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Frontlines

Do-nothing regulators scare off investment, raising prospects for yet another large-scale power failure.
Fortnightly Magazine - March 2004

Frontlines

Do-nothing regulators scare off investment, raising prospects for yet another large-scale power failure.

Last summer's blackout is slowly fading from the radar screen. The silver lining that might have moved some to action has now tarnished.

In the first days after Aug. 14, the Department of Energy, the Federal Energy Regulatory Commission (FERC), state regulators, and industry executives all seemed to be heeding President Bush's warnings that the power outages "across the Northeast and Midwest are a 'wake-up call' to the antiquated state of the nation's electrical grid." Under the white-hot glare of the media spotlight, they all promised they would do something.

But eight months later, industry analysts see very little investment in new technology or infrastructure. Are we heading toward yet another disaster?

In fact, many of those I spoke with on the condition of anonymity at Infocast's 2004 Transmission Summit in late January echoed the alarming concern that a large-scale blackout could very well occur this year.

This will come as no surprise to those who have been watching policy development on electric transmission over the last few years. Utilities and potential investors have long said that regulatory uncertainty over regional transmission organizations and reliability policy continues to hinder investment. "Why invest in an asset that we may not own or control?" utility execs ask. "Where is the regulatory clarity?"

Some utilities have just shot themselves in the foot. With their forays into the merchant sector, they have diminished their own financial capacity to spend on infrastructure upgrades. And the sidelining of comprehensive energy legislation that would have aided infrastructure development has just made things worse.

Disagreement continues over how to attract investment in transmission, whether for reasons of reliability or economics. How much should investors be compensated? Who should pay for the cost of the investment? Who should own the grid? Who should manage it?

Any hope that a wave of independent transmission companies would be formed last year was dashed when state regulators opposed FERC's rate incentives for transmission divestiture, concerned that they would increase retail rates and cause a loss in jurisdiction. FERC Chairman Pat Wood was quick to point out that a lack of independence in the transmission sector was inhibiting investment, but many private equity groups at the conference said they stood ready to invest in transmission infrastructure if the rules were clarified.

Certainly, there are very good reasons why transmission policy, and as a consequence, investment, is at a standstill. But if 50 million Americans were to lose their power again, would they be sympathetic to an industry that was recently described by one Infocast panelist as "an aging overstressed muddled beast mired in a swamp of indecision, conflict, and meetings?"

A Return to Central Planning?

Some say regulators may have no choice but to return to the old Soviet-style ordering and planning of transmission. That's where everything seems to be headed, given the current rhetoric from state officials. Furthermore, certain market experts believe some planning is necessary, even if they believe that central planning is not the answer.

At a conference

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