"Deregulation increased the vulnerability of the grid to failure"

[Sava]

August 24, 2003
New Kind of Electricity Market Strains Old Wires Beyond Limits
By NEELA BANERJEE and DAVID FIRESTONE


ith the lights back on after the biggest blackout in North American history, consumers have learned a difficult lesson about the electricity grid: it was an afterthought during the decade-long process of deregulating the power industry.

No single authority is in charge of the grid, and few have an incentive to invest the money needed to improve its reliability. Deregulation increased the vulnerability of the grid to failure, regulators and industry executives broadly concur.

Deregulation is actually a misnomer for the restructuring of the power industry, because only the generation of electricity was freed from strict government controls, beginning in 1992. Companies were allowed to charge market-based rates for generating electricity, creating the financial incentive to build more power plants.

But the transmission of electricity over high-voltage lines and the distribution into homes and buildings remained regulated. Power companies received only a relatively low, government-set return on their investment in the grid, so they allocated far less money to improving transmission reliability than to building power plants.

As a result, much more electricity is moving over virtually the same transmission wires, pushing them to carry loads they were not built to handle, according to many regulators and experts.

"Right now we have a highway" to transmit power, said David Owens, executive vice president of the Edison Electric Institute, an industry lobbying group. "But we need a superhighway."

Federal regulators and some industry groups realized long before the blackout that sweeping measures were needed to improve the reliability of power supplies. For the last four years, mandatory reliability standards have been proposed for the grid, along with the creation of independent regional operators to enforce those standards.

These plans, if passed by Congress, would produce greater regulation of the grid than existed in the days of utility monopolies, but politics have stymied their progress. While some plans may win approval in the wake of the blackout, other ideas may be delayed amid confusion and finger-pointing.

"Now is when we really need new rules and new institutions to help manage this market," said James J. Hoecker, former chairman of the Federal Energy Regulatory Commission, or FERC, the independent body in the Energy Department that oversees the power system. "But with the swirl of different agendas surrounding this event, it may be more difficult now."

The transformation of the American electricity industry began because businesses in California and the Northeast, where electricity rates have historically been high, threatened to abandon those regions for places with cheaper power. Federal and state governments, determined to cut rates, remade the industry, dismantling monopolistic utilities and encouraging new companies to compete to supply power.

As deregulation started to take hold, investment in transmission waned. The old utilities understood that they might be compelled to divest themselves of some assets, so they delayed many investments, including transmission upgrades.

"The transmission network needed for a wholesale market should be much larger," said Frank A. Wolak, an economics professor at Stanford University and chairman of the market monitoring committee at the California Independent System Operator, which runs the state's transmission grid. "The utilities said, `If we don't know what kind of returns we'll be getting or whether we get to keep our assets, then don't build it.' So leading up to restructuring, they didn't build transmission."

Nick Winser, group director of transmission for National Grid Transco, which owns and runs the grid in England and Wales, said the United States needed to invest $60 billion to $100 billion to make its grid big enough and robust enough for a fast-growing, deregulated market. But he estimated that the United States had spent $800 million a year over the last decade.

About 70 percent of an electricity bill covers power generation; transmission costs make up 10 to 15 percent, and the rest goes for distribution.

Restructuring led to a glut of power plants, and electricity rates have fallen in many areas. But few regulators or electric generation companies considered how best to connect the power plants to customers.

Industry analysts say that Mississippi provides an example of the folly that sometimes characterized restructuring. Merchant generation companies, which build power plants, rushed there in the late 1990's, drawn by financial incentives. Their plan was to pump electricity into growing markets in Florida and Georgia, the analysts said.

By the end of the year, Mississippi will have about 30,000 megawatts of excess capacity, industry experts said, but there is no way to transmit that electricity to the intended markets because no one wants to build the transmission lines.

"This is the best example in the country of sending the wrong price signals and locating in the wrong area," said an industry executive who spoke on condition of anonymity. "But that's the way deregulation is. It creates confusion and chaos for some time."

Under the old system, power plants shipped electricity to nearby communities. Now the search is for the cheapest, not the closest, source of power.

Industry regulators and experts warned Congress and power companies years ago that the grid could not easily handle increased power loads over long distances. In July 2001 the North American Electric Reliability Council, an industry group formed to monitor transmission after a blackout in 1965, told Congress that "the grid is now being used in ways for which it was not designed."

The council is a pivotal investigator in the blackout inquiry that is being led by the Energy Department. The council listed a host of weak spots in the system: rate formulas that encouraged utilities to upgrade transmission but that did not reflect risks in the new markets; companies making money from pushing the limits of the reliability rules; and "reliability responsibilities" being divided among many entities because the old integrated utilities had been broken up.

Transactions to buy and sell power, which have grown exponentially under restructuring, move over a balkanized web of transmission lines connecting 142 "control areas" with 6,000 power plants owned by 3,000 utilities.

Nowhere is the web more tangled than in the Midwest, where experts say that line failures apparently helped start the blackout. The independent system operator for the region monitors the flow of power but does not manage it. That is left to 23 utilities in Ohio, Indiana and Michigan to coordinate among themselves.

The Midwest Independent System Operator has asked the federal government for the authority to run the grid in the region. "There would be a smaller number of parties involved, so it would most definitely be an increase in reliability," said Ron McNamara, vice president of regional affairs at the system operator.

Not everyone agrees. Robert McCullough, an independent energy consultant in Portland, Ore., raised concerns in a recent analysis that more interconnections could raise the risk of widespread blackouts.

Why did regulators and companies fail to set up safeguards when restructuring began? Industry experts and economists say that the assumption was that the free market would smooth all bumps.

"We're Americans, and we think if it wasn't invented here, it wasn't invented," Mr. Wolak said. "A lot of problems could have been avoided if we had looked at other countries' experience that deregulated before us, like Australia, New Zealand, Norway, Sweden and the U.K."

Now, FERC is scrambling to push measures through Congress that it and many in the industry say would enhance the reliability of the grid. But some of these steps rekindle aspects of a long-simmering debate over what government intervention and oversight the power sector needs.

The blackout built a solid consensus for mandatory technical standards to keep the electricity system from failing. Until now, utilities and merchant generators have followed the standards voluntarily.

FERC wants the authority to enforce mandatory standards, and such a provision is part of the energy bill being negotiated in Congress.

The most contentious issue, one that has divided the industry for years, is the creation of regional transmission organizations to supervise the grid throughout the country, imposing uniformity on a system that has a few strong regional groups, a few weak ones, and several regions with no groups at all.

Regulators at FERC envision a system in which power generation remains deregulated to encourage competition, while transmission becomes a much more heavily regulated monopoly. The system would be shaped by new rules and controlled by regional transmission groups closely supervised by the commission.

Others in the industry also favor this approach. "When you do this stuff state by state, it doesn't work," said Craig Glazer, vice president of government policy for PJM Interconnection, the independent operator of the transmission system for all or part of seven Northeast states and the District of Columbia. "It's like having an air traffic control system state by state."

The move toward regional transmission groups, in particular, may become a casualty of the very blackout that the groups were intended to prevent. For years, the plan has been thwarted by opposition from utilities in the South and Northwest that fear a loss of autonomy. That opposition, in turn, has held up progress on an energy bill that included mandatory reliability standards for the grid. Now the Bush administration has proposed delaying work on the regional groups in order to obtain swift Congressional approval of the mandatory standards.

For now, the political fight over how to improve the transmission grid gives the industry little room to maneuver. Many industry experts have called for an increase in transmission lines, but others have begun to caution against throwing money at the problem.

In a recent analysis of the blackout, PennFuture, an energy research and advocacy group in Harrisburg, Pa., said that increased energy conservation and generation from smaller sources of on-site building energy, like microturbines, would help lessen the demands on the grid. Many industry experts have called for installing new technology on the grid to improve its ability to ship more power and to prevent failures.

Utilities are also seeking further deregulation by trying to persuade Congress to repeal the Public Utilities Holding Company Act, a Depression-era law that prohibits companies from owning several utilities in scattered parts of the country. Congressional proponents of the repeal, who have inserted it into the energy bill, say it would allow new capital reserves to flow into the industry and the grid. But consumer groups say it would concentrate the industry in a few powerful hands and would be a burden on ratepayers.

Any significant changes, from building new transmission lines to providing better technology for existing ones, will require sizable investment. Most likely, consumers will have to foot the bill, but transmission constitutes a small portion of that bill, industry analysts say.

Patrick H. Wood III, chairman of FERC, and other Washington supporters of competition acknowledge that serious mistakes have been made in the decade since the restructuring process began. But commissioners argue that now would be the wrong time to halt a process that has learned its lessons about transmission and was moving toward stronger federal oversight at the time of the blackout.

"We just need to get there," Mr. Wood said. "If people have got problems with some of our rules, if we're being too strict or not onerous enough, hell, we'll talk about it and negotiate. But dadgum it, we just need to get there. This very prolonged transition has not served anyone well at all."

okay those of you stuck in denial... read...

[Dis]

You think maybe it is because of our increased demand and not the building of new powerlines?

[Elok]

I question the validity of any report made by a man named Firestone.

[Solly]

I can't believe it took 30+ paragraphs before an article posted by Sava threw up those great lines..."the Bush administration"

[MichaeltheGreat]

Originally posted by Sava


okay those of you stuck in denial... read...

I'm surprised it took you this long. That brilliant energy policy guru, Sen. Schumer, either cited or plagiarized this article in the Dem's weekly radio address. Unless there's a whole magically different system on the east coast that none of the rest of us know about, the factual errors in this article are legion, but hey, why let that get in the way?

The "deregulation" aspect is complete nonsense. To blame "deregulation" for transmission system issues is either complete ignorance or complete fabrication to suit an agenda. You can ***** about supply issues and market issues, rightly or wrongly, but not transmission system issues, for one very simple reason:

Restructuring, (, Gorbachev called it that too, but as usual, the bureaucrats and vested interests have to sabotage it to preserve their status), which is what it's called in the industry, has never addressed transmission or distribution system ownership, control, or rate issues with the sole exception of creating open access.

Transmission systems were a set of separately regulated monopolies with distinct rate cases and operational issues before, and... they still are.

Separate from the minor fact that restructuring hasn't touched funding, ownership or control of transmission assets, the wires, capacitors and transformers in the transmission system neither know nor care who owns the particular electrons passing through at the moment, so change in ownership of generation assets and opening of the generation market has absolutely no effect whatsoever on the transmission system.

[mrmitchell]

...my opinion is, I don't know if it's hurting, but I know deregulation ain't helping. Power is one of the "We need it for our nation to survive" industries; this is why it shouldn't fall to the hands of capitalism. It's in the public's interests to keep forementioned industries under tight government scrutiny, so that they do not **** up and do not have money as their first interest.

[MichaeltheGreat]

Perhaps that's because deregulation of generation asset ownership has as much to do with the transmission system as your and my habits in commuting to work?

Transmission and distribution systems in regulated utilities (i.e. not municipal, state or Federal utilities, which can do whatever they want) have always been separately accounted for, funded, and included in the rate base, completely independent of charges related to energy procurement and deregulation. That is for two reasons: all transmission system transactions are subject to FERC approval (and used to be subject to the old FPC's approval, so the regulatory scheme dates back to FDR's first administration and the Federal Power Act); and so that state regulators and ratepayer groups can analyze pricing and allowed margins on separate components of the utilities' rate structures when the utilities file their rate case applications before their regulators.

[MichaeltheGreat]

Bump, since Savita ran away under cover of darkness.

[Sava]

nah I didn't see your guys' replies... but I now know that MtG is smarter than industry experts, executives, and regulators...

[MichaeltheGreat]

I am an industry expert, dufus. It's what I do for a living.

[PLATO]

It seems to me from the article that deregulation of the power industry caused excess power generation (which should lower prices...thought that was the goal) and the LACK of deregulation in the transmission industry stifled investment.

So how is more regulation the solution again?

[The Andy-Man]

you can't have something like energy (or water etc) operate on a amrket basis. No consumers can be bothered to use there consumer power, they just take what they got. which is a virtuall monopoly, and stagnation c&

[Ted Striker]

So, MTG, what in your opinion should we be doing as a nation to upgrade our existing power grid?

[MichaeltheGreat]

Transmission can't effectively be deregulated / restructured. It is a natural monopoly, because the private financial sector is distinctly uninterested in funding transmission projects without guaranteed revenues to meet debt service - and that completely contradicts the notion of a deregulated market.

The game within a game is interesting, because it's the left that traditionally whines about externalities, but the inter-utility part of the transmission system is only stressed if you have a lot of inter-utility transactions. It doesn't matter if those are wholesale dispatch transactions between regulated utilities, or power exchange/ISO market bids, or bilateral transactions between a generator and a remote end user - the lines don't care. The reason you have most of those stresses is because the major load centers (i.e. big cities full of yuppies) don't want to deal with the environmental and economic impact of generating enough locally to meet their needs. Let's shuffle that pollution off hundreds of miles away, so some yokels out in coal country can breathe the pollution necessary to support our lifestyle.

If you balance generation with consumption, the urbanites and suburbanites are all pissed at not being able to shuffle away the costs associated with their chosen standard of living and population density, but there's no strain at all on the regional level transmission system. Transmission problems arise because energy consumers want to push the negative aspects of production off on someone else, and the whole agenda for expanding central control is that more politically powerful urban constituencies can make out of area ratepayers subsidize their costs of service in the guise of "modernizing the grid."

[MichaeltheGreat]

Originally posted by The Andy-Man
you can't have something like energy (or water etc) operate on a amrket basis. No consumers can be bothered to use there consumer power, they just take what they got. which is a virtuall monopoly, and stagnation c&

The majority of consumers by quantity are the industrial, large commercial, and large non-electric utility (irrigation districts, sewer plants, etc.) consumers. They will certainly exercise their consumer market power, just as you would if you had a $100,000 to $10,000,000 a month electric bill. The argument advanced against allowing them to exercise that power without barriers is that they'll grab up all the preferred suppliers, and the residentials will end up with the dregs.

[MichaeltheGreat]

Originally posted by Ted Striker
So, MTG, what in your opinion should we be doing as a nation to upgrade our existing power grid?

Other than routine maintenance and ongoing upgrades to telemetry and status reporting systems, virtually nothing at all, with the very limited exception of some substation upgrades at a very few common bottlenecks.

Let me explain:

If you reduce inter-system load, the existing grid on a national or RRC scale has a huge amount of surplus capacity. Grid stability (i.e. phase imbalance and under/over voltage and current levels, plus reactive demand) is almost exclusively a function of distance. with a small contributor from generator age and efficiency. You have voltage drops and reactive load increases every mile you go on the lines, and you get phase balance issues at every transformer and switchyard. So reducing inter-system load reduces stability impacts on the RRC and national scale system as well.

Prior to the disaster model of restructuring chosen for California, there was a proposed competing model rejected by the CPUC because they couldn't understand how it works, and being down the street from PG&E's headquarters, the CPUC staff had their noses up the asses of their good buddies and neighbors.

The basics of this restructuring model were that the end user at any level was free to contract with whoever they wanted, but the buyer who made this choice had to pay what was called a "transmission congestion charge" - that is, if you gave a bunch of Utah folks black lung but got real cheap coal power, you'd have to pay on a variable basis for the impacts you imposed on the regional transmission system - so if everyone tried to go to that source for power, and overloaded that section of the grid, they'd price themselves out, and closer in generators that had higher generation costs, but lower transmission impacts, would start to balance. The idea is that by realistically reflecting total impact costs on both generation and transmission, you'd get the lowest level of system impact, and the best market price at the same time.

The flip side of it, was that the areas of the state which were the most generation hostile, such as the bay area, and the SF peninsula in particular, would pay for their choice of forcing remote generation to come in from a distance, so they'd internalize costs they'd been externalizing to others. That was what really killed it, but it was an all around superior model for setting market prices than the one California adopted.

That type of congestion charge system, with improved incentives (not subsidies, just removal of new and active barriers) for load reduction, self and distributed generation, etc. would solve the problem for a lot less money, but it won't put the money or the power in the pockets of the majority of the big vested interests who want to maintain the current system, or pass it off so they can impose rate increases and get cost plus corporate pork under a Federal regulatory mandate.

[Sprayber]

Originally posted by Sava
nah I didn't see your guys' replies... but I now know that MtG is smarter than industry experts, executives, and regulators...

I'm interested in your response to MTG's last few posts. And please avoid these They really don't constitute a response.

[PLATO]

Mtg, Great analysis! I'm not an industry expert, but I feel like one after reading your last few posts. Thanks for shedding some light on the situation (no pun intended!)

[Lefty Scaevola]

Sava, Read your article yourself, dimwit
"Deregulation is actually a misnomer for the restructuring of the power industry, because only the generation of electricity was freed from strict government controls, beginning in 1992. Companies were allowed to charge market-based rates for generating electricity, creating the financial incentive to build more power plants.
But the transmission of electricity over high-voltage lines and the distribution into homes and buildings remained regulated. Power companies received only a relatively low, government-set return on their investment in the grid, so they allocated far less money to improving transmission reliability than to building power plants."

The dereulgated part, generation is doing fine, the still regulated parts are crap.

[MichaeltheGreat]

I always love the "poor starving utilities getting only low, government-set returns" propaganda that the utilities have been putting out for years.

On the private side of the industry, we don't get any guaranteed returns at all, certainly nothing like cost plus.

Ever since PURPA in 1978, regulated utilities have magically found more and more of their costs were on the transmission, distribution and services side, and that generation was magically lean. They preserved most of that when restructuring came into being - keeping their wires side fat and gold plated.

Some utilities are less blatant that others, but a lot of them have capital and ratebased operating costs 40-60% higher than what they should be. And that's nothing to do with union vs. non-union contractors. For all intents and purposes, there is no non-union high voltage electrical contracting, and I sure wouldn't hire one for normal distribution voltages or higher.

[Berzerker]

Sava -

Deregulation is actually a misnomer for the restructuring of the power industry, because only the generation of electricity was freed from strict government controls, beginning in 1992. Companies were allowed to charge market-based rates for generating electricity, creating the financial incentive to build more power plants.

But the transmission of electricity over high-voltage lines and the distribution into homes and buildings remained regulated.

Sava, did you read this before giving your post a title?

[Berzerker]

Oh yeah, Sava, you blamed this on the GOP last time since they took control of the House in 1994, but according to the article, it began in 1992 so the Dems had 2 years.

[Goingonit]

This power outage is the fault of pretty much every politician who has held office in North America for the last thirty years - neither Democrats nor Republicans invested in the transmission grid. Yes, deregulation was manifestly dumb, but that doesn't mean only politicians who supported deregulation are to blame.

On a side note, Ontario still hasn't returned to full generation capacity since the blackout. You think your electrical system is crappy.

[Sava]

Originally posted by MichaeltheGreat
I am an industry expert, dufus. It's what I do for a living.

and you know more than everyone else, too...

But it's obvious that your position has you biased towards deregulation despite it's failings.

Oh yeah, Sava, you blamed this on the GOP last time since they took control of the House in 1994, but according to the article, it began in 1992 so the Dems had 2 years.

I did no such thing. I don't know where you got this idea... And despite your selective reading, I've consistently labeled Clinton as de-reg friendly.

[DinoDoc]

Originally posted by Sava
and you know more than everyone else, too...

But it's obvious that your position has you biased towards deregulation despite it's failings.

Where have you disproven anything he's said?

[Sava]

Where have you disproven anything he's said?

Where has he disproven anything the article has said?

[Imran Siddiqui]

His first post on this thread.

[Arrian]

But it's obvious that your position has you biased towards deregulation despite it's failings

And your political ideology doesn't bias you in the other direction?

So, faced with two people arguing over a topic I don't really know anything about, who am I to believe? One or both might be biased. Therefore, I can only go on the quality of their posts. Yours mainly consist of sarcastic one-liners and smileys. I'll go with the other guy.

-Arrian

[MichaeltheGreat]

Originally posted by Sava
and you know more than everyone else, too...

More than the vast majority, yes, that's why they pay me.

But it's obvious that your position has you biased towards deregulation despite it's failings.

What market failure in generation, or maintenance or operating failure on a non-regulated generation asset contributed to the NE grid problem?

I'm not biased towards deregulation except in those areas where things should be deregulated.

[MichaeltheGreat]

Originally posted by Goingonit
This power outage is the fault of pretty much every politician who has held office in North America for the last thirty years - neither Democrats nor Republicans invested in the transmission grid.

They can't really invest in what they don't own. I haven't done enough work on east coast power to know state level coops and power projects, but the Federal ones have been stable for decades, and they only run lines from their generators to delivery points. The rest of it is private sector.

It's also incorrect that there's been no investment in the transmission grid in the northeast in that time - there's been hundreds of projects worth billions of dollars, and if someone went to the trouble of digging up different utilities' general rate case filings with their regulators, the amounts and locations of all those transmission service projects are reflected in rate case filings.

It's convenient political spin, and goes with the agenda of (a) blaming someone else and (b) saying "we're gonna do something about it, give us more money" to say nothing's been done. Reality is that if you didn't have investment over the last 30 years, a lot of areas would be without power for hours of nearly every day.

Yes, deregulation was manifestly dumb, but that doesn't mean only politicians who supported deregulation are to blame.

Retail rates for power in much of the deregulated areas of the US are about what they were in 1985 while ICOP, which reflects the results of large scale open access and open market pricing, has actually gone down significantly since the mid 80's.

On a side note, Ontario still hasn't returned to full generation capacity since the blackout. You think your electrical system is crappy.

Sounds more like a lack of adequate black start capability, or synchronization problems. What's your approximate mix of generator types, or are you primarily importers of hydro from other parts of Canada?