Fixing grid likely to mean greater federal intervention

WASHINGTON -- The companies that deliver electricity have had little incentive to make the kinds of capital improvements that might have helped contain last week's blackout. For that to change, experts say, utilities will need to be allowed to charge more for power.

And that could mean greater government intervention in the market.

"We need to come up with clear and consistent rules," said John Howe, vice president of electric industry affairs at American Superconductor Corp., a Westborough, Mass.-based maker of power grid equipment.

Specifically, Howe said the federal government needs to guarantee utilities a higher rate of return on their investments in the power grid.

Currently, utilities get a federally guaranteed rate of return of about 10 percent; in order for them to charge more for transmission costs, though, state regulators will need to approve higher retail rates.

Utilities have been reluctant to spend money on adding to or upgrading their systems in recent years because higher returns on their investment had been available in unregulated businesses such as power generation and trading.

Another obstacle, according to utility executives, has been people's resistance to having new power lines built in their neighborhoods.

Moreover, making improvements to the grid in one area often benefits consumers far away, and utilities say they need the ability to pass along construction costs to ratepayers outside their service area.

'Turning point'

These issues have been debated within the industry for years, but last week's massive power outage was a "turning point," said Jose Rotger, director of regulatory policy at TransEnergie U.S., a subsidiary of Canada's Hydro-Quebec utility.

Rotger said the climate could now differ radically from the 1990s, when the emphasis was on energy deregulation with less government intervention. State and federal agencies must, however, now "let rates increase in order to fund this investment," he said.

Hoff Stauffer, senior consultant at Cambridge Energy Research Associates in Cambridge, Mass., said the country desperately needs to boost its ability to transfer electricity from areas where it is abundant to areas of persistent need.

Stauffer said better interconnectivity between the Midwest, the Northeast and Canada could have prevented Thursday's blackout -- which appears to have started in Ohio -- from spreading.

Had sufficient capacity existed, he said, surges of power might have dissipated across the region; instead, generators were forced to shut down lest they further overload the system.

Over the past decade, utilities spent billions on building new power plants, an area of the business that delivered hefty profits until an oversupply caused prices to fall. That left the country with ample juice, but an inadequate delivery system.

Further, with their balance sheets weakened, those same companies today cannot easily raise the capital needed to strengthen the grid even if they wanted to. This makes government help even more necessary, experts say.

To that end, a $210 million upgrade on California's "Path 15," an 84-mile stretch from Coalinga to Los Banos that played a role in a series of 2001 blackouts there, got significant government help.

Federal regulators authorized a slightly higher rate of return for Virginia-based Trans-Elect Transmission, which is expanding Path 15's capacity. The upgrade, expected to be done by late 2004, is expected to add about 20 cents per month to California electric bills.

If anything, the lessons learned from California's electricity problems should make consumers across the country leery of solutions that involve less government regulation, said Tyson Slocum, research director of energy programs for Public Citizen, a consumer group.

"Re-regulation is the solution we should be working for," he said.

That said, last week's blackout also is likely to intensify a legislative battle over the 68-year-old Public Utility Holding Company Act.

The Depression-era reforms established the rigid boundaries that confine utilities to regional markets and restrict investments by foreigners and companies from outside the power industry.

Utility executives and the Bush administration are pushing Congress to repeal the law, depicting it as an antiquated measure that has retarded the industry's growth and pushed away investors who might help finance improvements in the power grid.

But consumer activists are fighting to preserve the restrictions, arguing that a repeal would pave the way for local utilities to be devoured by giant companies that would be more interested in boosting profits than upgrading power lines.

An energy bill that would repeal the act has already passed in the Senate. If the proposal wins House approval, the utility restrictions could be lifted late next year.