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Saturday, August 16, 2003

The Blackout, And Deregulation

Robert Kuttner, writing in the NY Times:

In the search for the source of Thursday's blackout, the underlying cause has been all but ignored: deregulation. In principle, deregulation of the power industry was supposed to use the discipline of free markets to generate just the right amount of electricity at the right price. But electric power, it turns out, is not like ordinary commodities.

Electricity can't be stored in large quantities, and the system needs a lot of spare generating and transmission capacity for periods of peak demand like hot days in August. The power system also requires a great deal of planning and coordination, and it needs incentives for somebody to maintain and upgrade transmission lines.

Deregulation has failed on all these grounds. Yet it has few critics. Evidently, even calamities like the Enron scandal and now the most serious blackout in American history are not enough to shake faith in the theory.

Bill Richardson, Energy Secretary under Bill Clinton, and now Governor of New Mexico:

There are moves we need to make quickly to ease the crisis facing our electric transmission system. First, we must establish mandatory reliability rules....

Second, we need to outline basic rules of the road for utilities. For some time, the industry has been caught between the old paradigm of vertically integrated monopolies and the more modern approach of competitive wholesale markets. During this transition to competition, utilities have been reluctant to make investments in the transmission grid until they know what the rules will be and how they will benefit by them.

There is no doubt that a poorly handled deregulation can produce deplorable results. That does not in itself invalidate the theory.

UPDATE: Many links at from Tyler Cowen, powered via the InstaGrid.

Good point by Tyler Cowen - briefly, we have many layers of overlapping Federal, state, and local regulations. Deregulation may not work if we only cut part of the thicket, and we probably can't cut all of it.

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