August 28, 2003

This Is a Very Bad Place to Get Stuck

The Wall Street Journal's David Wessel writes about how markets only work when they are properly structured--when the underlying system and rules of the market game give individual agents the incentive to do the right thing. That does not appear to have been the case in electricity deregulation: - Capital: ...Electricity has its peculiar physical characteristics: Unlike most other commodities, it cannot be stored. Unlike interstate natural-gas pipelines, what happens on one transmission line affects transmission lines and generating plants elsewhere.

The transmission network is particularly important, and particularly vulnerable, as Aug. 14 demonstrated. Competition among electricity generators depends on access to a reliable transmission network with clear rules for pricing, access, avoiding congestion and managing it when it occurs. In England and several other countries smaller than the U.S., the transmission system is operated by a single regulated monopoly.

In the U.S., the network is managed differently in different regions, and -- it is now almost universally agreed -- remaining regulations discouraged investment in new transmission lines. In the old days, utilities built power lines when they needed them, their regulators assured them of a return on the investment and no one much worried about pricing or other details.

Today, amid vocal not-in-my-backyard opposition to new power lines, a community's electricity demands can be met locally or from afar, and no one entity is responsible for the overall system.

Says William Hogan, a Harvard University energy economist: "When you break up the companies, and say, 'We want you to make money as a generator or retailer or transmission company,' then companies respond to the incentives that they see -- and the incentives better be right."

They weren't.

As a result, FERC's Mr. Wood is proposing that each region have a grid operator independent of utilities and generators. The grid operator would oversee a market in which generators can contract for transmission capacity in advance or buy it in a pinch at prices that are set in an open spot market with rules, enforced by the grid operator, to thwart Enron-like abuses.

The obstacles Mr. Wood faces go well beyond the physics of electricity. "Wrangling between pro- and anticompetition forces, jurisdictional disputes between federal and state policy makers, and plenty of ignorance have led our electric-power system to become stuck somewhere between the old system of regulated monopoly and a new system that relies more on competitive power markets," says Paul Joskow, a Massachusetts Institute of Technology energy economist. "This is a very bad place to get stuck."

Critics of the FERC plan -- including some utilities, particularly in the South, who fear more competition will squeeze their profits, and state regulators who fear loss of clout to Washington -- enlisted allies in the Bush administration and the Senate. The latter were, at least before the blackout, poised to block or weaken the FERC initiative in the energy bill pending in Congress.

That may be changing, Mr. Wood said in an interview Wednesday. "I kinda think the blackout made 50 million voters a whole lot more educated, and they might actually start caring about how well it's being administered. Is it every little electricity utility bobbing on the sea by itself, which obviously didn't work the other day? Or does it need more rationality and organization around it?"

Posted by DeLong at August 28, 2003 07:24 AM | TrackBack


" Is it every little electricity utility bobbing on the sea by itself, which obviously didn't work the other day?"

Hmm. If that was the case, then why could a problem in Cleveland affect places hundreds of miles away?

Posted by: Barry on August 28, 2003 07:57 AM

August 15, 2003

The Road to Ruin
Paul Krugman - NYTimes

Whatever the initial cause, however, the current guess is that a local event turned into an epic blackout because the transmission network has been neglected. That is, the power industry hasn't spent enough on the control systems and safeguards that are supposed to prevent such things.

And the cause of that neglect is faith-based deregulation.

In the past, electric power was considered a natural monopoly. It was and is impractical to have companies competing either to wire up homes and businesses, or to build long-distance transmission lines. Because effective competition was impossible, power companies were given local monopolies, and regulated to keep them from exploiting customers.

These regulated monopolies took responsibility for the whole system transmission and distribution as well as generation. Then came the deregulation movement. It argued that a competitive market could be created in power generation (though not in transmission and distribution), and in much of the country utilities were forced to sell off their power plants.

In fact, effective competition has been elusive even in power generation. In California, deregulation led to one of history's great policy disasters: energy companies drove up prices by creating artificial shortages. This plunged the state into a crisis that ended only after much of its electricity supply was locked up in long-term contracts, and price controls were imposed on the rest....

Posted by: jd on August 28, 2003 09:01 AM

Energy transmission, you say. Well, why does a break in an oil pipeline in the southwest lead to gasoline at $2 a gallon in Boston and Chicago and and and? We are not paying attention to infra-structure for energy transmission for electricity, natural gas, and oil. These energy markets are not competitive. Simple deregulation has not provided for investment in infrastructure, nor protected enough against non-competitive pricing.

Posted by: jd on August 28, 2003 09:09 AM

The transmission system was built during the era of vertically integrated, geographically segmented utilitiy companies. Interconnections were built primarily to share access to spinning reserve and secondarily to lower costs and increase profits when possible through economy power transfers. (e.g. if company A's incremental cost for the next MW is $35 per MWH and company B's cost is $25, they might strike a deal for $30 per MWH. Thus A saves money and B makes money.) Well before deregulation began gaining momentum in the early 90s NIMBY was a big obstacle to building transmission. In addition to the fact that the new business model uses the existing transmission in a way that it was not built for, and in addition to the fact that it doesn't give anyone clear incentives to build transmission, it also gives new ammunition to opponents. "Why should I agree to have this ugly tower in my back yard just so some fat cats in Texas (or whereever) can make money?" or "Why should the citizens of my state of Connecticut agree to build a submarine cable to Long Island so that our cheaper power can lower the costs of the folks who weekend in the Hamptons while increasing ours?"
It's going to be instructive to see how the Bushies play the fall out of the blackout. They'll probably dust off their absurd energy bill, add some national transmission grid language that scythe away the process obstacles to eminent domaine and claim that somehow drilling in the NWR in Alaska will somehow help solve the problem as well.

Posted by: CTL on August 28, 2003 11:26 AM

Unlucky day to refer to the English grid as a better example, big grid failure in London:

Posted by: P O'Neill on August 28, 2003 11:50 AM

Just what has Tony Blair been about these past years? Wish there were an alternative.

Posted by: dahl on August 28, 2003 11:59 AM

Actually quite a small grid failure in London: initially quite a large area affected, but power coming on area by area within a few minutes. Where I am, right in the centre of the affected area we lost power for less than thirty minutes - much to the delight of the four year old, who had to have a second tea just to experience the joy of the gas hob being lit with a match. I'll take that over the NY experience anyday. There doesn't seem to be any clear story about the cause yet, but the critical difference is that the containment and control system clearly worked in a way it appeared not to have done a couple of weeks ago.

Update from the latest version of the BBC story (link still as above):

'The National Grid is investigating the cause of the fault but spokesman Sean Regan said any loss of power supply was "an unusual occurrence".
He added: "There was a fault in the 275,000 volt system affecting a ring around London, which occurred at 1826 BST.
"Power to the distribution network in London was restored at 1900 BST."'

Posted by: marek on August 28, 2003 02:51 PM

"Unlucky day to refer to the English grid as a better example, big grid failure in London:..."

Al Qaeda again! Those guys are geniuses! ;-)

Posted by: Mark Bahner on August 28, 2003 02:54 PM

Christ -- more of my uncle Paul (MIT economist Paul Joskow, that is). If we have a few more blackouts he may become a full-fledged star.

Posted by: Matthew Yglesias on August 28, 2003 04:33 PM

Christ -- more of my uncle Paul (MIT economist Paul Joskow, that is). If we have a few more blackouts he may become a full-fledged star.

Posted by: Matthew Yglesias on August 28, 2003 04:33 PM

when will we get away from the blather about high tension wires causing cancer?

unsightly? yes, certainly (although beauty is in the eyes of the beholder: i grew up watching miles of high voltage transmission lines and towers in rural southern india and i still enjoy seeing them)

Dangerous? as far as i can tell from the scientific evidence - no way!

Posted by: Suresh Krishnamoorthy on August 29, 2003 07:34 AM

and while on the subject, what stops us from building transmission lines along the medians of our interstates?

from what i have seen, they are wide enough to support the footprint of transmission towers, they cover the country well and we already have eminent domain.

i am probably oversimplifying...

Posted by: Suresh Krishnamoorthy on August 29, 2003 07:42 AM
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