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The Blackout of 2003: Why We Fell Into The Heart of darkness

The road to the current reliability crisis is paved with four decades of bad policy decisions.
Fortnightly Magazine - September 15 2003

author have been issued. The essential message was that there is underinvestment in the electric generation and transmission system and that there will be significant consequences. So what to do?

A Return to Basics

The historical business model of focusing on delivering electricity reliably at an economic price can be successful for both investors and consumers of electricity. This can serve as a starting point for developing policy reforms to modernize the grid.

The most obvious vehicle for reform is the energy legislation now in Senate-House conference. Other reform vehicles include changes in FERC, the Department of Energy, and state rate regulatory policies.

What should the overall objectives be?

  • The underlying mission of delivering reliable electric service at as economic a price as possible should be the principle that underlies any and all actions.
    • Economics and practical technology should drive investment decisions, not some preconceived notion of an ideal world.
    • Utilities and power generators are corporate entities that deliver an essential commodity, not organizations to be used for implementing public social policies, e.g., conservation.
  • Expanding and upgrading the electric transmission system is critical to accomplishing this mission.
    • Optimal transmission investment is encouraged when investors are able to realize significant financial returns.
    • Enforcing transmission rules of the road is required, along with re-establishing the principle of eminent domain.
  • Generation diversity should be an option, and tax and regulatory policies should be technology neutral.
    • Economic and financial stability in the electric sector cannot be accomplished by relying on a single fuel form, i.e., natural gas.
    • Economic and financial stability and reliability cannot be accomplished by over-reliance on energy forms that are at best ephemeral, i.e., renewables.
  • Free play should be given to reducing electricity sector barriers to entry.
    • Much of the electricity sector is non-monopolistic, especially generation
    • If utilities can squander investment dollars in non-traditional businesses, fairness requires that new entrants be allowed in to replace them.
  • Regulators' scope of operation should be limited to enforcing rules for participation
    • Companies should be free to earn as much as possible, as long as electricity is delivered reliably.
    • Operating rules should be spelled out, and whenever possible, be uniform.
  • The balkanized regulatory structure needs reform.
    • The Federal Power Act established the regulatory structure for the power industry, and like the Public Utility Holding Company Act, dates back to the 1930s.
    • Nearly all power companies have operations that are regional in scale, and bear little resemblance in scope and operations to the 1930s.
    • There are frequent conflicts between the goals of federal policy-makers and state officials. At the state level in particular, politics, not national interest, govern power industry regulatory and policy decisions.

Finally, the power industry would be well served by executives who make decisions in the best interests of electricity customers, shareholders, and the nation at large. All too frequently power industry managers have pursued business strategies with the sole purpose to pass muster by their regulatory and political masters.

This head-in-the-sand position will have to change. Enacting legislation and regulatory policies that work will require re-education of public officials on the economic and technical