Commentary: Political Power Overload

The power grid can be fixed--if Congress gets out of the way

The Great Blackout of 2003 may be over, but the debate over how to make the power grid safer is running on alarmingly low voltage. Even people who should know better are making statements that demonstrate evidence of rolling intellectual brownouts. Among the myths we've all heard lately:

The U.S. has a Third World transmission system. Wrong.

The main solution is to build more lines to carry power between different parts of the country. Wrong.

Upgrading the grid will be expensive. Wrong.

Here's what's true: The U.S. transmission grid, while imperfect, is still among the most reliable in the world. Yes, the mid-August blackout was frightening, and it may be a sign of vulnerabilities that still aren't fully understood. But even a good system can fail when an unusual confluence of events occurs. And let's keep things in perspective. The last time there was a blackout approaching the size of this one was 1965, when the Texan in the White House was Lyndon B. Johnson.

While more investment is clearly needed, it shouldn't be poured into tightening the linkages between neighboring sectors of the grid so more power flows over long distances. That would only increase the risk of cascading failures. "In the perfect storm, if one mountain climber slips, he brings everyone down with him," observes Jim Letzelter, a managing director of The McGraw-Hill Companies' Platts Research & Consulting (MHP ) energy service.

As for Myth No. 3, making the grid more robust needn't be expensive. While the Electric Power Research Institute says a complete, state-of-the-art modernization would cost $50 billion to $100 billion over the next 5 to 10 years, Edison Electric Institute President Thomas R. Kuhn says a lot could be accomplished by simply raising annual investment in transmission from its current $3 billion a year to around $5 billion a year. Contrast that with more than $100 billions that's been invested in just the past three years in new generating plants. Today, transmission costs account for only about 7% of utility bills. After what has happened, almost everyone would agree that spending a bit more on the grid is cheap compared with sweating (or maybe next time freezing) in the dark.

The fact is that the grid does indeed need upgrading. The obstacle is neither money nor technology. Nor is it a paucity of ideas. The problem is politics. In the absence of new rules from Congress, the electrical grid is trapped in limbo between the vertically integrated industry of the past and the horizontally integrated industry of the future. The result is confusion. No one has both the responsibility and the undisputed authority to make the grid operate reliably. And investors are reluctant to pump more money into the grid when they can't predict the outcome of the political stalemate over regulatory reform in Washington.

That's a shame, because there is one plan on the table that could go a long way toward clearing up authority over grid management and creating clear incentives for investment. It's the plan being pushed by Pat Wood III, President George W. Bush's appointee as chairman of the Federal Energy Regulatory Commission (FERC). Wood understands that the core problem of the transmission grid is what economists call "the tragedy of the commons." Like a fishing ground or a pasture, the grid is overused when there's no effective means of charging people for it or excluding them from using it.

FERC's plan would create perhaps seven or eight regional transmission organizations with undisputed authority to decide who can use the grid in their regions and when. Companies would also split themselves vertically, divorcing transmission from generation -- and then grow horizontally, by expanding in either wires or power plants. The end result: increased efficiency, which would slightly lower the national average retail cost of electricity, the Energy Dept. predicts. More important, the plan would lessen the risk of blackouts caused by underinvestment, miscommunication, incompetence, or Enron-style market manipulation.

Think of the power grid as a network of crisscrossing canals, shared by all. Generators pour power into the canals. Customers siphon it off. Electricity, like water, flows "downhill": It follows the path of least resistance, regardless of state borders or contractual arrangements. Customers do pay to use the transmission grid, of course. But because of the way power sloshes around, their transactions may trigger congestion on circuits hundreds of miles away -- causing problems that they will never pay for.

The tragedy of the commons has intensified since 1996, when FERC triggered an explosion in wholesale power trading by requiring utilities to let other companies send power over their lines for a fee. This lowered the cost of electricity by increasing the usage of the cheapest generators available. But it complicated grid management. To keep generation and consumption in balance, control-room operators are constantly negotiating with neighboring control areas, while asking utilities in their own areas to crank certain plants up or down, or even to "shed load" -- lingo for turning off the juice to some customers. But the U.S. grid is fragmented into some 120 control areas, and even inside most of the areas, operators can make only requests of utilities, not demands.

The nonprofit regional transmission organizations that FERC wants would operate -- but not own -- the wires in their areas. Making the regions large and few in number would give regional operators a broader view of the consequences of their actions, while reducing the need for negotiations between control areas. And the regional operators would have full command over all the plants in their territories, including the power to order construction of new power lines where needed -- meaning no more vulnerability to utilities that are incompetent or won't play nice. FERC is also seeking permission from Congress to order the siting of needed power lines, over states' objections if necessary, reducing the power of not-in-my- backyard lobbyists.

FERC's plan isn't entirely command and control. It harnesses market forces where possible. As a carrot, builders of badly needed lines could earn a premium over the ordinary rate of return -- one part of the FERC plan that is already in place and working. To discourage overuse of lines, which could lead to outages, the system would charge customers more for using lines that are already congested. The beauty of the system is that it sends crystal-clear price signals: If certain customers are paying a great deal because they have to import their power over congested lines, it's obvious that there is a need to build a new line that will serve them -- or to locate a new generating plant close by.

If FERC's plan makes so much sense, why isn't it breezing through Congress? Mostly because it will create losers as well as winners. Southern (SO ) Co., the big Atlanta-based utility holding company and generous political donor, is strenuously fighting FERC. The company argues that the reforms would cause low-priced power to flow out of the region, hurting its customers. But skeptics say Southern's main concern is that its unregulated generating business would lose business to cheaper imported power from the Midwest. Says one federal energy official: "A competitive market doesn't benefit a utility that has 100% market share, because there's only one way you can go from 100%."

Forget the scare stories you heard when the lights went out: America's electrical grid isn't in a shambles. And fixing it won't break the bank. All it takes is sensible policy and the political fortitude to make things happen.

By Peter Coy

With Richard S. Dunham and Mike McNamee in Washington and Christopher Palmeri in Los Angeles

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