Behind The Blackouts

Tyson Slocum
July 28, 2006


Tyson Slocum is the director of Public Citizen’s energy program.

Ken Lay may have passed away and Jeff Skilling and other former executives face dozens of years behind bars, but Enron’s legacy—single-handedly pushing electric power deregulation at the federal and state levels—unfortunately remains the law of the land. The radical restructuring that Enron achieved a decade ago overturned a century of orderly, accountable electricity planning that had made America’s power system the envy of the world. But our deregulated system is now a mockery, and consumers are left with higher prices and poorer reliability. That’s why our electric grid—from the August 2003 blackout that cascaded across the Midwest and Northeast, to recent power outages in New York and California—is more susceptible to failures that trigger blackouts.

Before the implementation of Enron’s agenda, electric utilities were fully regulated by states, with one company responsible for producing and delivering power. These utilities had a legal obligation to serve all consumers and were forced to re-invest a portion of their profits back in to improving reliability. Were there flaws with this system? Of course. But it produced the most reliable and affordable power system the world had ever seen.

Enron and their ilk smashed it apart, replacing legal mandates with “the market” to regulate America’s power system. They assumed competition would successfully replace regulators to provide the necessary investments in power generation and transmission.

But that didn’t happen. With the requirements to invest a share of profits into improving reliability now removed, Wall Street and the power industry shunned putting their money into unprofitable investments like upgrading transmission lines and distribution networks. Why should investors spend money on low-rate-of-return investments like reliability when they can make a killing buying and selling power plants?

On top of this market failure, deregulation has also encouraged distributional utilities, like ConEd in New York, to skimp on preventative maintenance spending. They have slashed utility workforces—particularly experienced, unionized jobs. And regulators in New York and other deregulated states no longer pour over the companies’ reliability budgets, allowing the utilities’ service to slide in pursuit of higher profits. As a result, distributional utilities now have too much incentive to replace equipment after, not before, it blows.

Deregulation presents other challenges as well. The United States’ transmission system was designed to accommodate local electricity markets, not the large, freewheeling trading of electricity and movement of power over long distances under deregulation. Sending power over a much wider area strains a transmission system designed to serve local utilities.

Rather than require electric companies to return to their century-old obligation to re-invest in transmission, Congress and President Bush muscled through an energy bill last summer that jacks up power prices by allowing owners of transmission lines to charge higher prices. The energy bill sticks consumers with as much as $100 billion for the construction of new transmission lines that big energy companies want but consumers don’t need. This consumer-funded subsidy prioritizes the construction of power lines preferred by wire-hogging power marketers intent on moving large loads of electricity that will bypass the needs of local households.

Utilities are focusing more of their investments on things outside providing electricity service to customers—such as Enron-style power marketing, power plants far outside their retail service area, and ventures into broadband and the like. The result is a pattern where deregulation encourages billions of dollars to flow into non-utility ventures at the expense of shoring up reliability.

Rather than pandering to an electric industry that gave more than $47 million in campaign contributions to federal candidates since 2001 (with 66 percent of that total going to Republicans) Congress needs to restore reliability and affordability to our electric power system. Three steps to improving our system include:

Providing incentives and assistance to states to help utilities re-acquire generation assets divested during deregulation;
Promoting decentralized power sources such as distributed generation and wind and solar energy; and,
Investing in energy efficiency technologies, such as building weatherization, to reduce electricity demand.
And states must insist on regulators that will be accountable to citizens, not utility company special interests. Ending the ability of regulators to cash in through the revolving door of getting a lucrative job after serving on public utility commissions would help restore accountability. And state and local governments can explore government-owned power, which provides lower-cost and more reliable service for millions of Americans across the country.

The recent blackouts were caused by a failure of policy. Ending the disastrous deregulation experiment and establishing locally-controlled power systems will help restore America’s electricity sector.




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