Posted: 07/15/2004 | Author: H. Sterling Burnett
Blackout: Getting the Electricity Provisions Right
With the anniversary of 2003’s power blackout of much of the upper-Midwest and North Eastern coast coming up on August 14 th, and the recent power black out in Athens in the headlines, a question comes to mind: Has much changed since last year to prevent future power outages? Unfortunately, the answer is no. Due to the focus on terrorism, various problems in Iraq and high gasoline prices, a report released earlier this year by the U.S./Canadian panel established in response to 2003’s electrical blackout went largely unnoticed. The lack of a public outcry over the findings of the report combined with the failure of the comprehensive energy bill to get out of the Senate in 2003 means that as we sweat through the summer of 2004, crossing our fingers that the power, and thus our air conditioners, doesn’t go off, nothing has been done to prevent future electrical system failures.
To fix this problem the electricity provisions of last years failed energy bill could be stripped from the comprehensive legislation and passed as a stand alone bill, reducing the chances for large scale power failures in the future. For example, provisions that would repeal the Public Utility Holding Company Act (PUHCA) would strip away layers of regulation that are 40 years out of date. When the Federal Power Act (FPA) and PUHCA were enacted in most utilities were self-sufficient, highly localized producers that made few transactions with other systems and offered customers no choices about service. Thus, the FPA left most aspects of transmission to state regulators, including siting authority. By contrast, long-distance transmission and wide-area controls came of age in the 1970s and, as a result, utilities purchase over 1/3 of their power from other systems or from a competitive new industry of independent generators. Isolated utilities have been supplanted by three interconnected grids and in a growing number of states, large consumers can bypass utilities for competitive suppliers or produce their own power on site.
However, as Professor Robert Michaels pointed out in a recent NCPA report, by far the greatest barrier to reliability is the growing inadequacy of the nation’s transmission system. Expansion of the grid has been steadily falling behind increases in electrical load. Between 1979 and 1999, U.S. peak load grew by 2.8 percent per year. From 1979 to 1989 transmission capacity grew by 3.1 percent per year, but between 1989 and 1999 that rate had fallen to 0.7 percent. Annual investment in transmission (in constant dollars) has steadily declined since 1975. Indeed, transmission investment in 2000 was less than half its 1980 amount, and capacity has fallen by 25 percent relative to peak demand since 1982.
Proposals currently under consideration by Congress would authorize the Department of Energy to designate “National Interest Economic Transmission Corridors.” Under these proposals power entrepreneurs would be allowed to build new transmission lines for reasons beyond reliability, for example, if building new lines or strengthening existing ones might give a region access to cheaper power, or the new lines might reach a more diverse mix of generators by reducing the dependence of a community on a single fuel source for electricity generation. If a state imposes excessive delays, the Federal Energy Regulatory Commission (FERC) would be allowed to intervene and invoke eminent domain, as it already can for gas pipelines. This is a rare instance where federal preemption is arguably warranted.
Power flows within states affect entire regions, but states when making expansion decisions often think of only of the costs and benefits to public utilities and consumers within their State. For example, only a part of the power traded between California and Washington State moves along the lines that directly link them. A substantial amount also flows southward through Idaho, Utah, and the Southwest, sometimes congesting these lines and making it impossible for buyers and sellers in those state to gain access to the regional market. If Utah builds new lines to relieve the congestion, the entire west will benefit from this expansion, but other states will not necessarily pay for their share of the benefits.
This is a classic free-rider problem. It pays those in one region to wait for other regions to build additional lines. The eminent domain provisions would prohibit single states from exercising veto power over projects that increase both reliability and the potential benefits of competitive power markets over a region.
Resistance to new construction too often comes from parties like local environmental groups who take a “not in my backyard” attitude toward siting new power plants and transmission lines and from the owners of high-cost power plants, most importantly transmission-owning utilities who eschew competition and wish to maintain captive markets for their power. Congressional proposals concerning “participant funding” of new lines would allow non-utilities (e.g. independent power producers or consumers) in some regions to construct their own lines to access larger markets. If enacted, utilities hostile to competition would not longer be able to expand transmission.
Additionally FERC could attack other causes of the current gap between electric power production and delivery by settling on efficient methods of transmission pricing, like off peak pricing discounts, and allowing owners’ returns commensurate with the risks of competitive markets.
During the 2003 blackout, former Energy Secretary Bill Richardson said that the U.S. had a “third world transmission system.” While this was an unfair description of both the technology and the competence of its operators, changes to the current system do need to be made in order for the U.S. electricity system to meet the challenges of continued economic growth.