"The blackout of 2003 offers a simple but powerful lesson: Markets are a great way to organize economic activity, but they need adult supervision."
The Wall Street Journal
, August 28, 2003
On August 14, 2003 the Niagra power plant suffered some type of mechanical problem and shut down. Or something went wrong with the transmission line network surrounding the Great Lakes. Whatever the final cause this one failure created overload situations at other plants and transmission lines, forcing electrical utilities to shut down large parts of the grid or overheat due to excessive demand. The result of one failure took down the power for major metropolitan areas including New York City, Cleveland, Detroit, Toronto Ottowa and more.
The questions is obvious: How is it that a simple could do so much damage? While the weather was hot that day, there was no particular heat wave leading to unexpectedly high demands. Not one mention of record highs. Just normal August weather.
The answer is simple: Deregulation
Utility deregulation is something of a sacred cow for conservatives. They argue that if market forces are permitted to work, normal competition will drive out inefficiency, and reduce overall prices as the most efficient providers will win. They are correct in this. Free markets are very efficient at reducing prices, provided there is a truly competitive environment. As utilities were government regulated monopolies they seemed an ideal place to prove the conservative case. They had large amounts of redundant facilities and large numbers of relatively well paid employees. Competition would cut payrolls, cut wages, close inefficient facilities and generally drive down prices. Which it did.
But utilities are different from other industries. If you don't like your Chevy you can easily opt for a Honda. You can walk or take the bus. But if your power goes out you lose your light. They're not something easily done without. In addition, maintaining a utility in any form requires maintaining a very large and expensive infrastructure. Individual pieces of said infrastructure may not pay for themselves, but the whole is a distributed power grid that benefits all. For example, the fact that a power, sewer and gas and transportation grids already exist in many locations makes it easier and less expensive for businesses to choose an optimal location. They don't have to guarantee the utility's costs.
Economists have long recognized the special nature of utilities. There are some goods and services which the market will systematically underprovide, simply because it is very difficult to capitalize their full value. The term spillover benefits is used to describe investments whose benefits exceed those which can be captured by the markets. There are costs the market does not capture as well, such as pollution. Markets are very good at what they do, which is reward efficitent providers and drive out inffectiency, but they are not perfect. They don't care about anything that doesn't make money.
Deregulation was indeed successful in many areas. Airline prices did drop, as did trucking costs (at the possible cost of higher highway fatalities}. Utility prices came down as well, as competition ruthlessly cut costs. And the management of shared utility grids is something of an achievment even if the original creators of said grids often complain that their infrastructure unfairly subsidizes their competitors.
But one of those costs so ruthelessly cut was the cost of redundancy. A regulated utility can plan for unexpected demand and the long term reasonably sure of a modest, but guaranteed profit. In the old days the rule was expected peak demand plus 10%. That meant that the utility maintained power plants and transmission lines they did not always use. They could afford line workers who perhaps weren't always busy, but with the assurance if there were an emergency or a surge in demand they could meet it.
Not anymore. Since the advent of deregulation that sort of redundancy is no longer affordable. Market forces make such investments unprofitable. In the old days the failure of one power plant would have simply brought another online, and fairly quickly.
Of course one might argue that the savings in cost outweigh the occasional power outages. Perhaps so. But people die when their air conditioners fail in a heat wave. And businesses like stability-- it makes planning easier. True lower electrical rates cuts costs. But what happens when they skyrocket, like they did in California in 2001? Plants there made more money producing nothing, or shut down.
So if you pay less for electricity thank a Conservative.
When your power is out, you should also thank a Conservative.
it is interesting that during the California energy crisis President Bush and Dick Cheney refused all requests to meet with California Senator Barbara Boxer, and other California officials. Yet at the same time they continued to meet with Enron executives, the same Enron executives that were playing shell games to screw Californians out of more money. It is also interesting that First Energy chair Anthony J. Alexander is a "Bush Pioneer" for raising over $100,000 for our president. Expect rhetoric only.
Postscript we now have evidence, including memos and taped conversations that California's energy crisis was at least partially managed for the purposes of increasing prices. The markets care about money, not about the public good.