Don't give more freedom to those who have already demonstrated an uncontrollable urge to game regulators and manipulate markets, says David Hughes

Sunday, August 24, 2003

The recent blackout was bound to happen and more are coming. Now it should be clear that the U.S. grid is an antiquated hodgepodge of "arteries" owned by utilities that transport electricity from mostly inefficient, dirty and unsafe base load generating plants to buildings that only waste energy.

	David Hughes is executive director of Citizen Power, a regional energy advocacy organization (www.citizenpower.org)..

This Third World system could have been transformed a long time ago were it not for powerful coal and nuclear interests that use all their might to slow the inevitable change to a 21st-century distributed, renewable energy system that does not rely on 20th-century technology; a technology that is vulnerable to everything from storms and computer glitches to foreign supply/price fluctuations and terrorism.

The solution to our energy problems, however, is not just a matter of building a new national transmission grid. There is a bigger and more long-term issue the American people must understand.

The U.S. nuclear power debacle, where regulators let utilities charge ratepayers for tens of billions of dollars in construction cost overruns, prepared the ground for the free marketeers and their errand boy, George Bush Sr., to deregulate the wholesale electricity industry. Once Bush Sr. signed the Energy Security Act in the last month of his presidency, the big boys, in particular Bush pal Kenneth Lay of Enron, began the campaign to deregulate retail generation markets.

We were promised that deregulation would bring down electricity prices; that the market would spur new plant construction and grid upgrades. But for most ratepayers, prices have stayed the same or gone up. The transmission system has been let go, and the new plants that have been built have taxed the grid to dangerous levels. More problematic has been the increasing concentration of ownership that is creating energy behemoths too big even for the government to control.

Those calling for passage of a new energy bill, including President Bush, are pushing for more deregulation, including repealing the Public Utility Company Holding Act. PUHCA, however, is a protection needed more now than ever. This and other proposals will only further erode government's ability to protect consumers and the environment, leading to more blackouts and California-like energy catastrophes.

The last thing we should be considering is giving more control of a vital service to those who have already demonstrated an uncontrollable urge to game regulators and manipulate markets. Just as the truth is the first casualty of war, reliability (and thus safety) is the first casualty of electricity deregulation.

There is a nexus between an unregulated generation market and still regulated transmission. Under regulation, utility profits were independent of how a plant's electricity was dispatched. Under deregulation, owners of generation rely on how much power they can sell for their profits, unless they have a long-term contract. Thus, the transmission system is being overburdened so that generators can try to reach more customers, resulting in too many flows that are too large, given the physical conditions of the system.

To prepare for a deregulated marketplace, utilities took steps to be competitive. But, instead of cutting shareholder dividends or senior management salaries, or closing inefficient power plants, utilities laid off front-line workers and let the transmission system continue to deteriorate. This created the perfect scenario for market abuse and system failures.

It is a simple plan. First you pay decision-makers to repeal long-standing protections, while letting the energy system infrastructure deteriorate to an unreliable state. Then, when price controls come off, you create fake power demand and congestion points on the grid to jack up prices. The problem is, after ratepayers' money is stolen and the perpetrators are exposed, the grid continues to deteriorate, the blackout rate increases and dirty and unsafe generators continue to run while regulators and the courts sort out the fiasco.

The Federal Energy Regulatory Commission has a plan to establish huge Regional Transmission Organizations that FERC hopes will help smooth "seams issues" in wholesale markets that cross utility (and state) transmission systems. RTOs may make possible smoother cross-market sales but they will not fix the kinds of problems that likely caused last week's blackout.

It is usually only economical to transmit power for less than 200 miles, given the high cost of new transmission lines. Thus, people calling for broad regional generation markets are ignoring the concept of least-cost planning for new transmission. It is not cost-effective for ratepayers to have large generation markets if that requires much, if any, new transmission.

Therein lies the dilemma. Under regulation, utility investments were essentially guaranteed. This ensured sufficient capital for plant construction and line maintenance, which in turn ensured reasonable reliability. Under deregulation, the only way generation owners are going to pay costs and make profits is by getting onto the transmission lines and selling their power. However, the added traffic requires a transmission system upgrade so costly that it would likely offset savings customers might get from a competitive market.

More deregulation is exactly the wrong way to go. The real long-term solution is public power. The near-term remedy must be a return to strong, state-led regulation of integrated utilities with mandatory long- range planning that includes efficiency and environmental impacts, backed up by strong federal regulation of wholesale rates (based on cost of service) and continuing the prohibition against the return of the unregulated utility holding company.

All of us can help immediately by conserving energy and demanding an end to the influence of special interests that hold us hostage to outdated technologies that risk our health, our businesses and our future safety.

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