Politics & Policy

So What Do We Do About The Grid?

Post-Blackout action items.

The events of last Thursday have put a spotlight on a usually obscure topic: grid reliability. Everyone seems to agree that the federal government should mandate more investment in transmission lines and that had those investments taken place over the years, Thursday’s blackouts wouldn’t have happened. We’re not so sure.

Because it is still unclear why the systems that normally prevent transmission anomalies from spreading failed to do their job, no one knows whether the sort of investments contemplated by the politicians and regulators would have reduced the chance of the blackouts occurring. We say reduce rather than eliminate deliberately because reducing the chance of another blackout to zero is not possible given the complexity of the current transmission system.

The need for more investment in the grid, however, seems clear. The transmission system was designed to serve not as an electricity superhighway but as a robust system for relatively small service territories will little service capacity between territories and few on-ramps. Since then, the capacity to generate power has grown far faster than the capacity to move it great distances, which has put increasing stress on the system.

The reason for the deteriorating state of the grid are several-fold and suggestive. First, transmission projects are considered, approved, and paid for at the state level even though they have benefits that cross state lines. State decision-makers understandably resist using ratepayer dollars to pay for investments that will primarily help parties outside the state.

Second, in many parts of the country, incumbent utilities and state politicians actively resist improving the grid. Vertically integrated companies (those owning the generating plants, transmission lines, and distribution networks within the same service territory) often fear that a more robust transmission system will primarily advantage the competition — independent generators whose only business is power production. Politicians in many states likewise oppose grid improvements because the benefits of cheaper generation technologies, particularly old coal-fired plants, would then flow to the highest bidder rather than flow exclusively to ratepayers within their state.

Third, returns on transmission are regulated and utilities have found that they can make more money by investing in virtually anything besides transmission infrastructure.

Fourth, uncertainty regarding what new regulations may be put in place has deterred investors from putting money into the grid until the regulatory fights are settled.

The solution currently in vogue to solve those problems is to give the Federal Energy Regulatory Commission (FERC) more authority over transmission investment. While state regulation of transmission is indeed an archaic relic of another era — and while it’s also true that all who use the transmission system are vulnerable to the weakest links in it — forcing utilities to invest in transmission upgrades through increased federal regulation is too crude and too blunt a policy hammer.

Instead, why not try deregulating the transmission system? Jettison the regulated cap on transmission profits. Remove the state regulations protecting transmission companies from competition. Cease the endless political debate over how the transmission lines ought to be administratively organized and managed and let grid owners discover for themselves how to most efficiently run their businesses — something market agents are more adept at discovering than legislators or regulators.

Although most analysts recoil at the very thought given the conviction that the transmission system is a natural monopoly, competition to the grid already exists in the form of natural-gas pipelines. All new power plants, after all, are natural gas-fired. They can be located far from urban areas and their product shipped to urban areas via the electricity-transmission system, or they can be located in urban areas and their output shipped locally. The competition between gas and electric transmission would be no worse than the competition between cable- and satellite-television service providers.

Deregulation would also mean an end to regulations forcing grid owners to do business with anyone who wants access to their wires. Transmission providers should be allowed to negotiate the terms and conditions for both putting power into the lines and for taking it off. Those who own the power lines, after all, have a greater incentive to ensure the integrity of their services once their returns are no longer assured through regulation.

Deregulation could not guarantee that blackouts would never again occur. But it would almost certainly lead to a faster flow of dollars into overdue reliability investments and a far wiser use of such dollars than would the orders and mandates being contemplated in Washington.

Jerry Taylor is director of natural resource studies at the Cato Institute. Peter Van Doren is editor of Cato’s Regulation magazine. This also appears in today’s New York Post.

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