17th March 22:27
The Road to Ruin
The Road to Ruin
By PAUL KRUGMAN
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
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.