Perspective
Hopes and dreams sag and fail, like an overheated power line.
The big blackout has reinvigorated the debate about deregulation, snaring hopes and dreams and bringing them back to Earth. For there can be no doubt that electric restructuring, through its emphasis on market prices and market incentives-but none for transmission-contributed mightily to the recent collapse.
As some had foreseen, the new market models forced greater use of the grid, but did little to beef up the transmission lines that were left to carry the load of competition. A soupçon of planning and of command and control measures might have gone a long way to averting this latest breakdown, not to mention the next one, which is inevitable.
When all is said and done, the blackout illustrates again what we once knew but somehow have now sadly forgotten: that electricity supplies huge external benefits in sustaining modern society, so that catastrophe will surely ensue if those benefits are lost through a failure of the power system. And this value cannot be measured by its worth to individual customers. Rather, all members of society benefit indirectly from maintaining the system as a whole. Therefore, the market price of electricity does not provide a realistic measure of the value of a reliable supply to society. Reliability likely will not receive its due under a system where the market does the regulating.
Of course, for years we've heard earnest pleas that power systems in this country were excessively reliable-that utilities forced consumers to pay for excessive and expensive reserve margins they did not need or want. If the market price of electricity could find its own level, consumers could get the degree of reliability that they wanted and were willing to pay for, deregulation advocates argued.
Yet these arguments lose weight in the face of a real, extensive blackout like the recent one in the Midwest and Northeast, which led to hundreds of millions of dollars in economic loss. The intimate relationship between society, economy, and reliable electric power was revealed for all to see, experience, and appreciate.
All of this should not necessarily cause one to abandon the idea of restructuring, however, but instead should lead us to realize that reliability cannot be fully committed to the Invisible Hand. Human needs can be assured adequately, but only through central planning and recourse to unapologetic regulation.
Can we solve our problems with power reliability simply through greater market incentives for investment in transmission?
No, not entirely. That's because the discoveries and realizations that emerged from the California debacle of 2000-2001 reinforce the notion that reliability remains one among a number of qualities of the power system that cannot be left entirely to market forces, nor even to a system of financial incentives geared to preserve reliability by encouraging more investment in the grid. Of course, it is important that the investor in transmission be provided with the resources to do his duty.
And what is that duty? The answer is complex, but its discovery and definition must come from central planning and firm regulatory requirements.
From our experience in California, we learned also that difficulties with reliability spring in part from inflated expectations about deregulation and a narrow focus on the problems it purported to solve at the expense of other important considerations. Much has been said and written about how to minimize market power in the interest of unfettered competition without comparable attention to keeping the system reliable. There were promises of much cheaper prices (so far unrealized), but little concern that competition would make the system less reliable because the economic incentives to invest in transmission would disappear.
And the problem of reliability is made no easier now by the fragmented nature of ownership and control of the nation's transmission grid. Granted, as plans for regional transmission organizations go forward, fragmentation may be reduced, and the possibility of central control increased. But we have lived for many years with fragmented ownership and found it consistent with a reliable system. That experience flowed from a spirit of cooperation, even as competition promised a better tomorrow.
New policies never come without risk. But energy policy, in particular, I've noticed, always seems at risk of becoming entranced with the prospects of a single controlling idea. The benefits of this idea often are exaggerated, its difficulties ignored. The best recent example of this effect is the infatuation with natural gas turbines as "the answer" to all the problems of electric generation.
Natural gas was thought to be cheap, the turbines also relatively cheap and efficient, and the environmental impact relatively benign. One could hardly read an article on any energy subject that did not sing the praises of natural gas as the universally advantageous fuel of choice. Partly because of its newfound popularity, natural gas is now in tight supply, with prices rising, and energy thinkers may be in search of a magically appropriate source of generation.
In reality, the historical record reveals a disquieting pattern: unrestrained enthusiasm for an idea or process, followed by disillusion and pursuit of just the opposite-perhaps also to extremes.
Many flights of fancy grew up around the promise of deregulation, but now we know better. Let's hope that the Big Blackout will supply a proper grounding for the next new idea in energy policy.
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