NCPA - National Center for Policy Analysis

Grid Investment Requires Competition, not Heavier Regulation

August 18, 2003

Last week, approximately 100 generators connected to the electric power transmission system cut themselves off in response to a sudden imbalance in power flows. They are designed to do this to prevent mechanical damage to the generators, which would have taken weeks or months to repair. This also prevents blackouts from spreading.

Policymakers are looking for ways to prevent future blackouts, but Cato Institute experts say they shouldn't draw the incorrect conclusion that the blackout was due to "market failure." Rather, it is due to the failure of the regulatory structure.

California, for example, experienced blackouts in 2000-2001 after changing its regulatory structure. But in California there was no deregulation of the transmission system.

Generation and retail sales regulations were loosened somewhat, but regulation of the transmission grid increased.

New investment in the transmission grid may be needed, but the way to encourage it is not heavier federal control.

  • Some policymakers want to transfer authority over transmission investment from the 50 state utility commissions to the Federal Energy Regulatory Commission (FERC), and force utilities to invest in transmission upgrades through increased federal regulation.
  • A better way to encourage investment is to remove the rate-of-return regulation that caps transmission profits, and to allow companies to charge market prices for access to those who want to use their wires.
  • A corresponding transfer of grid management responsibilities from public to private hands -- the direct opposite of what is proposed by the FERC -- would encourage innovation and experiments in various market organizations.

For example, direct current transmission lines are not subject to regulatory price controls and don't affect users of the alternating current transmission system. One such line between Connecticut and Long Island was used for the first time last Friday to help bring power to Long Island.

Source: Jerry Taylor And Peter Van Doren (Cato Institute), "Outside the Grid," Wall Street Journal, August 18, 2003.

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