Averting blackouts stirs talk on policy

The exposure of flaws in power-grid equipment and design after last week's massive blackout has added a sense of urgency to the long-standing debate about how to improve the nation's electricity transmission network.

In essence, the debate, likely to be taken up by Congress next month, is over two competing economic philosophies. Each would require the government to intervene, with one seeking more federal regulation and the other, less.

Both sides promise better electric reliability and lower prices, and they are quick to point out the failings in the other's plan.

"Clearly, there's a kind of states' rights versus central government argument going on here," said Craig Shere, utilities analyst at Standard & Poor's equity research division.

Of course, ideology isn't the only thing at stake.

There will be financial rewards -- and liabilities -- for some of the largest power companies in the country, depending on which viewpoint prevails.

Also, Congress' ability to pass a national energy plan -- a cornerstone of the Bush administration's agenda -- could be sidetracked by the debate if partisans dig in their heels.

To that end, the Bush administration had sought to postpone talks about some of the knottiest transmission issues. On Tuesday, however, Energy Secretary Spencer Abraham reversed course, saying "all parties are prepared to have discussions."

Industry officials estimate that $5 billion a year needs to be spent to fix the grid and keep pace with growing demand. Over the past decade, only about $3 billion had been spent annually, according to the Edison Electric Institute, a Washington-based trade group.

While the Aug. 14 blackout in eight states and Canada appears to have originated in Ohio, investigators say it is too early to assign blame. Nevertheless, industry officials and critics have seized on the blackout to support their opinions on what should be done to fix the grid.

Strong government mode

On one side are those who believe that topdown decisions should be made about where the grid needs improvement and who should do the work. The costs would be passed along to consumers through higher rates.

This approach would benefit makers of grid equipment and technology as well as regulated utilities, which presumably would be guaranteed a better rate of return than they currently receive for such projects. It also has strong support among consumer advocates, who emphasize that the higher rates would only be temporary.

Regulators "can mandate a decrease in rates after the utility pays off the bonds to finance the construction," said Tyson Slocum, energy-research director at Public Citizen, a Washington-based consumer advocacy group. "It's a system in which the consumers are a type of shareholder."

Bush preference

The opposing view, which has the support of the Bush administration, advocates a more hands-off approach -- but only after the federal government imposes a nationwide design for power markets that would centralize grid management by region and increase connections between regions in order to spur interstate competition.

The underlying belief is that the least efficient sections of the grid will have the highest prices and attract private capital to finance construction of new power lines.

"There's a major new industry that's waiting to be born if the obstructionist regulation can be redesigned and streamlined to allow and encourage the needed investment to take place," said John Howe, vice president of electric industry affairs at American Superconductor Corp., a Westborough, Mass.-based maker of power grid equipment.

Proponents say that investment will permit cheaper power to flow to the areas that need it most.

This concept would be good for independent power producers whose growth depends on the expansion of unregulated markets in which they can sell their juice for the highest possible price. It also has strong support from the Federal Energy Regulatory Commission.

There is a third point of view that is basically a hybrid of the other two. Its proponents tend to be regulated utilities in regions with few transmission constraints and ample power supplies, such as the Southeast, Texas and parts of the Northwest.

These semi-free marketeers don't want the government telling them how to run their businesses, and have reservations about a grid design that would foster power trading with neighboring regions.

"What we wouldn't want to do is have us so tied together that the next blackout takes out Canada all the way down to Mexico," said Dwight Evans, executive vice president of external affairs at Southern Co., an Atlanta-based holding company for five regulated utilities in several southern states.

Furthermore, Southern argues that its customers would suffer if the region's relatively cheap power were diverted elsewhere. "Our concern is in socializing costs and having customers in Georgia, Mississippi and Florida paying for costs that benefit other parts of the country," he said.

Experts point out that southeastern utilities like Southern could also lose out with greater interconnectivity, since it would enable power providers in other parts of the country to directly compete for their customers.

The construction of new transmission could squeeze profits at power providers in any region.

For example, a company that produces and sells power in state A -- where the grid has bottlenecks, the electricity supply is low and prices are high -- has a very valuable asset.

However, if new lines are strung from neighboring states B and C to unclog the congestion in state A, power producers and distributors there could see lower profits as rivals from states B and C steal market share and force prices to go lower.

Slocum, of Public Citizen, believes there would be less strain on the system without all the buying, selling and reselling of power in today's partially deregulated environment. The biggest profits are coming from power generation and marketing, creating a de facto disincentive to reinvest in transmission.

"It is market forces that are preventing adequate investment in this system," said Slocum.