The Right Way to Fix the Grid

Last week’s blackout put a bright spotlight on a usually obscure topic - grid reliability. Everyone seems to agree that the feds should mandate more investment in transmission lines and that had those investments taken place over the years, Thursday’s blackouts wouldn’t have happened. We’re not so sure.

It’s still unclear why the systems that normally prevent transmission anomalies from spreading failed to do their job. So no one knows whether the sort of investments contemplated by the politicians and regulators would have reduced the chances for a blackout.

Yes, the need for more investment in the grid seems clear. The system was designed to handle a limited number of transactions, not the large interstate exchanges of electricity now common. Moreover, transmission capacity has been stagnant relative to the growth in power generation, stressing the system even more.

Why has the grid deteriorated?

* Transmission projects are considered, approved and paid for at the state level - but the benefits cross state lines. And state-level decision-makers understandably resist using ratepayer dollars to pay for investments that will mainly help out-of-staters.

* In much of the country, incumbent utilities and state politicians actively resist improving the grid. Vertically integrated companies (which own the generating plants, transmission lines and distribution networks within a service territory) often fear that a more robust transmission system would boost potential competition.

Many politicians also oppose grid improvements because new transmission capacity would make it easier for out-of- state customers to bid-away the cheap power from in-state consumers.

* Returns on transmission are regulated, so utilities have found that they can make more money by investing in virtually anything besides transmission infrastructure.

* With many regulatory fights still unresolved, and the potential for profit thus unclear, investors have delayed risking their money on the grid.

The solution now in vogue to solve these problems is to give the Federal Energy Regulatory Commission more authority over transmission investment. State regulation of transmission is, after all, an archaic relic of another era; and all who use the transmission system are vulnerable to the weakest links in it.

But forcing utilities to invest in transmission upgrades through increased federal regulation is too crude and blunt a policy hammer. It may get the job done to some degree, but running industries by federal dictate is less efficient than ensuring that proper incentives exist for the industry to operate efficiently on its own.

Instead, why not try deregulating the grid? Kill the cap on transmission profits. Jettison the state regulations that protect transmission companies from competition. Cease the endless political debate over how the transmission lines ought to be organized and managed and let grid owners discover for themselves how to most efficiently run their businesses - something market agents are more adept at learning than legislators or regulators.

Most analysts are convinced that the transmission system is a natural monopoly, and so recoil at the very thought of competition to the grid. But it already exists, in the form of natural-gas pipelines.

All new power plants, after all, are natural gas-fired. They can be located far from urban areas and their product shipped to urban areas via the electricity-transmission system, or they can be located in urban areas and their output shipped locally.

The competition between gas and electric transmission is no worse than the competition between cable and satellite television service providers.

Deregulation would also mean an end to rules that force grid owners to do business with anyone who wants access to their wires. Transmission providers should be allowed to negotiate the terms and conditions for both putting power into the lines and for taking it off.

Those who own the power lines, after all, have a greater incentive to ensure that their lines run safely than do the regulators who watch over them, particularly since they wouldn’t be able to rely on regulatory bodies to guarantee them a rate of return on their investments.

Deregulation can’t guarantee that blackouts would never again occur. But it would almost certainly lead to a faster flow of dollars into overdue investments in reliability and a far wiser use of such dollars than would the orders and mandates being contemplated in Washington.

Jerry Taylor is director of natural resource studies at the Cato Institute. Peter Van Doren is editor of Cato’s Regulation magazine.