During the afternoon of Thursday, August 14, 2003, the North American continent experienced the largest blackout of electricity ever. Almost immediately, people demanded to know why it happened, and how to prevent it from happening again.
The short answer to “why” is that the transmission grid became overloaded and was automatically shut down to avoid self-destruction.
As it is presently configured, the grid mainly connects locally generated power with local consumers. It is not a system of superhighways. When the restructuring of electric utilities began in the 1990s, many utilities sold off their generation plants to other companies. Many were peaker plants designed to operate on short notice during periods of high demand.
During this same time many large industrial and commercial consumers were installing their own emergency generators to carry them through peak demand periods when they were subject to being shut down by the local electric utility.
Thus, we have a new pattern of generation and consumption that overlies the older locally oriented grid structure. It is a prescription for disaster that promises to continue unless we do something about it.
Where’s the Solution?
One Harvard economist, who helped design the failed system in California, suggests a federal takeover of the transmission grid. Two analysts from the Cato Institute suggest we let the free market find the solution … without giving us a hint of what that might be.
We can do better than that. We can, for example, look at similar systems to see how they handle the relationship between shippers and the owners of the transmission.
One example is the system of interstate oil pipelines. Another is the system of natural gas pipelines in Texas.
What these examples share primarily is that the operations, rules, and rates are mostly determined by the owners and shippers, not by regulators. Frequently the shippers are also owners of the pipelines. These shippers are sometimes producers of oil and natural gas, and sometimes they are large consumers of energy. There are also shippers who do not hold an equity interest in the pipelines.
Light-handed regulation guarantees these nonowners are treated equitably. At the same time, the ownership arrangements facilitate the proper amount of maintenance and improvement of the pipeline systems. The very liquid futures and options markets that exist ensure that all consumers and producers are protected from market fluctuations regardless of the cause. The ultimate measures of success are very low costs of transportation.
These features are exactly the ones we would like to have in a new and improved electricity grid. Like the pipelines, the grid has relatively few principals involved in the transmission compared with the potential number of regulators. Moreover, the principals face long-term relationships with one another. Add to this the possibility of broadening grid ownership to include new generators, and much of the incentive to game the system is eliminated. The agreements could be routinely approved by the Federal Energy Regulatory Commission unless there is an unresolved complaint.
Individual residential electricity consumers would be protected by individual state regulation that will not go away anytime soon. Further protection could be obtained through the new electricity markets like the PJM contract and with natural gas contracts. The marginal fuel for generating electricity is natural gas and the prices tend to move together.
This is not to say that formulating the contracts among principals will be easy. The legal technology will have to be expanded along with the engineering and computer technology. But it is more likely to be developed successfully if regulatory agreement is not required at every small step.
No one likes to live in the dark for more than a few hours. To avoid another blackout, we must put the design and operation of the new grid in the hands of owners who have the competence and incentive to make the system more reliable.
Jim Johnston is a policy advisor to the Heartland Institute and a retired Amoco economist.