There is significant fascination in the utility industry today about the future of the “smart grid’.
The expansive electric utility view of the smart grid is a means to know in real-time, in detail, how electricity is being distributed and consumed in their networks. Their view also includes some ability to use the smart grid, either through direct controls or through real-time pricing changes, to manage consumption to limit peak demand for generating capacity. To electric utilities, the smart grid concept includes functions like automated meter reading, distribution automation, and remote service connection and disconnection. Their concept also includes load management and demand response management. The overall purpose of the smart grid is to deliver a more reliable supply of electricity at lower cost – both the average cost and the marginal cost of peak demand.
An underlying element of the utility vision is that they have to establish a communications network to communicate with their infrastructure and with their customer end points (meters). A communications network is essential to the concept of the smart grid because monitoring, management and control of the network elements must happen in real-time. Almost all discussions about building the smart grid inherently include the concept of building a utility-specific communications network as its foundation (such as noted in this blog on Electricity 2.0). Most of these envisioned communications networks are proprietary, whether communicating over the existing power lines that the utilities already have deployed, or constructing some proprietary wireless network overlaid on that distribution infrastructure.
This makes electric utilities, along with the US military, among the last industries in this country that believe that they have to build their own proprietary communications network. They can not imagine any other way to reliably reach the large number of business and residential customers that they serve. Utilities are pursuing this proprietary vision largely because of their monopoly history. They believe that they have to control their entire infrastructure. For example, utilities have been grandfathered with radio frequency licenses from the FCC over which they have operated their own wireless voice communications networks for decades. The utilities believe that the only way to achieve the functionality, reliability, capacity and security that they need is to build, own and operate their own communications network.
Most plans for the smart grid do not currently envision using any of this country’s existing, ubiquitous communications networks. The telephone network is a well-known, technically mature resource that covers almost literally the entire country. The more recently deployed cellular communications networks have almost equally universal coverage, although the technologies continue to evolve. But the utilities are mostly overlooking the advantages of the existing, broadly deployed, broadly supported, low cost nationwide data communications network – the Internet.
If a smart grid is to be built that reaches to every customer meter, and to the power-consuming equipment behind the meter, it will be built on the Internet. The Internet is already broadly deployed, and it is expanding its reach into more places and to more devices every day. The Internet is already the backbone communications network for a broad range of commercial communications, whether conducting financial transactions, supporting on-line retailing, operating an integrated supply chain, or conveying medical information. The costs of adding Internet connectivity to devices, appliances, or machines is continuing to drop, and that connectivity is being built in. Utilities are wasting their money chasing the broad deployment, general adoption, and low cost of the Internet.
Load management and demand control will never operate over a proprietary utility network as envisioned by the electric utilities. Customers are not going to invest to communicate data through a smart electric meter. Particularly in commercial and industrial facilities, and increasingly even in residences, demand management of energy consuming devices is already being conducted by existing intelligent systems – industrial control systems, building automation systems, energy management systems, and even smart thermostats. All of these systems are being connected to the Internet, to the extent that they are not already. Customers will not tolerate having to connect to another network to take input from the utility, whether it is pricing or demand response requests. They will demand that information to come over the data communications network that they already support – the Internet.
Utilities may still pursue the misguided vision of building their own communications network to control their own power distribution infrastructure. They may also extend it all the way to their smart meters. Those smart meters will be the end points of any utility communications network, however, not a portal to the energy consuming equipment of their customers. The only real reason that utilities will install “smart” meters (for AMR or AMI) is so that they can track usage in real-time to assure compliance with pricing and demand response programs intended to limit peak demand. That function could be performed more easily and inexpensively over the Internet, but that will be up to the electric utilities and their regulators. The utilities’ customers increasingly conduct their data communications over the Internet, and they will require utilities to communicate with them that way too.
There may be a “smart grid” over which the utilities do a better job of managing their power distribution network. But it will never be a mechanism for communicating with their customers. That network already exists.
Tuesday, June 30, 2009
Friday, March 20, 2009
The Nationalization of Banking in the United States
Since the depths of the financial crisis in the fall of 2008, the United States government has become intimately involved in the ownership and operations of the financial services industry in general, and the banking system in particular. The US Treasury has made equity investments in major banks, and has become the major supplier of capital and liquidity to these largest banks. Since everyone knows that a major debtor is really an equity investor, these moves have essentially amounted to the nationalization of banking in the US. Anyone who doubts that the US government believes that it owns the banks has not been listening to recent speeches by President Obama and the US Congress.
Nationalization of the US banking industry is bad for the economy for all the reasons that nationalized industries have been bad throughout history in any country you choose to examine. This is especially so in the US because the free flow of capital is so important to the growth and vibrancy of our economy. Federal government intervention in the United States financial services industry will degrade the ability of the economy to function and to recover quickly from the current recession.
The US government is not just another investor among equals, it is an investor with a gun. The federal government will dictate the strategies, culture and actions of banks disproportionately to its ownership stake. The CEOs and management of the US financial institutions no longer work for traditional profit-motivated investors; they are working for the State. They are no longer motivated by making profits for investors – and themselves. Their compensation will look increasingly like that of civil servants, in which there is no upside reward for innovation and risk-taking, and in which the primary goal is job preservation by avoiding risk and responsibility for decisions that might have negative outcomes.
Today’s major bank CEO now works for the Secretary of the Treasury, and in reality, works for the Chairman of the congressional Banking Committees. The first time anyone forgets that, he will be called into a Congressional hearing to remind him. Those hearings will be called when major losses occur, when major expenditures are made without political benefits, or when politically correct lending is not extended. The management of financial institutions will now be motivated to not have any losses, so risk taking of any type is out. These government-owned institutions will no longer participate in the type of aggressive risk-taking that has funded the largest and most dynamic economy in the world, and that has built the globe’s largest and most efficient capital market.
The management of these government-owned institutions will be motivated to make lending decisions based on political goals, rather than the merits of the loan itself. We will see much more lending to the relatives, friends and political donors of Congressmen, lending in certain Congressional districts, lending for questionable but politically correct projects, and so on. Bank lending will become the new source of “earmarks,” and the new source of money for the politically connected to loot. Any banker that forgets who is really in charge will find themselves called before a Congressional committee to be publically excoriated, humiliated, and professionally destroyed. Only a few examples will be required to teach this lesson to the rest. Making money is no longer the goal of banking – buying votes is the objective.
The tragedy for the American people and our economy is that massive intervention and Federal seizure of the financial sector was not necessary. The industry needed to go through the catharsis of bad decisions being rewarded by bank failures. Overly inflated financial assets needed to be revalued to sustainable levels – and still need to. All of this could have happened, albeit painfully, and the economy would have absorbed the pain, learned its lesson, readjusted to the new reality, and moved on to the overriding goal of growing by creating wealth. The actions of the US government are only serving to defer this necessary cleansing process, prolong the recession, and seriously degrade the capital markets.
The private equity market has grown tremendously over the last decade in response to increasing government intervention in and regulation of the public equity markets. Now private equity remains the great unregulated hope for capitalism in the United States to provide the investment capital and profit-maximizing guidance that will once again create growth in the American economy. That is, unless the major US banks can quickly pay off the government investments and get out from under the Congressional boot.
Nationalization of the US banking industry is bad for the economy for all the reasons that nationalized industries have been bad throughout history in any country you choose to examine. This is especially so in the US because the free flow of capital is so important to the growth and vibrancy of our economy. Federal government intervention in the United States financial services industry will degrade the ability of the economy to function and to recover quickly from the current recession.
The US government is not just another investor among equals, it is an investor with a gun. The federal government will dictate the strategies, culture and actions of banks disproportionately to its ownership stake. The CEOs and management of the US financial institutions no longer work for traditional profit-motivated investors; they are working for the State. They are no longer motivated by making profits for investors – and themselves. Their compensation will look increasingly like that of civil servants, in which there is no upside reward for innovation and risk-taking, and in which the primary goal is job preservation by avoiding risk and responsibility for decisions that might have negative outcomes.
Today’s major bank CEO now works for the Secretary of the Treasury, and in reality, works for the Chairman of the congressional Banking Committees. The first time anyone forgets that, he will be called into a Congressional hearing to remind him. Those hearings will be called when major losses occur, when major expenditures are made without political benefits, or when politically correct lending is not extended. The management of financial institutions will now be motivated to not have any losses, so risk taking of any type is out. These government-owned institutions will no longer participate in the type of aggressive risk-taking that has funded the largest and most dynamic economy in the world, and that has built the globe’s largest and most efficient capital market.
The management of these government-owned institutions will be motivated to make lending decisions based on political goals, rather than the merits of the loan itself. We will see much more lending to the relatives, friends and political donors of Congressmen, lending in certain Congressional districts, lending for questionable but politically correct projects, and so on. Bank lending will become the new source of “earmarks,” and the new source of money for the politically connected to loot. Any banker that forgets who is really in charge will find themselves called before a Congressional committee to be publically excoriated, humiliated, and professionally destroyed. Only a few examples will be required to teach this lesson to the rest. Making money is no longer the goal of banking – buying votes is the objective.
The tragedy for the American people and our economy is that massive intervention and Federal seizure of the financial sector was not necessary. The industry needed to go through the catharsis of bad decisions being rewarded by bank failures. Overly inflated financial assets needed to be revalued to sustainable levels – and still need to. All of this could have happened, albeit painfully, and the economy would have absorbed the pain, learned its lesson, readjusted to the new reality, and moved on to the overriding goal of growing by creating wealth. The actions of the US government are only serving to defer this necessary cleansing process, prolong the recession, and seriously degrade the capital markets.
The private equity market has grown tremendously over the last decade in response to increasing government intervention in and regulation of the public equity markets. Now private equity remains the great unregulated hope for capitalism in the United States to provide the investment capital and profit-maximizing guidance that will once again create growth in the American economy. That is, unless the major US banks can quickly pay off the government investments and get out from under the Congressional boot.
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