I was intending to comment on all of these commentaries, but some writing has come my way that has taken more time than I thought … in any case, for your convenience and my own, a compendium of commentaries:
Robert Kuttner from the New York Times Saturday: no great surprise, he blames deregulation for the blackout. This ill-placed blame ignores several things. First, it does not stand up to logical scrutiny: we had blackouts before the purported “deregulation” he decries, and in places that have actually implemented deregulation (such as the UK), there is no demonstrable increase in blackouts.
Second, it ignores the reality that what we have experienced in the U.S. is not, repeat not, deregulation, not by any stretch of the definition of the word. We have had some liberalization of the wholesale trade of generated electricity, but both transmission and retail distribution and pricing are still heavily regulated by a rigid 1930s vestige of trying to control and manage a vertically integrated, government granted local monopoly.
Third, his desire to return to the days of that vertically integrated, government granted local monopoly speaks to me of a lack of imagination and creativity. Technological change has transformed human lives for the better in so many ways, including the wholesale generation and market exchange of electricity, and if we had proper deregulation, innovators seeking value opportunities would create and apply new ideas in this industry in ways that would be mutually beneficial to suppliers and customers alike.
His title, “An Industry Trapped By A Theory” is clever enough, but I claim that the industry’s problems arise from being trapped by a different theory: the theory of natural monopoly.
The New York Times editorial from today does not cover any new ground, but at least does lay out the political road we can anticipate. I like where they say
A burst of political leadership, not blame-saying, would cut through the complex of government and utility factors that let the issue become stymied.
but in the context of the editorial it’s clear that they mean political leadership for increased regulation. Please see my above comments on that topic.
I thought this morning’s Wall Street Journal editorial (subscription required) was pretty sensible. It was an interesting editorial decision to run William Hogan’s call for uniform rules and support of FERC’s Standard Market Design proposal next to Jerry Taylor and Peter VanDoren’s call for market self-regulation. These two approaches tend to bracket the pro-deregulation opinions I’ve encountered, from wanting to manage the process of creating markets (Hogan’s ordered competition) to “markets are self policing” (Taylor and VanDoren’s competitive order). I am skeptical of the the desirability of micro-managing the process of creating electricity markets to the degree that Hogan advocates, and to the degree seen in the FERC Standard Market Design proposal. But, as the WSJ editorial points out, in reality transitions can be messy and some pernicious outcomes can be avoided by having some clear rules.
PJM [the mid-Atlantic ISO; they had no outage on Thursday] is no miracle worker. It is merely an example of the kind of “regional transmission organization” (or RTO) that can develop everywhere if a more competitive wholesale electricity market is allowed to proceed. More than 215 buyers and sellers of electricity are part of PJM, and the efficiencies of its marketplace have produced both lower consumer costs and more investment to ensure that the transmission grid remains reliable.
As it happens, the Federal Energy Regulatory Commission (FERC) has been proposing rules that would allow more of these RTOs to develop. Legislation to do so is pending in the energy bill now in House-Senate conference — one of the few parts of that bill that would actually be useful. (Most of it is a subsidy-fest for ethanol and other political constituencies.)
Some of our friends on the right have assailed this FERC idea as a federal takeover of state prerogatives. And, yes, in a perfect world we would prefer if the states eliminated their franchise monopolies on power generation, as the Cato Institute proposes. While we wait for that utopia to arrive, however, the rest of us have to find some way to avoid blackouts that close down much of the country.
The FERC proposal is arguably less intrusive than a system of state monopolies, and as the PJM experience shows it holds the promise of increasing both the competitive supply and reliability of electrical power. As William Hogan elaborates nearby, it also allows for consistent rules of the road. The state utilities have a point that the rules are changing underneath them and that their cheaper hydro-power will capture national prices, but perhaps some compromise can be worked out in drafting the FERC rules.
The FERC proposal has evolved from encouraging RTOs to mandating RTOs (one per region), back to encouraging RTOs a bit more firmly than initally.
But all of this discussion, including these three WSJ pieces, focuses entirely on wholesale electricity markets and on transmission. Such a focus puts the cart before the horse by not addressing the appalling lack of retail choice for customers. Without such choice, how do we know if we’re investing optimally in generation and transmission?