Everyone seems obsessed about which weak link in the power chain caused last week's spectacular blackout. But that exercise is a little like wondering where it was a nail or a piece of glass that finally caused a bald tire to blow. In this case, the bald tire is the electrical grid. And the grid is overstressed because of the logic of electricity deregulation.
Until the mid-1990s, local public utilities generated, transported, and sold power. State public utilities commissions shared responsibility for planning adequate capacity and for making sure that utilities invested in maintaining transmission lines. As regulated monopolies, the utilities were guaranteed a fair rate of return.
Most economists thought that electric companies had to be organized and regulated as "natural monopolies," for several reasons: Power could not be efficiently stored. Electricity is a vital service. There needs to be spare capacity for periods of peak demand. And it makes no sense economically to string two parallel sets of wires, so the consumer could not be sovereign. In the 1970s, however, a new wave of economic thinking held that electric power could be treated like an ordinary commodity after all. Local utilities would get out of the business of generating electricity. They would buy their power from the cheapest producer, and the market in wholesale electricity would be like any other market. Local utilities, however, would still be regulated in terms of rates they could charge customers and in terms of the system's reliability.
But, as the Enron scandal and the great blackout of 2003 demonstrated, the theory had some big glitches. The new unregulated generating companies often took advantage of their power to manipulate prices. And with electricity being bought and sold over long distances, the grid (which was designed for a local regulated industry) was not up to the load. Nor was anyone ultimately responsible for upgrading it.
In theory, it's efficient to trade wholesale electricity. But in practice, it costs a fortune to upgrade transmission lines in order to transmit all that power. It's not at all clear that the benefits outweigh the new costs. It's also evident that deregulation has dramatically increased the risk of catastrophic failure. Earlier blackouts were usually confined to smaller areas because long-distance transmission was a rarity.
Further, the obscure organization responsible for coordinating the whole show, the North American Electric Reliability Council, is a voluntary industry affair. Its own executives and engineers say that it lacks the authority to effectively govern the grid.
There's another irony. Everyone now concedes that a "deregulated" electricity industry still needs regulation. But the Republican administration in Washington believes in as little regulation as possible. So while there is widespread consensus that Congress needs to legislate reliability standards, pro-regulation forces don't trust Bush's appointees to deliver adequate regulation. The potential for both mischief and for catastrophe is so large that regulation needs to be in the hands of people who believe in it.
The story is also complicated by two other factors. Pending federal legislation would give the Reliability Council and regional coordinating bodies new powers. But the Bush administration and its energy industry allies want to use the electricity crisis to light up a Christmas tree of special interest measures -- everything from oil drilling in Alaska to new giveaways to oil and gas interests.
There's also an issue of federal authority versus states' rights -- but with an unusual twist. After Enron fleeced Californians to the tune of tens of billions of dollars, several other states lost their appetite for deregulation. Montana also took a beating. That state has plentiful cheap power, in coal and hydro-electricity. But after deregulation, the local utility made some foolish investments, Montana's own power ended up being sold out of state, and local rates skyrocketed.
Many other states with cheap local power looked at these misadventures in deregulation and said, "No thanks." Now the Bush administration, in a reversal of the usual Republican position on states' rights, wants to compel those states to deregulate.
So the legislative tangle matches the tangle of outmoded electric lines.
What's the answer? Free marketers want to go full speed ahead to full deregulation. They deserve to write their expert testimony by candlelight.
At a minimum, Congress needs to pass reliability legislation without the special interest gimmicks. States that want to keep integrated and regulated utilities should be allowed to do so. Local power, including solar, also makes us less vulnerable to terrorists than huge regional grids. Public power, the cheapest and most reliable form of electricity, would be the best approach of all.
Robert Kuttner is co-editor of the Prospect.
This column originally appeared in Wednesday's Boston Globe.
