An Industry Trapped by a Theory
By ROBERT KUTTNER
I n the search for the source of Thursday's blackout, the
underlying cause has been all but ignored: deregulation. In
principle, deregulation of the power industry was supposed to use
the discipline of free markets to generate just the right amount
of electricity at the right price. But electric power, it turns
out, is not like ordinary commodities.
Electricity can't be stored in large quantities, and the system
needs a lot of spare generating and transmission capacity for
periods of peak demand like hot days in August. The power system
also requires a great deal of planning and coordination, and it
needs incentives for somebody to maintain and upgrade transmission
lines.
Deregulation has failed on all these grounds. Yet it has few
critics. Evidently, even calamities like the Enron scandal and now
the most serious blackout in American history are not enough to
shake faith in the theory.
Ten years ago, most public utilities were regulated monopolies.
They were guaranteed a fair rate of return, based on their capital
investment and costs. So the government compensated them for
building spare generating capacity and maintaining transmission
lines. Regulators, of course, sometimes made mistakes and the
industry oversold technologies like nuclear power. Even so, in the
half-century before deregulation, productivity in the electric
power industry increased at about triple the rate of the economy
as a whole.
However, the wave of deregulation that culminated in the late
1990's broke up the integrated utilities like Con Ed that once
generated power in its own plants, transmitted it and sold it
retail. It ushered in a new breed of entrepreneurial generating
and trading companies. However, the prices the local utility
companies could charge consumers remained partly regulated. The
theory was that local utilities, no longer producing their own
power, could negotiate among competing suppliers for the best
price and pass the savings along to the consumer.
But deregulation hasn't worked, for three basic reasons. First,
there is a fairly fixed demand for electricity and generating
capacity is tight, so companies that produce it enjoy a good deal
of power to manipulate prices. The Enron scandal, which soaked
Californians for tens of billions of dollars, was only the most
extreme example. California authorities calculated that a
generating company needed to control just 3 percent of the state's
supply to set a monopoly price.
Second, the idea of creating large national markets to buy and
sell electricity makes more sense as economic theory than as
physics, because it consumes power to transmit power. "It's only
efficient to transmit electricity for a few hundred miles at
most," says Dr. Richard Rosen, a physicist at the Tellus
Institute, a nonprofit research group.
Third, under deregulation the local utilities no longer have an
economic incentive to invest in keeping up transmission lines.
Antiquated power lines are operating too close to their capacity.
The more power that is shipped long distances in the new
deregulated markets, the more power those lines must carry.
In addition, in the old days of regulation, a utility like Con Ed
would be required to regularly submit a resource plan to a state's
public service commission. The two organizations would forecast
demand and decide how much money should be invested in power
plants and transmission lines. Rates would be adjusted to cover
costs. Under deregulation, however, nobody plays that crucial
planning role.
Much of the Southeast, by contrast, has retained traditional
regulation -- and cheap, reliable electricity.
When the blackout hit on Thursday, many of us first thought of
terrorists. What hit us may be equally dangerous. We are hostage
to a delusional view of economics that allowed much of the
Northeast to go dark without an enemy lifting a finger.
Robert Kuttner is co-editor of The American Prospect and author of
"Everything for Sale: The Virtues and Limits of Markets."
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