Arthur W. Wright

English

Research Papers in Economics

4 The Connecticut Economy Fall 2003 4
By Arthur W. Wright
In the Summer 2000 issue, Brian Kench and I 
surveyed the incomplete “deregulation” or (better)
restructuring of the Connecticut market for electric
power.  Today, three years on, the latest Great
Northeastern Blackout this past August 14 is a 
stark reminder that the tortuous process still has a
long ways to go in Connecticut and the rest of the
country.  Unless we act soon, and with resolve, 
8/14 will prove an augury of the future.  Next time
our state may not get off so lightly, and the “next
time” is not a matter of whether but when.
The proximate causes of 8/14 were dumb bad
luck at two Midwestern utilities and weak gover-
nance of their rickety regional grid.  But the under-
lying source of the outage was the still incomplete
restructuring of the nation’s electric power sys-
tem—in particular, continued mispricing of electric
power and a lack of will to make long-overdue
institutional changes.  The resulting uncertainties
are impeding the major investments, especially in
transmission, that must be made if we are to avert
further widespread blackouts.
A fix for both pricing and institutions will
require leadership capable of overcoming both
entrenched state or regional interests and political
grandstanding about “protecting consumers.”
Connecticut, a small state, is not in this alone, but
state politicians must be part of the solution, not
naysayers standing in the way of progress.  If
parochial interests and small minds prevail, we
will deserve the old Louisiana epithet from the
dawn of the Energy Crisis 30 years ago:  “Let the
bastards freeze in the dark.”
In this age of technological miracles, how could
seemingly innocuous problems at a couple of Ohio
electric utilities cascade into a prolonged, costly
outage covering many thousands of square miles
and millions of customers?  It wasn’t easy.
Cooking Up a Blackout
Start with a power network linking the lower
Midwest, Ontario, New York, and New England,
with system capacity still trying to catch up with
the vigorous demand growth of the 1990s.  Add
system control that relied on a merely advisory
Independent System Operator (ISO), and interutili-
ty communications requiring minutes when, in a
crisis, every second counts.  Voila!  Disaster.
The ISO itself is only a few years old, one of the
paltry products of what is now referred to tongue-
in-cheek as “electric power deregulation.”  This
grab bag of half- and quarter-measures cobbled
together since the 1980s took its inspiration from
the earlier deregulations of transportation, oil-and-
gas, communication, and banking beginning in the
late 1970s.  Alas, “restructuring” electric power by
moving from the old regulatory regime to a new
one, was inherently messier than in those other
sectors.
First, the technical challenges inherent in the
physics of electricity are much more complex.  As
8/14 demonstrated only too well, if power systems
are not properly coordinated, imbalances can easily
spin out of control and spread far and wide.  
Second, the tattered tapestry that was the old
system of regulation had just growed, like Topsy,
for nearly a century, with responsibility fractured
among the contiguous American states and
Canadian provinces and the two countries’ Federal
governments.
Third, state public utility commissions (PUCs)
have long jealously guarded their ability to control
rates and investments, which give them (and the
politicians who appoint them) their political clout.
Add regulated rates that favor smaller users and
that respond only with a lag, if at all, to changes in
costs, and you get power prices that systematically
ignore demand signals throughout most of the elec-
tric power system.
Paving The Road to Hell
Well-intentioned restructurers of electricity mar-
kets tried to deal with the complexity by dismem-
bering the integrated power companies that had
long combined all three stages of production—gen-
eration, transmission and distribution—under the
same roof.  (See the diagram; also see Stanley
McMillen’s article on page 18.)  The
original rationale for regulating power
markets was the familiar one:
economies of scale that make one sup-
plier in a market more efficient than
two or more.  But significant scale
economies in generation disappeared
more than 30 years ago, so the existing
franchise-monopoly regulation was now
simply protecting incumbents against
competition from new, more efficient
generators.  Thus, traditional utilities
like United Illuminating (UI) and
Connecticut Light and Power (CL&P)
were told to sell off their generating
plants.
At the same time, long-distance trans-
mission systems were facing ever
1977:
2003:
GENERATION TRANSMISSION DISTRIBUTION CONSUMPTION
Functional Coordination by CL&P and UI
Independent and
Potentially
Competitive
Owned by CL&P and UI;
Coordinated by
ISO-New England
Operated and 
Maintained
by CL&P and UI
{
{
{
{
Connecticut’s Power Industry, Then and Now
Fiddling While Rome Goes Dark: 
the Meaning of 8/14 for Connecticut5 The Connecticut Economy Fall 2003
increasing challenges, as regional power markets
expanded.  Restructuring the ownership and gover-
nance of transmission lines has proved to be a
tougher nut to crack than forcing electric utilities
out of the generating business.  Inducing them to
invest in more transmission capacity or to share
their existing capacity as part of new, better-inte-
grated regional systems has been hobbled by dis-
putes over financing (who should pay how much
for what?), and pricing (who should be able to
charge how much for what?), and by mutual suspi-
cions of the motives of neighboring utilities.  The
result has been added uncertainty about what the
ultimate restructured systems will look like—fur-
ther weakening utilities’ investment incentives.
Alphabet Soup
The Federal Energy Regulatory Commission or
FERC, which has jurisdiction over interstate com-
merce in power, has attempted to tighten up the
regional grid networks by phasing in a new sys-
tem. The basically advisory ISOs, like the one in
the Midwest, introduced in phase one, are sup-
posed to gradually morph into more powerful
Regional Transmission Organizations or RTOs,
which would have sole authority over a region’s
grid.  The RTOs’ authority would cover mainly
transmission lines, but could also extend to the sit-
ing of new generating capacity where it affects sys-
tem reliability. 
FERC’s initiative on ISOs and RTOs has of course
provoked squabbling among utilities and outright
opposition from state and local officials and con-
sumer groups.  If fully implemented, the initiative
would wrest considerable power away from state
PUCs.  Making utilities sell off their generating
capacity was easy for PUCs, but forging new
regional transmission systems is a tortuous process
of multistate negotiation and crafting of new rate
schedules to finance improved power lines.  Even
harder will be inducing the PUCs to reform their
rate-setting habits.  
“It’s the Price, Stupid!”
The term “demand” to any A-student in Econ
101 means an inverse relation between quantities
demanded and unit prices.  Not so in the regulat-
ed-electric utility business, where “demand” refers
to “system load”—that is, to quantity supplied.
The classic “service obligation” of regulated fran-
chise-monopoly electric utilities means the ability
at all times to meet all demand (see Leon Olivier’s
article on page 20).  As a result, unlike most other
markets, higher power prices cannot help ration
use to ease the strain during rough patches.
If that sounds a lot like the wringer that
California put itself through in 2001, it should.
Rationing there was excruciatingly painful, with
rampant rolling blackouts and brownouts (voltage
reductions) that can damage equipment.  Allowing
rates to rise to clear the market would have been
far more efficient—and much less inconvenient.
Governor Arnold Schwartzenegger has vowed to
lift California out of its power woes by reopening
the restructuring effort abandoned by his predeces-
sor in a pell-mell retreat into hugely expensive
long-term power contracts.  The former Mr.
Universe rates an A in Econ 101 for favoring more
competitive pricing.
Workable technologies for rationing power by
price-elasticity of demand already exist.  Better
methods of allowing customers to monitor varying
prices and respond to them would doubtless
emerge, were power rates freed up.  Meanwhile, by
neglecting different customers’ sensitivities to elec-
tricity rates, we’re raising the risk of crises like
California’s and 8/14, and condemning ratepayers
to paying for excess capacity. 
True, proposing any change that might raise elec-
tricity rates in the short run would elicit howls of
protest from “consumer” representatives, be they
state- or self-appointed.  But the latest Webster-
UConn Survey shows more than half of respon-
dents at least willing to consider paying higher
rates.  And opposing short-run rate increases, espe-
cially on the heels of a half-decade of price caps, is
the epitome of short-sighted behavior.  In the long
run, consumers’ true interest lies in allowing mar-
ket dynamics to work themselves out.  If the end
result is higher rates, suppressing rate increases
will only produce underinvestment and
shortages—that is, more blackouts.  
Chicken Soup for the 
Ailing Restructuring Process
Here’s my own home remedy for what ails the
restructuring of the U.S. power system.
Regional problems demand interstate solutions,
so the basic stock should be new Federal legisla-
tion.  This bill should be broad and enabling, not
narrow and detailed, so as to minimize the self-
interested logrolling that too often plagues such
legislative efforts.
The new legislation should scrap the hoary
Public Utility Holding Company Act (PUHCA) of
1935, following the lead of other industries in
throwing off the chains of old New Deal arrange-
ments.  PUHCA’s limits on power-company organi-
zation, for instance, probably were never a good
idea, but especially not today.
The new law should also broaden and strength-
en the powers of FERC, giving it greater say in the
myriad decisions required to bring what is a clear
case of interstate commerce, vital to the nation’s
economic future, kicking and screaming into the
21st century.  FERC needs more discretion in
designing and managing the interstate power trans-
mission network, including investment in new
capacity, siting new generating capacity, and com-
pelling regional oversight bodies to move to RTO
status.  The agency should also require state PUCs
to address pricing issues, as part of approving the
various regional restructuring plans.  Legislators, in
crafting this law, must be held to account in resist-
ing parochial opposition to the reduction of state
and local influence implicit in it.
Finally, the bill should include a directive to
work with the governments of Canada and Mexico
to coordinate our policies with theirs but (more) to
persuade them to match our policies, thus protect-
ing the U.S. power system from cross-border dis-
ruptions.

Fiddling While Rome Goes Dark: the Meaning of 8/14 for Connecticut

http://cteconomy.uconn.edu/articles/AW_F2003.pdf

Fiddling While Rome Goes Dark: the Meaning of 8/14 for Connecticut

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