The Cascading Power of a Myth: As the Blackout of 2003 Was Tripping Up, the Deregulation Story Was Wheeling Out of Control
by Mark Hand
de·reg·u·la·tion, noun, Date: 1963: the act or process of removing restrictions and regulations.
Starting last Thursday at 4:11 p.m. EDT, the myth that our electric power industry is deregulated electrified our national psyche at almost the same speed that the great blackout of 2003 cascaded from FirstEnergy's suspect transmission lines in Ohio to the dirty coal-fired power plants of the Motor City to the fish-killing nukes along the Hudson River to the neon signs in Times Square.
Too bad there weren't any circuit breakers that automatically kicked in to prevent the spread of the deregulation myth. Give the electric industry some credit. It quarantined the outage in the Lake Erie loop and a few (heavily populated) adjacent areas before it could spread to the entire Eastern Interconnection. But the myth of electric deregulation spread all across the country and shows no signs of abating.
If we are to take away only one economic lesson from the blackout, it should be, don't believe the deregulation hype about electricity. The U.S. electric transmission system is not deregulated. In fact, electric power companies have been regulated pretty much since the dawn of the electric utility age almost a hundred years ago. And that's not even counting the hundreds of public power companies across the country that snubbed the regulated model for full-fledged socialized power, with amazingly successful results.
The eerily similar blackout of 1965 and the smaller-scale outage of 1977 occurred in what everyone agrees were traditionally regulated environments. The outage that struck a large portion of the Western Interconnection in 1996 occurred at a similarly regulated time, before the energy merchants had found their reins loosened a little in California.
So, I wish the pundits and journalists talking and writing about the great blackout of 2003 would get their facts straight about today's regulated environment. Sure, I'm willing to give the vast majority of the Fourth Estate the benefit of the doubt when it comes to understanding how our federal and state governments interact with the electric power industry. These are the same Soviet-style propagandists who disseminate, without the slightest pinch of irony, the Bush regime's whoppers about U.S. and British invasion forces in Iraq working as liberators and Iraqi resistance forces acting as terrorists.
But there is a group of people in the know who should know better. Are you reading this Greg Palast, Harvey Wasserman, Wenonah Hauter? For instance, in a debate earlier this week with Fred Smith of the Competitive Enterprise Institute on Pacifica's Democracy Now!, Palast said: "We have the cheapest, best electric system on this planet until a disease hit us called deregulation."
Come on, Greg. Last week's massive blackout was bad and the mostly contrived California electricity crisis was appalling, but, for the most part, the U.S. electric system is still pretty darn cheap and reliable. As for this disease you call deregulation, you know as well as I that regulatory bodies at the state and national levels still have tremendous authority and often wield it to the chagrin of the electric companies they oversee.
If electricity is deregulated, as so many contend, then what exactly is going on in the electric divisions of the public utility commissions across the United States? Okay, sure, a little hanky-panky takes place between state PUC officials and the executives at the monopoly utilities they regulate. Favors aside, these state commissions are for the most part keeping a watchful eye on the electric utilities in their states as required by the public utility statutes passed by in the state legislatures.
The primary goal of the PUCs is to ensure the electric companies provide service that's in the public interest. In other words, the regulators want to keep the public disinterested in electricity. Because when you and I don't take hitting the light switch and having the lights come on for granted, the regulators know they've failed in their relationship with the electric utilities.
Do you think the commissioners at the Public Utilities Commission of Ohio care that a company under their charge has been blamed by some for launching the outage virus that infected 49 million people in the United States and Canada? I would bet PUCO officials are raging mad at FirstEnergy. While PUCO Chairman Alan Schriber has issued public comments saying he doesn't think FirstEnergy is solely to blame for the blackout, you can rest assured the staff at the Ohio commission is already investigating how the utility company will need to improve its service to justify its current regulated rate of profit.
In fact, Ohio regulators still have the authority to revoke the service territory franchise license of FirstEnergy — or any other Ohio electric utility — if the company is a persistent screw-up. Revoking an electric utility's license? Letting another utility take over a delinquent company's operations? Or, in the backyard of former boy mayor Dennis Kucinich, municipalizing a troubled electric power system? If an electric utility company can face these types of consequences, and they can, is it deregulation that allows these scenarios to play out? My guess is no.
As for rate cases, they never died. State regulators still require investor-owned utilities to file massive rate applications, which trigger rate case proceedings that result in, among other things, the PUC assigning the utility a specified rate of return on their transmission assets. (The fight over the size of the utility's profit margin typically provides the only suspense during rate case proceedings.) This is traditional electric utility regulation. It's still alive and well after all these years. I think you'd be hard-pressed to find someone on either side of a rate case proceeding willing to characterize the environment in which they conduct these proceedings as "deregulation."
Head to Washington, D.C., and you'll find about 1,250 employees with a budget just shy of $200 million working on energy regulation issues at the Federal Energy Regulatory Commission. I think it's safe to say a large number of these people are focusing on regulating electric power companies. Sure, FERC's budget is chump change compared to the annual revenue generated by the companies the agency regulates. But, when not wasted on huge executive salaries and bonuses, a budget of that size can go a long way in setting rules for the electric industry and monitoring the conduct of energy companies in the United States.
Maybe the pundits are referring to the wholesale generation and retail side of the electric power industry. At the wholesale level, regulation of the industry in fact has been loosened. But the Federal Energy Regulatory Commission still has the authority to review all aspects of the wholesale power market, from long-term contracts to the real-time market, to ensure that the prices being charged are just and reasonable. That doesn't sound like deregulation to me.
At the retail level, some state PUCs have let commercial and industrial customers shop for their electric power supply from companies other than their incumbent public utility. And certain states even let residential customers enter the open market to buy their power.
For those customers who don't like how much a non-utility supplier is charging for power, state regulators have established a fallback system that provides them with access to power set at more affordable and stable rates. In some states, regulators (there's that word again) tell non-utility suppliers that they must provide electricity to customers at a certain price or else they can't play the power game in that state.
Telling companies how much to charge? Once again, that doesn't sound like deregulation to me. Providing customers with a safety net in case they're too afraid to venture into the scary open market? That too doesn't sound like deregulation.
Electric power companies have certainly gouged customers over the years. But none of this gouging has taken place in a deregulated environment. All of the profiteering has occurred under the watchful eyes of regulators and legislators who played a role in crafting the rules, i.e., regulations, that enabled the companies to pull off the schemes.
If you're worried that deregulation has taken away your power to register your gripes about your electric company, take a deep breath and relax because the United States still has an extremely sophisticated and responsive regulatory system that gives average Joes like you and me the ability to be heard.
The regulators are out there in large numbers, with big sticks in their toolboxes that can be wielded when electric companies are naughty. Sometimes, though, the regulators need to be reminded that they indeed have the power to enforce reliability among their electric utility subjects. In those states where regulators fell asleep on the job, I think the great blackout of 2003 may have jolted them from their slumber.