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...

Posted by DeLong at 07:24 AM