WEBVTT - Travis Kavulla Explains Why Electric Bills Shot Up 0:00:03.120 --> 0:00:16.840 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.079 --> 0:00:22.000 Hello and welcome to another episode of the Odd Lots podcast. 0:00:22.079 --> 0:00:23.640 I'm Joe and. 0:00:23.600 --> 0:00:24.520 I'm Tracy Alloway. 0:00:25.040 --> 0:00:27.480 Tracy, it's been too long since we've done an electricity 0:00:27.480 --> 0:00:28.400 great episode. 0:00:28.520 --> 0:00:32.000 I've been avoiding it on purpose, Joe. I, in all honesty, 0:00:32.120 --> 0:00:36.960 I really find this particular market slash issue a difficult 0:00:37.000 --> 0:00:40.440 one to talk about because it's impossible to talk about 0:00:40.479 --> 0:00:42.800 it in broad terms, and I know on odd thoughts 0:00:42.840 --> 0:00:45.920 we try to avoid doing that generally, but even in 0:00:46.000 --> 0:00:49.360 an hour long podcast, even with multiple episodes, we could 0:00:49.360 --> 0:00:53.479 do an episode for each electricity market in the United 0:00:53.479 --> 0:00:57.200 States and still only scratch the surface, right, Like you 0:00:57.240 --> 0:01:01.440 have to talk about regulated monopolies versus competitive markets, and 0:01:01.480 --> 0:01:03.760 then you have to talk about what's an independent system 0:01:04.120 --> 0:01:08.360 operator and what's like, well, what's Texas? That's all about Texas? 0:01:08.400 --> 0:01:09.240 What is Texas? 0:01:09.280 --> 0:01:10.280 What is Texas? 0:01:10.319 --> 0:01:13.520 What is Texas? Would be its own episode, but yeah, 0:01:13.560 --> 0:01:16.440 that's right. You ask a question to a grid expert 0:01:16.640 --> 0:01:18.400 and their first thing and they're like, wait, are you 0:01:18.400 --> 0:01:21.160 talking about a competitive market or regulated market here? 0:01:21.240 --> 0:01:24.200 That's always a meter basis or unmetered or I don't know. 0:01:24.560 --> 0:01:28.480 Yeah, behind the meter, et cetera. Yeah, But anyway, obviously 0:01:28.760 --> 0:01:31.480 with the sort of Ian Dunning who we recently had 0:01:31.640 --> 0:01:35.640 Hudson River Trading, he was talking about how, you know, 0:01:35.720 --> 0:01:38.200 their main constraint is power and that's just a small, 0:01:38.680 --> 0:01:42.080 a very small in the grand scheme of things user 0:01:42.200 --> 0:01:45.119 of AI services. We're talking about using AI and high 0:01:45.120 --> 0:01:48.280 frequency trading. And he said even more than chips that 0:01:48.360 --> 0:01:52.120 the power constraints are their biggest constraints right now. And 0:01:52.160 --> 0:01:54.160 so I do think that one thing we have to 0:01:54.200 --> 0:01:57.600 think about is, especially how long can this AI boom 0:01:57.800 --> 0:02:01.120 go on? Is what's it going to get all of 0:02:01.160 --> 0:02:04.320 this AI activity on the grid, Like how constrained is it? 0:02:04.600 --> 0:02:07.400 That's right, And we also recorded that episode with Sager 0:02:07.440 --> 0:02:10.600 and Jetty and we were talking about the political controversy 0:02:10.720 --> 0:02:13.919 surrounding AI, and obviously power consumption is a big one 0:02:13.960 --> 0:02:18.000 of those. At a time when electricity prices have already 0:02:18.120 --> 0:02:21.600 been rising, is AI only going to drive them up further? 0:02:21.639 --> 0:02:25.200 Although that said, you can't even say that electricity prices 0:02:25.240 --> 0:02:27.520 have been rising because in certain states they've actually been 0:02:27.520 --> 0:02:30.960 going down on an inflation adjustment basis. But even that 0:02:31.120 --> 0:02:32.160 is a nuanced picture. 0:02:32.240 --> 0:02:35.760 But by and large, especially since the pandemic. Really by 0:02:35.800 --> 0:02:39.400 and large we have seen faster than normal increase in 0:02:39.639 --> 0:02:43.680 electricity price inflation, and we have the big AI question. 0:02:44.200 --> 0:02:47.840 So we really have to figure out a how is 0:02:47.880 --> 0:02:50.040 all of this new data center capacity going to come 0:02:50.040 --> 0:02:52.440 onto the market, Who's going to apply the generation? And 0:02:52.480 --> 0:02:54.800 then who is going to bear that cost? Is it 0:02:54.919 --> 0:02:59.120 going to be the consumers who are already generally speaking 0:02:59.160 --> 0:03:01.919 across several markets seeing their bills go up. 0:03:02.280 --> 0:03:05.960 If we have to talk about this rubber band ball market, 0:03:06.880 --> 0:03:09.440 then I'm glad we at least have the perfect guest 0:03:09.440 --> 0:03:09.960 to do. 0:03:10.240 --> 0:03:12.440 That's im say we do, in fact have the perfect guest. 0:03:12.480 --> 0:03:14.560 I'm very excited to say we're going to be speaking out. 0:03:14.720 --> 0:03:16.320 Someone been trying to get on the podcast for a 0:03:16.320 --> 0:03:19.320 little while, Travis Cavula. He is a VP of regulation 0:03:19.480 --> 0:03:24.480 at energ Energy. He's also been on a public commission 0:03:24.560 --> 0:03:27.680 in Montana, so he knows that side of the business 0:03:27.800 --> 0:03:30.880 in terms of how prices are set in those regulated 0:03:31.040 --> 0:03:34.320 monopoly markets. He is also an academic. Travis, thank you 0:03:34.440 --> 0:03:35.880 so much for coming on Outlaws. 0:03:36.080 --> 0:03:37.400 It's great to be here. Thank you. 0:03:37.680 --> 0:03:40.800 We're really excited about this one because there's so many questions, 0:03:41.000 --> 0:03:42.480 why are we talking to you? What do you give 0:03:42.560 --> 0:03:45.360 us the sort of brief intro of what you do 0:03:45.440 --> 0:03:48.280 and what your background is, so that our audience has 0:03:48.280 --> 0:03:50.400 some idea of why are the perfect guest? 0:03:50.840 --> 0:03:51.120 Sure? 0:03:51.680 --> 0:03:54.760 So I spend my time on regulatory affairs at a 0:03:54.800 --> 0:03:57.840 company NRG. We're a big producer of power. We sell 0:03:57.920 --> 0:04:01.160 power to end use customers. That's permitted by law where 0:04:01.240 --> 0:04:04.000 competition exists in the power and gas markets. So we've 0:04:04.000 --> 0:04:07.600 got about eight million end use customers. And previously I 0:04:07.760 --> 0:04:10.520 was the head of the Montana Public Service Commission, the 0:04:10.640 --> 0:04:13.800 rate setting body for regulated utilities in the state. I 0:04:13.840 --> 0:04:17.280 head it up an organization that represents state utility commissions 0:04:17.279 --> 0:04:19.840 at the national level called NAYRUK, and I teach a 0:04:19.880 --> 0:04:21.919 little bit on the side at University of Chicago's Hair 0:04:22.040 --> 0:04:25.240 School of Public Policy, of course on utility regulation and 0:04:25.360 --> 0:04:28.440 electricity markets. So I spend my time thinking a lot 0:04:28.480 --> 0:04:31.280 about what goes into customer bills, both the stuff that 0:04:31.520 --> 0:04:34.440 we can control being a company that is a provider, 0:04:34.480 --> 0:04:36.960 and also stuff that are sort of upstream costs of 0:04:37.000 --> 0:04:40.320 goods sold that appear on my company's bills, the sort 0:04:40.360 --> 0:04:44.080 of polls and wyers charges, that go into people's bills. 0:04:44.120 --> 0:04:46.640 So basically, you know, there's two parts of people's bills, 0:04:46.760 --> 0:04:50.880 the commodity and the regulated grid charges that get the 0:04:50.880 --> 0:04:53.919 commodity to you, and both of those are subject to 0:04:53.960 --> 0:04:56.200 some form of regulation in this industry. 0:04:56.960 --> 0:05:00.800 Yeah, Tracy, when we were in Chicago recently for a 0:05:00.839 --> 0:05:04.840 live episode, I met one of Travis's students there and 0:05:04.880 --> 0:05:07.120 he's like, you got to talk to Travis. Travis is 0:05:07.160 --> 0:05:09.480 the man that will explain all these things. So Glamor 0:05:09.640 --> 0:05:10.880 finally making this happen. 0:05:11.440 --> 0:05:15.160 I'm high rating for that's important from. 0:05:15.160 --> 0:05:16.120 Rate by professor. 0:05:16.520 --> 0:05:18.360 That's right. Okay, so no pressure Travis. 0:05:18.400 --> 0:05:18.760 All right. 0:05:18.880 --> 0:05:21.680 So you were talking about the wholesale cost of the 0:05:21.720 --> 0:05:25.080 thing that goes across the wires and the polls and 0:05:25.120 --> 0:05:29.000 all of that. So that's electricity versus the actual transmission system. 0:05:29.600 --> 0:05:32.880 One thing that we hear whenever this topic comes up 0:05:33.120 --> 0:05:36.360 is it's not necessarily about the wholesale cost of electricity. 0:05:36.440 --> 0:05:40.000 It's the cost of actually maintaining and expanding the grid. 0:05:40.720 --> 0:05:42.880 How much truth is there to that? If you're going 0:05:42.960 --> 0:05:47.800 to pinpoint the dominant factor behind higher electricity prices right now, 0:05:48.240 --> 0:05:52.360 is it the wholesale price or the actual cost of transmission. 0:05:52.680 --> 0:05:54.360 Yeah, it's kind of the scope of time that you 0:05:54.440 --> 0:05:56.719 choose to evaluate, but you know, just to give you 0:05:56.839 --> 0:05:59.720 kind of a benchmarking. You know, if you looked at, 0:06:00.000 --> 0:06:03.320 say the New England power market over the last twenty years, 0:06:03.440 --> 0:06:06.920 which sort of is the beginning point of the restructuring 0:06:06.960 --> 0:06:10.400 of the industry and the introduction of competition in a 0:06:10.440 --> 0:06:14.159 place like New England, the actual commodity cost would have 0:06:14.200 --> 0:06:18.000 fallen by about fifty percent on an inflation adjusted basis, 0:06:18.279 --> 0:06:21.839 whereas on the same basis, transmission costs would have increased 0:06:21.839 --> 0:06:24.920 something like nine hundred percent now from a very low 0:06:25.040 --> 0:06:28.240 level to a much more substantial level. But then if 0:06:28.240 --> 0:06:31.760 you drew that comparison in another market, say the mid Atlantic, 0:06:32.279 --> 0:06:35.200 over a shorter period of time, like year over year, 0:06:35.400 --> 0:06:38.119 you know, the grid costs would not have risen substantially 0:06:38.160 --> 0:06:40.920 in a year, but power prices would have. And that's 0:06:40.960 --> 0:06:44.080 really just because the commodity works on more fundamental kind 0:06:44.120 --> 0:06:46.960 of supply and demand balance. You know, scarcity will drive 0:06:47.040 --> 0:06:51.240 up prices relatively rapidly, and then an oversupply that occurs 0:06:51.279 --> 0:06:53.640 when the market is moving back toward equilibrium will drive 0:06:53.680 --> 0:06:57.159 prices down rapidly. Whereas those regulated set of costs that 0:06:57.200 --> 0:07:00.720 attached to the transmission and distribution systems. You know, those 0:07:00.800 --> 0:07:04.360 are still cost plus regulated industries, and they have a 0:07:04.400 --> 0:07:08.120 funny way of working monodirectionally up over the course of time. 0:07:08.360 --> 0:07:11.320 But these do things trade off against one another. You know, 0:07:11.360 --> 0:07:14.640 you need to invest in transmission in order to facilitate 0:07:14.640 --> 0:07:17.240 the efficient delivery of electricity. You need to invest in 0:07:17.280 --> 0:07:20.400 it in order to open up regions for low cost 0:07:20.520 --> 0:07:24.520 renewable energy production. So they do have an interactive effect, 0:07:24.600 --> 0:07:27.360 but they're regulated in a very different way, and both 0:07:27.360 --> 0:07:29.880 of those land on consumers bills. I think the easiest 0:07:29.880 --> 0:07:32.680 way to understand this is that, you know, consumers in 0:07:32.720 --> 0:07:35.680 a sense had maybe been as a result of the 0:07:35.720 --> 0:07:39.920 regulated charges the proverbial frog and gradually warming water, and 0:07:39.960 --> 0:07:44.280 then when you finally enter a commodity supercycle, people can 0:07:44.320 --> 0:07:46.840 have the sense that, oh wow, someone just ratcheted up 0:07:46.960 --> 0:07:49.520 the heat on this pot. But both of those are 0:07:49.560 --> 0:07:53.760 contributing factors and they require sort of different structural approaches 0:07:53.840 --> 0:07:55.720 in order to reckon with them. 0:07:56.240 --> 0:08:00.520 Jo, this is my perennial frustration talking about electricity prices 0:08:00.560 --> 0:08:02.960 and the electricity system in the US, which is you 0:08:03.040 --> 0:08:06.280 cannot talk in generalities, right, there are different types of 0:08:06.320 --> 0:08:10.320 regulations for different entities. There are different regulations for each state. 0:08:10.440 --> 0:08:13.280 Basically there's you know, the New England system, then there's 0:08:13.320 --> 0:08:15.360 the West Coast, and then there's Texas, which is its 0:08:15.400 --> 0:08:18.400 own special entity. You kind of have to talk about 0:08:18.440 --> 0:08:22.200 every single market in isolation, which is difficult even on 0:08:22.880 --> 0:08:25.640 our long podcasts. So that's going to be the caveat 0:08:25.680 --> 0:08:26.720 throughout this conversation. 0:08:26.800 --> 0:08:29.680 I think it's idiosyncratic and it's funny because at the 0:08:29.720 --> 0:08:33.480 same time restructuring and competition was introduced into this industry, 0:08:33.559 --> 0:08:37.079 it was also occurring in things like telecom. Telecom, you know, 0:08:37.280 --> 0:08:42.560 was substantially deregulated and federalized. At the same time, states, however, 0:08:42.640 --> 0:08:45.280 were left to make their own decisions about the power sector, 0:08:45.360 --> 0:08:48.360 and as a result, you really have a huge patchwork 0:08:48.440 --> 0:08:52.400 quilt of state and federal regulation and different industry models. 0:08:52.400 --> 0:08:53.000 It's true. 0:08:53.440 --> 0:08:57.280 I have another really rudimentary question, I guess what are 0:08:57.280 --> 0:09:01.079 we even talking about when we talk about competition in electricity? 0:09:01.160 --> 0:09:04.120 You know, I don't get to choose which wire I 0:09:04.200 --> 0:09:07.199 get into. There's one utility I have the option from. 0:09:07.440 --> 0:09:10.040 Sometimes there are these people on the street, and they're like, oh, 0:09:10.160 --> 0:09:13.240 sign will you sign up for clean power or something 0:09:13.320 --> 0:09:15.080 like that, and they try to get me to do stuff. 0:09:15.080 --> 0:09:17.040 But I don't really understand how that works, because I 0:09:17.040 --> 0:09:20.600 don't understand how electrons can be directed to anyone's home. 0:09:20.600 --> 0:09:22.480 So I'm always very skeptical of it. What do we 0:09:22.559 --> 0:09:25.520 talk about when people talk about a competitive market. 0:09:25.800 --> 0:09:29.560 Yeah, so think of the electricity system as sort of 0:09:29.600 --> 0:09:33.360 a chain of links. Upstream, you've got the power generators, 0:09:33.559 --> 0:09:36.960 and then after that you've got the high voltage transmission system. 0:09:37.360 --> 0:09:40.640 It patches into a substation that steps down the voltage 0:09:40.760 --> 0:09:43.880 to a lower level. That's what we'd call the distribution system. 0:09:44.320 --> 0:09:46.320 And then there's a meter hanging on the side of 0:09:46.320 --> 0:09:49.720 your home, and beyond that meter, you are the consumer 0:09:49.760 --> 0:09:54.440 of electricity. The most upstream the generation and the most 0:09:54.520 --> 0:09:59.120 downstream retailing have been opened in some states to competition, 0:09:59.400 --> 0:10:01.760 and I think it's fairly intuitive what that means. For 0:10:01.840 --> 0:10:05.559 generation power plants are owned by private investors who make 0:10:05.559 --> 0:10:08.840 investments in them. Those power plants compete against one another 0:10:09.040 --> 0:10:12.520 in auctions for electricity and to sell their power to 0:10:12.880 --> 0:10:16.559 wholesale off takers. Some of those off takers then are 0:10:16.600 --> 0:10:20.640 the retailers of electricity who sort of buy an upstream 0:10:20.720 --> 0:10:24.760 supply of goods and then use the regulated poles and 0:10:24.800 --> 0:10:29.280 wires and pay regulated rates to deliver that commodity to 0:10:29.400 --> 0:10:31.800 you at your home. So some of the value proposition 0:10:31.880 --> 0:10:35.440 of what you're experiencing as a potential retail customer and 0:10:35.480 --> 0:10:38.120 a competitive market is your product selection. I mean to 0:10:38.120 --> 0:10:41.560 give an example, a retailer came to me and marketed 0:10:41.600 --> 0:10:45.040 me a five year fixed price for electricity. Last year, 0:10:45.120 --> 0:10:47.599 I bought it. I locked in a rate, I'm insulated 0:10:47.760 --> 0:10:52.359 from upstream changes in wholesale market volatility. 0:10:52.360 --> 0:10:53.360 As a result, that's. 0:10:53.360 --> 0:10:57.400 Generally the value proposition of competitive retail. Though in places 0:10:57.440 --> 0:11:01.079 like Texas, you're also seeing product differentiation, and that has 0:11:01.120 --> 0:11:04.640 a ring of telecommunications and data competitions sort of like 0:11:04.760 --> 0:11:07.720 more apps. As part of your retail electric supply service, 0:11:07.960 --> 0:11:11.880 people selling you smart thermostats or residential batteries that can 0:11:11.920 --> 0:11:16.040 be packaged onto your retail electricity supply plan to sell 0:11:16.080 --> 0:11:18.880 back to the grid, help manage your costs upstream to 0:11:18.920 --> 0:11:22.600 stabilize pricing. But that's the paradigm of competition in this space. 0:11:22.640 --> 0:11:26.600 It's a regulated system in the middle with competition on 0:11:26.679 --> 0:11:27.320 the edges. 0:11:28.920 --> 0:11:30.760 Can we back up for a second and go back 0:11:30.760 --> 0:11:33.839 to that big restructuring of the market, because I have 0:11:33.880 --> 0:11:36.360 a feeling this will help us understand our current situation. 0:11:36.600 --> 0:11:39.880 But what was the problem that we were trying to 0:11:39.960 --> 0:11:43.320 solve back then? You know, people have short memories. A 0:11:43.320 --> 0:11:46.400 lot of people would say that our electricity system right 0:11:46.440 --> 0:11:49.360 now has its own special problems, and they would forget 0:11:49.360 --> 0:11:51.880 that there were previous problems that this system was meant 0:11:51.920 --> 0:11:52.480 to address. 0:11:52.920 --> 0:11:55.439 Yeah, I mean, it's kind of haunting. It's funny you 0:11:55.440 --> 0:11:57.880 should ask that question, because the problem it was meant 0:11:57.880 --> 0:12:01.480 to address is that regulated utilities, which used to own 0:12:01.559 --> 0:12:06.160 this whole chain of links on a consolidated, vertically integrated basis, 0:12:06.840 --> 0:12:11.320 bet wrong very badly on the amount of demand growth 0:12:11.320 --> 0:12:14.520 in the sector, and they put themselves out there building 0:12:14.720 --> 0:12:17.680 power plants that were intended to be included in what's 0:12:17.720 --> 0:12:20.280 called their rate base, on which they earn a return 0:12:20.640 --> 0:12:22.600 and are able to charge off those costs to a 0:12:22.640 --> 0:12:25.680 captive set of customers. When they bet wrong on the 0:12:25.760 --> 0:12:29.480 demand that would ultimately materialize on the system, they found 0:12:29.480 --> 0:12:32.080 themselves well over their skis in the amount of power 0:12:32.200 --> 0:12:34.840 generation that they either had built or were in the 0:12:34.880 --> 0:12:39.000 process of building. At the heart of regulated utility economics 0:12:39.080 --> 0:12:42.280 is this division problem where kind of a total system 0:12:42.360 --> 0:12:46.280 of fixed costs is the numerator divided by the denominator 0:12:46.320 --> 0:12:50.480 of throughput. So these regulated utilities were adding handsomely to 0:12:50.520 --> 0:12:54.560 the numerator. The denominator wasn't propping up that, and the 0:12:54.640 --> 0:12:57.920 result was that division problems, spitting out a price that 0:12:58.000 --> 0:13:01.600 was escalating higher and higher. Some utilities, at that point 0:13:01.679 --> 0:13:04.840 their state regulators said you've been imprudent. We're going to 0:13:05.120 --> 0:13:07.960 not allow you cost recovery because you've been imprudent. They 0:13:08.000 --> 0:13:10.320 went bankrupt, but that was the exception to the rule. 0:13:10.760 --> 0:13:14.000 Most of them allowed those costs to be recovered from 0:13:14.000 --> 0:13:16.760 a captive customer base. But some of those states also 0:13:16.800 --> 0:13:19.319 pass laws that said, let's never do this again. There's 0:13:19.360 --> 0:13:24.240 no reason why we shouldn't have power generation invested in 0:13:24.320 --> 0:13:27.200 to meet the levels of demand needed on the system. 0:13:27.559 --> 0:13:31.560 Be a function of investors' competitive bets in the market, 0:13:32.120 --> 0:13:35.160 and so in about you know, call it a third 0:13:35.200 --> 0:13:37.280 of the states, but accounting for more than half of 0:13:37.280 --> 0:13:40.800 the power sold. That's now the business model where companies 0:13:40.840 --> 0:13:43.800 like mine are, you know, have to make guesses about 0:13:43.800 --> 0:13:45.680 what the demand is going to be and try to 0:13:46.400 --> 0:13:50.920 sign up customers to voluntarily contract with us to produce 0:13:51.040 --> 0:13:53.959 revenue for the power generation we might invest in. And 0:13:54.000 --> 0:13:56.240 for the rest of the country. It still works by 0:13:56.400 --> 0:13:59.160 you know, people like me wearing my former hat, you know, 0:13:59.240 --> 0:14:02.199 as as the chairman of a utility commission, like guessing 0:14:02.240 --> 0:14:04.760 what the future is going to be and charging off 0:14:04.800 --> 0:14:08.000 the costs of those guesses to a monopolized customer base. 0:14:23.840 --> 0:14:26.560 Let's talk about your former hat, because one of the 0:14:26.560 --> 0:14:29.160 things you hear about is that the utilities have this 0:14:29.280 --> 0:14:34.280 incentive to overinvest because that might help determine what they're 0:14:34.480 --> 0:14:37.520 allowed to charge on a going forward basis. But why 0:14:37.560 --> 0:14:39.960 don't you sort of talk about your former hat and 0:14:40.160 --> 0:14:43.120 the basic role you played, how you thought about decision making, 0:14:43.240 --> 0:14:46.720 and how we are to understand what the world looks 0:14:46.800 --> 0:14:50.000 like from the standpoint of someone sitting on the regulatory commission. 0:14:50.200 --> 0:14:51.520 Yeah, well, you're number one. 0:14:51.520 --> 0:14:54.560 You're absolutely correct about the incentives at play under the 0:14:54.840 --> 0:14:59.280 style of economic regulation that is widely used really without 0:14:59.320 --> 0:15:02.920 exception the United States to regulate the monopoly industries in 0:15:02.960 --> 0:15:07.320 the utility sector. The companies earn a return that is 0:15:07.360 --> 0:15:10.720 sort of announced and advanced by their state or federal 0:15:10.800 --> 0:15:15.040 economic regulators based on the amount of capital they've invested 0:15:15.040 --> 0:15:18.040 in the system. So spend more, make more has some 0:15:18.120 --> 0:15:21.520 paradoxical effects where the most amount of profit a utility 0:15:21.520 --> 0:15:23.880 will ever make is in the first year that it 0:15:23.960 --> 0:15:26.400 owns a particular asset, and then when they own it 0:15:26.440 --> 0:15:29.240 free and clear, they actually earn zero profits, so sort 0:15:29.240 --> 0:15:32.560 of an inversion of the cash flow paradigm that you 0:15:32.600 --> 0:15:36.640 would expect out of competitive businesses. Regulators also establish the 0:15:36.680 --> 0:15:40.480 depreciation life span for rate making purposes of regulated assets, 0:15:40.760 --> 0:15:44.440 which has some interactive effects with that model. So that's 0:15:44.680 --> 0:15:47.920 basically the grist in the mill of what state regulatory 0:15:48.040 --> 0:15:52.240 utility commissions do. They determine the amount that is quote 0:15:52.320 --> 0:15:56.640 unquote used and useful in service to customers of the 0:15:56.680 --> 0:16:01.400 capital investments that utilities have made. They also establish an 0:16:01.440 --> 0:16:05.960 allowance for so called prudently incurred expenses the O and 0:16:06.080 --> 0:16:09.640 M on the system around which the utility earns no margin, 0:16:09.840 --> 0:16:13.120 just gets a recovery of those costs, and that also 0:16:13.320 --> 0:16:16.360 has the knock on incentive of if I'm a utility 0:16:16.640 --> 0:16:18.560 and I look at a problem that I have to solve, 0:16:18.800 --> 0:16:21.440 I will always want to solve it with capital investment. 0:16:21.800 --> 0:16:24.560 I will never want to solve it with opex, you know. 0:16:24.960 --> 0:16:27.960 And because that one earns return, one does not. So 0:16:28.240 --> 0:16:31.800 ordinary trade offs that would occur in competitive businesses between 0:16:31.800 --> 0:16:35.480 capex and opics tend not to occur in the regulated sector. 0:16:35.680 --> 0:16:37.840 Other countries have done this a different way and have 0:16:37.880 --> 0:16:40.800 tried to establish more of a performance based framework of 0:16:40.880 --> 0:16:45.240 regulation that rewards utilities with profits based on outcomes. But 0:16:45.520 --> 0:16:47.720 you know, the United States has never got there for 0:16:48.200 --> 0:16:51.920 a whole variety of frankly dumb reasons. So that's the 0:16:51.920 --> 0:16:54.800 way those sector is regulated. It's weird to have a 0:16:54.840 --> 0:16:59.520 sector that is really regulated according to early twentieth century 0:16:59.600 --> 0:17:02.000 standard that's trying to serve a modern economy. 0:17:02.080 --> 0:17:03.320 To be fully candid. 0:17:03.000 --> 0:17:05.800 With you, yeah it does feel that way, doesn't it. 0:17:05.880 --> 0:17:07.800 So again I said in the intro, I do not 0:17:07.960 --> 0:17:10.680 know much about the electricity market. I feel like I'm 0:17:10.720 --> 0:17:13.959 constantly struggling to try to understand it. But one thing 0:17:14.000 --> 0:17:16.280 I do know is that a lot of the electricity 0:17:16.280 --> 0:17:19.000 companies seem to complain for years and years and years 0:17:19.040 --> 0:17:23.119 that loads in the US had actually been either declining 0:17:23.359 --> 0:17:26.679 or stagnant. Now we have the situation where everyone is 0:17:26.720 --> 0:17:29.840 talking about data centers coming on stream and they use 0:17:29.880 --> 0:17:33.280 a lot of electricity, so loads are finally rising. Shouldn't 0:17:33.280 --> 0:17:35.920 this be a good thing for the electricity company. Shouldn't 0:17:35.920 --> 0:17:39.119 they be celebrating they have extra money to spend on, 0:17:39.440 --> 0:17:41.040 If not opics, then capex. 0:17:42.000 --> 0:17:46.240 Generally yes, And it's true that for most electricity markets 0:17:46.280 --> 0:17:49.160 in the United States it's been fairly flat. In the PGAM, 0:17:49.240 --> 0:17:52.880 the Pennsylvania New Jersey Maryland market that stretches from Washington, 0:17:52.960 --> 0:17:56.359 d C. To Chicago, they last recorded a record peak 0:17:56.440 --> 0:17:59.440 demand in two thousand and six. They'll in all likelihoods 0:17:59.480 --> 0:18:02.560 set a demand next year twenty years later in twenty 0:18:02.600 --> 0:18:06.879 twenty six. Some markets, like Texas's ERCOT market have been growing, 0:18:06.960 --> 0:18:09.440 but it is definitely the exception to the rule. Most 0:18:09.480 --> 0:18:12.360 of these people less set a record demand. You know, 0:18:12.720 --> 0:18:17.280 before the period of offshoring and de industrialization of industries 0:18:17.280 --> 0:18:21.119 that use a lot of electricity, and that actually facilitated 0:18:21.200 --> 0:18:24.919 the kind of turnover of capital from colt gas and 0:18:25.080 --> 0:18:27.160 to renewables a little bit as well in a lot 0:18:27.160 --> 0:18:30.000 of these places. But net of net, you know, that 0:18:30.160 --> 0:18:32.520 was kind of neutral or even a little bit negative 0:18:32.560 --> 0:18:35.520 in terms of the total installed generation capacity was kind 0:18:35.560 --> 0:18:40.240 of managing to even in terms of generation capacity editions, 0:18:40.560 --> 0:18:43.840 and then in terms of like, shouldn't they be celebrating, Yes, definitely. 0:18:44.040 --> 0:18:47.680 Everyone in the sector, my business and the regulated utilities 0:18:48.040 --> 0:18:51.280 are excited about the prospect of growth. They're also nervous 0:18:51.520 --> 0:18:54.840 about whether or not this growth is real and to 0:18:54.880 --> 0:18:58.200 what magnitude. Part of what makes it a little worrying 0:18:58.280 --> 0:19:01.359 is that ordinarily electric city demand growth would be a 0:19:01.440 --> 0:19:06.920 composite of growing demand from many different end use applications 0:19:06.960 --> 0:19:09.399 that would kind of diversify the risk of betting on 0:19:09.480 --> 0:19:12.119 growth here, it's like a one or a zero. You know, 0:19:12.280 --> 0:19:15.600 if you take out the data centers, the sector is actually, 0:19:16.200 --> 0:19:19.400 you know, pretty stable in terms of electricity demand. If 0:19:19.400 --> 0:19:22.720 you add the data centers, the sector is really poised 0:19:23.080 --> 0:19:25.720 to grow a heck of a lot. And when you 0:19:25.760 --> 0:19:28.880 look at the projections of the grid operators, I mean, 0:19:29.119 --> 0:19:32.000 just to put some numbers on this, the market PJAM 0:19:32.080 --> 0:19:34.480 in the Mid Atlantic that I was referring to, it's 0:19:34.560 --> 0:19:38.240 currently about one hundred and sixty thousand megawat market. It's 0:19:38.280 --> 0:19:42.119 projecting to add forty thousand megawatts by twenty thirty. The 0:19:42.240 --> 0:19:46.760 URKAT Texas market, you know about eighty five thousand megawats 0:19:46.840 --> 0:19:49.359 right now. Its latest projection is up to nearly one 0:19:49.400 --> 0:19:53.760 hundred and forty thousand megawatts by twenty thirty. Now, that's 0:19:53.760 --> 0:19:57.360 like adding a California to Texas in terms of electricity 0:19:57.400 --> 0:20:00.280 demand in five years. And that's not going going to 0:20:00.320 --> 0:20:03.920 happen because it can't. It just, I mean literally could 0:20:04.000 --> 0:20:08.160 not occur. But therein lies the problem is like what 0:20:08.240 --> 0:20:11.480 are we actually investing toward and what are the regulatory 0:20:11.560 --> 0:20:16.399 policies that can essentially help call the question on the 0:20:16.440 --> 0:20:19.679 amount of off take that will actually materialize from AI 0:20:20.119 --> 0:20:23.919 so that then capital investments can propagate throughout the supply 0:20:24.080 --> 0:20:28.119 chain to end up serving them. That's really the fundamental 0:20:28.160 --> 0:20:32.639 question that policymakers, utilities, and competitive providers like US are 0:20:32.680 --> 0:20:33.440 trying to deal with. 0:20:34.160 --> 0:20:38.680 Those numbers are absolutely staggering the idea of adding California 0:20:38.960 --> 0:20:43.560 size demand to Texas in just a standpoint of a 0:20:43.600 --> 0:20:46.080 few years. When you say you don't think those numbers 0:20:46.119 --> 0:20:48.720 can happen, what is the constraint is it on the 0:20:48.800 --> 0:20:51.959 generation side in a market like Texas or if we're 0:20:51.960 --> 0:20:55.080 talking about what any other region, or because I think 0:20:55.400 --> 0:20:58.400 it's pretty easy to set up, you know, solar farms 0:20:58.480 --> 0:21:00.919 or whatever. Texas seems pretty liber with what kind of 0:21:00.920 --> 0:21:03.239 how easy it is to plug into the grid or 0:21:03.440 --> 0:21:05.560 is it in a state like that there isn't the 0:21:05.640 --> 0:21:09.240 transmission capacity even if you can stand up the production. 0:21:09.720 --> 0:21:12.040 Yeah, it's I mean, it's a little bit of everything, 0:21:12.440 --> 0:21:15.800 everything from stuff that isn't you know, on the power 0:21:15.880 --> 0:21:18.560 sector side of the fence line in terms of actually 0:21:18.600 --> 0:21:21.960 being able to construct data centers and you know, their 0:21:22.160 --> 0:21:24.920 chips and the fiber optics that would back them up. 0:21:25.640 --> 0:21:28.080 And then on our side of the fence, you're right 0:21:28.119 --> 0:21:32.280 getting access to the grid through interconnection, getting all the 0:21:32.359 --> 0:21:34.400 equipment that you would need to tap into the grid. 0:21:34.440 --> 0:21:37.400 We're talking about, you know kind of grid step up generators, 0:21:37.400 --> 0:21:40.000 step up transformers and stuff like that. Joe, I know 0:21:40.080 --> 0:21:42.119 that's topic near and dear to you from listening to 0:21:42.160 --> 0:21:44.040 the pot over the years. And then it is the 0:21:44.080 --> 0:21:48.439 power equipment in terms of like gas turbine availability. You know, 0:21:48.520 --> 0:21:50.560 solar panels probably aren't going to do it for you 0:21:50.600 --> 0:21:54.560 given the demand for you know, kind of consistent power 0:21:54.560 --> 0:21:57.680 production off of these data centers, but they are helpful. 0:21:58.160 --> 0:22:00.040