Build infrastructure like a perennial football contender

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The American Society of Civil Engineers’ latest report card gave U.S. infrastructure a grade of D+. The report considers the rating “at risk” and one step above failing and unfit for purpose.

But readers shouldn’t see this poor grade as a justification for hasty public spending. It’s time for thoughtful evaluation of existing infrastructure programs and reforms that make infrastructure investments cost-efficient, while respecting the consequences of increased public spending in a constrained fiscal environment.

Shiny, modern public infrastructure makes for great optics but often-lousy investment returns. When considering infrastructure spending, it’s important to look at things from an economic as well as engineering perspective. Engineers evaluate infrastructure by functional performance, whereas economists focus on maximizing the returns of scarce resources. This can result in different conclusions. For example, an economist may be content with an engineering infrastructure rating of C if it’s not worth the cost to upgrade to a B. If B is the desired policy objective, then they’d stress finding the most cost-effective means to get there, rather than just throwing money at the problem.

Football management offers a timely analogy, given the start of NFL free agency and the forthcoming draft. Armchair general managers often “know” that their team must make the splashiest signings to fill positions of need. Then there’s the prudent GMs (who are much better paid!) who seek to maximize returns with finite resources. Commonly, this translates into the pursuit of C and B caliber players for contracts that cost a fraction of those extended to A players. That’s why GMs who sign quality players for reasonable contracts (bargain deals), build robust rosters through the draft (less expensive personnel) and draft the best player available (versus sacrificing quality to meet a short-term need) have sustained success.

Like an athlete, proponents of new public infrastructure investment often use age as a proxy for physical condition. Yet a fit 32-year-old athlete may perform better than an injury-riddled 27-year-old. The same applies in the electric industry. For example, coal and nuclear plants built a half-century ago commonly had an engineering life of 40 years. As they reached 40 years, cost-effective improvements to extend their life were often more economical than investing in new power plants. On the flip side, many power plants recently became unprofitable after natural-gas prices plummeted. Bailout proponents have claimed shutting these units down before their engineering life is through would be premature. Economics tells us there’s nothing premature about closing an unprofitable facility when a less expensive and/or more profitable one can take its place.

The age argument has also led to claims that our electric transmission and distribution infrastructure is crumbling. Such statements are often exaggerated (e.g., age overstates performance risk) or misapplied (i.e., failing to note the effectiveness of processes to replace or repair existing infrastructure). The ASCE report highlights reliability concerns from aging T&D lines built in the 1950s and 1960s, given their 50-year life expectancies. But a look at reliability metrics themselves tells a different story.

Independent studies generally do not find widespread T&D reliability concerns that existing processes can’t handle. Most indicators developed by the North American Electric Reliability Corp. actually show an improving reliability trend of the domestic bulk high-voltage power system. A 2016 study highlighted that, despite aging low-voltage electric distribution infrastructure, existing investments to modernize infrastructure have contributed to a likely decrease in the number and duration of power outages since the 2000s.

A 2015 study found that the frequency of power outages remains unchanged in recent years, but the total number of minutes customers are without power increased. Drilling down, the culprit is major power loss events resulting from severe weather. Importantly, the study did not find a link between reliability and increased expenditures on transmission and distribution, but rather highlighted differences in the effectiveness of utility maintenance policies.

The ASCE report cites growing T&D congestion (lines carrying electric current at their full capacity) as cause for concern. An economic view is that we’re utilizing T&D infrastructure more efficiently. Unused infrastructure is a wasted expense, though it should be granted that excessive congestion can cause reliability problems. Since the early 2000s, major advances in “organized” electricity market structure and operation have enabled far more efficient use of existing infrastructure to manage transmission congestion.

At the same time, new economic paradigms are under consideration for improved distribution management. These market-based approaches bolster reliability, avoid the need for some infrastructure investment and signal efficient infrastructure investment when needed. Still, there’s plenty of room for improvement in T&D planning, especially on joint planning with generation infrastructure. The main value is to lower costs. Reliability processes generally are already robust.

The takeaway from all this: we don’t need to throw public money haphazardly at energy infrastructure. Rather, we need to pinpoint areas of need and to reform any flaws in existing processes to encourage cost-effective private investment.

The ASCE’s report offers insight into areas to expedite and lower the cost of infrastructure-planning processes. These include streamlining permitting processes for new transmission lines and natural-gas pipelines. That’s a worthy pursuit, as is encouraging the Federal Energy Regulatory Commission and states to further pursue competitive models for T&D planning.

Given the White House’s expressed desire for a massive federal infrastructure bill, it’s especially critical that policymakers eye cost-effective investments and maintain fiscal discipline. Laying out the benefits of improved energy infrastructure (e.g., avoided outages) alone should not prioritize policy action (a common engineering perspective). Policy decisions must weigh benefits alongside costs. Costs for expanded federal outlays take on new meaning as we approach $20 trillion in national debt. Plus, the case for fiscal stimulus is especially weak with the economy on relatively solid footing. Congress must carefully weigh digging a deeper debt hole to fill some potholes.

Facilitating efficient infrastructure investments largely comes down to aligning private investment incentives with the public interest. ASCE’s recommendation to use performance-based regulations for pipeline safety is consistent with this. Policymakers should expand such performance-based constructs to electric-distribution utilities, rather than enacting strict equipment-design standards, which seldom weigh costs and benefits effectively. At the same time, policymakers must carefully parse the report’s conclusion that a lack of federal energy policy has caused a lag in energy investment.

America’s infrastructure team is quite strong already, but we could use some roster upgrades. For semantics, let’s just say that to make America’s team (not the Cowboys) great again, we need to do the most with scarce resources. That lends support for cutting red tape, not spending money we don’t have.


Image by Debby Wong

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