Transforming the Grid

 | Feb 10, 2014 | 6:55 PM EST
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The attack on PG&E's (PCG) substation is a big deal. Investors should not dismiss it as a simple act of vandalism. It is serious and it may change how the nation's power markets operate. Let me explain.

Last Tuesday, the Wall Street Journal reported, "The attack began just before 1 a.m, when someone slipped into an underground vault not far from a freeway and cut telephone cables. Within half an hour, snipers opened fire on a nearby electrical substation. Shooting for 19 minutes, they surgically knocked out 17 giant transformers that funnel power to Silicon Valley. A minute before a police car arrived, the shooters disappeared into the night."

It should be pointed out the Wall Street Journal was responsible in its reporting. They were not the first outlet to raise the issue to the public, nor were they the last. Prior to their publication, there had been several conversations within the industry, many of which were in public forums. By publishing this story, the Wall Street Journal was not teaching bad actors any new tricks. They were putting pressure on policymakers to address an issue that has been festering for more than a decade.

To be clear, the issue is not about transmission lines. It is not about substations or power plants. It is about transformers. The Wall Street Journal reported that attackers attempted to damage several transformers.

The fact their focus was on the transformers suggests the intruders have a sophisticated understanding of the grid. Most grid managers know that transmission lines can be repaired quickly. If someone is foolish enough to topple a line, it can be repaired within in a few days. On the other hand, if the transformer feeding that line is destroyed, it can take much longer to restore service.

Why are transformers the Achilles heel of the nation's grid? Simply put, they are easy to damage and hard to replace.

High voltage transformers are massive. Some are larger than a three-story house and can weigh up to 200 tons to 400 tons. They are expensive and difficult to move. One 765kV transformer can cost more than $10 million to procure and install. Large transformers cannot be transferred over normal rail cars because the heaviest load a railroad normally carries is about 100 tons. A specialized railroad freight car known as the Schnabel railcar is often used; however, there are a limited number of Schnabel cars available worldwide, with only about 30 of them in North America.

Large transformers are not mass-produced. Normally, the lead time for procurement, delivery and set up can take more than a year for each transformer.

Returning to the Wall Street Journal article, shooting an operating transformer by draining the oil will permanently destroy a transformer. Once windings are damaged, the entire unit is destroyed.

Should the PG&E incident be a dry run for simultaneous attacks on multiple substations, the economic outcome could be devastating for any nation. It would likely shut down power over broad geographic areas for a very long time.

Now that the issue is public, the question becomes what to do and who pays. Many of the nation's critical transformers are owned by different types of companies. Some are regulated by the Federal Energy Regulatory Commission. Some are regulated by various state utility commissions. Still others are owned by unregulated entities. No single entity has jurisdiction over all the nation's large power transformers.

Nevertheless, the Congress is asking federal regulators to write and impose interim rules on grid defenses. The problem is FERC has limited ability to address the technical capabilities needed for equipment or facilities. Up to now, its charter has been limited to interstate commerce issues.

The simple solution is to have a spare transformer located nearby. The spare needs to be protected and ready to operate. While this solution may sound simple, it would take years and billions of dollars to implement.

In the meantime, hardening substations and switchyards seems to be a practical option. How that hardening is accomplished is anyone's guess. It will take time to develop authorities, methods and standards. With government involved, it will take even more time.

The issue is not limited to the U.S. It is a problem for China, Europe and any other nation with a developed grid.

This attack is a warning. It represents a serious threat to national security. An urgent response is needed. An urgent response is likely.

The companies most able to respond to the hardening solution are Quanta Services (PWR) and Pike (PIKE). Individual utilities such as Pepco Holdings (POM) may also deploy energy services subsidiaries which competes in this same market.

On the manufacturing side, the U.S. has only six transformer manufacturers. Three of the largest are foreign with a domestic footprint. They include ABB (ABB), Siemens (SI) and Alstom (French).

Hopefully, we will never see another intrusion like the one in PG&E's system. In the meantime, preventive measures will be developed and deployed. Improvements will come later.

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