[They consistently phrase things in such a way as to flatter deregulationists. But their bottom line argument seems to be that dereg can only work with a government run grid -- in other words, if it is considerably regged. Buried in here is a not bad illustration of how real markets depend on government in their innermost nature.]
New York Times August 17, 2003 THE PROBLEM WITH POWER The System Did Not Fail. Yet the System Failed. By DANIEL YERGIN and LAWRENCE MAKOVICH W hile Americans have become ever more dependent upon electricity in their daily lives, a crucial part of the system that supports their way of life has not kept up. Yes, the country has built more power plants enough to create a glut of power in most parts of the country. But the transmission system a collection of high-voltage networks that connect the power plants where the electricity is produced to the local distribution companies that deliver it to homes and businesses is caught in the middle of the stalled deregulation of the American electric power industry. California's disastrous partial energy deregulation and the role played by Enron and other energy marketing companies in its power crisis have impeded changes in the national ability to deliver power, leaving the system a hybrid of the worst of the old without the best of the new. Despite claims in the wake of last week's blackout that the nation has a "third world" power grid, the regional networks that feed its annual 710,000-megawatt appetite are first-world and would generally be envied by the rest of the globe. But in one critical aspect, the system has become increasingly vulnerable: in the interconnections among the different regions. Both the number and size of the wires on the borders between regions are inadequate for the rising flow of electricity. This missing part creates the worst bottlenecks in the system. Moreover, the deficiency also includes inadequate coordination among the regions in managing the flow of electricity. These interregional weaknesses are so far the most plausible explanation for the blackout on Thursday. What's preventing greater connection and coordination between regions? The technology exists, and is available; the economic benefits of relieving the bottlenecks between regions far exceeds the costs by many billions of dollars. The problem is with the system of rules, organization and oversight that governs the transmission networks. It was set up for a very different era and is now caught in a difficult transition, trying to avoid the pitfalls evident in the California crisis. The transmission networks were built to serve a utility system based on regulated monopolies. In the old days, there was no competition for customers. One locality equaled one utility. And state regulatory commissions set prices. Today, the mission is to connect buyers and sellers seeking the best deal, irrespective of political boundaries and local jurisdictions. Large industrial customers in the East routinely shop for power in the Midwest. Over all, for more than a decade, the power industry has been struggling with how to move from the old regulation to the new marketplace. This shift was driven by the view that half a century of state regulation had produced power prices that were too high and too varied among states. Factories and jobs were migrating from states with high electric power prices to those with lower prices. Yet the power industry is probably not even halfway there in its shift from regulation to the marketplace. The California power crisis and the power-trading scandals sent regulators back to the drawing board, slowing the development of new institutions, rules and investment to make competitive markets work. As a result, the development of the regional transmission organizations is erratic. More than one-third of the power transmitted primarily in the Southeast and the Northwest is not under the control of regional transmission organizations. Some states fear that their cheap power would be sucked away to other markets; others do not want to subordinate state authority to the Federal Energy Regulatory Commission. Power flows relatively easily and with great flexibility within each region. But there are simply not enough heavy-duty wires between the regions. The wires become filled to their capacity, and the system operator has to order reduced output from power plants. The result, at critical moments, can be like a freeway in rush hour. The costs of this congestion, which reduces flexibility, are heavy, measured in many billions of dollars. What would ease the congestion? American electricity use increased 8 percent over the past four years, while electric generating capacity expanded by 12 percent. Over this same time, transmission investment has ranged from $2 billion to $5 billion a year only a fraction of the level needed to keep up with this growing supply and demand. Transmission itself remains, in economic terms, largely a regulated natural monopoly. Yet it is also the basis of the new market in electric power. Without the ability to send power in different directions to different customers at different times at different prices in response to different demands, there is no market. So who will make the new investment? It could be a utility that already owns the transmission wires though they are managed by the independent regional transmission organizations. The investor might also be an outsider willing to bet on a growth market. But it's not clear how the potential investor would make a profit. One way or another, changes will be needed to ease the flow of capital into transmission and, in turn, ensure the steady flow of electricity to customers. When it comes to the national transmission network, the whole is greater and better than the sum of the parts. Daniel Yergin is chairman and Larry Makovich is senior director of Cambridge Energy Research Associates. With Hoff Stauffer, they are co-authors of the new study "Grounded in Reality: Bottlenecks and Investment Needs of the North American Transmission System." Copyright 2003 The New York Times Company
