London Blackout

Okay, another one … but at least this one lasted only an hour, and was probably due to a transformer failure in south London, according to this Financial Times article. Not being an engineer, I don’t know if the recent, sustained strains from the heat wave has weakened any part of the transformers on the system … I do recall in 1998, when during a hot Chicago summer ComEd customers suffered from blackouts due to overheating transformers, that transformer maintenance became a priority item.

London mayor Ken Livingstone is claiming that National Grid, the owner of the transmission system in England, has underinvested in the grid system. I think the important question is, will customers suck it up and deal with higher electricity prices to help fund equipment upgrades. If prices are politically constrained away from allowing the producer surplus required to fund investment because customers will complain (and retailers won’t be able to pass on the full cost of the power they buy), then reliability will be a problem, even in an electric system that is as successful and vibrant as England’s (actually, England-and-Wales’s).

Think of this analogy: would you be willing to pay, say 50 cents more per month for your cell phone plan if your cell phone company were going to build more towers to improve the reliability of the signal? Why should electricity transmission investment be any different?

I thank Tyler Cowen for his post on the blackout, and particularly the link to this speech by Stephen LIttlechild, the outstanding economist (and extremely nice fellow) who has worked tirelessly to create institutions so that choice and competition can create value in this industry in England and Wales.

England has been one of the success stories of electricity privatization, but its comparison with the U.S. is apples-to-oranges, because we have 51 jurisdictions with regulators, and fragmented transmission ownership. England had a nationalized industry and has not had to struggle with the consequences of fragmented transmission ownership.

I will be interested to see if the more performance-based and outcome-oriented transmission regulation environment in England leads to more fluid adaptation to the needs for investment. I hope so, for the sake of English customers and entrepreneurs.