The Road to Ruin
August 19, 2003
The New York Times
OP-ED COLUMNIST
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 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.
nytimes.com
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