Thursday, December 28, 2006

Electric Power: Was It Broke? Did We Fix It?

Like any other profession, engineering has its particular proverbs and sayings. One of my favorites is, "If it ain't broke, don't fix it." As with most proverbs, this one captures only part of the whole picture of a complex situation. But when I look at the potential and actual problems we have these days with the U. S. electric power system, I wish more people in authority had paid attention to that particular proverb.

Electricity is an unusual commodity in that it must be produced exactly as fast as it is sold. If a million people suddenly turn on their lights all at once, somebody somewhere has to supply that much more electricity in milliseconds, or else there is big trouble for everybody on the power distribution network. For lights to come on reliably and stay on all across the country, the systems of generating plants, transmission lines, distribution lines, and monitoring and control equipment have to work in a smooth, coordinated way. And, somebody has to pay for it all.

From an economic point of view, approaches to electric utility management and financing lie somewhere between two extremes. At one extreme is completely centralized control, billing, and coordination, often performed in many countries by the national government. France is an example of this approach. Large, complex electric systems are a natural fit to large, complex government bureaucracies, and in the hands of competent, dedicated civil servants, government-owned and -operated utilities can be a model of efficiency and advanced technology. Government control and ownership can provide the stability for long-term research and development. This is one reason that France leads the world in the development of safe, reliable nuclear power, which provides most of the electricity in that country.

The other extreme can be found in third-world countries where there is little or no effective government regulation of utilities, either through incompetence, war, or other causes. In this type of situation, private enterprise rushes in to fill the gap and you have private "utilities"—often nothing more than a few guys with a generator and some wire—selling electricity for whatever the market will bear, in an uncoordinated and inefficient way. This approach leads to a spotty, inefficient market in which the availability and reliability of electricity depends on where you live, and typically large portions of the market (in rural or dangerous areas) are not served at all.

In the U. S., we have historically swung from near one extreme to the other. As electric utilities began to grow in the late 1800s and early 1900s, they began as independent companies. But the technical economies of scale quickly became apparent, and the Great Depression brought on tremendous consolidation of companies into a few large firms, which were then taken under the regulatory wing of federal and state governments. What we had then was a kind of benevolent dictatorship of the industry by government, in which private investors ceded much control to the various regulatory commissions, but received in turn a reliable but relatively small return on their investment.

This state of affairs prevailed through the 1970s, whereupon various political forces began a move toward deregulation. The record of deregulation is spotty at best, probably because it represents an attempt to have our regulatory cake and eat it too. No one wants the electricity market here to devolve to the haphazard free-for-all that it is in places like Iraq, or even India, where electricity theft is as common as beggary. So rightly, some regulations must be left in place in order to protect the interests of those who cannot protect themselves, which in the case of electric utilities means most of us.

The most noteworthy recent disasters having to do with deregulation were the disruptions and price explosions in California of a few years ago, caused in large part by Enron and other trading companies who manipulated the market during hot summers of high demand. Even if the loopholes allowing such abuses are closed and inadequate generating capacity is addressed with more power plants, however, many problems remain. A recent New York Times article points out that because the existing rules provide disincentives for power companies to spend money on transmission and distribution equipment (power lines), certain parts of the country have to pay exorbitant rates in the form of "congestion charges."

The basic problem is, there are not lines enough to carry cheap power from where it is available to where it is needed. Somebody would have to pay to build them, and somebody else would have to approve the construction. In these days of "not in my back yard" attitudes, it is increasingly hard to construct new power lines anywhere, even in rural areas. The net result of these complications is that as time goes on and demand for power increases, more and more areas may find themselves starved for power, and will have to pay rates that might be as high as twice the prevailing rate of surrounding regions.

My personal bias is that we have gone way too far in attempts to privatize the electric utility industry. It is a business which technologically fits better with a centralized authority and center of coordination. But in today's political climate, the chances of going back to a more centralized way of doing things are small. It looks like the best we can do is to continue to tinker with what regulations remain, fixing problems where pernicious disincentives appear, and keeping an eye out for Grandma and her electric heater that she needs to get through the winter. But in my opinion, the whole thing wasn't broke to begin with, and the fix of deregulation didn't need to be applied the way it was.

Sources: The New York Times article on congestion charges appeared in the Dec. 13, 2006 online edition at

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