Don’t Blame Deregulation for the Blackout

The causes of the electricity blackout of August 14, 2003, as of this writing, are far from determined, but already the blame is being misdirected. While power providers were struggling to restore power to affected areas from Michigan across Canada and Ohio to New York and New England, some prominent politicians were already claiming that deregulation of electricity is somehow the cause of the massive outage. Another popular culprit was lack of investment in the transmission network, particularly in transmission interconnections, which leads some of its proponents to call for more regulation, or at least a national energy policy.

Stay Engaged

Receive our weekly emails!

This rush to assign blame for the outages came at a time when there was no agreement on the basic facts, such as whether the outages started in Lansing, Canada, New York or Ohio. More importantly, the solutions being proposed are mostly calls for more government regulation and spending that may well worsen rather than prevent future blackouts.

Until relatively recently, electricity was generally provided by vertically-integrated monopolies under the regulatory control of local authorities, with a single utility providing electricity generation, transmission and local distribution. The Federal Energy Regulatory Commission (FERC) in Washington added an additional layer of regulatory control, particularly over interstate transmission of electricity.

Substantial progress has been made to provide more competition in Michigan electricity markets. Upstream, current electricity generation has become more competitive due to both FERC regulatory changes and Michigan legislation. Downstream, Michigan was a leader in giving consumers choice over their local electricity provider, and generally without the regulatory blunders made by state regulators during California’s disastrous electricity restructuring.

In the middle stage, however, the story is much different. FERC has actively promoted interconnectivity of transmission systems across state lines, and "wheeling," which occurs when one utility provides transmission services across its lines for another utility. If anything, regulation of transmission systems has increased in recent years as FERC has promoted interconnectivity, even as significant state deregulation of generation and distribution has occurred in Michigan. Current regulation basically treats transmission systems as common carriers, in the traditional regulated monopoly model of regulation, and provides little incentive for private companies to invest in transmission capacity and improvements.

The benefit of increased transmission interconnectivity is that when one or two generation facilities or transmission connections fail, other connections provide back-up through alternative sources of generation and transmission capacity. Such breakdowns do occur on a regular basis, and usually are barely noticeable by consumers. Interconnections of generation and transmission systems across utilities means that more back-up capacity is available for the local utility when it experiences an individual breakdown.

The drawback to interconnectivity, however, is that when failures are more widespread, larger system failures are able to migrate across the entire region rather than be confined to the local utility. It now appears that local failures were able to spread across the eastern power grid, and the grid system that worked well in backing up individual and localized breakdowns was overwhelmed by more widespread problems.

Thus, if the deregulation of electricity in Michigan over the past few years had not occurred, it now appears that the blackout would have been no less extensive. Indeed, to the extent that deregulation in Michigan encouraged entry into electricity generation, the state may have been better able to draw upon more sources of electricity while restoring service to the affected areas. In the end, however, the blackout was primarily the result of failures, wherever they may have originated, at the transmission level — the level where almost no deregulation has occurred.

There certainly are some legitimate problems that have been exposed by the blackout of August 2003, including aging infrastructure and continued misaligned regulatory incentives that discourage private investment in transmission capacity and improvements. But to the extent these are government policy failures, they are regulatory failures, not deregulatory failures.

The rush to assign blame for the power outage only distracts from legitimate concerns about electricity markets in Michigan and the other states affected by the blackout. Moreover, if the finger pointing over a failure at the transmission level turns into calls for Michigan and other states to undo the deregulation at the generation and distribution levels, the resulting regulatory uncertainty will threaten the progress that has been made to provide meaningful competition in electricity markets in Michigan, while doing nothing to prevent future blackouts.

# # #

Theodore R. Bolema is an adjunct scholar with the Mackinac Center for Public Policy and an attorney in the Finance and Law Department of Central Michigan University’s College of Business Administration, where he specializes in regulatory law and economics. He holds a Ph.D. in Economics from Michigan State University and a J.D. from the University of Michigan Law School. He is the recent author of an essay on Michigan anti-corporate-takeover legislation.