Commentary

Congressional Review of Blackout

This article appeared in The Washington Post on September 8, 2003.

Congress is holding a two-day hearing focusing on the investigation of the nation’s worst blackout. In his remarks, Energy Secretary Spencer Abraham says that it is too early to identify the cause of the northeast power outage.

Jerry Taylor, director of Natural Resource Studies at the Cato Institute, will be online Thursday, Sept. 4 at 10:30 a.m. ET to discuss whether the Congressional hearing will improve deregulation and benefit consumers.

The transcript follows.

Editor’s Note: washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.


Jerry Taylor: Hello everyone. Thanks for stopping by to chat with me about electricity policy, the recent blackouts, and what is likely to come of it in Congress this session.

I have little hope that the hearings launched yesterday on the Hill will shed any light on the causes of the blackout or reasonable policy responses thereto. Congressional hearings are essentially a combination of “show trial” and “P.R. theater.” It’s not for nothing that they were ignored by the New York Times in today’s edition.

Spencer Abraham for once got it right, however. In testimony yesterday, he said that we still don’t really know what caused the blackout or whether there is or is not a legislative “silver bullet” at hand. Unfortunately, that didn’t stop him or politicians on either side of the aisle from offering prescriptions for a “disease” that is still unidentifiable.

The tranmission system is, however, every bit as degraded as it’s made out to be by the experts. Whether the poor state of the grid had anything to do with the blackouts is another matter. My own fear, however, is that the common perscription for what to do about it - establish regional transmission organizations to centrally manage operations by a non-profit, pseudo-governmental entity - will only make problems worse. Governments that have embarked on this path (the U.K., Argentina, and New Zealand) have all found that this type of policy fails to arrest grid deterioration because it takes profit incentives out of investment decisions.

For my take on the major problems, see my recent op-ed published in the Wall Street Journal (http://www.cato.org/research/articles/taylor-030818.html) and another more directly about the underlying causes for grid deterioration from the NY Post (among other papers - http://nypost.com/postopinion/opedcolumnists/3491.htm). For our global take on the entire issue of electricity deregulation (more properly tagged as “resturcturing,” however, because it’s not really a clean deregulatory approach) see our study from a few years ago: http://www.cato.org/pubs/pas/pa-320es.html.


Washington, D.C.: Deregulation of electricity is great in theory, but so far it doesn’t seem to be working. There’s little or no competition in most areas of the country. Should states wait until the transmission mess is resolved before deregulating further?

Jerry Taylor: Your point is well taken. Electric utility restructuring was sold by politicians as an opportunity choose power companies the same way you can no choose long distance telephone service providers. It didn’t work out that way. States that restructured found that there was very little price difference between service providers and an overwhelming majority of ratepayers chose to stay with the devil they knew (the incumbant utility) rather than some company they never heard of.

Going back and looking at the studies about how competition will save ratepayers billions is revealing. The main route for cost savings was never - according to the academics - that competition pe se would bring prices down. Despite common wisdom to the contrary, incumbant utility providers were not gaining large economic “rents” that would be competed away with competition. The real cost saving was supposed to come from the introduction of “real time pricing” - that is, variable rates depending upon supply and demand for specific times of the day. Academics thought real time pricing would follow naturally from restructuring. It hasn’t worked out that way.

I believe that deregulation is still warranted, but not along the lines persued thus far.


Mt. Lebanon, Pa.: What’s the likelihood of independent, real power system EXPERTS getting to address Congress and the nation on energy delivery system problems and solutions? I watched the hearings yesterday and it was largely high-priced suits reading from prepared statements. That doesn’t auger well for coming to grips with our nation’s decaying generation/transmission/distribution infrastructure. Nor have the hearings illuminated the public in the art and complexity of the high speed relay-control-communication systems that dictate the sequence of events during changing power system dynamics especially those leading to instabilities. And as we saw with the events of 14 August, it was pretty well over in nine seconds - which is too fast for human intervention but actually a very long time where transient (event time in thousandths of seconds) and dynamic (event time in seconds) stability events are witnessed. The devil is in the details not in the preening, posturing, and positioning - if it’s the devil you’re really seeking to exorcise.

Thanks much. Signed.. Electric Power System Protection & Planning Engineer.

Jerry Taylor: The liklihood of independent experts with no axe to grind testifying in front of Congress is slim. That’s not how this town operates. Unfortunately, politicians make decision based on political - not economic - criteria. If it were otherwise, we wouldn’t have an ethanol program, farm subsidies, steel import quotas, etc.

If you want to actually learn about the economic issues in play with regards to the electricity delivery system, congressional hearings are about the last place I’d tell you to look.


Richmond, Va.: Do you feel we will we ever reduce our dependency on fossil fuels?

Jerry Taylor: When fossil fuels become more expensive than alternative sources of energy, we’ll switch energy sources. Not until then, however. And that - I’d maintain - is how it should be.


Cottage City, Md.: Other countries seem to be much more effective in protecting their power supply/flow. Is it a problem with our size? Do other countries invest more in their infrastructure? Would the grid be more effective and secure if large parts of it were underground?

Jerry Taylor: I’m not sure if other countries do a better job protecting it’s people against blackouts. Most countries, after all, are rather poor and blackouts occur there all the time. Burying power lands would indeed make outages less frequent, but it’s rather expensive to do.

The main thing to keep in mind is that moving from localized power service (the kind that we grew up with) to a more “interstate” approach to transmission is that it’s reduced the chances of localized blackouts because we are more capable today of moving electricity from where it’s plentiful to where it’s scarce. It has, however, created another problem - localities are more dependent upon other localities for power and problems in Buffalo, for instance, can create blackouts in Maryland if things go horribly wrong. That was far less of a problem in the old system.


Arlington, Va.: Do you think that the blackout would happen again?

Jerry Taylor: You cannot reduce the chances of future blackouts to zero. And even if we could, I’m not sure that anyone would want to see their bills double or triple to do so.


Mt. Rainier, Md.: Will Congress improve regulation of the power industry? In a word, No. The improvement of the grid isn’t on anyone’s agenda since it will be costly and there is no industry pushing it. The drilling in Alaska will again be raised even though it has nothing to do with the power supply - another journalist pointed out we don’t use oil to create electricity. And once that red herring is brought up, Congress will be divided into partisan teams and rendered ineffectual.

Jerry Taylor: Under the current system, there is little incentive for private companies to invest in transmission. First, returns are regulated and companies have found they can make more money elsewhere in the system. Second, some firms fear that increasing transmission capacity would help their competitors more than it would help then. Third, uncertainty over future regulation dampens interest. And finally, it must be remembered that everyone benefits to some degree from tranmission investments and unless you figure out a way to make all benefited parties pay for any particular investment (which is very, very hard to do), you’ll have a free-rider problem that reduces incentives for any private party to invest.

You are certainly correct that whether we drill or not in ANWR has absolutely nothing to do with the issue of electricity transmission or even electricity supply in general. We use petroleum primarily to make lubricants and move vehicles. We don’t use it to generate electricity to any great extent.


Washington, D.C.: Do locales with multiple power companies have lower electricity prices or better service than locales with municipal or state power monopolies?

Jerry Taylor: The main determinant for whether ratepayers in one reason pay less for power than ratepayers in another reason are (1) did their state regulators go crazy and force utility companies to sign long term contracts for expensive sources of “non-utility” power in the 1980s? (2) did their utility companies invest heavily in nuclear power in the 1970s? (3) do their utilities rely on power from old coal-fired power plants” and (4) how much economic growth has occured in their region over the past couple of decades? Whether a state has or has not “deregulated” (or again, more accurately, “restructured”) has little do with it. In fact, the states that haven’t restructured are paying less on average for power than the states that have. That doesn’t mean that restructuring causes higher rates (it doesen’t - necessarily), but it does say that, if you’re in a state that didn’t go crazy signing long-term contracts for power from non-utility providers in the ’80s, if you’re in a state that didn’t invest heavily in nuclear power in the ’70s, if you’re in a state or region that has a lot of old coal plants, and if you’re in a state that hasn’t grown a lot lately, your rates are probably pretty low.

As far as publicly-owned power companies are concerned, they’re not necessarily more “friendly” to ratepayers than investor-owned utilities. In California, for instance, municipal owned utilities were charging the state higher prices for electricity during the crisis of 2000/20001 than the investor-owned utilities or traders — even higher prices than charged by Enron!


Atlanta, Ga.: As an engineer who has worked with power companies, I too notice the lack of education being provided to the general public about how the grid system evolved into what it is now. Where would you recommend the general public go to learn more information? (Anyone who thinks power outages can be elimated obviously doesn’t get it.)

Also, I think people don’t realize, though the grid is far from ideal, it works wonderfully given the political constraints, budget constraints, NIMBYs and all the issues that have to be addressed.

Jerry Taylor: I think we published an excellent primer on the subject, which can be found here: http://www.cato.org/pubs/pas/pa-320es.html.

I agree with you that some of the charges about the transmission system are over-blown. Former energy secretary Bill Richardson’s oft-repeated line that America “Is a global superpower with a third world grid” is nonsense.


Washington D.C.: When the lights were out in New York City, President Bush released a taped statement saying that we should fund a modernization of the power grid, which would cost a $50 billion. How does he plan to finance that effort, or was his plan just a throw-away line to appease the public during the blackout?

Jerry Taylor: Investment in the transmission grid will (probably) not come out of government coffers - it will come from private investors who hope to make a buck. Of course, the costs of that investment will to some degree be passed on to to ratepayers, but since some of those investments will serve to lower the price of getting electricity from point a to point b, the additional cost to ratepayers will almost certainly be far less than $50 billion. It’s worth noting, moreover, that only 10% of your electricity bill (on average) reflects transmission costs. Spending money on transmission to reduce other costs may on balance save - not cost - ratepayers … at least in some circumstances.


Harrisburg, Pa.: What are your thoughts on the deregulation of the electric industry? Should government have maintained regulations that would have required industry investments in maintaining its infrastructure and in keeping rates lower? After all, if the goal of increased competition was to provide consumers lower rates, shouldn’t consumers have been provided assurances that rates would be kept down and not used by the industry to take advantage of the lack of regulations by then increasing rates?

Jerry Taylor: This is a big question. In brief, the “old system” of vertically integrated power companies (that is, companies that owned the power plants, transmission lines, neighborhood wires, and residential meters) arose not because such an organization structure took advantage of economies of scale but because it was the best way to manage the highly complicated matter of moving electons around on wire. Unfortunately, vertically integrated companies have a lot of market power, so what you gain in operational efficiency you perhaps lose in that you are living with what many people think is a natural monopoly.

Restructuring was aimed at killing vertical integration. Economists discovered that technological advances rendered the business of generating electricity quite competitive. They argued that the industry should be broken up: utilities forced to sell-off their competitive assests (the power plants) and be confined to the heavily regulated business of moving electrons from independent generators to consumers.

What was overlooked, I think, is that it is extremely difficut to manage power lines in such a world with any modicum of efficiency. The problem is that this form of deregulation turns the transmission grid into an incredibly comples public commons, and one thing we know about “the public commons” in any industrial sector is that its natural tendency is to deteriorate. That’s what we’re seeing today in the electricity sector.

My own take is that it’s unclear whether vertical integration is or is not the most efficient way to organize the industry. It’s also unclear whether the “best” system is one which relies on a relatively few power plants and lots of wires to hook everyone up to them (sort of like computer mainframes, which I’ll call the Harvard model) or a lot of smaller power plants with relatively less wires necessary (sort of like desktop PCs, which I’ll call the “Green” model since lots of enviros like this a lot).

The only way we’ll learn the answers to these and other questions is to turn market agents lose to discover them via trial and error. That’s the greatest asset provided by free markets - they’re wonderful engines of discovering how best to efficienty do things. If we could know a priori how best to efficiently manage our economic transactions absent market information, then socialism would be a viable economic model. But we can’t so it isn’t.


Richfield, Ohio: I want to believe that a profit motive will make it beneficial for utilities to invest in the power grid, but I don’t see how. It seems to me the situation is akin to contracted food services on college campuses cutting costs to make a profit. Or maybe like the saw about the auto maker bean counters who skimp on the breaks because the cost of fixing them is greater than the expected payout in damages. And it’s not as if competing utilities would be using a different grid, to incentivize customer movement to a more responsible utility. So, can you shed some light on this? Why would a utility ever be motivated to invest in a redundant grid?

Jerry Taylor: If they can charge whatever they like for access to their wires, they can indeed find a lot of investments that will make them money. There are plenty of bottlenecks in the system at present that cost companies a tremendous amount of money to navigate. Letting transmission owners charge what the market will bare for alleviating those bottlenecks would provide a lot of incentive for investors to go forth and do good by doing well (as the old saw goes).


Vienna, Va.: In a Post story, Backers of Power-Grid Upgrade See an Opening (Post, Sept. 2), they talked about how the blackout would argue for more expensive technology to fix the power system. What are your thoughts?

Jerry Taylor: You can make a reasonable case for high tech investments in the grid, but you can also make a reasonable case for going back to the old system in which interconnection was less robust between utilities and the dreamed-off electricity superhighway was only a series of old state roadways. We simply don’t know whether those proposed investments make any sense until will turn the transmission sector over to the marketplace. As I noted earlier, if central planners could know which investments made sense and which did not without recourse to information derived by freely functionin markets, socialism would work well.


Washington DC: I have to confess confusion over how deregulation has helped. If the companies providing the power don’t invest in the transmission line infrastructure (which is how they get their product to the consumer) because they can make more money elsewhere in the system - then what’s the point?

Jerry Taylor: I share your suspicion that what passes for deregulation has done more harm than good to the system. In fact, I’ve warned that that would indeed be the case when these proposals first started popping up in the mid-90s.

Don’t get me wrong - I’m a libertarian who’s genetically inclined to love anything tagged “deregulation” - but the specific circumstances are important when it comes to crafting specific proposals for how to go about it in any particular industry.

That having been said, the “old system” was scarcely ideal. It was illegal for people to build their own power plant to compete against the incumbant utility. It’s no longer illegal, but it is illegal in many places to build you own wires to compete with the incumbant tranmission provider.

Moreover, the old system was characterized by a number of gross cross subsidies that were created for political reasons. For instance, ratepayers in rural areas paid far less for power than the cost of providing that service demanded while urban ratepayers paid far higher rates to make up for the “good deal” provider rural ratepayers. Other examples abound.

Finally, one reason some ratepayers pay less than others around the country has to do with how “smart” their utility company has been over the years. In the old system, a mismanaged company that made mistakes costing their customers money could not go out of business. That’s never a good thing.


Jerry Taylor: Thanks to everyone who participated - I enjoyed it and hope to have given you some food for thought.
Jerry Taylor is the Director of Natural Resource Studies, Cato Institute.