Economists sometimes get confused - especially when the real world doesn't fit into their neat boxes.
The crisis of confidence in today's power industry is, at its heart, a crisis of ideas.
Conflicting regulations and government mandates become increasingly burdensome and, eventually, violate the law of the possible. Politically favored actors-an "aristocracy of pull"-wield influence in opaque backroom meetings, which result in mysterious market interventions. As brute power overshadows reasoned principle in determining the rules of the marketplace, private initiative and risk-taking begin to wither. In time, capital flight leads to a loss of productive capacity and the destruction of large swaths of the economy. Finally, the inviolable laws of physics trump the irrational laws of men; the electric power system fails, and a major American metropolis is plunged into darkness.
Is this a post mortem of the power crisis in Gov. Gray Davis' California? No, these are plot elements from Ayn Rand's epic 1950s novel, . Upon publication, Rand's novel was derided as implausible, jeered for glorifying capitalism, or simply ignored by the mainstream literary establishment. Nevertheless, it built an enduring following among millions of readers. It persists as one of the most widely read and provocative works of fiction of the last century-and, for our new century, has won regard as a work of prophecy. Readers, though, know it chiefly as a work of philosophy. vigorously defends the free enterprise system for its ability to tap the energy of human creativity, but it notes that initiative withers without the right conditions, thereby spreading material and spiritual impoverishment.
Rand's novel is newly relevant because the crisis of confidence in today's power industry is, at its heart, a crisis of ideas. The industry is caught between conflicting and, to a large extent, contradictory visions of its future. Which vision will predominate: wide-area competition, fragmentation and devolution, or a return to regulation? Will the process of planning be market driven or litigated in stakeholder forums? Can decisions regarding the electric power system be depoliticized, or will they be subject to the demands of pressure groups?
Nominally, the Energy Policy Act of 1992 (the Energy Act) adopted a framework of competition and wholesale market liberalization. Yet more than a decade later, market development remains burdened by conflicting jurisdictional claims and an ad hoc patchwork of mandates, prohibitions, incentives, and policy priorities. Without a commitment to clear and consistent market rules and principles, the result has been drift, disarray, and disinvestment.
Consider the new or increased pressures facing today's utilities from a range of constituencies: to furnish equal grid access to competitors at cost; to boost the role of green and distributed generation resources, even with direct or implicit subsidies; to placate NIMBY (not-in-my-backyard) opposition to power line blight; and to freeze or cut consumer rates. Notably missing has been any clear regulatory incentive, let alone public support, for utilities to fulfill what is their most essential responsibility: ensuring that the network infrastructure itself is sufficiently robust and flexible to meet these various demands.
Unsurprisingly, this was the pressure point that yielded. From the late 1980s onward, utilities cut back on grid investments that did not directly serve