The Road to Ruin
By Paul Krugman
The New York Times
Tuesday 19 August 2003
We still don't know what started the chain reaction on Thursday. Whatever the initial cause, however, the current guess is that a local event turned into an epic blackout because the transmission network has been neglected. That is, the power industry hasn't spent enough on the control systems and safeguards that are supposed to prevent such things.
And the cause of that neglect is faith-based deregulation.
In the past, electric power was considered a natural monopoly. It was and is impractical to have companies competing either to wire up homes and businesses, or to build long-distance transmission lines. Because effective competition was impossible, power companies were given local monopolies, and regulated to keep them from exploiting customers.
These regulated monopolies took responsibility for the whole system transmission and distribution as well as generation. Then came the deregulation movement. It argued that a competitive market could be created in power generation (though not in transmission and distribution), and in much of the country utilities were forced to sell off their power plants.
In fact, effective competition has been elusive even in power generation. In California, deregulation led to one of history's great policy disasters: energy companies drove up prices by creating artificial shortages. This plunged the state into a crisis that ended only after much of its electricity supply was locked up in long-term contracts, and price controls were imposed on the rest.
Incidentally, there seems to be a weird reluctance to face up to what happened in California. Since the blackout, I've seen national news reports attributing California's woes in part to environmental restrictions, while ignoring the role of market manipulation. Huh? There's no evidence that environmental restrictions played any role; meanwhile, even the Federal Energy Regulatory Commission, which strongly backs deregulation, has concluded that market manipulation played a major role. What's with the revisionist history?
Anyway, market manipulation aside, energy experts have long warned that deregulation would lead to neglect of the grid. Under the old regulatory system, power companies had strong incentives to ensure the integrity of power transmission they would catch the flak if something went wrong. But those incentives went away with deregulation: because effective competition in transmission wasn't possible, the companies providing transmission still had to be regulated. But because regulation limited their profits, they had little financial incentive to invest in maintaining and upgrading the system. And because of deregulation elsewhere, responsibility was diffused: nobody had a strong stake in keeping the system reliable. The result was a failure not just to add capacity, but to maintain and upgrade capacity that already existed.
These experts didn't necessarily oppose deregulation; their point was that deregulation could lead to disaster unless accompanied by policies not just to keep the grid reliable, but to expand it. (To make competition possible, a deregulated system needs considerably more transmission capacity than one based on regulated monopolies.) But their warnings weren't taken seriously; politicians and deregulation enthusiasts simply had faith that somehow "the market" would take care of the problem.
Four years ago, Paul Joskow of M.I.T. told FERC: "Proceeding on the assumption that, at the present time, `the market' will provide needed network transmission enhancements is the road to ruin." And so it was.
Have we learned our lesson? Early indications are not promising. President Bush now says that "our grid needs to be modernized . . . and I've said so all along." But two years ago Tom DeLay blocked a modest Democratic plan for loan guarantees for system upgrades, calling it "pure demagoguery." And press reports say that despite the blackout, the administration will bow to pressure from Senate Republicans and put on ice the only part of its energy plan that had any relevance to the blackout, a FERC proposal for expanded oversight of the transmission system.
This nation needs to invest billions in its power grid, yet given recent history, it's crucial that this investment not be simply another occasion for energy-industry profiteering. Somehow, I'm not optimistic.
Jump to TO Features for Wednesday 20 August 2003