As we write, no one has a definitive explanation for the electricity blackout that affected millions of people across eight states last Thursday afternoon -- the largest such system failure in our nation's history. We do know that a sudden imbalance in power flows occurred in a transmission system that connects the Midwest, Ontario and New York. The automatic control systems, relays and circuit breakers that are supposed to quarantine any imbalance so that it does not spread somehow failed. That imbalance was not eliminated and approximately 100 generators connected to the transmission system cut themselves off, causing the blackout.
While the cut-off caused the blackout, it also prevented tremendous mechanical damage to the generators that would have taken weeks or months to repair had they stayed connected to an imbalanced transmission system. Moreover, the contagion-prevention system did prevent the collapse from spreading through all utilities east of the Rockies.
Despite our current inability to pinpoint what went wrong, policy peddlers have offered various remedies. Some contend that deregulation is the culprit and that Thursday's blackouts were simply an eastern variation of the nightmare that struck California in the winter of 2000-2001. The basic problem with this argument is that there was no deregulation of the transmission system. While regulations pertaining to the generation and retail sale of electricity were loosened somewhat, regulations pertaining to the transmission grid increased -- not decreased -- as part of the reform exercise.
Others have argued that a more decentralized power grid and a more diverse set of energy suppliers might have prevented the contagion. But the problem of grid stability and management increases if grid managers have to balance thousands or millions of generators simultaneously using the transmission system. Mandating more wind power, for example, also increases the difficulties of managing grid stability, because the wind varies and thus requires conventional source backup.
Some believe that we've allowed environmentalists and "not-in-my-back-yard" activists to hijack the electricity system, preventing badly needed investment in new power plants and transmission assets that might have served to reduce the scope of the blackouts. But there appears to be no overall shortage of generating capacity in the eastern United States at the moment. Moreover, industry officials report that local opposition is not responsible for preventing major planned upgrades because few projects are even planned in the first place.
Most analysts seem convinced that the deteriorating transmission system must be the proximate cause of the blackouts. Former Energy Secretary Bill Richardson's charge that "We're the world's greatest superpower but we have a Third World electricity grid" is echoed by President Bush and many in the utility industry. Whether or not grid deterioration had anything to do with Thursday's blackouts, the policy dialogue is now almost exclusively a dialogue about how to go about "fixing" the power grid.
One problem is the existing system of joint federal and state regulation. Utility investments in transmission improvements are considered, approved and paid for at the state level, even though they have ramifications that cross state lines. The solution currently in vogue is to give the Federal Energy Regulatory Commission (FERC) more authority over transmission investment. However, while state regulation of transmission is an archaic relic of another era and all who use the transmission system are vulnerable to the weakest links in it, forcing utilities to invest in transmission upgrades through increased federal regulation is too crude and too blunt a policy hammer.
A better way to encourage more investment in the grid is to remove the rate-of-return regulation that caps transmission profits, and to allow companies to charge those who want to use their wires whatever they are willing to pay for access. Accurate price signals are crucial if we want to identify where investment might do the most good and ensure that problems are quickly and efficiently addressed.
A corresponding transfer of grid management responsibilities from public to private hands -- the direct opposite of what is proposed by the FERC -- would encourage innovation and experiments in various market organizations. For example, entrepreneurs have proposed building direct current transmission lines not subject to regulatory price controls, in order to relieve recurring transmission bottlenecks. Direct current lines provide benefits to those who pay for their use and don't create external costs for those who use the conventional alternating current transmission system. One such line has been built between Connecticut and Long Island and was used for the first time last Friday to help bring power to Long Island.
This brings us to a larger point: Market actors must be allowed to discover the most efficient transmission and generation arrangements without politicians imposing some uniform model upon the industry. Neither politicians nor regulators know how to organize industrial sectors or systematically arrange business transactions. If it were otherwise, Cuba and North Korea would be economic powerhouses.
We constantly hear that we need more transmission capacity on the grid. But how do we know that? After all, generation and transmission are interchangeable inputs. The right mix is an economic, not an engineering, question; but we can't discover the most efficient set of arrangements without market signals and entrepreneurial experiments to guide us.
Moreover, the "more wires" remedy was the very one prescribed and implemented after the 1965 East Coast blackout. Greater interconnectivity has indeed reduced the chance that a localized power failure will result in a blackout; but as we saw last week, it has also increased the chance that a problem in one locale will migrate to others. In short, it trades one set of problems for another. Let companies decide for themselves the terms and conditions under which they'll cooperate with their neighboring service territories, including the terms under which parties will be liable to one another for error.
Regardless of how much market oxygen we give the system, it's important to note that -- given the unique properties of electrons moving along wires and current technology -- some centralized grid operator will still have to run the system and computers will still be necessary to keep power loads balanced. Errors in the day-to-day task of managing the wires will still invariably occur. But the fastest and most efficient way to modernize the grid is to allow profits to be gained by grid owners. And the best way of organizing this industry -- and the best mix of generation to transmission as well as interconnectivity and independence -- are questions that no centralized planner or computer program can answer.