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The unexpected storms that knocked out power to millions in the Midwest and Mid-Atlantic last month highlighted how fragile America’s electric grid is. But while front-page photos of fallen trees and utility repair trucks capture people’s attention, there’s a much more grave and fundamental threat to our electric grid.

The U.S. grid system was born in the 1920s, and has seen few major upgrades since the 1960s. With America’s growing population and exploding demand — bigger houses, A/C units, TVs, iThings — we have serious congestion and inadequate capacity on our nation’s power lines. This has led to more frequent power outages, which cost the American economy well over $100 billion each year [PDF]. The inefficiency of our old-fashioned grid also leads to enormous waste through “line loss.” In 2010, 6.6 percent [PDF] of the electricity generated in the U.S. simply disappeared before it could reach consumers. That’s $25.7 billion worth of electrons, lost into thin air.

Investing in grid modernization would clearly save American consumers tremendous amounts of energy and money. So why aren’t we doing more of it?

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One reason is that these projects are just plain difficult to carry out. Siting and constructing power lines usually requires a utility to go through environmental regulators and public utility commissions for each state they cross, as well as federal regulators and local governments. Regulations are intended to provide important benefits or protections for ratepayers, communities, public safety, and the environment. But they rarely line up well with one another and are, at times, contradictory.

An equally complicated barrier to grid modernization is figuring out exactly who should pay for it. The power grid is owned and operated by about 500 individual utilities, some large, some small, some private, some public. And the grid is totally interconnected, so if one utility does work to improve its segment, the benefits often flow to utilities and consumers somewhere else. It’s the standard “freeloader” problem.

Despite these challenges, one particularly creative transmission project appears to be threading the regulatory needle –and could possibly serve as a model for other desperately needed grid improvements. If it receives final approval by state and federal agencies, the Champlain Hudson Power Express (CHPE) will connect up to 1,000 megawatts of wind and hydro power from Canada and upstate New York to energy-hungry New York City. This renewable energy, when added to the clean nuclear and natural-gas plants that already power the city, will reduce congestion and other strains on the grid — improving service for families and businesses in this service area. In addition to creating 2,000 jobs [PDF] in New York state, this project is expected to reduce acid-rain pollutants by hundreds of tons and lower New York’s annual carbon dioxide emissions by 9 percent [PDF]. And perhaps most importantly, CHPE will directly benefit consumers, saving ratepayers a whopping $600 million each year [PDF].

All of the costs of developing the CHPE will be paid by third-party investors who will be repaid by power generators that utilize the lines once the project is finished. This financing method avoids the stalemate that often results when utilities are left to cover costs and seek reimbursement through politically complicated rate increases. Knowing the “not in my backyard” resistance generated by giant transmission towers normally used for such projects, CHPE’s owners chose less-intrusive infrastructure to smooth its regulatory path. Their system will consist of two power lines roughly the diameter of coffee cans running 333 miles — mostly buried in Lake Champlain, the Hudson River, and along railroad tracks — using construction techniques that garnered the approval of local environmental organizations. So by planning ahead and collaborating with major stakeholders over a period of four years, CHPE’s investors have found a way to streamline compliance with multiple regulations, expedite permitting, and ultimately save money.

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The U.S. needs to resolve the state and federal regulatory issues that make siting power lines and recovering the cost of grid investments prohibitively difficult. Our interconnected grid system can no longer be regulated as it was a century ago, when each utility operated its own power lines. To manage a regional system, we’re going to need regional coordination and authority that, in limited situations, supersedes that of the states. Until this type of legislative fix is made, let’s hope that CHPE and other equally creative projects are able to thread that needle.