An Industry Trapped by a Theory (energy deregulation has failed)

nytimes.com ^ | August 16, 2003 | ROBERT KUTTNER

[Destro]

An Industry Trapped by a Theory

By ROBERT KUTTNER

In the search for the source of Thursday's blackout, the underlying cause has been all but ignored: deregulation. In principle, deregulation of the power industry was supposed to use the discipline of free markets to generate just the right amount of electricity at the right price. But electric power, it turns out, is not like ordinary commodities.

Electricity can't be stored in large quantities, and the system needs a lot of spare generating and transmission capacity for periods of peak demand like hot days in August. The power system also requires a great deal of planning and coordination, and it needs incentives for somebody to maintain and upgrade transmission lines.

Deregulation has failed on all these grounds. Yet it has few critics. Evidently, even calamities like the Enron scandal and now the most serious blackout in American history are not enough to shake faith in the theory.

Ten years ago, most public utilities were regulated monopolies. They were guaranteed a fair rate of return, based on their capital investment and costs. So the government compensated them for building spare generating capacity and maintaining transmission lines. Regulators, of course, sometimes made mistakes and the industry oversold technologies like nuclear power. Even so, in the half-century before deregulation, productivity in the electric power industry increased at about triple the rate of the economy as a whole.

However, the wave of deregulation that culminated in the late 1990's broke up the integrated utilities like Con Ed that once generated power in its own plants, transmitted it and sold it retail. It ushered in a new breed of entrepreneurial generating and trading companies. However, the prices the local utility companies could charge consumers remained partly regulated. The theory was that local utilities, no longer producing their own power, could negotiate among competing suppliers for the best price and pass the savings along to the consumer.

But deregulation hasn't worked, for three basic reasons. First, there is a fairly fixed demand for electricity and generating capacity is tight, so companies that produce it enjoy a good deal of power to manipulate prices. The Enron scandal, which soaked Californians for tens of billions of dollars, was only the most extreme example. California authorities calculated that a generating company needed to control just 3 percent of the state's supply to set a monopoly price.

Second, the idea of creating large national markets to buy and sell electricity makes more sense as economic theory than as physics, because it consumes power to transmit power. "It's only efficient to transmit electricity for a few hundred miles at most," says Dr. Richard Rosen, a physicist at the Tellus Institute, a nonprofit research group.

Third, under deregulation the local utilities no longer have an economic incentive to invest in keeping up transmission lines. Antiquated power lines are operating too close to their capacity. The more power that is shipped long distances in the new deregulated markets, the more power those lines must carry.

In addition, in the old days of regulation, a utility like Con Ed would be required to regularly submit a resource plan to a state's public service commission. The two organizations would forecast demand and decide how much money should be invested in power plants and transmission lines. Rates would be adjusted to cover costs. Under deregulation, however, nobody plays that crucial planning role.

Much of the Southeast, by contrast, has retained traditional regulation — and cheap, reliable electricity.

When the blackout hit on Thursday, many of us first thought of terrorists. What hit us may be equally dangerous. We are hostage to a delusional view of economics that allowed much of the Northeast to go dark without an enemy lifting a finger.

Robert Kuttner is co-editor of The American Prospect and author of "Everything for Sale: The Virtues and Limits of Markets."

[woofie]

The author of this is an unbiased open minded seeker of the truth?

[Paleo Conservative]

Barbara Streisand!

[No Truce With Kings]

Texas has deregulated electricity. Texas has cheap, available energy. Texas has a reliable grid. Texas also controls the NIMBY and BANANA type that have run amok in California and the Northeast.

[Destro]

...why would he be "unbiased"? This was an op/ed by him after all. It is worth discussing. Monopolies are part of the capitalist system. In fact in an odd twist getting the govt. to stop a monopoly is intervention in the free market to save the free market.

Monopolies can and do exist as a function capitalism. Are they good or bad? They can be bad, but they can have their place also.

[Destro]

What? See my #5 and try again.

[Alberta's Child]

As soon as you see the word "Enron" in an article like this, you can be certain that the author is more interested in pushing a political agenda than in presenting facts. The New York Times can always be counted on to blur the line between a financial scandal and a technical problem.

Enron didn't own any power plants or transmission lines, and never generated any electricity. This is exactly why an "energy company" that was once among the ten largest companies in the U.S. could go out of business without even so much as a hiccup in the price of energy.

Asking the New York Times to comment objectively on yesterday's blackout is like asking Ken Lay to restore power to those 50 million people who were in the dark yesterday.

[Destro]

Oh?

High natgas costs test Texas energy deregulation

How energy deregulation works in Texas - Throughout the country, people are watching the Texas energy deregulation model to see how successful it is in lowering electricity costs for consumers. Renee Feltz examines a Houston area development that may raise the prices on electricity bills of the city's residential users.

[woofie]

Take a look at Mr Kuttners aricles: http://www.prospect.org/columns/kuttner/
See a pattern here?

Yea its an op/ed (by a liberal maniac)

[Mind-numbed Robot]

Texans know the energy business and have recently, 2000 forward, escaped the clutches of the liberal Democrats.

Regulation, though sold to the public as a way to protect the consumer, actually protects the producers from competition. Competition encourages innovation, costs cutting, and productivity increases. Regulation encourages increasing costs, lowering productivity (the unions love it) and discouraging innovation. (If a utility is allowed to make a margin of say 10%, then the higher their costs the more they are legally allowed to make.) That is why the industries seeking regulation contribute heavily to the Democrats. The Democrats, of course, say the Republicans are in the pockets of big business. Typical Democrat hypocrisy.

[squidly]

Well, he's wrong and he's right.

First, there is a fairly fixed demand for electricity

False.

Third, under deregulation the local utilities no longer have an economic incentive to invest in keeping up transmission lines. Antiquated power lines are operating too close to their capacity.

He scores a bingo with that one, but it comes on the heels of this relative nonsense:

Second, the idea of creating large national markets to buy and sell electricity makes more sense as economic theory than as physics, because it consumes power to transmit power. "It's only efficient to transmit electricity for a few hundred miles at most," says Dr. Richard Rosen, a physicist at the Tellus Institute, a nonprofit research group.

[Naspino]

I would rather have the government control it all -- no better yet -- the Democratic party. I'm sure they won't raise the prices through the roof to try and make me a more responsible consumer of electricity while lowering the price in heavily Democratic voting districts.. No they wouldn't do that...

[Libertarianize the GOP]

http://www.freerepublic.com/perl/bump-list

[Destro]

Enron didn't own any power plants or transmission lines, and never generated any electricity. This is exactly why an "energy company" that was once among the ten largest companies in the U.S. could go out of business without even so much as a hiccup in the price of energy.

Maybe your views are clouding your reading -- the Enron example exactly how the deregulation was supposed to work. In a funny way, your point HELPS the author's case I think

Enron didn't own any power plants or transmission lines, and never generated any electricity. This is exactly why an "energy company" that was once among the ten largest companies in the U.S. could go out of business without even so much as a hiccup in the price of energy.

Of course under the old system, "Enron" would not have happened to begin with.

[WOSG]

Kuttner proves himself WRONG about yet another thing.

Baloney and barf alert.

Eggs are perishable commodities too and somehow the free market seems to work. In TX, there is now retail competition.

The blackout has nothing to do with de-regulation or not, but to do with under-investment, usually a feature of *EXCESSIVE* regulation from parties that want a 'free lunch'. IN this case, the political demgogues who want reliable energy but accuse private industry of 'gouging' when they are actually paid for that reliability.
(This is in the form of capacity payments).

The system is a mess largely because it is complex enough of a problem to be more easily demagogued by the Leftists than solved.

"But deregulation hasn't worked, for three basic reasons. First, there is a fairly fixed demand for electricity and generating capacity is tight, so companies that produce it enjoy a good deal of power to manipulate prices."

This is false in 3 ways - first demand is variable for many important users eg aluminum producers, enough to make certain demand/price curves flexible. Second he is WRONG to say generating capacity is tight - it is not overall, there is a bit of a glut in many grid. Third, he is wrong about manipulation. The free market works and there is little "pricing power" in well-connected grids other than the usual supply and demand that you would expect.

The rest of his article is full of more such nonsense, eg connecting grids does not mean the distance each electron goes on average is much farther. It's a reliability enhancer.

And this is the the biggest honker: "Third, under deregulation the local utilities no longer have an economic incentive to invest in keeping up transmission lines."

HELLO!?!? " Antiquated power lines are operating too close to their capacity." This is already happened -- under the REGULATED industry! This has been going on for 30 years or so. Wake up and smell the coffee MR Kuttner.

"The more power that is shipped long distances in the new deregulated markets, the more power those lines must carry."

Who says deregulated markets have to carry electrons any further than regulated markets?? That would only happen
if it is more economically efficient than using close-sited plants. Which in turn is a function of whether local regions have a glut or shortage of generating capacity, and the heat-rate (efficiency) of particular plants. eg TX has a glut, Cali has a shortage. They are on different grids so cant share power sources. ... how would it HURT if they were on the same grid?
The fact is: A) It wouldnt hurt it would improve costs and efficiency overall even if actual sharing of electricity was small (since it could be considered part of reliability 'backup' capacity), and B) this issue is completely orthogonal to dergulation per se.

The confusion is Mr Kuttner as usual assumes the worst from market players and assumes no ability of markets to adapt.
He also fails to point out that "deregulation" is a myth for energy, there are different levels and types of REGULATION. What happened in Cali was mis-regulation more than de-regulation.

here's how to make it work: separate the transmission issues (properly) from generation and so allows conceiving of free market IPPs using regulated transmission grids to deliver power to retail suppliers, who can bid for the supplies on the spot *or* via long-term contracts. let multiple retailers bid for customers. This is how Texas is doing it. We'll see how it works, but IMHO probably not badly at all.

Mr Kuttner, quit talking out of your ass.

[Alberta's Child]

Local utilities have a huge incentive to maintain and upgrade their transmission lines -- or at least they should.

I am no fan of trial lawyers, but it seems to me that if some guy who spills coffee on his d!ck can sue McDonald's for several hundred thousand dollars, then a local utility should certainly be held liable for the damages that result when their transmission network breaks down.

[WOSG]

Note: Utility "monopolies" exist because the Govt supports and sets them up that way. Without Govt, true monopolies would baely exist.

[stylin19a]

Demand was under peak when the outage occurred, so that argument fails on its face.

Deregulation bred mostly re-sellers, not generators of electricity. Maintaining the grids and lines still reside with Con-Eds. So that argument fails on its face.

Utilities, as monopolies enjoyed more than a fair rate of return. Customers took it in the shorts for the mistakes, via raised rates, to guarantee shareholder returns.

Deregulation and the power outage are 2 separate issues. Trying to make a nexus is a leap of faith.

[Major Matt Mason]

OK, then how would the author explain the blackouts in the 70's and 60's, when energy was regulated? these guys are getting too predictable.

[Alberta's Child]

Enron was an energy trading company, and nothing more.

Blaming Enron for yesterday's power failure is like blaming Merrill Lynch for United Airlines' crappy on-time performance.