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A Low-Voltage Energy Bill

While a few provisions are worth embracing, most of its 1,724 pages represent a waste of good timber.

Fortnightly Magazine - October 2005


Real-time pricing promises efficiency gains because, at present, electricity prices are wrong all the time. They are too low on peak and too high off peak. Marginal-cost pricing would reduce peak demand, increase off-peak demand, and reduce the needless political struggles that arise (such as the need to subsidize alternative supplies and demand reduction) because of the absence of prices as a signaling device.

But if real-time pricing has merit, why does the government have to mandate it? Even where it is excluded by regulators, utilities that have to sell below cost at peak have an incentive to pay users not to consume. 4 There is no externality that needs fixing unless low peak rates induce inefficient rationing.

No More Blackouts?

Political supporters of the Energy Policy Act of 2005 counter arguments that the legislation is nothing but a grand pork barrel by frequently pointing to provisions of the bill that ostensibly address the reliability of the transmission system. Here too, however, there is less than meets the eye.

The central means by which the law hopes to improve reliability is by mandating compliance with the heretofore voluntary reliability rules promulgated by the North American Electric Reliability Council (NERC). Many analysts have claimed that this will reduce the probability of future blackouts and that had those rules been mandatory prior to 2003, the Northeast blackout would not have occurred.

That argument is hard to square with the final report of the U.S.-Canada Power System Outage Task Force, which concluded that poor tree maintenance along transmission lines in the First Energy (Ohio) service area, combined with inoperative computer software and operator errors, were the proximate cause of the blackout.5 At the time of the blackout, "NERC had no standards or requirements for vegetation management or transmission right-of-way clearances, nor for the determination of line ratings." 6 In fact, the task force concluded that "although First Energy's vegetation management practices are within common or average industry practices, those common industry practices need significant improvement to assure greater transmission reliability." 7

In short, had the reliability provisions of the Energy Policy Act of 2005 been in place a few years ago, they would have had nothing to say about a central element of the blackout story.

Better Than Nothing?

While there are a few provisions of the legislation worth embracing, most of its 1,724 pages represent a waste of good timber. Still, it could have been worse. When Congress last panicked about electricity prices, it imposed price controls on natural gas and banned its use in commercial electricity generating plants (the 1978 Fuel Use Act). Congress then went on to mandate that utilities buy unconventional power from third parties under terms and conditions established by state public utility regulators. In short, Congressional intervention in electricity markets often has been far more robust and counterproductive than that contemplated by the Energy Policy Act of 2005.

Still, it's distressing that Congress refuses to engage in a serious discussion about electricity regulation. Lawmakers in Washington don't bother to offer an intellectual justification for the policies they impose