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August 16, 2003

Blackouts: I Told You So

As my power was finally restored late last night, I could take small spiteful comfort in feeling like a prophet confirmed. Like the price ripoffs out in California, I basically predicted back in 1998 that this kind of blackout was almost inevitable due to national energy deregulation. With none of the utilities taking real responsibility for maintenance of the grid, neglect was bound to lead to a catastriphoic meltdown.

From my 1998 Dissertation version (the 2002 book version had some updated analysis):

Under market competition, power producers treat their own plant capacity as fixed moment-to-moment (since all prices will be based on marginal costs, not on longer-term rates of return as with the utilities) while prices will fluctuate across the country as demand adjusts to prices changes. Regulation is required because marginal cost decisions will not include calculations relating to maintaining the system as a whole, forcing new regulations at each point in the distribution system in order to bring those market transactions in line with the need for stable service, reliability, access and long-term investments in the transmission grid. It is the shift from a few key macro regulations to a proliferation of micro regulations.

What worries many people is that political pressure will create microregulations that favor short-term profit for producers over reliability of the system, a dangerous proposition for networks transmitting the lifeblood of commerce across the country. Many critics of the move to competition, especially to movement towards for-profit transmission systems, have pointed to the West Coast blackout of four million homes that occurred in 1996 just weeks before final passage of the California market competition legislation. A July 1996 report by the North American Electric Reliability Council, the umbrella for the nine regional utility councils that manage the national electricity grid, warned that with greater and greater national transmission of power, the thermal limits of power lines will be pushed farther on a day-to-day basis than ever before. All this will happen in an environment where short-term profit will encourage stretching the system to the limit, even as utilities which formerly cooperated in management of the grid increasingly become direct competitors.69

The hope is that through the careful information mandates involved in the OASIS Internet system, the FERC will maintain real-time management of demand in a way that overcomes those dangers. But many worry that if a loose wire can shut down the West Coast in 35 seconds in times of peak demand, what will the swings of market demand do in a system where knowledge of national capacity is uncoordinated in any central way?

While the exact cause of this year's blackouts are not established yet, it's clear that neglected infrastructure lay at the heart of the problem. "electricity demand has shot up by 25 percent since 1990, [while] construction of transmission systems has declined by 30 percent." People will point to why this regulation or that regulation was not in place, but the reality is that deregulation gave the key energy players self-interested incentives not to waste their own funds on maintenance.

Posted by Nathan at August 16, 2003 08:01 AM