[lbo-talk] Kuttner blames blackout on electricity deregulation

Michael Pollak mpollak at panix.com
Sat Aug 16 03:27:47 PDT 2003


August 16, 2003

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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