To Improve Electric Reliability, Put Power in Hands of Shippers

Published October 1, 2003

Heartland in Print

Chicago Sun-Times
September 2, 2003
circ. 467, 170

The afternoon of August 14, 2003, the North American continent experienced the largest blackout of electricity ever, and almost immediately, people demanded to know why and how to prevent it from happening again.

The short answer is that the transmission grid became over-loaded and automatically shut down to avoid self-destruction.

The grid as presently configured is not a system of interstate superhighways. In practice, the grid mainly connects locally generated power with local consumers. When the restructuring of electric utilities began in the 1990s, some utilities sold off their generation plants to other companies, and many of those units were peaker plants designed to operate on short notice during periods of high demand in the service areas of local utilities.

During this same time, many large industrial and commercial consumers installed their own emergency generators to carry them through peak demand periods.

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 persist unless we do something about it.

One Harvard economist, who helped design the failed system in California, suggests a federal takeover of the transmission grid. Two analysts from the libertarian Cato Institute suggest we let the free market find the solution … without giving us a hint of what that might be.

Models Exist

We can do better than that. We can 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, and another is the system of natural gas pipelines in Texas. What these examples of safe and efficient transportation show us is that the operations, rules, and rates are mostly determined by the owners and the shippers, not regulators. Frequently the shippers are also owners of the pipelines on both sides of the deal: Shippers are sometimes producers of oil and natural gas, and sometimes they are large consumers of energy.

Some shippers hold no equity interest in the pipelines, but light-handed regulation guarantees that these nonowners are treated equitably.

At the same time, the ownership arrangements facilitate the proper amount of investment in the 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 wild price fluctuations regardless of the cause.

And here’s the ultimate measure of success: very low cost 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 state and local regulators.

Moreover, the principals face long-term relationships with one another. Add to this the possibility of broadening the grid ownership to include new generators, and we can eliminate much of the incentive power producers have to game the system by withholding electric power to drive prices higher.

The Texas provision could be adopted to handle complaints. That is, the agreements between the large, sophisticated shippers and owners could be routinely approved by the Federal Energy Regulatory Commission unless there is an unresolved complaint.

Individual residential electricity consumers would be protected from price gouging by individual state regulators who would continue their role in setting residential rates.

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, so to avoid another blackout, we must put the design and operation of the new grid in the hands of the 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. His email address is [email protected].