America needs a smart grid
The latest item atop Congress’s list of stuff to haggle over is the transportation bill, legislation the Washington Post calls the “best bet for passage of a major jobs bill this year.” The threat of the expiration of authority to spend money from the Highway Trust Fund at the end of the month is motivating House and Senate leaders to reach a compromise in the coming days. Although there are certainly investments to be made in our transportation infrastructure that would contribute to America’s economic competitiveness, it’s a shame that our energy infrastructure has received such scant attention from lawmakers.
The national electrical grid is as important for economic growth, if not more so, than the national highway system or the privately owned router system that supports the Internet. As part of the American Recovery and Reinvestment Act, the Department of Energy funded several demonstration programs for increasing electrical system integration and reducing peak loads on the electrical grid. These efforts are commonly known as the “smart grid,” and this is where Congress needs to turn its attention.
Fort Collins, Colorado was chosen for a public-private smart grid project supported with DOE funding. Called FortZED, the project integrates five public and private institutions into a web that shares excess electrical generation during peak load periods. Some facilities, like the University of Colorado campus, have enormous backup diesel generators that can be powered up to add electricity to the system during times of peak demand. A local brewery and city facility have large solar-cell arrays that can also feed electricity back into the system.
Electrical capacity and demand is mapped across the entire web, and smart devices collect information at nodes all along the system. The map also shows machines that can be shut down during peak demand to reduce the draw on the electrical grid. In contrast, current electrical systems use a hub-and-spoke configuration in which power is produced in a large central facility and then distributed to substations and users. A smart grid flows in all directions and utilizes excess capacity across the system, eliminating the need to build additional power plants to handle peak loads.
I’m sure that many were turned off by the DOE’s Solyndra debacle, but it’s time to invest our best thinking and resources in upgrading our nation’s energy infrastructure. Watch the 14-minute video above to see the power of collaboration and creativity that comes from designing and building smart grids. If we are to restore America’s economic vitality, we need to focus on the enormous resources that are currently underutilized.
Further:
It's a shame that our energy infrastructure has received such scant attention from lawmakers. Join DiscussionWho will pay for new infrastructure spending?
Infrastructure is an important contributor to full employment, and an efficient network of roads, mass transit and water systems is critical for economic vitality. In 2009, the American Society of Civil Engineers issued a report card showing that the U.S. needed to spend $2 trillion over a five-year period for its infrastructure to be upgraded to “good.” That’s about $1.4 trillion more than the U.S. spent on capital improvements to infrastructure over the five-year period from 2003 to 2007. Where could this new funding come from?
According to a 2010 Congressional Budget Office report, state and local governments accounted for about 60 percent of infrastructure spending and 90 percent of the cost of maintaining transportation and water infrastructure nationally. The federal government provided the remaining funds as well as most of the funding for the nation’s air traffic control system. The CBO breaks down how the money was spent:
Spending on highways at all levels of government accounted for 43 percent of expenditures for transportation and water infrastructure in 2007. Expenditures on water supply and wastewater treatment systems accounted for 28 percent of spending; aviation, mass transit and rail made up 23 percent; and the remaining categories of water transportation and water resources accounted for 5 percent.
And here’s the CBO on the funding for these projects:
In the United States, the public sector rather than the private sector typically provides funding for transportation and water infrastructure. Whether it is more efficient for the federal government to provide that funding depends on the type of infrastructure and the likelihood that such infrastructure will be undersupplied if its provision is left to state and local governments or to the private sector.
Evidence suggests that spending for carefully selected infrastructure projects can contribute to long-term economic growth by increasing the capital stock and raising productivity. (During a prolonged economic downturn, infrastructure spending can also mitigate losses in output and employment.) Realizing the potential gains from public spending for transportation and water infrastructure depends crucially on identifying economically justifiable projects – those with benefits to society that are expected to outweigh costs – but a variety of factors make identifying such projects difficult.
Since yields on U.S. Treasury and municipal bonds are at record lows, it’s appealing for federal, state and local governments to finance projects with borrowed dollars. Lately, investors have favored bonds backed by dedicated revenue streams – there were $11.1 billion in bonds issued for water and sewer facilities in the first quarter, nearly four times more than the $2.9 billion issued for toll roads, highways and streets in the same period, according to the SIFMA Municipal Bond Report (page 7). Private investors are also very eager to gain control of public assets through public-private partnerships, though these are increasingly being shown to be a bad deal for the public.
The 2010 CBO report says state and local governments paid for about 60 percent of infrastructure spending and 90 percent of the cost of maintaining transportation and water infrastructure, with the feds picking up the rest. The argument for increasing that spending is persuasive, but so is the idea of clearly justifying taxpayer dollars used for it. Join DiscussionPresident Obama, the Ricketts family and Wrigley Field
Is the Ricketts family of Chicago bipolar? The patriarch, billionaire and Chicago Cubs owner Joe Ricketts, blasted onto the national stage yesterday, when the New York Times reported that his super PAC considered running an ad campaign entitled “The Defeat of Barack Hussein Obama: The Ricketts Plan to End His Spending for Good.” His super PAC, the Ending Spending Action Fund, also lobbies against excessive federal spending and special-interest earmarks.
Meanwhile Ricketts’s son Tom, the general chairman of the Cubs, has been lobbying Rahm Emanuel, the mayor of Chicago and President Obama’s former chief of staff, for $150 million in tax revenues to renovate Wrigley Field, the home of his family’s Major League Baseball team. The irony of Joe Ricketts blasting the president for special-interest spending while his son grovels for taxpayer support to renovate his baseball stadium is enormous. The Ricketts family needs to meet around their kitchen table and get this matter worked out, because it makes both the father and son look clueless.
Greg Hinz of Crain’s Chicago Business has the local scoop:
Did the Ricketts family just knee-cap its own plan to rebuild Wrigley Field with a healthy dose of Chicago taxpayer cash?
My phone has been ringing with just that question this morning in the wake of a stunning New York Times story about how a new super PAC headed by Joe Ricketts, patriarch of the Chicago Cubs’ owning family, is pondering a big, especially nasty ad campaign against President Barack Obama this fall.
[...]
The Chicago angle on this is that Mayor Rahm Emanuel, Mr. Obama’s former chief of staff, has been trying to put together a deal for the city to put $100 million or more in tax incentives into a Wrigley [stadium] rebuild.
The Wall Street Journal discussed the proposed renovation of Wrigley Field, for which Tom Ricketts wants taxpayer money:
Proposals include more premium seating near the field; a Jumbotron; a new building along Clark Street that could contain a restaurant, parking, and hall of fame; and game-day street fests open only to ticket-holders.
The father’s advocacy group, Ending Spending, describes itself like this:
The irony of Joe Ricketts blasting the president for special-interest spending while his son Tom grovels for taxpayer support to renovate his baseball stadium is enormous. Join DiscussionInfrastructure financing and the federal government
There is a general consensus that America needs both new infrastructure and more jobs. Where there’s disagreement is over what role the federal government should play in providing the necessary funding to jump-start new projects. In a recent webinar, Standard & Poor’s laid out the current types of financing available for surface transporation projects (page 3):
• General Obligation Bonds (Appropriation debt) • Sales Tax Revenue Bonds • Gas Tax Revenue Bonds • Toll Revenue Bonds • Federal Grant-Secured Obligations (GANs/GARVEEs) • Transportation Infrastructure Finance and Innovation Act (TIFIA) loans • Public Private Partnerships (P3)
The top five categories in the list above are types of municipal bonds, meaning that they require a local or state government to take on debt to fund infrastructure. At the level of federal financing, the U.S. Department of Transportation’s Federal Highway Administration gives out TIFIA loans to public-and-private infrastructure projects. For example, the Macquarie-owned public-private partnerships that are building the Midtown Tunnel in the Norfolk and Hampton Bays area of Virginia and the FasTracks rail project in Denver are using federal TIFIA loans in the funding pool.
I don’t really understand why the FHA’s TIFIA program favors private investment. Here’s what the FHA website says (emphasis mine):
The program’s fundamental goal is to leverage Federal funds by attracting substantial private and other non-Federal co-investment in critical improvements to the nation’s surface transportation system. TIFIA was created because state and local governments that sought to finance large-scale transportation projects with tolls and other forms of user-backed revenue often had difficulty obtaining financing at reasonable rates due to the uncertainties associated with these revenue streams.
I’m sure the FHA folks know about the $230 billion of transportation bonds outstanding (page 13). Many of these securities are repaid with tolls. In fact, the FHA’s own website lists public projects that are owned by municipal and state governments and repaid with toll fees. It’s no surprise that public toll roads charge users lower fees than do those involving private investors, but that is not an explicit program goal of the FHA, unfortunately.
The webinar highlighted a study S&P conducted about cash flows on publicly and privately owned toll roads (emphasis mine, page 13):
The Federal Highway Administration's TIFIA program could be an enormous engine for expanding U.S. infrastructure and creating jobs if it would shift its focus from enabling the privatization of public assets to backstopping municipal governments that issue debt to fund transportation projects. Join DiscussionHow American municipalities can learn from Parisian mistakes
Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. Per remunicipalisation.org:
In the 1990s many countries privatised their water and sanitation services, particularly in the [hemispheric] South, as a result of strong pressure from neoliberal mindset governments and international financial institutions, to ‘open’ up national services.
The promises that privatisation would improve the provision of drinking and wastewater services soon faltered. Many of the privatised operations quickly began to show weaknesses as they missed targets for expanding and upgrading networks, introduced excessive tariff increases alongside connection fees which were unaffordable for low-income families. Management activities were not transparent and accountable. As a result numerous contracts with private operators were terminated often following popular unrest. Many cities, regions and even countries have chosen to close the book on water privatisation and instead embarked on remunicipalisation or renationalisation of water delivery
It’s easy to see how U.S. public officials facing substantial budget issues might consider privatizing their public systems. Reuters’ Joan Gralla wrote yesterday about the possible lease of its sewer plant by New York’s Nassau County. County officials have been using the system as a piggybank and had raided $200 million of reserves to plug a county budget deficit. Now the system is financially broke, and the officials are pushing to lease it off:
A long-term lease of Nassau’s Sewer and Storm Water Finance Authority, outlined in September by Republican County Executive Edward Mangano, has drawn interest from Severn Trent Services, Veolia Environment VE SA and United Water, a unit of Suez Environment Company SA.
However, it is not clear if and when any lease contract might be approved.
State control board officials and Democratic legislators have criticized the proposal. Credit agencies say public assets – from roads to parking garages – should not be leased to private companies if the cash raised from them just papers over deficits.
About $115 million of the money raised by a long-term lease of the sewer system would be spent closing deficits in 2013 and 2014, according to Fitch. It views this strategy “negatively.”
Philadelphia is moving ahead with a sale of the Philadelphia Gas Works, one of the nation’s oldest municipally owned utilities. A report prepared for the city by the investment firm Lazard (page 16) says it’s likely the city will not see any substantial cash benefit from the sale but will instead be able to repay bonds issued for the utility and discharge the pension obligations of the employees. What Philadelphia will give up in exchange is an opportunity to continue providing low-cost energy to its residents as an enormous supply of natural gas from hydraulic fracking in Pennsylvania’s Marcellus Shale region comes online. In a city with a substantial number of people who live below the poverty level, the utility is perfectly positioned to create economic stability by remaining public and a non-profit entity. The economic stability provided by Philadelphia Gas Works could be a vital foundation for long-term urban revitalization for the city. From BusinessReviewUSA.com:
With more than 500,000 commercial, industrial and residential customers and 84 percent saturation of residential heating in the City of Philadelphia, PGW is the nation’s largest municipally owned natural gas utility.
Natural gas is transported to PGW by two direct interstate pipelines, but PGW also operates a liquefied natural gas facility to meet peak day and winter requirements. The facility’s dual 12-story tanks store over four billion cubic feet of natural gas and have remained among the country’s largest since they were constructed in the 1970s. It has saved customers more than $2.5 billion in the last 35 years.
Selling older and irreplaceable public assets does gain short-term cash for cities and counties. But losing control of valuable public assets for decades is not necessarily the best way to serve the public. These deals need to weigh the economic interests of all stakeholders. U.S. public officials might want to jet over to Paris to visit with officials there before they make any final decisions on privatizing public works.
Cash-strapped U.S. municipalities are considering the sale of their public-utility systems. But are these moves in the public interest? Officials should look to France and other nations moving in the opposite direction with a "remunicipalization" of their utility systems. Join DiscussionThis is an op/ed blog, NOT journalism. Quoting two dot.coms does not confer either analysis or credibility.
Please provide the author’s credentials, so we can know which special interests/opinions she identifies with.
Boston funds publicly, while Chicago goes private
Two major American cities are embarking on large capital programs, but in very different ways. Boston Mayor Thomas Menino has a $1.8 billion, five-year plan that he will fund with municipal bonds, while Chicago Mayor Rahm Emanuel is trying to push a $7 billion plan, which will be paid for by private investors, through the city council. It would be hard to find to two more dissimilar approaches to rebuilding America’s urban infrastructure or two more different lists of who will reap the monetary benefit of the improvements.
Boston approaches its infrastructure needs with a rolling five-year schedule of projects that is updated on an annual basis. This allows for more controlled expensing and planning. In contrast, Chicago’s Emanuel announced his infrastructure privatization plan in January with very few details and buy-in only from the private investors who will benefit from their involvement. The Chicago proposal gives control of infrastructure decisions to a panel of four private citizens and one city council member with no ability for the city council to have oversight on projects and contracts. Chicago has a terrible history of leaving taxpayer money on the table in its privatization efforts. In 2008 the city’s parking meters were leased out to private investors for a tiny sum:
Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.
Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue.
Chicago, with a population of 2.7 million, is over four times larger than Boston, with 617,000 residents. But Boston will be spending about $2,900 per resident compared with Chicago’s $2,597 without privatizing any of the work. Boston does have lower funding costs because it is viewed more favorably by bond markets, with a rating of Aaa from Moody’s, its highest rating. Chicago comes in three notches lower at Aa3, or what Moody’s terms “high quality and very low credit risk.” Bond markets do make Chicago pay more, and its bond* due 2024 traded at 3.32 percent Thursday, while a comparable Boston bond,** due 2024, traded at 2.28 percent, according to the Municipal Securities Rulemaking Board’s EMMA system.
The additional 1.04 percentage points Chicago pays to borrow versus Boston is a much lower cost for Chicago than what it will pay to private investors through Mayor Emanuel’s proposed infrastructure trust. America’s urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city’s rebuilding to private investors. Boston Mayor Menino has the right approach and should be a model for Chicago Mayor Emanuel.
It would be hard to find to two more dissimilar approaches to rebuilding America's urban infrastructure. America's urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city's rebuilding to private investors. Join DiscussionThe Virginia tunnel goldmine
The battle to privatize America’s public assets had a big win when the Newport News Daily Press reported:
The governor of Virginia, Bob McDonnell announced Monday that a deal with private construction consortium Elizabeth River Crossings to build a new Midtown Tunnel tube; refurbish the existing facility along with the Downtown Tunnel; and expand the Martin Luther King Freeway has reached a financial close.
The project, which is now owned by Australian infrastructure company Macquarie, will add another tunnel under the Elizabeth River to relieve congestion in the Norfolk and Hampton Roads area. Getting control of the project will bring in rich rewards for Macquarie and its construction partner Skanska. For an equity investment of $208 million, Macquarie stands to realize over $5 billion in cash flow over the 58-year concession after repayment of bonds, loans and mandated capital expenditures.
Total building costs are estimated to be $2.1 billion. Fitch Ratings laid out who will provide the money for the cost of building the tunnel in its Apr. 5 report (page eight):
Funding for transportation projects is becoming tighter, but transferring an enormous project - and its revenues - into private hands seems the wrong way to gather resources to improve public infrastructure. Join DiscussionFunding sources include: equity from Macquarie and Skanska including contingent equity (12% of total sources); Private Activity Bonds (32%); Transportation Infrastructure Finance and Innovation Act (federal government) loan (22%); Virginia Department of Transportation contribution (17%); and toll revenue during construction (17.5%).
Denver’s botched FasTracks privatization
Reuters ran a piece yesterday that caught my eye: “Macquarie eyes $2 billion North American infrastructure fund: sources.” According to the article, Macquarie, the Australian company active in infrastructure privatization, wanted to leverage its prior American success as it begins to raise funds:
Macquarie has also proved successful in bidding for the few new assets on the market. It was behind the largest U.S. infrastructure deals of the last two years – a $2.1 billion project to build and operate commuter rail lines to Denver International Airport and a $1.7 billion upgrade of a tunnel between the cities of Norfolk and Portsmouth in Virginia.
The privatization of American infrastructure has become a hot topic, despite the lack of notable success stories. The Macquarie project building and operating commuter rail lines to Denver International Airport illustrates the costs associated with this approach. The project is not doing very well: Because of cost overruns, its budget was recently revised upward, to $7.8 billion.
Once construction is completed, Macquarie will have a concession to run the commuter rail system, an expansion of the Denver Regional Transportation District transit system called FasTracks. The company contributed $2 billion toward the cost of the project, of which $54 million was an equity investment (page 25). The remainder of Macquarie’s portion came from construction payments from the sponsor, the Regional Transportation District, and issuance of $397 million in private activity bonds in 2010. These bonds received the lowest possible investment grade rating, Baa3 and BBB-, demonstrating the weakness of the financing plan.
In partnership with the construction company Fluor, Macquarie became a leader in the Denver project by bidding $300 million lower than its competitors. The company also promised to complete the project 11 months ahead of the 2016 deadline. Unfortunately, they are running behind on these promises, according their February 2012 MSRB filing (pages 13 and 14). Many of the delays are related to the approval of “right of ways,” which could have been encountered even if the project had not been privatized.
The funds that pay for the entire $7.8 billion FasTracks project, beyond the $2 billion portion for which Macquarie is responsible, come mainly from a regional sales tax and federal funds, with a small portion from transit fares. There is some concern among state politicians about the management of the entire project:
The privatization of U.S. infrastructure has become a hot topic, despite the lack of notable success stories. Given the expensive stumbles in Denver, we need more examination of the privatization approach. Join Discussion“Privatization has driven our country forever.”
Beyond the fact it’s doubtful you know the meaning of “privatization,” you provide no substantiation for your claim that it has “driven our country forever”.
Here’s a tip: simply saying a thing does not make it true — even though the FOX cesspool teaches you that it does. That’s why such things as science and law are so difficult: they require PROOF that a statement is true.
But that takes effort foreign to the experience of the lazy.
Fracking’s externalities
Fracking is under increased scrutiny in the U.S. and in Australia, in the state of New South Wales. Both nations have undertaken studies to examine the effect of fracking on groundwater supplies. But there are other potential socialized costs that need to be included in these public studies, including the possible cost of wastewater treatment plants, damage to local roads, air and water pollution and the linkages to earthquakes. The costs of these possible side effects to local communities may exceed the gains they’ll receive from extraction royalties and increased tax revenues. We need some accounting.
In the U.S. the Environmental Protection Agency has begun a study on fracking and water supplies, and it released a status report in December 2011. The EPA anticipates a first round of results by the end of 2012 and a final report to be released in 2014. The agency has conducted literature reviews, requested data from manufacturers of fracking fluids and scheduled case studies with landowners. It also released a startling preliminary report on possible groundwater contamination in Wyoming. From USA Today:
The EPA found that compounds likely associated with fracking chemicals had been detected in the groundwater beneath Pavillion, a small community in central Wyoming where residents say their well water reeks of chemicals. Health officials last year advised them not to drink their water after the EPA found low levels [of] hydrocarbons in their wells.
[...]
The fracking occurred below the level of the drinking water aquifer and close to water wells, the EPA said. Elsewhere, drilling is more remote and fracking occurs much deeper than the level of groundwater that would normally be used.
In Australia the national government has moved much more decisively and imposed a temporary ban on fracking that lasts through the end of April. The national government also allocated about $150 million to conduct an independent review of the health, safety and environmental risks of the process. From Bloomberg:
Prime Minister Julia Gillard said Nov. 21 that the government will allocate A$150 million ($153 million) to establish an independent committee to provide scientific advice on the impact of coal-seam gas projects on water supplies.
“The framework is not designed to add extra work or increase the regulatory burden for upcoming projects,” Gillard said in a statement. “It does mean, however, that their applications will be subject to rigorous and independent scientific assessment before states grant an approval.”
The efforts of both nations are a good start, but government oversight needs to be broadened to account for other environmental and social costs. There is already academic work that creates a framework for enviromental costs for the economy. In 2009, economists Nicholas Muller, Robert Mendelsohn and William Nordhaus published a methodology that weighed both costs and benefits to the economy from air pollution (page 3). Their work focuses on measuring damages and the value added from various industrial processes.
Fracking is under increased scrutiny in the U.S. and Australia. Both nations have undertaken studies to examine the effect of fracking on groundwater supplies. But there are other potential socialized costs that need to be included in these public studies. Join Discussion[W]e compare Gross External Damages (GEDs) to value added (VA). The purpose is to determine whether correcting for external costs has a substantial effect on the net economic impact of different industries. We find that the ratio of GED/VA is greater than one for four industries (stone quarrying, solid waste incineration, sewage treatment plants, and fossil fuel power plants). This indicates that the air pollution damages are greater than their net contribution to output of these industries. Several other industries also have high GED/VA ratios.
@ Cate Long: Thank you. And thank you, and thank you again. It is nice to see a balanced piece of journalism appear here, in the MSM.
The reality is that regardless of the size of LP/NG reserves in the U.S. (and contrary to the narrow and limited understanding of OneOfTheSheep, above), the resource is finite, and the U.S. will never, ever achieve “self-sufficiency” in energy production at the present (or foreseeable) rates of consumption.
The undeniably valid point you make in this piece is that if the costs are socialized and the profits taken privately, the American public are NOT served by permitting these practices. That American citizens do not, or cannot, understand that their support of such practices harms them in far greater measure than the curtailed/reduced production that may result. They don’t understand that in order to keep their fuel costs a dollar lower, they are handing three dollars to the producers.
Foreigners want America’s public assets
It seems like foreign governments and corporations are craving U.S. public assets like toll roads, electrical grids and railways. In the case of our largest creditor, the Chinese government, they don’t want any more U.S. Treasuries, but they do want to own the hard assets that comprise our nation’s infrastructure.
Reuters Beijing bureau reported:
It's a good stance for the President to encourage foreign investment. But is it such a great idea for foreign firms to own our most vital infrastructure? Join DiscussionChina may channel part of its huge pool of foreign exchange reserves into investment in U.S. infrastructure, including rail and transportation networks, Commerce Minister Chen Deming said on Friday.
“China is unwilling to take on too much U.S. government debt. We are willing to turn that money into investment,” he told U.S. Ambassador to China Gary Locke and U.S. businessmen.
Chen did not elaborate on how China might channel some of the country’s war chest of $3.2 trillion foreign currency reserves to invest in U.S. infrastructure, such as rail and transportation systems.
It almost sound like a good idea that China would invest in rail expansion. But where can they do that? 50 years of auto dependency and suburban sprawl has done a job on most remaining ROWs in this country.
The Chinese would have a difficult time trying to reconstruct many former rows and they would need municipal condemnation powers to accomplish the thousands of takings that task would require. They would not be popular.
If any doubt this information, take a search online using “abandoned railroad ROWs as your key words, just to start. Abutting property owners are also encroaching on ROWs that haven’t been converted to recreational purposes yet. The days of major expansion of rail ROWs is probably over. They grew best when they preceded development in the open planes and far western states. The best they could hope to do is improve some still living – but highly subsidized major corridors.
The Chinese may not actually know what they a would be getting into because land use law is not the same as they are accustomed to. They would have legal problems they cannot imagine.
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Resident Muniland expert
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