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Regulation leads to blackouts

Steve BucksteinQuickPoint!

Advocates of government regulation are crowing over last Thursday’s biggest-ever electricity blackout in the Eastern United States and Canada. They mistakenly blame electricity deregulation.

Apparently, power flows in the region’s connected transmission systems became dangerously unbalanced. Automatic control systems then turned off some 100 power plants rather than let their generators sustain serious damage that might have taken weeks to repair. None of this resulted from deregulation, because the transmission systems remain heavily regulated.

Most analysts believe the transmission system is too old to effectively cope with today’s electricity demands. The generally accepted solution is to require power companies to invest in major system upgrades. This approach requires even more regulation which, according to a Reason Public Policy Institute analyst, is the problem, not the solution.

Whatever the cause of last week’s blackout, the big picture culprit is most likely what’s called rate-of-return regulation, which caps transmission profits. These regulations, in effect, put a penny in the fuse box. They prevent the pricing system from giving badly needed signals to those trying to determine exactly where new transmission investments are needed most.

As two Cato Institute analysts explain, “the fastest and most efficient way to modernize the grid is to allow profits to be gained by grid owners. And the best way of organizing this industry — and the best mix of generation to transmission as well as interconnectivity and independence — are questions that no centralized planner or computer program can answer.”

Steve Buckstein is senior policy analyst at Cascade Policy Institute, a Portland, Oregon based think tank.

© 2006, Cascade Policy Institute. All rights reserved. Permission to reprint in whole or in part is hereby granted, provided the author and Cascade Policy Institute are cited. Contact Cascade at (503) 242-0900 to arrange print or broadcast interviews on this topic. For more topics visit the QuickPoint! archive.

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