's true.

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Speaker 2: I have another really rudimentary question, I guess what are

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Speaker 2: we even talking about when we talk about competition in electricity?

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Speaker 2: You know, I don't get to choose which wire I

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Speaker 2: get into. There's one utility I have the option from.

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Speaker 2: Sometimes there are these people on the street, and they're like, oh,

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Speaker 2: sign will you sign up for clean power or something

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Speaker 2: like that, and they try to get me to do stuff.

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Speaker 2: But I don't really understand how that works, because I

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Speaker 2: don't understand how electrons can be directed to anyone's home.

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Speaker 2: So I'm always very skeptical of it. What do we

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Speaker 2: talk about when people talk about a competitive market.

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Speaker 5: Yeah, so think of the electricity system as sort of

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Speaker 5: a chain of links. Upstream, you've got the power generators,

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Speaker 5: and then after that you've got the high voltage transmission system.

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Speaker 5: It patches into a substation that steps down the voltage

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Speaker 5: to a lower level. That's what we'd call the distribution system.

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Speaker 5: And then there's a meter hanging on the side of

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Speaker 5: your home, and beyond that meter, you are the consumer

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Speaker 5: of electricity. The most upstream the generation and the most

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Speaker 5: downstream retailing have been opened in some states to competition,

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Speaker 5: and I think it's fairly intuitive what that means. For

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Speaker 5: generation power plants are owned by private investors who make

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Speaker 5: investments in them. Those power plants compete against one another

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Speaker 5: in auctions for electricity and to sell their power to

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Speaker 5: wholesale off takers. Some of those off takers then are

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Speaker 5: the retailers of electricity who sort of buy an upstream

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Speaker 5: supply of goods and then use the regulated poles and

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Speaker 5: wires and pay regulated rates to deliver that commodity to

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Speaker 5: you at your home. So some of the value proposition

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Speaker 5: of what you're experiencing as a potential retail customer and

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Speaker 5: a competitive market is your product selection. I mean to

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Speaker 5: give an example, a retailer came to me and marketed

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Speaker 5: me a five year fixed price for electricity. Last year,

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Speaker 5: I bought it. I locked in a rate, I'm insulated

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Speaker 5: from upstream changes in wholesale market volatility.

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Speaker 4: As a result, that's.

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Speaker 5: Generally the value proposition of competitive retail. Though in places

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Speaker 5: like Texas, you're also seeing product differentiation, and that has

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Speaker 5: a ring of telecommunications and data competitions sort of like

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Speaker 5: more apps. As part of your retail electric supply service,

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Speaker 5: people selling you smart thermostats or residential batteries that can

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Speaker 5: be packaged onto your retail electricity supply plan to sell

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Speaker 5: back to the grid, help manage your costs upstream to

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Speaker 5: stabilize pricing. But that's the paradigm of competition in this space.

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Speaker 5: It's a regulated system in the middle with competition on

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Speaker 5: the edges.

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Speaker 3: Can we back up for a second and go back

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Speaker 3: to that big restructuring of the market, because I have

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Speaker 3: a feeling this will help us understand our current situation.

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Speaker 3: But what was the problem that we were trying to

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Speaker 3: solve back then? You know, people have short memories. A

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Speaker 3: lot of people would say that our electricity system right

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Speaker 3: now has its own special problems, and they would forget

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Speaker 3: that there were previous problems that this system was meant

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Speaker 3: to address.

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Speaker 5: Yeah, I mean, it's kind of haunting. It's funny you

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Speaker 5: should ask that question, because the problem it was meant

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Speaker 5: to address is that regulated utilities, which used to own

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Speaker 5: this whole chain of links on a consolidated, vertically integrated basis,

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Speaker 5: bet wrong very badly on the amount of demand growth

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Speaker 5: in the sector, and they put themselves out there building

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Speaker 5: power plants that were intended to be included in what's

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Speaker 5: called their rate base, on which they earn a return

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Speaker 5: and are able to charge off those costs to a

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Speaker 5: captive set of customers. When they bet wrong on the

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Speaker 5: demand that would ultimately materialize on the system, they found

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Speaker 5: themselves well over their skis in the amount of power

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Speaker 5: generation that they either had built or were in the

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Speaker 5: process of building. At the heart of regulated utility economics

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Speaker 5: is this division problem where kind of a total system

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Speaker 5: of fixed costs is the numerator divided by the denominator

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Speaker 5: of throughput. So these regulated utilities were adding handsomely to

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Speaker 5: the numerator. The denominator wasn't propping up that, and the

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Speaker 5: result was that division problems, spitting out a price that

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Speaker 5: was escalating higher and higher. Some utilities, at that point

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Speaker 5: their state regulators said you've been imprudent. We're going to

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Speaker 5: not allow you cost recovery because you've been imprudent. They

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Speaker 5: went bankrupt, but that was the exception to the rule.

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Speaker 5: Most of them allowed those costs to be recovered from

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Speaker 5: a captive customer base. But some of those states also

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Speaker 5: pass laws that said, let's never do this again. There's

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Speaker 5: no reason why we shouldn't have power generation invested in

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Speaker 5: to meet the levels of demand needed on the system.

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Speaker 5: Be a function of investors' competitive bets in the market,

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Speaker 5: and so in about you know, call it a third

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Speaker 5: of the states, but accounting for more than half of

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Speaker 5: the power sold. That's now the business model where companies

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Speaker 5: like mine are, you know, have to make guesses about

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Speaker 5: what the demand is going to be and try to

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Speaker 5: sign up customers to voluntarily contract with us to produce

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Speaker 5: revenue for the power generation we might invest in. And

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Speaker 5: for the rest of the country. It still works by

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Speaker 5: you know, people like me wearing my former hat, you know,

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Speaker 5: as as the chairman of a utility commission, like guessing

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Speaker 5: what the future is going to be and charging off

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Speaker 5: the costs of those guesses to a monopolized customer base.

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Speaker 2: Let's talk about your former hat, because one of the

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Speaker 2: things you hear about is that the utilities have this

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Speaker 2: incentive to overinvest because that might help determine what they're

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Speaker 2: allowed to charge on a going forward basis. But why

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Speaker 2: don't you sort of talk about your former hat and

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Speaker 2: the basic role you played, how you thought about decision making,

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Speaker 2: and how we are to understand what the world looks

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Speaker 2: like from the standpoint of someone sitting on the regulatory commission.

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Speaker 4: Yeah, well, you're number one.

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Speaker 5: You're absolutely correct about the incentives at play under the

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Speaker 5: style of economic regulation that is widely used really without

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Speaker 5: exception the United States to regulate the monopoly industries in

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Speaker 5: the utility sector. The companies earn a return that is

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Speaker 5: sort of announced and advanced by their state or federal

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Speaker 5: economic regulators based on the amount of capital they've invested

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Speaker 5: in the system. So spend more, make more has some

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Speaker 5: paradoxical effects where the most amount of profit a utility

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Speaker 5: will ever make is in the first year that it

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Speaker 5: owns a particular asset, and then when they own it

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Speaker 5: free and clear, they actually earn zero profits, so sort

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Speaker 5: of an inversion of the cash flow paradigm that you

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Speaker 5: would expect out of competitive businesses. Regulators also establish the

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Speaker 5: depreciation life span for rate making purposes of regulated assets,

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Speaker 5: which has some interactive effects with that model. So that's

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Speaker 5: basically the grist in the mill of what state regulatory

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Speaker 5: utility commissions do. They determine the amount that is quote

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Speaker 5: unquote used and useful in service to customers of the

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Speaker 5: capital investments that utilities have made. They also establish an

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Speaker 5: allowance for so called prudently incurred expenses the O and

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Speaker 5: M on the system around which the utility earns no margin,

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Speaker 5: just gets a recovery of those costs, and that also

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Speaker 5: has the knock on incentive of if I'm a utility

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Speaker 5: and I look at a problem that I have to solve,

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Speaker 5: I will always want to solve it with capital investment.

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Speaker 5: I will never want to solve it with opex, you know.

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Speaker 5: And because that one earns return, one does not. So

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Speaker 5: ordinary trade offs that would occur in competitive businesses between

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Speaker 5: capex and opics tend not to occur in the regulated sector.

303
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Speaker 5: Other countries have done this a different way and have

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Speaker 5: tried to establish more of a performance based framework of

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Speaker 5: regulation that rewards utilities with profits based on outcomes. But

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Speaker 5: you know, the United States has never got there for

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Speaker 5: a whole variety of frankly dumb reasons. So that's the

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Speaker 5: way those sector is regulated. It's weird to have a

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Speaker 5: sector that is really regulated according to early twentieth century

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Speaker 5: standard that's trying to serve a modern economy.

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Speaker 4: To be fully candid.

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Speaker 3: With you, yeah it does feel that way, doesn't it.

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Speaker 3: So again I said in the intro, I do not

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Speaker 3: know much about the electricity market. I feel like I'm

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Speaker 3: constantly struggling to try to understand it. But one thing

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Speaker 3: I do know is that a lot of the electricity

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Speaker 3: companies seem to complain for years and years and years

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Speaker 3: that loads in the US had actually been either declining

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Speaker 3: or stagnant. Now we have the situation where everyone is

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Speaker 3: talking about data centers coming on stream and they use

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Speaker 3: a lot of electricity, so loads are finally rising. Shouldn't

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Speaker 3: this be a good thing for the electricity company. Shouldn't

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Speaker 3: they be celebrating they have extra money to spend on,

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Speaker 3: If not opics, then capex.

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Speaker 5: Generally yes, And it's true that for most electricity markets

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Speaker 5: in the United States it's been fairly flat. In the PGAM,

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Speaker 5: the Pennsylvania New Jersey Maryland market that stretches from Washington,

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Speaker 5: d C. To Chicago, they last recorded a record peak

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Speaker 5: demand in two thousand and six. They'll in all likelihoods

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Speaker 5: set a demand next year twenty years later in twenty

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Speaker 5: twenty six. Some markets, like Texas's ERCOT market have been growing,

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Speaker 5: but it is definitely the exception to the rule. Most

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Speaker 5: of these people less set a record demand. You know,

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Speaker 5: before the period of offshoring and de industrialization of industries

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Speaker 5: that use a lot of electricity, and that actually facilitated

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Speaker 5: the kind of turnover of capital from colt gas and

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Speaker 5: to renewables a little bit as well in a lot

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Speaker 5: of these places. But net of net, you know, that

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Speaker 5: was kind of neutral or even a little bit negative

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Speaker 5: in terms of the total installed generation capacity was kind

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Speaker 5: of managing to even in terms of generation capacity editions,

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Speaker 5: and then in terms of like, shouldn't they be celebrating, Yes, definitely.

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Speaker 5: Everyone in the sector, my business and the regulated utilities

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Speaker 5: are excited about the prospect of growth. They're also nervous

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Speaker 5: about whether or not this growth is real and to

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Speaker 5: what magnitude. Part of what makes it a little worrying

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Speaker 5: is that ordinarily electric city demand growth would be a

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Speaker 5: composite of growing demand from many different end use applications

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Speaker 5: that would kind of diversify the risk of betting on

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Speaker 5: growth here, it's like a one or a zero. You know,

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Speaker 5: if you take out the data centers, the sector is actually,

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Speaker 5: you know, pretty stable in terms of electricity demand. If

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Speaker 5: you add the data centers, the sector is really poised

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Speaker 5: to grow a heck of a lot. And when you

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Speaker 5: look at the projections of the grid operators, I mean,

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Speaker 5: just to put some numbers on this, the market PJAM

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Speaker 5: in the Mid Atlantic that I was referring to, it's

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Speaker 5: currently about one hundred and sixty thousand megawat market. It's

359
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Speaker 5: projecting to add forty thousand megawatts by twenty thirty. The

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Speaker 5: URKAT Texas market, you know about eighty five thousand megawats

361
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Speaker 5: right now. Its latest projection is up to nearly one

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Speaker 5: hundred and forty thousand megawatts by twenty thirty. Now, that's

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Speaker 5: like adding a California to Texas in terms of electricity

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Speaker 5: demand in five years. And that's not going going to

365
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Speaker 5: happen because it can't. It just, I mean literally could

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Speaker 5: not occur. But therein lies the problem is like what

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Speaker 5: are we actually investing toward and what are the regulatory

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Speaker 5: policies that can essentially help call the question on the

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Speaker 5: amount of off take that will actually materialize from AI

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Speaker 5: so that then capital investments can propagate throughout the supply

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Speaker 5: chain to end up serving them. That's really the fundamental

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Speaker 5: question that policymakers, utilities, and competitive providers like US are

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Speaker 5: trying to deal with.

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Speaker 2: Those numbers are absolutely staggering the idea of adding California

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Speaker 2: size demand to Texas in just a standpoint of a

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Speaker 2: few years. When you say you don't think those numbers

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Speaker 2: can happen, what is the constraint is it on the

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Speaker 2: generation side in a market like Texas or if we're

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Speaker 2: talking about what any other region, or because I think

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Speaker 2: it's pretty easy to set up, you know, solar farms

381
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Speaker 2: or whatever. Texas seems pretty liber with what kind of

382
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Speaker 2: how easy it is to plug into the grid or

383
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Speaker 2: is it in a state like that there isn't the

384
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Speaker 2: transmission capacity even if you can stand up the production.

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Speaker 5: Yeah, it's I mean, it's a little bit of everything,

386
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Speaker 5: everything from stuff that isn't you know, on the power

387
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Speaker 5: sector side of the fence line in terms of actually

388
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Speaker 5: being able to construct data centers and you know, their

389
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Speaker 5: chips and the fiber optics that would back them up.

390
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Speaker 5: And then on our side of the fence, you're right

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Speaker 5: getting access to the grid through interconnection, getting all the

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Speaker 5: equipment that you would need to tap into the grid.

393
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Speaker 5: We're talking about, you know kind of grid step up generators,

394
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Speaker 5: step up transformers and stuff like that. Joe, I know

395
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Speaker 5: that's topic near and dear to you from listening to

396
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Speaker 5: the pot over the years. And then it is the

397
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Speaker 5: power equipment in terms of like gas turbine availability. You know,

398
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Speaker 5: solar panels probably aren't going to do it for you

399
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Speaker 5: given the demand for you know, kind of consistent power

400
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Speaker 5: production off of these data centers, but they are helpful.

401
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Speaker 5: So it's just the magnitude.

402
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Speaker 4: There is a dilemma.

403
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Speaker 5: And you know, right now, if I were to place

404
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Speaker 5: in order for something like you know, a generator's step

405
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Speaker 5: up transformer, you know, pre COVID, it would have been

406
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Speaker 5: maybe like twelve to eighteen months. Now we're talking about

407
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Speaker 5: three to four years for a spoke piece of equipment

408
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Speaker 5: whose specifications are only available to me after the local

409
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Speaker 5: utility the Polls and Wires company tells me what my

410
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Speaker 5: interconnection study looks like in terms of grid availability in

411
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Speaker 5: our connection to the system. So that that's one, you know,

412
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Speaker 5: and RG is lucky enough to have some gas turbines

413
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Speaker 5: lined up for delivery you know, later in this decades,

414
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Speaker 5: so we would be able to facilitate some of this investment.

415
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Speaker 5: But if you were going to get in line right now,

416
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Speaker 5: that too would be a process that would take several years.

417
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Speaker 5: Some of it's the availability of equipment, and some of

418
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Speaker 5: it is a natural pacing of steps in the kind

419
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Speaker 5: of quasi regulatory process to get projects online. It would

420
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Speaker 5: be better, I think one of the interesting policy innovations

421
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Speaker 5: that's out there is if you had kind of more

422
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Speaker 5: of a market to make use of the scarce remaining

423
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Speaker 5: headroom in our system from sort of a grid interconnection

424
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Speaker 5: point of view without tripping into having to build a

425
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Speaker 5: bunch of capital investments in polls and wires. But you

426
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Speaker 5: know that's not the way the regulatory model is set up.

427
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Speaker 5: You know, right now we have a paradigm where final

428
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Speaker 5: power generator I kind of knock on the door of

429
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Speaker 5: the local utility and say, hey, you know, I want

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Speaker 5: to build a power project at this place. Can you

431
00:23:28,720 --> 00:23:32,080
Speaker 5: study it for the sake of its interconnection to the grid.

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Speaker 5: They come back with a study and I don't like

433
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Speaker 5: the number, I don't like the specs, and then I

434
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Speaker 5: submit another study and we iterate. So it's a time

435
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Speaker 5: consuming process sometimes to develop these projects, and there probably

436
00:23:45,040 --> 00:23:49,000
Speaker 5: needs to be avenues that are more coordinated between the

437
00:23:49,040 --> 00:23:52,639
Speaker 5: demand and supply side. And even if you don't, you know,

438
00:23:53,000 --> 00:23:57,160
Speaker 5: even if you certainly shouldn't functionally reintegrate the utility business model,

439
00:23:57,160 --> 00:23:59,840
Speaker 5: but there does need to be more coordination between the

440
00:24:00,080 --> 00:24:02,040
Speaker 5: blue on the polls and wires and the people who

441
00:24:02,080 --> 00:24:04,479
Speaker 5: are doing the generation. And that's kind of a missing

442
00:24:04,560 --> 00:24:07,400
Speaker 5: link right now in this policy landscape.

443
00:24:07,600 --> 00:24:12,840
Speaker 3: Other than sheer volume of power needs, I guess sheer megawatts.

444
00:24:13,400 --> 00:24:17,480
Speaker 3: Do data centers have specific energy needs in terms of

445
00:24:17,560 --> 00:24:19,960
Speaker 3: I don't know the type of electricity. I would assume

446
00:24:19,960 --> 00:24:22,320
Speaker 3: a megawat is a megawat, but what do I know?

447
00:24:22,680 --> 00:24:25,399
Speaker 3: But maybe in terms of timing and things like that,

448
00:24:25,640 --> 00:24:29,119
Speaker 3: are there sort of operational considerations that are unique to

449
00:24:29,240 --> 00:24:34,639
Speaker 3: data center's electricity consumption versus say an industrial factory or

450
00:24:34,960 --> 00:24:37,240
Speaker 3: US turning the lights on when we get home.

451
00:24:38,240 --> 00:24:41,840
Speaker 5: Yeah, So, I mean the first experience, you know, at

452
00:24:41,880 --> 00:24:46,439
Speaker 5: any scale that anyone seemed to have with computing technologies,

453
00:24:46,800 --> 00:24:50,679
Speaker 5: you know, were kind of you know, cloud based servers.

454
00:24:51,080 --> 00:24:54,600
Speaker 5: And then really on the other side, like crypto mining

455
00:24:54,600 --> 00:24:57,440
Speaker 5: facilities and both of them data centers. But the two

456
00:24:57,480 --> 00:25:00,520
Speaker 5: could not be more different, right, I mean, doak and

457
00:25:01,320 --> 00:25:05,640
Speaker 5: it becomes uneconomic at a certain strike price for cryptocurrency

458
00:25:05,680 --> 00:25:08,520
Speaker 5: to continue mining. And so it's a highly flexible load

459
00:25:08,560 --> 00:25:12,480
Speaker 5: that drops off the system when conditions become tight in

460
00:25:12,520 --> 00:25:14,680
Speaker 5: an electricity market, and we see that all the time

461
00:25:14,720 --> 00:25:18,280
Speaker 5: in Texas. On the other hand, for you know, cloud

462
00:25:18,359 --> 00:25:24,439
Speaker 5: services that are providing kind of real time instantaneous hosting capabilities,

463
00:25:24,920 --> 00:25:26,880
Speaker 5: you know, they kind of need they have a very

464
00:25:26,960 --> 00:25:30,960
Speaker 5: high what's called load factor of their power consumption. They're

465
00:25:31,040 --> 00:25:34,639
Speaker 5: drawing from the system on a relatively consistent basis, and

466
00:25:34,760 --> 00:25:37,159
Speaker 5: of course they need to be highly reliable. You know,

467
00:25:37,160 --> 00:25:40,240
Speaker 5: they can't really be interrupted without having cloud fare or

468
00:25:40,320 --> 00:25:44,240
Speaker 5: aws interruption style problems, so very different. And you can

469
00:25:44,280 --> 00:25:47,720
Speaker 5: look back to analogues of you know, other industrial customers,

470
00:25:47,800 --> 00:25:51,159
Speaker 5: you know, aluminum smelters, high load factor when they were

471
00:25:51,160 --> 00:25:54,879
Speaker 5: doing the batching of smelting, couldn't be interrupted. Paper mills,

472
00:25:54,960 --> 00:25:57,480
Speaker 5: maybe you could interrupt them. So the industry has some

473
00:25:57,680 --> 00:26:01,280
Speaker 5: like kind of learnings from this and have been markets

474
00:26:01,320 --> 00:26:05,919
Speaker 5: designed around the flexibility of demand to try to do

475
00:26:06,080 --> 00:26:09,359
Speaker 5: for the power sector what previously happened to say, the

476
00:26:09,359 --> 00:26:11,520
Speaker 5: airline sector, which had used to have, you know, a

477
00:26:11,640 --> 00:26:16,120
Speaker 5: very low load factor, and then after restructuring and deregulation

478
00:26:16,200 --> 00:26:19,640
Speaker 5: in the seventies, suddenly everyone's you know, everyone's airplanes ended

479
00:26:19,720 --> 00:26:22,640
Speaker 5: up full, you know, and two full in some cases

480
00:26:22,680 --> 00:26:24,960
Speaker 5: where you know, people get bumped and compensated for it.

481
00:26:25,080 --> 00:26:28,280
Speaker 5: So we've yet to achieve that though in the power sector,

482
00:26:28,359 --> 00:26:32,000
Speaker 5: where load factors continue to be you know, fifty sixty

483
00:26:32,119 --> 00:26:35,359
Speaker 5: seventy percent, so there's a lot of headroom during certain

484
00:26:35,440 --> 00:26:39,440
Speaker 5: hours and very little headroom during other hours. So kind

485
00:26:39,480 --> 00:26:42,280
Speaker 5: of the primary question in terms of the network economics,

486
00:26:42,359 --> 00:26:45,160
Speaker 5: is if you end up with a bunch of high

487
00:26:45,240 --> 00:26:49,280
Speaker 5: load factor data center customers, the type that can't be interrupted,

488
00:26:49,960 --> 00:26:53,639
Speaker 5: how do you get them online without tripping into a

489
00:26:53,640 --> 00:26:57,960
Speaker 5: bunch of necessary capital investments to serve that last few

490
00:26:58,080 --> 00:27:01,399
Speaker 5: percent of hours where they're demand needs to be served

491
00:27:01,400 --> 00:27:04,119
Speaker 5: in firm or can you source flexibility out of the

492
00:27:04,160 --> 00:27:07,959
Speaker 5: system somewhere else, like from residential air conditioning or something

493
00:27:08,000 --> 00:27:10,480
Speaker 5: like that. That's a question again, that's very important to

494
00:27:10,480 --> 00:27:12,919
Speaker 5: figure out. People have kind of issue spotted it, but

495
00:27:13,000 --> 00:27:15,720
Speaker 5: we've really yet to solve in any meaningful way. The

496
00:27:15,840 --> 00:27:18,639
Speaker 5: markets like Texas are kind of geared towards solving it

497
00:27:19,040 --> 00:27:22,359
Speaker 5: in more of a free enterprise premise. Other markets seem

498
00:27:22,400 --> 00:27:23,320
Speaker 5: to be struggling a bit.

499
00:27:39,040 --> 00:27:41,639
Speaker 2: It's funny to think about getting an alert on your phone.

500
00:27:41,800 --> 00:27:45,320
Speaker 2: It's like GPT six is completely against training run. Sorry, no,

501
00:27:46,200 --> 00:27:48,200
Speaker 2: we would like you to turn down your air conditioning

502
00:27:48,280 --> 00:27:49,640
Speaker 2: right now. No, I don't know if that would happen.

503
00:27:49,760 --> 00:27:52,760
Speaker 2: But the part of the reason everyone's interested in data

504
00:27:52,760 --> 00:27:55,280
Speaker 2: centers period, well, there's a lot of reasons, but people

505
00:27:55,320 --> 00:27:58,760
Speaker 2: are worried when they hear these numbers. They're like, oh, am,

506
00:27:58,760 --> 00:28:01,920
Speaker 2: I as the consumer. Let's say I lived in Texas,

507
00:28:01,960 --> 00:28:05,000
Speaker 2: which I sometimes have am I as the consumer going

508
00:28:05,040 --> 00:28:07,879
Speaker 2: to in some way or another, be paying the price

509
00:28:08,600 --> 00:28:13,399
Speaker 2: for this massive expansion of demand thanks to data centers. Intuitively,

510
00:28:13,440 --> 00:28:15,640
Speaker 2: it seems like, well it shouldn't be. They could pay

511
00:28:15,640 --> 00:28:18,000
Speaker 2: for their own electricity, they can pay for their own upgrades.

512
00:28:18,080 --> 00:28:22,320
Speaker 2: But how does this massive increase in demand play out

513
00:28:22,480 --> 00:28:25,199
Speaker 2: from the sort of the ratepayer perspective.

514
00:28:25,920 --> 00:28:29,080
Speaker 5: Yeah, so we go back to the kind of segmentation

515
00:28:29,320 --> 00:28:33,080
Speaker 5: between the regulated grid costs and the commodity costs. In

516
00:28:33,160 --> 00:28:36,119
Speaker 5: answer to that question. On the commodity side, you know,

517
00:28:36,200 --> 00:28:41,640
Speaker 5: this tends to be a marginal cost pricing environment where

518
00:28:41,960 --> 00:28:48,280
Speaker 5: if you have demand growth outstripping supply editions, the system

519
00:28:48,320 --> 00:28:53,200
Speaker 5: becomes tighter, the supply curve moves up for the kind

520
00:28:53,240 --> 00:28:56,960
Speaker 5: of last unit that's necessary to serve demand, and its

521
00:28:57,040 --> 00:29:01,600
Speaker 5: marginal costs in a very real way dablish the clearing

522
00:29:01,680 --> 00:29:05,840
Speaker 5: price that all demand has to pay unless and to

523
00:29:05,880 --> 00:29:09,400
Speaker 5: the extent to they are bilaterally contracted with some kind

524
00:29:09,440 --> 00:29:12,880
Speaker 5: of hedging instruments, which everyone should be. No one should

525
00:29:12,920 --> 00:29:15,920
Speaker 5: be in an ideal market exposed to that spot price.

526
00:29:15,960 --> 00:29:18,560
Speaker 5: But we find that many people are for a variety

527
00:29:18,560 --> 00:29:23,640
Speaker 5: of reasons. So some policy interventions that people have contemplated is,

528
00:29:24,480 --> 00:29:27,320
Speaker 5: you know, usually we would let these markets kind of

529
00:29:27,360 --> 00:29:30,800
Speaker 5: equliberate on their own. We would expect sort of organic

530
00:29:30,920 --> 00:29:35,360
Speaker 5: growth to be met with organic supply editions. Here people

531
00:29:35,400 --> 00:29:39,280
Speaker 5: have observed, like, wow, this demand growth seems really out

532
00:29:39,280 --> 00:29:42,800
Speaker 5: of scale with what the markets have organically been able

533
00:29:42,840 --> 00:29:45,680
Speaker 5: to achieve. Maybe we should have a requirement to just

534
00:29:45,720 --> 00:29:47,960
Speaker 5: bring your own generation. You know, we're not going to

535
00:29:48,040 --> 00:29:52,120
Speaker 5: let the power markets on a forward traded basis send

536
00:29:52,160 --> 00:29:55,480
Speaker 5: the right signal and hope that enough generation shows up

537
00:29:55,720 --> 00:29:58,400
Speaker 5: to serve this demand. As sort of part of the

538
00:29:58,480 --> 00:30:01,880
Speaker 5: social license or even a four normalized regulatory requirement for

539
00:30:01,920 --> 00:30:03,800
Speaker 5: them to get online, you've got to show us the

540
00:30:03,840 --> 00:30:05,840
Speaker 5: megawots that you bring on in the system. So that's

541
00:30:05,920 --> 00:30:08,080
Speaker 5: one of the debates. On the other side of the ledger.

542
00:30:08,120 --> 00:30:11,320
Speaker 5: The regulated costs, that too can be a problem usually,

543
00:30:11,600 --> 00:30:14,400
Speaker 5: and again this division problem of network economics. For the

544
00:30:14,480 --> 00:30:18,560
Speaker 5: regulated costs, if you're adding to that denominator of throughput

545
00:30:19,000 --> 00:30:22,360
Speaker 5: at a rate that is higher, then you're adding to

546
00:30:22,600 --> 00:30:26,200
Speaker 5: additions to the fixed costs of the system. Everyone's rates

547
00:30:26,240 --> 00:30:29,600
Speaker 5: go down produces a lower quotient, which is the price

548
00:30:30,160 --> 00:30:34,160
Speaker 5: of grid consumed electricity. The problem here is that in

549
00:30:34,200 --> 00:30:37,920
Speaker 5: a kind of an inflationary environment for all the materials,

550
00:30:38,000 --> 00:30:41,960
Speaker 5: the transformers, the cabling, everything that goes into the polls

551
00:30:41,960 --> 00:30:45,320
Speaker 5: and wires, if you're adding demand and you're not just

552
00:30:45,440 --> 00:30:48,280
Speaker 5: using headroom that already exists on the system, if you're

553
00:30:48,280 --> 00:30:51,560
Speaker 5: not increasing that capacity factor on the system, if you're

554
00:30:51,560 --> 00:30:55,800
Speaker 5: tripping into a lot of new capital expenditures, then even

555
00:30:55,840 --> 00:30:58,760
Speaker 5: if you're adding demand that's paying regulated rates, it may

556
00:30:58,800 --> 00:31:01,280
Speaker 5: not be enough to offset at the total amount of

557
00:31:01,280 --> 00:31:04,840
Speaker 5: expenditures incrementally you're making on the system. So there's policy

558
00:31:04,880 --> 00:31:08,440
Speaker 5: interventions there too, where you can try to directly assign

559
00:31:08,960 --> 00:31:11,840
Speaker 5: the costs that are caused on the grid back to

560
00:31:11,880 --> 00:31:14,960
Speaker 5: the data centers. But those are pretty nascent approaches, and

561
00:31:15,080 --> 00:31:17,360
Speaker 5: some of the ones that have been tried are kind

562
00:31:17,360 --> 00:31:19,480
Speaker 5: of aiming at the wrong thing. So a lot of

563
00:31:19,520 --> 00:31:22,320
Speaker 5: policy work remains to be done here. And all of

564
00:31:22,320 --> 00:31:24,880
Speaker 5: this is kind of a political debate where you know,

565
00:31:24,960 --> 00:31:27,320
Speaker 5: a lot of state governors, the people who are really

566
00:31:27,320 --> 00:31:29,719
Speaker 5: the ones kind of in charge of, you know, with

567
00:31:29,800 --> 00:31:33,760
Speaker 5: their state utility commissions, setting these policies, they simultaneously want

568
00:31:33,800 --> 00:31:37,200
Speaker 5: the economic development of data centers, but they don't want

569
00:31:37,200 --> 00:31:42,520
Speaker 5: any negative externalities around reliability, affordability, clean energy and all

570
00:31:42,560 --> 00:31:45,960
Speaker 5: those things trade off against one another. But you know,

571
00:31:46,120 --> 00:31:49,000
Speaker 5: political actors will want to maximize all of those variables,

572
00:31:49,160 --> 00:31:51,400
Speaker 5: which is not possible in the current environment.

573
00:31:51,840 --> 00:31:55,200
Speaker 3: Can I ask a very basic question, and I'm struggling

574
00:31:55,240 --> 00:31:57,760
Speaker 3: to think of a way to frame it that doesn't

575
00:31:57,800 --> 00:32:00,800
Speaker 3: sound like I've just taken an elderly family member to

576
00:32:01,000 --> 00:32:05,600
Speaker 3: a medical office or something. But what is a node?

577
00:32:05,880 --> 00:32:09,080
Speaker 5: A node usually would be a place like a substation.

578
00:32:09,600 --> 00:32:14,000
Speaker 5: It is the place on the physical grid at which

579
00:32:14,200 --> 00:32:18,240
Speaker 5: electricity is bought and sold. It's a physical destination on

580
00:32:18,280 --> 00:32:21,480
Speaker 5: the grid. When we say nodal markets, which is a

581
00:32:21,480 --> 00:32:25,320
Speaker 5: way to describe electricity markets, we're referring to markets where

582
00:32:25,480 --> 00:32:30,480
Speaker 5: electricity is priced on a so called locational marginal price basis,

583
00:32:30,840 --> 00:32:35,480
Speaker 5: and the LMPs as they're called, are based on physical

584
00:32:35,480 --> 00:32:39,680
Speaker 5: destinations on the grid called nodes. I'm just estimated, guess here,

585
00:32:39,760 --> 00:32:42,280
Speaker 5: but a market like Texas will have a few thousand

586
00:32:42,400 --> 00:32:47,240
Speaker 5: nodes at which electricity is traded on an individuated price basis.

587
00:32:48,240 --> 00:32:50,360
Speaker 3: That seems like such a weird way of doing it

588
00:32:50,400 --> 00:32:52,560
Speaker 3: to me, and I'm sure there are very valid reasons

589
00:32:52,600 --> 00:32:55,040
Speaker 3: for doing it in this way, But like nowadays, given

590
00:32:55,120 --> 00:32:58,240
Speaker 3: all the data at our disposal, given the rise of AI,

591
00:32:58,640 --> 00:33:01,360
Speaker 3: can't we work out some sort of average cost across

592
00:33:01,360 --> 00:33:03,680
Speaker 3: the system. It seems really weird that we're taking it

593
00:33:03,680 --> 00:33:06,360
Speaker 3: at like physical points, although I guess you know there

594
00:33:06,360 --> 00:33:09,920
Speaker 3: are plenty of commodities that do trade based on particular locations,

595
00:33:09,960 --> 00:33:11,320
Speaker 3: but it just seems strange to me.

596
00:33:11,840 --> 00:33:15,160
Speaker 5: Well, it is important that you have nodal pricing in

597
00:33:15,200 --> 00:33:19,479
Speaker 5: the system only because it sends a powerful price signal

598
00:33:19,600 --> 00:33:24,360
Speaker 5: for the accurate location of necessary power generation. There are

599
00:33:24,480 --> 00:33:28,040
Speaker 5: certain markets, I'm thinking of Alberta, some of the European

600
00:33:28,120 --> 00:33:32,280
Speaker 5: markets that actually do establish a zonal price across their

601
00:33:32,400 --> 00:33:36,800
Speaker 5: entire market. But there you end up with power plant developers,

602
00:33:37,040 --> 00:33:40,920
Speaker 5: you know, who develop wind in a particular area far

603
00:33:40,960 --> 00:33:45,480
Speaker 5: away from demand to capture the average price, but then

604
00:33:45,520 --> 00:33:49,480
Speaker 5: that energy ends up being undeliverable because there are transmission

605
00:33:49,520 --> 00:33:54,800
Speaker 5: system constraints and congestions. So the nodal pricing formulation is

606
00:33:54,840 --> 00:33:59,120
Speaker 5: intended to reflect a market that, unlike the stock exchange,

607
00:33:59,320 --> 00:34:02,959
Speaker 5: isn't just trading bits of data to represent kind of

608
00:34:03,080 --> 00:34:07,000
Speaker 5: paper securities. It in a very real way, is meant

609
00:34:07,040 --> 00:34:10,480
Speaker 5: to simulate a kind of flow of electrons on a

610
00:34:10,760 --> 00:34:15,319
Speaker 5: system constrained basis, And then it provides valuable information too,

611
00:34:15,400 --> 00:34:20,080
Speaker 5: because if you continue to see locational marginal prices you know,

612
00:34:20,200 --> 00:34:23,640
Speaker 5: in one place that are very high and twenty miles

613
00:34:23,680 --> 00:34:27,080
Speaker 5: away they're very low, that's a signal to the people

614
00:34:27,080 --> 00:34:29,120
Speaker 5: who plan the transmission grid that hey, you know, we

615
00:34:29,120 --> 00:34:32,480
Speaker 5: should probably build a transmission line here, because the addition

616
00:34:32,560 --> 00:34:35,000
Speaker 5: of the transmission line will be the thing that flattens

617
00:34:35,040 --> 00:34:38,760
Speaker 5: out that price differential and creates a market that looks

618
00:34:38,840 --> 00:34:41,799
Speaker 5: more like a you know, a copper plate rather than

619
00:34:42,040 --> 00:34:43,560
Speaker 5: two separate swimming pools.

620
00:34:44,680 --> 00:34:47,120
Speaker 3: Interesting. Just to be clear though, if I want it

621
00:34:47,120 --> 00:34:50,120
Speaker 3: to be public enemy number one, could I build a

622
00:34:50,160 --> 00:34:54,720
Speaker 3: gigantic data center next to a locational marginal price point

623
00:34:54,960 --> 00:34:58,319
Speaker 3: node and affect the cost of electricity for you know,

624
00:34:58,360 --> 00:34:59,240
Speaker 3: a greater area.

625
00:35:00,239 --> 00:35:03,000
Speaker 5: Yes, you absolutely could, And in fact, I mean I

626
00:35:03,080 --> 00:35:05,920
Speaker 5: know of at least one example. You know, North Dakota

627
00:35:06,120 --> 00:35:08,319
Speaker 5: is actually a good example of this. A place that

628
00:35:08,480 --> 00:35:13,240
Speaker 5: is doesn't have a lot of robust transmission infrastructure does

629
00:35:13,320 --> 00:35:16,759
Speaker 5: have a lot of renewable resources that cause and those

630
00:35:16,800 --> 00:35:19,400
Speaker 5: renewables are almost kind of dumping on the market in

631
00:35:19,440 --> 00:35:22,960
Speaker 5: a way that causes the energy price to go down

632
00:35:23,120 --> 00:35:26,880
Speaker 5: and even negative at times in North Dakota. And you know,

633
00:35:27,000 --> 00:35:29,160
Speaker 5: some of the first data centers that we've seen in

634
00:35:29,200 --> 00:35:32,920
Speaker 5: this wave of expansion chose to locate in North Dakota

635
00:35:32,960 --> 00:35:36,720
Speaker 5: because they had access to wholesale prices that were lower negative.

636
00:35:36,760 --> 00:35:38,919
Speaker 5: They were just following the price signal. And so there's

637
00:35:39,040 --> 00:35:41,120
Speaker 5: you know, there's certain data centers out there that are

638
00:35:41,160 --> 00:35:44,640
Speaker 5: literally being paid to consume electricity because there's such an

639
00:35:44,640 --> 00:35:47,839
Speaker 5: oversupply and so little transmission into the area.

640
00:35:48,560 --> 00:35:50,319
Speaker 2: I you know, I got to ask this question on

641
00:35:50,400 --> 00:35:52,760
Speaker 2: a podcast recently and I didn't have a good answer,

642
00:35:52,760 --> 00:35:55,320
Speaker 2: and I so now I want to ask So you mentioned, Okay,

643
00:35:55,320 --> 00:35:58,480
Speaker 2: all these different pieces of electrical gear, they're in short supply.

644
00:35:59,080 --> 00:36:01,200
Speaker 2: You might not be able to get some key equipment

645
00:36:01,320 --> 00:36:06,200
Speaker 2: until twenty thirty. Is it strain going to ease at all?

646
00:36:06,360 --> 00:36:09,680
Speaker 2: Is there any additional capacity coming on the market. When

647
00:36:09,719 --> 00:36:12,239
Speaker 2: I was asked this, I like sort of like hesitated.

648
00:36:12,239 --> 00:36:14,400
Speaker 2: I was like, well, maybe they're not sure about the future,

649
00:36:14,520 --> 00:36:17,600
Speaker 2: so they're like reluctant to do the capital expending involved.

650
00:36:17,600 --> 00:36:20,560
Speaker 2: But do you think there's any like is capacity growing

651
00:36:20,600 --> 00:36:22,840
Speaker 2: for some of this core infrastructure As far as you

652
00:36:22,880 --> 00:36:23,440
Speaker 2: can tell.

653
00:36:23,480 --> 00:36:26,760
Speaker 5: My impression is yes. I mean you've seen public announcements

654
00:36:26,800 --> 00:36:32,200
Speaker 5: from the largest gas turbine manufacturer, ge Vanova about new

655
00:36:32,560 --> 00:36:37,360
Speaker 5: manufacturing base editions, you know, some of the transformer equipment

656
00:36:37,400 --> 00:36:40,480
Speaker 5: as well. I think you're seeing some incremental investment in.

657
00:36:40,920 --> 00:36:45,280
Speaker 5: You're certainly seeing power generators like NRG, you know, take

658
00:36:45,360 --> 00:36:50,920
Speaker 5: positions in lining up their optionality to have power projects

659
00:36:50,920 --> 00:36:54,279
Speaker 5: that can be deployable to either the Texas market or

660
00:36:54,400 --> 00:36:59,000
Speaker 5: the mid Atlantic market, depending on where consumer demand actually arises.

661
00:36:59,320 --> 00:37:02,880
Speaker 5: So I think there is some development in that market.

662
00:37:03,120 --> 00:37:05,359
Speaker 5: I will say, I think what people are waiting for.

663
00:37:05,520 --> 00:37:08,080
Speaker 5: You know, everyone looks around the supply chain and you

664
00:37:08,120 --> 00:37:11,399
Speaker 5: know is reasonably asking, well, who's got the deep pockets here?

665
00:37:11,800 --> 00:37:14,480
Speaker 5: And then everyone turns to big tech. You know big tech.

666
00:37:14,520 --> 00:37:18,000
Speaker 5: Obviously if they signed a power purchase agreement for fifteen

667
00:37:18,080 --> 00:37:21,560
Speaker 5: years or even less to take power at a certain price,

668
00:37:22,000 --> 00:37:25,560
Speaker 5: some of this supply chain would fall into place pretty readily,

669
00:37:25,680 --> 00:37:28,480
Speaker 5: I would say. And so people are kind of waiting

670
00:37:28,520 --> 00:37:32,440
Speaker 5: in a sense for big tech to make those big

671
00:37:32,520 --> 00:37:38,040
Speaker 5: bilateral contracting moves that would serve to propagate sort of

672
00:37:38,120 --> 00:37:41,879
Speaker 5: rationality around response to the perceived demand up and down

673
00:37:41,920 --> 00:37:44,480
Speaker 5: the supply chain. And I think that's kind of the

674
00:37:44,600 --> 00:37:49,359
Speaker 5: leading indicator to watch for in the sector. How many

675
00:37:49,400 --> 00:37:51,440
Speaker 5: of those contracts are actually being signed.

676
00:37:52,400 --> 00:37:54,200
Speaker 2: Big tech is just going to do everything. They're going

677
00:37:54,239 --> 00:37:55,920
Speaker 2: to build nuclear plants, so they're going to build their

678
00:37:55,920 --> 00:37:57,800
Speaker 2: own ships, and they're going to build their own fabs,

679
00:37:57,840 --> 00:38:00,680
Speaker 2: and everything will be this entire ecosystem that it is

680
00:38:00,719 --> 00:38:02,920
Speaker 2: just alphabets from down the line. I want to go

681
00:38:02,960 --> 00:38:05,080
Speaker 2: back though, to something you said, which is that part

682
00:38:05,120 --> 00:38:08,280
Speaker 2: of what's tricky about the data center thing is that, Okay,

683
00:38:08,280 --> 00:38:11,640
Speaker 2: here's this big boom in demand, but it's not because

684
00:38:11,680 --> 00:38:14,919
Speaker 2: of like general like trend economic growth. And you could

685
00:38:15,000 --> 00:38:17,680
Speaker 2: be perhaps that a year from now or six months

686
00:38:17,680 --> 00:38:20,880
Speaker 2: from now or tomorrow, people say, oh, I want to

687
00:38:20,920 --> 00:38:23,840
Speaker 2: slam the brakes on AAI spending. We're not getting this return.

688
00:38:23,960 --> 00:38:26,160
Speaker 2: Fears of a bubble, you know. Fourth I talk to

689
00:38:26,239 --> 00:38:29,799
Speaker 2: us a little bit more. Howady commissions are dealing with

690
00:38:29,960 --> 00:38:33,840
Speaker 2: this risk and this very binary state of planning.

691
00:38:34,400 --> 00:38:37,200
Speaker 5: Yeah, so commissions at the state level have dealt with

692
00:38:37,239 --> 00:38:40,120
Speaker 5: this in a very different way. Some of them have

693
00:38:40,920 --> 00:38:45,080
Speaker 5: candidly and regulated utilities themselves have said we want no

694
00:38:45,160 --> 00:38:48,400
Speaker 5: part of this risk. Like we're a small MidCap utility

695
00:38:48,640 --> 00:38:52,120
Speaker 5: and someone is knocking at our door asking us to

696
00:38:52,160 --> 00:38:55,520
Speaker 5: invest in power generation that would be like a third

697
00:38:55,560 --> 00:38:59,000
Speaker 5: of our total existing balance sheet that's remained stable for decades.

698
00:38:59,160 --> 00:39:01,480
Speaker 5: We're just not doing it. You can get on our grid,

699
00:39:01,480 --> 00:39:03,680
Speaker 5: and you can pay the cost to get on our grid,

700
00:39:03,920 --> 00:39:06,399
Speaker 5: but in terms of power generation, you've got to bring

701
00:39:06,400 --> 00:39:09,600
Speaker 5: your own project. We're not involved in that. Other utilities

702
00:39:09,640 --> 00:39:14,280
Speaker 5: that have larger balance sheets, the Southeastern utilities, are using

703
00:39:14,320 --> 00:39:17,640
Speaker 5: their regulated balance sheets to build out generation and supply

704
00:39:17,719 --> 00:39:21,720
Speaker 5: data center customers. Devils in the details on those heavily

705
00:39:21,760 --> 00:39:25,120
Speaker 5: redacted commercial agreements that would I would desperately love to

706
00:39:25,160 --> 00:39:29,239
Speaker 5: see about the degree to which they protect consumers. And then,

707
00:39:29,239 --> 00:39:31,800
Speaker 5: of course, the other side of the industry, the competitive industry.

708
00:39:32,239 --> 00:39:35,080
Speaker 5: You know, it's companies like mine and data centers that

709
00:39:35,239 --> 00:39:38,440
Speaker 5: enter into commercial agreements for the purchase and sale of power,

710
00:39:38,760 --> 00:39:41,400
Speaker 5: and neither of those parties have recourse to a captive

711
00:39:41,400 --> 00:39:44,080
Speaker 5: base of customers. So they could go bust, we could

712
00:39:44,120 --> 00:39:46,640
Speaker 5: go bust. It's not going to you know, be skin

713
00:39:46,719 --> 00:39:49,520
Speaker 5: off the teeth of a set of quote unquote ratepairs.

714
00:39:50,160 --> 00:39:53,680
Speaker 5: Again on the grid costs, it's about whether or not

715
00:39:53,920 --> 00:39:56,920
Speaker 5: state commissions, and in this case of federal regulator, the

716
00:39:56,960 --> 00:40:01,719
Speaker 5: Federal Energy Regulatory Commission, are going to style take or

717
00:40:01,760 --> 00:40:06,480
Speaker 5: pay contractual agreements to require large data centers that come

718
00:40:06,520 --> 00:40:13,160
Speaker 5: onto the grid to essentially collateralize a revenue stream associated

719
00:40:13,200 --> 00:40:17,600
Speaker 5: with the incremental costs of developing the grid to serve them.

720
00:40:18,120 --> 00:40:21,439
Speaker 5: And so far there seems to be relative unanimity that

721
00:40:21,440 --> 00:40:24,200
Speaker 5: that is the right way to go in order to

722
00:40:24,239 --> 00:40:27,600
Speaker 5: protect legacy customers. But again, the devils in the details,

723
00:40:27,800 --> 00:40:30,280
Speaker 5: and I have a problem with some of the math

724
00:40:30,360 --> 00:40:33,560
Speaker 5: that's being done in those regulatory approaches. So it's not

725
00:40:33,640 --> 00:40:37,560
Speaker 5: as if this problem is invisible to the people who

726
00:40:37,560 --> 00:40:40,759
Speaker 5: are economically regulating this industry, but they are trying to

727
00:40:40,840 --> 00:40:42,520
Speaker 5: in a very real way. They are trying to figure

728
00:40:42,520 --> 00:40:45,000
Speaker 5: it out on real time, and I'll be the first

729
00:40:45,040 --> 00:40:47,760
Speaker 5: to say their solution set is far from perfect.

730
00:40:48,040 --> 00:40:50,200
Speaker 3: So just on this note, it strikes me that the

731
00:40:50,280 --> 00:40:53,880
Speaker 3: difficulty in the system, I mean, setting aside the patchwork

732
00:40:54,000 --> 00:40:57,160
Speaker 3: of fifty different states all having their own different regulations,

733
00:40:57,200 --> 00:40:59,560
Speaker 3: like the heart of the difficulty in the current system

734
00:40:59,680 --> 00:41:05,200
Speaker 3: is we're trying to preserve the market signal for further investment,

735
00:41:05,320 --> 00:41:08,200
Speaker 3: but also smooth out some of the volatility so that

736
00:41:08,320 --> 00:41:11,560
Speaker 3: Joe and I don't have to spend an inordinate amount

737
00:41:11,560 --> 00:41:14,160
Speaker 3: of time thinking about what is like the most cost

738
00:41:14,160 --> 00:41:17,359
Speaker 3: effective time to blow dry our hair or do our

739
00:41:17,400 --> 00:41:20,719
Speaker 3: laundry or something like that. So we're kind of trying

740
00:41:20,760 --> 00:41:24,360
Speaker 3: to have our capitalism cake and eat it too. Cake italism,

741
00:41:24,960 --> 00:41:28,799
Speaker 3: cake italism. That kind of works. What is your platonic

742
00:41:29,040 --> 00:41:34,440
Speaker 3: ideal of a electricity market. Do you have one, either

743
00:41:34,480 --> 00:41:37,000
Speaker 3: in the US or elsewhere in the world that you

744
00:41:37,040 --> 00:41:39,880
Speaker 3: would say, look, here is a system that actually manages

745
00:41:40,239 --> 00:41:41,799
Speaker 3: to do both these things.

746
00:41:42,239 --> 00:41:44,000
Speaker 4: Yeah, man, I love that question.

747
00:41:44,160 --> 00:41:48,400
Speaker 5: I mean, I will say that one of the real

748
00:41:48,480 --> 00:41:53,440
Speaker 5: flaws in the US electricity system is that it is

749
00:41:53,560 --> 00:41:57,080
Speaker 5: not as robustly a two sided market as you would

750
00:41:57,080 --> 00:42:01,640
Speaker 5: hope for. It's still demand. It just exists on the system.

751
00:42:01,760 --> 00:42:05,040
Speaker 5: It's coming onto the system based on people's on the

752
00:42:05,040 --> 00:42:07,880
Speaker 5: supply side guesses about what will happen, and then the

753
00:42:07,920 --> 00:42:11,160
Speaker 5: supply side is expected to solve all of it. There's

754
00:42:11,280 --> 00:42:14,759
Speaker 5: very little in the way of demand elasticity, and that's

755
00:42:14,800 --> 00:42:18,000
Speaker 5: been for a variety of historical reasons. I mean, the

756
00:42:18,000 --> 00:42:20,799
Speaker 5: first and most obvious one is that you didn't even

757
00:42:20,840 --> 00:42:24,600
Speaker 5: have the technology in the form of advanced metering infrastructure

758
00:42:24,880 --> 00:42:28,680
Speaker 5: to understand when people were actually using the power in

759
00:42:28,719 --> 00:42:32,920
Speaker 5: relation to a highly time variable set of upstream costs.

760
00:42:33,480 --> 00:42:36,600
Speaker 5: Now you do have that. You are also increasingly having

761
00:42:36,680 --> 00:42:40,080
Speaker 5: the software that allows financial settlements on the part of

762
00:42:40,120 --> 00:42:43,600
Speaker 5: the people retailing electricity to end use consumers to be

763
00:42:43,800 --> 00:42:48,000
Speaker 5: settled on the basis of that advanced metering infrastructure's actual

764
00:42:48,040 --> 00:42:51,520
Speaker 5: meter reads so on a time interval basis. And finally,

765
00:42:51,640 --> 00:42:53,680
Speaker 5: because you shouldn't have to think about when you're going

766
00:42:53,680 --> 00:42:56,360
Speaker 5: to blow dry your hair, you have a significant amount

767
00:42:56,360 --> 00:43:01,480
Speaker 5: of device automation in the form of smart thermostat, battery storage,

768
00:43:01,600 --> 00:43:07,040
Speaker 5: electric vehicles, manufacturing, and industrial processes which can be sort

769
00:43:07,080 --> 00:43:10,080
Speaker 5: of a set it and forget it to automatically respond

770
00:43:10,080 --> 00:43:12,799
Speaker 5: to high prices to try to increase the system's load

771
00:43:12,880 --> 00:43:16,800
Speaker 5: factor and avoid using electricity at very high cost times.

772
00:43:17,120 --> 00:43:21,240
Speaker 5: So that is just starting happen in the American electricity sector.

773
00:43:21,719 --> 00:43:25,400
Speaker 5: I would tend to look to the UK and Australia

774
00:43:26,080 --> 00:43:30,279
Speaker 5: as places that have gone a bit ways further in

775
00:43:30,360 --> 00:43:35,360
Speaker 5: trying to solve that problem and embrace the inherent flexibility

776
00:43:35,360 --> 00:43:38,759
Speaker 5: of a system as versus the United States, which is

777
00:43:38,880 --> 00:43:42,320
Speaker 5: kind of stuck in this sort of supply does something

778
00:43:42,360 --> 00:43:47,120
Speaker 5: to demand framework of industry. So that's definitely on my

779
00:43:47,520 --> 00:43:49,719
Speaker 5: It's always on the top of my homework list, if

780
00:43:49,760 --> 00:43:51,600
Speaker 5: only because I think a lot of people are thinking

781
00:43:51,640 --> 00:43:55,560
Speaker 5: about solving this problem highly conventionally with supply editions, which

782
00:43:55,760 --> 00:43:59,680
Speaker 5: is going to be really important. But that demand flexibility

783
00:43:59,719 --> 00:44:03,360
Speaker 5: comp is actually essential to get to a market that

784
00:44:03,400 --> 00:44:07,320
Speaker 5: looks like every other efficient and competitive market in the world,

785
00:44:07,440 --> 00:44:08,920
Speaker 5: which has two sides to it.

786
00:44:09,280 --> 00:44:11,640
Speaker 2: We've been telling you a lot about sort of the future,

787
00:44:11,719 --> 00:44:14,839
Speaker 2: looking forward and figuring out, you know, how that we're

788
00:44:14,840 --> 00:44:17,959
Speaker 2: going to get all this new capacity on to the market,

789
00:44:17,960 --> 00:44:21,120
Speaker 2: et cetera. Let's look at the last several years, like

790
00:44:21,239 --> 00:44:23,040
Speaker 2: what happened. Part of the reason we're even having this

791
00:44:23,120 --> 00:44:26,440
Speaker 2: conversation is because electricity bills are on people's minds, right,

792
00:44:26,480 --> 00:44:28,520
Speaker 2: and they've been high, and it's a little unclear like

793
00:44:28,719 --> 00:44:31,080
Speaker 2: how much of this is just keeping up with inflation.

794
00:44:31,800 --> 00:44:36,480
Speaker 2: I presume that, like grid maintenance is actually straightforwardly in

795
00:44:36,600 --> 00:44:39,640
Speaker 2: effective labor costs and inflation, et cetera. One thing we

796
00:44:39,719 --> 00:44:43,439
Speaker 2: do know, however, is that the pace of electricity price increases. Really,

797
00:44:43,480 --> 00:44:46,319
Speaker 2: since the pandemic seems to have been a level step up.

798
00:44:46,719 --> 00:44:49,600
Speaker 2: What's driven that? How would you characterize the last several

799
00:44:49,680 --> 00:44:53,640
Speaker 2: years of electricity prices and perhaps the role of load

800
00:44:53,680 --> 00:44:55,360
Speaker 2: growth in driving those increases.

801
00:44:55,840 --> 00:44:59,319
Speaker 5: Yeah, so so far load growth is really not the

802
00:44:59,520 --> 00:45:03,960
Speaker 5: contribute to what has happened here is almost an awakening

803
00:45:04,280 --> 00:45:08,359
Speaker 5: to the fact that we had, already, without any more

804
00:45:08,440 --> 00:45:12,520
Speaker 5: load growth, a less reliable system than we thought we did,

805
00:45:13,000 --> 00:45:15,359
Speaker 5: and that's due to a variety of reasons. You know,

806
00:45:15,680 --> 00:45:18,719
Speaker 5: we retired a lot of coal, which you had a

807
00:45:18,840 --> 00:45:21,239
Speaker 5: lot of emissions, but we replaced it with a bunch

808
00:45:21,280 --> 00:45:26,200
Speaker 5: of natural gas. That created a you know, a sort

809
00:45:26,200 --> 00:45:30,080
Speaker 5: of more of a dependency on an interrelated network system,

810
00:45:30,600 --> 00:45:34,359
Speaker 5: the gas supply and pipeline system, which, while usually very

811
00:45:34,440 --> 00:45:39,319
Speaker 5: robust and very economically efficient, in winter conditions where there's

812
00:45:39,360 --> 00:45:43,719
Speaker 5: a lot of residential heating drawn, that system can show frailties,

813
00:45:44,400 --> 00:45:48,080
Speaker 5: and so market operators in these electricity markets sort of

814
00:45:48,160 --> 00:45:51,359
Speaker 5: de rated the value of that capacity in how they

815
00:45:51,360 --> 00:45:55,000
Speaker 5: set up these markets, which meant effectively a sort of

816
00:45:55,040 --> 00:46:00,600
Speaker 5: administrative withdrawal of supply from some of these markets similar

817
00:46:00,600 --> 00:46:04,480
Speaker 5: to that renewables were seen not as a one to

818
00:46:04,560 --> 00:46:08,799
Speaker 5: one replacement for reliable generation in the parts of the

819
00:46:08,800 --> 00:46:11,200
Speaker 5: country the middle of the country, especially where they were

820
00:46:11,200 --> 00:46:14,040
Speaker 5: heavily invested in, but they were really being leaned on

821
00:46:14,400 --> 00:46:19,719
Speaker 5: as an effective substitute for more dispatchable power. And I

822
00:46:19,800 --> 00:46:21,480
Speaker 5: think everyone in the back of their head knew that

823
00:46:21,560 --> 00:46:25,799
Speaker 5: wasn't the case. But only recently, as things have gotten tight,

824
00:46:25,840 --> 00:46:28,200
Speaker 5: have people begun to do a lot of hard math

825
00:46:28,239 --> 00:46:31,440
Speaker 5: around it. And then finally, you know, we've just seen

826
00:46:31,760 --> 00:46:36,239
Speaker 5: a few really traumatic winter storms, in particular, one in

827
00:46:36,280 --> 00:46:39,120
Speaker 5: the East and one in Texas that have sort of

828
00:46:39,239 --> 00:46:43,600
Speaker 5: reshaped the way in which the people who have responsibility

829
00:46:43,880 --> 00:46:48,040
Speaker 5: to operate the grid think about the operational posture and

830
00:46:48,200 --> 00:46:51,520
Speaker 5: need for reliable resources on the grid. And so there

831
00:46:51,520 --> 00:46:55,680
Speaker 5: were a variety of regulatory changes that were made that

832
00:46:55,800 --> 00:46:59,120
Speaker 5: had net of net the effect to tighten up the

833
00:46:59,320 --> 00:47:03,600
Speaker 5: understanding of what generating capacity was available in the system

834
00:47:04,040 --> 00:47:07,600
Speaker 5: relative to a base of demand that really didn't change.

835
00:47:07,640 --> 00:47:10,799
Speaker 5: But suddenly, because of all of the retirements that had

836
00:47:10,840 --> 00:47:14,759
Speaker 5: happened of coal and older gas due to economics as

837
00:47:14,760 --> 00:47:18,479
Speaker 5: well as environmental regulation, we suddenly found ourselves pretty tight.

838
00:47:19,160 --> 00:47:22,200
Speaker 5: And then this demand growth started to happen, so we

839
00:47:22,200 --> 00:47:26,120
Speaker 5: were not particularly well positioned for the present moment of

840
00:47:26,120 --> 00:47:31,319
Speaker 5: demand growth. We'd already driven the system to Some might

841
00:47:31,320 --> 00:47:34,040
Speaker 5: call it a tight and efficient system if you had

842
00:47:34,040 --> 00:47:36,759
Speaker 5: demand growth that was level, but it was not well

843
00:47:36,800 --> 00:47:40,000
Speaker 5: situated to pick up tens and tens of new gigawatts

844
00:47:40,000 --> 00:47:40,480
Speaker 5: of demand.

845
00:47:41,040 --> 00:47:45,399
Speaker 3: I have a hypothetical question, but just as a theoretical exercise,

846
00:47:45,960 --> 00:47:48,719
Speaker 3: if we are all in the pursuit of cheap and

847
00:47:48,800 --> 00:47:52,120
Speaker 3: plentiful energy, and if as part of that pursuit, you

848
00:47:52,160 --> 00:47:54,840
Speaker 3: could choose between two options. You could either wave a

849
00:47:54,840 --> 00:47:58,280
Speaker 3: magic wand and get a bunch of nuclear reactors scattered

850
00:47:58,280 --> 00:48:01,799
Speaker 3: around America, or you could wave ad and get huge

851
00:48:01,840 --> 00:48:06,359
Speaker 3: advances in battery technology across America. Wish of those would

852
00:48:06,400 --> 00:48:10,760
Speaker 3: be most conducive to having that cheap and plentiful energy supply.

853
00:48:11,640 --> 00:48:13,600
Speaker 5: Yeah, I mean, I'm going to make a lot of

854
00:48:13,600 --> 00:48:16,279
Speaker 5: my friends unhappy with this one, but I'd probably go

855
00:48:16,400 --> 00:48:21,120
Speaker 5: batteries and storage. I think there are some natural economic

856
00:48:21,160 --> 00:48:26,279
Speaker 5: advantages and wide swaths of the country for relatively affordable

857
00:48:26,400 --> 00:48:31,200
Speaker 5: even without subsidies, solar production in particular, and batteries seem

858
00:48:31,360 --> 00:48:34,640
Speaker 5: like a pretty good natural match to that. It really

859
00:48:34,719 --> 00:48:37,799
Speaker 5: has been in the kind of Texas story to date,

860
00:48:38,360 --> 00:48:42,840
Speaker 5: the pairing of batteries and solar together with natural gas

861
00:48:42,960 --> 00:48:47,640
Speaker 5: additions that have supported really the only electricity market that

862
00:48:47,640 --> 00:48:51,080
Speaker 5: has been growing without data centers. So I would take

863
00:48:51,120 --> 00:48:54,040
Speaker 5: that as the leading indicator. That's not to speak ill

864
00:48:54,080 --> 00:48:57,239
Speaker 5: of my friends in the nuclear bro community. I hope

865
00:48:57,280 --> 00:49:01,239
Speaker 5: that technology pantses that seem to be occurring in the

866
00:49:01,280 --> 00:49:04,600
Speaker 5: small modular space come to fruition. I just so far,

867
00:49:04,680 --> 00:49:08,719
Speaker 5: I don't see a lot of people laying down serious

868
00:49:08,840 --> 00:49:12,080
Speaker 5: capital on that from a commercial perspective, but I do

869
00:49:12,120 --> 00:49:15,239
Speaker 5: see people laying down money on storage.

870
00:49:15,800 --> 00:49:18,240
Speaker 2: I just have one last question, and it's kind of cheating.

871
00:49:18,280 --> 00:49:20,640
Speaker 2: I'm actually this question. I'm kind of going to have

872
00:49:20,760 --> 00:49:24,320
Speaker 2: you do our work for US et cetera. You know,

873
00:49:24,360 --> 00:49:26,239
Speaker 2: I'm trying to think of a really good title for

874
00:49:26,320 --> 00:49:29,240
Speaker 2: this episode. But if you look out over the next

875
00:49:29,600 --> 00:49:32,359
Speaker 2: five years, you know, you mentioned adding a whole California

876
00:49:32,400 --> 00:49:35,560
Speaker 2: to Texas. How are you thinking about the scale of

877
00:49:35,600 --> 00:49:39,080
Speaker 2: the challenge overall that the US electricity system, that the

878
00:49:39,120 --> 00:49:43,319
Speaker 2: grid overall really faces in this moment? Like how big

879
00:49:43,400 --> 00:49:46,080
Speaker 2: is it that everyone from companies like yours to the

880
00:49:46,160 --> 00:49:49,640
Speaker 2: various utility commissions. Like, how big is this a challenge

881
00:49:49,640 --> 00:49:50,000
Speaker 2: going to be?

882
00:49:50,280 --> 00:49:52,520
Speaker 5: It could be a substantial one. I mean, I think

883
00:49:52,560 --> 00:49:58,279
Speaker 5: that AI demand growth for electricity consumption is real. I

884
00:49:58,320 --> 00:50:02,840
Speaker 5: also think that that growth needs to pony up financial

885
00:50:02,880 --> 00:50:08,400
Speaker 5: commitments to engender capital investments in the power sector that

886
00:50:08,440 --> 00:50:11,120
Speaker 5: it intends to rely upon. I think those will be

887
00:50:11,160 --> 00:50:14,799
Speaker 5: the table stakes of their social license to operate in

888
00:50:14,880 --> 00:50:18,360
Speaker 5: a grid that, even where competition has been introduced, remains

889
00:50:18,480 --> 00:50:23,160
Speaker 5: pretty heavily regulated. So I think we're going to get there.

890
00:50:23,760 --> 00:50:27,000
Speaker 5: I do think that in terms of the regulatory policy

891
00:50:27,000 --> 00:50:29,920
Speaker 5: that I deal with, there's too much small ball thinking

892
00:50:30,080 --> 00:50:33,560
Speaker 5: on this, and there's too much trust in the way

893
00:50:33,600 --> 00:50:38,520
Speaker 5: we've always done things. It's probably a time to really

894
00:50:38,600 --> 00:50:43,120
Speaker 5: have kind of regulatory policy innovations like we've seen with

895
00:50:43,800 --> 00:50:48,320
Speaker 5: the FCC regulating spectrum and the deregulation of the airline

896
00:50:48,360 --> 00:50:53,520
Speaker 5: industry that tries to allocate the capacity on the grid

897
00:50:54,239 --> 00:50:57,080
Speaker 5: to the highest value the people who are actually willing

898
00:50:57,160 --> 00:51:00,399
Speaker 5: to pay the most for it, and those payments, which

899
00:51:00,440 --> 00:51:04,440
Speaker 5: would likely exceed the incremental cost of serving them, could

900
00:51:04,480 --> 00:51:08,560
Speaker 5: then actually be a revenue source back to consumers that

901
00:51:08,719 --> 00:51:12,000
Speaker 5: helps on the affordability side. So I you know, it's

902
00:51:12,000 --> 00:51:14,440
Speaker 5: almost a call to your listeners that, you know, if

903
00:51:14,440 --> 00:51:17,840
Speaker 5: you're doing a mundane corporate job and want to do

904
00:51:17,920 --> 00:51:22,400
Speaker 5: something completely different, consider becoming a utility regulator and applying

905
00:51:22,480 --> 00:51:26,400
Speaker 5: some market based principles to help solve some of these problems.

906
00:51:26,440 --> 00:51:30,279
Speaker 5: Because really, when you think about it, utility regulation they

907
00:51:30,320 --> 00:51:33,600
Speaker 5: need to be an agent of capital formation here in

908
00:51:33,640 --> 00:51:37,319
Speaker 5: the sector and to clarify this moment in terms of

909
00:51:37,360 --> 00:51:40,799
Speaker 5: demand uncertainty. And that is the kind of challenge on

910
00:51:40,880 --> 00:51:43,200
Speaker 5: a conceptual basis that we're grappling.

911
00:51:42,719 --> 00:51:45,640
Speaker 2: With Crevis Kavila. You know, we could talk to you

912
00:51:45,640 --> 00:51:48,319
Speaker 2: for hours actually just on you know, I have a

913
00:51:48,360 --> 00:51:51,799
Speaker 2: million more questions just about specifics from your time in

914
00:51:51,880 --> 00:51:54,239
Speaker 2: Montana and how all those things work, but we'll let

915
00:51:54,280 --> 00:51:56,800
Speaker 2: you go. Really appreciate your time. Let's do it again sometime.

916
00:51:56,840 --> 00:51:59,120
Speaker 2: And I did learn a few things on this episode.

917
00:51:59,160 --> 00:52:00,520
Speaker 2: So appreciate you coming on our luck.

918
00:52:00,760 --> 00:52:02,600
Speaker 3: Thank you so much, Thank you so much, Travis.

919
00:52:02,640 --> 00:52:16,040
Speaker 2: That was great, Tracy.

920
00:52:16,080 --> 00:52:16,600
Speaker 4: I really like that.

921
00:52:16,640 --> 00:52:18,319
Speaker 2: I really like the way you put it there in

922
00:52:18,360 --> 00:52:21,600
Speaker 2: your question of we want to have a market ish

923
00:52:21,760 --> 00:52:25,960
Speaker 2: environment and demand signals are pretty important, et cetera, and

924
00:52:26,000 --> 00:52:28,400
Speaker 2: we want capital to flow where it's going to be

925
00:52:28,400 --> 00:52:31,440
Speaker 2: profitable and all that, we just don't really want anything

926
00:52:32,000 --> 00:52:34,560
Speaker 2: associated with the market.

927
00:52:34,920 --> 00:52:37,880
Speaker 3: Yeah, And I mean the irony is that the market

928
00:52:37,960 --> 00:52:40,960
Speaker 3: could be functioning as intended in the sense that a

929
00:52:41,120 --> 00:52:44,440
Speaker 3: large consumer of power, like a data center, decides to

930
00:52:44,480 --> 00:52:47,560
Speaker 3: relocate itself to a place where energy costs are actually

931
00:52:47,640 --> 00:52:50,560
Speaker 3: quite low. Yeah, and then because it does that, it

932
00:52:51,040 --> 00:52:53,919
Speaker 3: ends up distributing, you know, the cost of its own

933
00:52:53,960 --> 00:52:56,880
Speaker 3: power needs across a wider area. And it all seems

934
00:52:57,320 --> 00:52:58,520
Speaker 3: I mean, I'm just going to go back to what

935
00:52:58,560 --> 00:53:02,200
Speaker 3: I said earlier. It all seems so convoluted, yeah, and

936
00:53:02,320 --> 00:53:07,360
Speaker 3: so idiosyncratic across different jurisdictions. I do actually really respect

937
00:53:07,600 --> 00:53:10,960
Speaker 3: Travis's coll Just then, if you're interested in markets and

938
00:53:11,040 --> 00:53:14,080
Speaker 3: want to have an impact on people's everyday lives, consider

939
00:53:14,120 --> 00:53:16,880
Speaker 3: trying to clean up the mess that is energy regulation.

940
00:53:17,200 --> 00:53:21,120
Speaker 2: But you know, even in the non convoluted version of it,

941
00:53:21,280 --> 00:53:23,920
Speaker 2: if we just imagine the platonic ideal of a normal

942
00:53:24,000 --> 00:53:28,080
Speaker 2: market and there's this commodity electrons, and it's well, what

943
00:53:28,239 --> 00:53:32,399
Speaker 2: if AI is this really valuable thing, and it's more

944
00:53:32,480 --> 00:53:35,120
Speaker 2: valuable than blow drawing your hair. I mean, for real,

945
00:53:35,200 --> 00:53:37,520
Speaker 2: this could be a thing like you know, we were

946
00:53:37,520 --> 00:53:41,799
Speaker 2: talking about making cars or making steel, et cetera. Like, Oh, yeah,

947
00:53:41,800 --> 00:53:43,920
Speaker 2: well this is this thing.

948
00:53:44,160 --> 00:53:46,160
Speaker 3: I wasn't going to do it. I wasn't going to

949
00:53:46,239 --> 00:53:47,680
Speaker 3: But now I'm going to bring up that time you

950
00:53:47,719 --> 00:53:51,360
Speaker 3: wrote that mining crypto could theoretically be a more valuable

951
00:53:51,440 --> 00:53:53,520
Speaker 3: activity than running a fridge.

952
00:53:53,840 --> 00:53:57,680
Speaker 2: Well, right, this is the question in a normal market.

953
00:53:58,040 --> 00:54:00,960
Speaker 2: The reason why that example seems absurd. I'm glad you

954
00:54:01,000 --> 00:54:03,520
Speaker 2: actually brought up because the reason why that example seems

955
00:54:03,640 --> 00:54:07,440
Speaker 2: absurd is because very few people could ever wrap their

956
00:54:07,480 --> 00:54:11,720
Speaker 2: heads around, well, could cryptomning be more valuable or value

957
00:54:11,800 --> 00:54:14,400
Speaker 2: add than running a fridge. That being said, when it

958
00:54:14,440 --> 00:54:17,120
Speaker 2: comes to something like AI, there really is a debate,

959
00:54:17,200 --> 00:54:19,720
Speaker 2: and some people would say that's a total waste because

960
00:54:19,920 --> 00:54:22,760
Speaker 2: AI is just a costly way to make fast poems.

961
00:54:22,760 --> 00:54:25,040
Speaker 2: And other people would say, no, this is the fourth

962
00:54:25,120 --> 00:54:27,960
Speaker 2: Industrial Revolution or whatever. And so I think part of

963
00:54:28,000 --> 00:54:31,760
Speaker 2: the reason we're sort of uncomfortable with the oh, let's

964
00:54:31,840 --> 00:54:34,200
Speaker 2: just move the electrons to where they're who's going to

965
00:54:34,200 --> 00:54:36,239
Speaker 2: pay for them most is because I don't think a

966
00:54:36,239 --> 00:54:37,960
Speaker 2: lot of people there are a lot of people who

967
00:54:37,960 --> 00:54:42,200
Speaker 2: intuitively are skeptical that this is a good allocation of

968
00:54:42,239 --> 00:54:43,440
Speaker 2: real resources.

969
00:54:43,080 --> 00:54:46,200
Speaker 3: Right, I mean, I think politically, the message that the

970
00:54:46,239 --> 00:54:48,759
Speaker 3: cost of your electricity has to go up so that

971
00:54:48,800 --> 00:54:51,640
Speaker 3: AI can do its thing, Yeah, you can lose your job.

972
00:54:52,160 --> 00:54:54,120
Speaker 3: Is it an extremely unpalatable one.

973
00:54:54,360 --> 00:54:55,200
Speaker 4: No, it's totally.

974
00:54:55,239 --> 00:54:57,239
Speaker 2: It's totally. I think this is why I'm just going

975
00:54:57,280 --> 00:55:00,120
Speaker 2: to break a lot of people's brands. But on the

976
00:55:00,160 --> 00:55:02,840
Speaker 2: other hand, if we accept that, you know, the belief

977
00:55:03,320 --> 00:55:07,680
Speaker 2: that markets are generally good allocators of resources, et cetera,

978
00:55:07,760 --> 00:55:09,839
Speaker 2: they're like, well, it's not really our job to have

979
00:55:09,880 --> 00:55:11,640
Speaker 2: an opinion on this is a good use. So this

980
00:55:11,760 --> 00:55:14,160
Speaker 2: is not a good use. But anyway, I did find

981
00:55:14,160 --> 00:55:17,840
Speaker 2: that to be a very interesting conversation. It does seem

982
00:55:17,920 --> 00:55:21,160
Speaker 2: like those commissions that have to decide what is an

983
00:55:21,200 --> 00:55:25,240
Speaker 2: appropriate amount to spend on upgrades and capacity, they really

984
00:55:25,320 --> 00:55:27,279
Speaker 2: have their work cutout for them right now.

985
00:55:27,520 --> 00:55:29,400
Speaker 3: Yeah. The way I would put it is they are

986
00:55:29,440 --> 00:55:33,920
Speaker 3: not always the most popular people among their respective jurisdictions,

987
00:55:34,000 --> 00:55:34,719
Speaker 3: that's for sure.

988
00:55:34,800 --> 00:55:36,520
Speaker 2: Well, someone has to have the job of doing the

989
00:55:36,560 --> 00:55:37,560
Speaker 2: unpopular stuff, right.

990
00:55:37,640 --> 00:55:42,360
Speaker 3: Someone has to have the job of adequately compensating investors

991
00:55:42,400 --> 00:55:45,120
Speaker 3: in utilities for the risks that they take on in

992
00:55:45,239 --> 00:55:49,960
Speaker 3: providing a necessary commodity for life and the Fourth Industrial Revolution.

993
00:55:50,200 --> 00:55:51,080
Speaker 2: That's right, all right?

994
00:55:51,160 --> 00:55:51,920
Speaker 3: Shall we leave it there?

995
00:55:52,000 --> 00:55:52,680
Speaker 2: Let's leave it there.

996
00:55:52,880 --> 00:55:55,200
Speaker 3: This has been another episode of the Odd Thoughts podcast.

997
00:55:55,320 --> 00:55:57,840
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy al the.

998
00:55:57,880 --> 00:56:00,480
Speaker 2: Way, and I'm Jill Wisenthal. You can follow me at

999
00:56:00,520 --> 00:56:04,000
Speaker 2: the Stalwart. Follow our guest Travis Kavula, He's at Tkavula.

1000
00:56:04,239 --> 00:56:07,680
Speaker 2: Follow our producers Carmen Rodriguez at Carmen armand dash Ol

1001
00:56:07,680 --> 00:56:11,160
Speaker 2: Bennett at Dashbot and Kilbrooks at Kalebrooks. For more odd

1002
00:56:11,239 --> 00:56:13,960
Speaker 2: Laws content, go to Bloomberg dot com slash odd Lots

1003
00:56:13,960 --> 00:56:16,400
Speaker 2: were a bit daily newsletter and all of our episodes,

1004
00:56:16,600 --> 00:56:18,560
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1005
00:56:18,600 --> 00:56:23,320
Speaker 2: four seven in our discord discord dot gg slash odlines.

1006
00:56:23,120 --> 00:56:25,279
Speaker 3: And if you enjoy odd Lots, if you like it

1007
00:56:25,360 --> 00:56:28,839
Speaker 3: when we try to untangle the US utility landscape, then

1008
00:56:28,880 --> 00:56:31,920
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1009
00:56:32,200 --> 00:56:34,719
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1010
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1011
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1012
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