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ENERGY: Laissez Faire Legacy Leaves US, Canada Cursing the Dark

Katherine Stapp

NEW YORK, Aug 19 2003 (IPS) - Pundits blaming last week’s vast blackout in parts of the United States and Canada on an antiquated "third world" power grid seem to have forgotten that deregulation – which many analysts say spawned the crisis – has been Washington’s mantra to developing countries for years.

Even the price-gouging and rolling outages in the state of California have not discouraged U.S.-dominated lending agencies like the World Bank from telling debtors to model their own markets after the freewheeling United States electricity grid.

Last Thursday, the flaws of this model again became evident when a massive backflow of electricity circling the Great Lakes triggered the worst blackout in the region’s history, darkening 24,000 sq kms in eight U.S. states and most of Canada’s Ontario province.

The weak link was soon traced to a company called FirstEnergy, which owns four of the five lines in northern Ohio that initially failed. The company said an early warning system never kicked in.

FirstEnergy has a dubious record, shutting down its Davis-Besse nuclear plant last year when maintenance workers stumbled on a gaping hole in the steel reactor cap.

No one has yet tallied the bill for last week’s blackout, which surged though 100 power stations, including 22 nuclear reactors. New York City alone lost about one billion dollars in revenue, according to officials – 36 million dollars per hour that the lights were out.

As the George W. Bush administration manoeuvred to deflect blame, Energy Secretary Spencer Abraham appeared on television Sunday to announce that consumers will likely pay up to 50 billion dollars in higher electric bills to fix the nation’s power transmission system.

"Rate-payers, obviously, will pay the bill because they’re the ones who benefit," he said on ‘Face the Nation’. "And that’s where most of the responsibility, ultimately, will be assigned."

But numerous critics say the responsibility lies with successive U.S. administrations that lifted oversight of the industry and made complying with the rules voluntary. Starting in the late 1970s, generation, transmission and distribution were broken into separate entities.

One result was that utilities had little incentive to build new power lines, even as electricity use mushroomed, growing eight percent in the United States over the last four years. Generating capacity expanded by 12 percent over the same period, further straining the transmission infrastructure.

Deregulation is actually a misnomer, said Enver Masud, who led the ‘U.S. National Power Grid Study’ for the Department of Energy in 1980.

"What really happened was that new laws and regulations were put in place, and a tried-and-true system that favoured cost minimisation was replaced with an untested system that favoured profit maximisation," he wrote in an article in the ‘Christian Science Monitor’ newspaper.

"It also fractured responsibility for the overall reliability of the system. In fact, (the blackout) is a wake-up call: rethink deregulation."

Others argue that the problem is actually that deregulation has not gone far enough.

"Deregulation has been fingered as a culprit, but the transmission and distribution system has not been deregulated – in fact, regulation of this sector has increased throughout the 1990s," said Peter VanDoren, editor of the quarterly journal ‘Regulation’.

"Assertions that the blackouts underscore the need for a national energy strategy fail to recognise that the energy bill now in a congressional conference committee would do little to increase the incentives for private companies to invest in expanded transmission capacity," he added in a statement.

Congressional hearings are now in the works on what went wrong, with Republicans and Democrats already trading blame. A special U.S.-Canadian task force has also been scrambled to look into the crisis.

Beyond pointing out that the blackout is "an indication of the fact that we need to modernise the electricity grid", Bush has not yet promised to push for meaningful changes in how the power industry does business.

Rather, Abraham and leading Republicans in Congress have seized the opportunity to try to revive Bush’s moribund energy plan, which includes controversial provisions like offshore oil drilling and drilling in Alaskan wilderness areas.

The administration has also sought a three-year delay in a plan by the Federal Energy Regulatory Commission, a government agency with no policing powers, to create a network of regional organisations that would manage the grid system.

Environmentalists and proponents of alternative energy, which has languished under the Bush administration, say a decentralised grid of wind and solar generators is the only reliable, long-term solution to the problem.

"Every technological system ever designed, from the wheel to the space shuttle, fails from time to time," Lloyd J. Dumas, a professor of political economy at the University of Texas at Dallas, told IPS.

"We would greatly reduce this vulnerability if we moved deliberately toward renewable energy systems that are much simpler and more easily decentralised than the combination of nuclear power and fossil fuel generation of electricity on which we currently depend," he added.

Around the world, the temporary travails of millions of North Americans drew reactions veering from surprise at the fragility of the world’s most powerful economy, to grim satisfaction that people in the United States were getting a taste of their own medicine.

But governments faced with the Enron model of Wild West-style energy markets should take this crisis to heart, analysts like Masud say.

Energy markets worldwide are consolidating into sprawling systems that could be vulnerable to the same "cascade" effect seen on the Niagara-Mohawk grid last week, where outages spread as swiftly as a computer virus from one local grid to the next.

Power companies in the Middle East and South Asia have been rapidly building up their generating capacity in recent years, at a cost of billions of dollars, partly financed by the World Bank and other global financial institutions – with the proviso that they restructure their electricity markets.

"California’s deregulation fiasco and the more recent blackout should serve as a red flag for developing countries," Masud said.

Although California’s 1996 deregulation of the electricity sector was supposed to benefit consumers by lowering prices through increased competition, the state ended up hostage to a cartel of energy companies that artificially drove up rates by withholding power.

The legislation had encouraged the state’s three largest utility companies to sell off their power generation facilities, and also gave them 17 billion dollars in taxpayer subsidies for "stranded assets" – debts from inefficient power plants, including nuclear.

But the promised competition failed to materialise. Less than two percent of all California customers, including large industrial customers, switched suppliers, leaving the utilities free to manipulate the market. In San Diego, the cost of electricity soared 240 percent over the space of one month last year.

Since 1996, 20 other states, including New York and New Jersey, have followed suit and deregulated their power sectors. Vertically integrated companies that used to work with local governments to manage the grid dissolved into a patchwork of competing suppliers with no responsibility for the system as a whole.

When India opened up its power sector to foreign investors in the early 1990s, it ended up owing 19 million dollars in electricity bills to the disgraced U.S. energy giant Enron.

The successor Bharatiya Janata Party-Shiv Sena government that came to power, instead of "throwing Enron into the Arabian sea" as promised, renegotiated for what critics call even more unfavourable terms. The country is still plagued with major power problems.

In the Philippines, the state utility, the National Power Corp, owes more than nine billion dollars under agreements with multinational power companies that went sour after its markets were opened up.