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Like earlier outages in 1965 and 1977, the widespread blackout that plunged most of the Northeastern US into darkness August 14th will be seen as a watershed event in the history of the US power industry. Our ability to more readily contain or even avoid future episodes will turn largely on whether government officials, regulators, the power industry itself and consumers learn the right lessons from this event. A torrent of public relations exercises being mounted by those for and against new generation, renewable energy, distributed generation, greater investment in transmission infrastructure, and deregulation are using the blackout to bolster their claims without regard to whether those claims have merit or are even relevant. Politicians on both sides of the spectrum have used the event to attack their opponents and gain political advantage.
Informed debate is an essential step in determining the underlying cause and implementing appropriate solutions but the current blizzard of arguments, counter arguments and political posturing is largely unproductive. Business and political leaders who are responsible for crafting solutions and the consumers who will have to live with and ultimately pay for them understand little about how electricity is produced, transported, consumed and regulated, but they’re being fed myths and half-truths about what happened, why it happened, and what has to be done to keep it from happening again. Following are five popular myths about the cause of the blackout and how to avoid a recurrence:
"We are a first world country with a third-world power grid"
So claims former Energy Secretary and current New Mexico Governor Bill Richardson. This is little more than political rhetoric designed to make splashy headlines. In fact, bulk power reliability in the US is as good as anywhere in the industrialized world. Widespread cascading outages like the August 14th event are extremely rare, as evidenced by the fact that only four have occurred in the last 40 years and many areas of the country have never been completely blacked out. More localized outages are also very infrequent, and most of those are caused by storm damage. Even remote villages in Alaska have more reliable electricity than most of the third world.
The kind of third-world power system Governor Richardson is using as a basis for comparison typically suffers from frequent outages and almost daily electricity rationing in which electricity is made available in specific geographic areas during certain hours of the day. That situation has not existed in the US since very early in the last century.
"The blackout was a direct result of underinvestment in transmission infrastructure"
Numerous commentators have attempted to establish a link between growth in generating capacity and electric demand on the one hand, and the level of investment in transmission facilities to move power from the point of production to the point of consumption. Their thesis – that investment in transmission should be keeping pace with investment in generation - assumes power plant developers should be able to build power plants any place where a high voltage power line and a gas transmission line cross.
In fact, the grid has come under stress largely because merchant energy companies sited generation projects to minimize the cost of interconnecting with fuel supply and electric transmission infrastructure rather than locating them close to demand centers. The result in many parts of the US, most notably the Southeast, is “stranded assets” owned by merchant energy companies that can’t sell beyond a local market dominated by an uncooperative incumbent utility because there’s no transmission capacity available to do so.
It is certainly feasible to build generation almost anywhere from a technical standpoint, but it is often more sensible for economic, security and operational reasons to locate generating plants closer to the point of consumption rather than further away. For one thing, many of the nation’s largest urban areas are already vulnerable to widespread outages if key transmission facilities are damaged or destroyed. For another, shorter distances between supply and demand translate into better power system stability. And finally, it is generally cheaper and easier to transport fossil fuels over long distances than it is to transport electrons.
There are many places where local transmission projects are urgently needed to accommodate population and industrial growth, but these incremental additions are nowhere near the scale of the superhighway system for electric power that is being proposed in some quarters. Policy initiatives and financial incentives should focus on encouraging developers to build generation closer to where it is ultimately consumed rather than creating an expensive, complex electricity transportation system that leaves us even more vulnerable to natural disasters and terrorists than we already are.
"Most of the states affected by the blackout have implemented deregulation, therefore deregulation is to blame"
This assertion perversely twists the fact to suit the agenda of advocates for more government control over electricity production, transportation and distribution.
Most of the states involved have indeed made changes to their regulatory regimes for electric power, but it is hardly appropriate to call what they and others have done “deregulation”. Electric power remains one of the most intensely regulated industries in this country at all levels – retail and wholesale, generation and transmission – by overlapping state and federal jurisdictions. The Energy Policy Act of 1992 paved the way for lifting regulations on wholesale electricity prices and several states have introduced retail competition that allows electricity retailers other than the incumbent utility to charge largely unregulated prices. However, the transmission grid is still subject to intense regulation at both the state and Federal levels that addresses prices, safety and maintenance standards, and non-discriminatory access. The FERC has made numerous attempts in the face of determined opposition by incumbent utilities to institute a consistent set of commercial practices for using the bulk power transmission network that would help improve its reliability, a process that involves more regulation, not less. Moreover, the 1965 and 1977 Northeast blackouts and the 1996 West Coast blackout all occurred before states in those areas “deregulated” their electricity markets.
"Utilities should be guaranteed a higher rate of return to incentivize grid investments"
Higher returns for transmission investment are wholly unwarranted and entirely unnecessary. This is simply a case of utilities attempting to boost returns in a slow-growth business and repair earnings power that has been decimated by ill-advised forays into riskier unregulated investments.
In spite of FERC’s open access policy, electric transmission assets are subject to none of the ordinary business risks faced by most firms. Prices set by state and federal regulators cover all capital, operating and maintenance costs. Once built, transmission assets are largely immune to competition. Utilities are even allowed to recover the costs of projects that are cancelled by the utility or its regulators for any number of reasons. Both the FERC and most state utility regulators compensate utilities for building these nearly risk-free assets by approving prices that allow utility transmission assets to earn a return on equity of 11-12%, or as much as 600 basis points (6 percentage points), over the interest rates on 30-year corporate bonds. Arguing that transmission projects will only attract capital if it offers higher returns ignores the risk-reward tradeoffs investors make every day.
Moreover, providing incentives to build transmission tends to bias utility investment decisions in favor of transmission projects that allow increases in bulk power imports and against new generation sited closer to demand. Non-utility generating assets that already bear ordinary market risk as a result of competition in the generation business will now be faced with a new, extraordinary market risk from competitors that can outbid them for capital, offer a significantly better risk-reward ratio, and buy power from lower cost sources without regard to the security implications. Utility profits will still be tightly linked to the size of their asset base and since they won’t face the same competition for building transmission that they now have in the generation sector, there’s a very powerful incentive to build transmission projects whether they are needed or not.
Consumers won’t necessarily be better off. Any possible savings in purchased power expense will be offset to varying degrees by higher transmission costs. The end result is that utilities will see a risk-free improvement in their earnings at the expense of consumers and merchant generator competitors.
"More government oversight is needed to avoid future blackouts"
Proponents of big government believe every problem can be addressed through more regulation, more oversight, and a new bureaucracy. Government’s track record suggests otherwise.
Seventy years after the passage of the Securities Act of 1933, literally thousands of pages of rules govern the conduct of the nation’s financial business, yet dishonest, unethical people are still able to bilk investors out of billions of dollars every year. At the height of the Savings and Loan crisis of the 1980s numerous federal agencies, including the Federal Home Loan Bank Board, were responsible for overseeing the operation of S&Ls yet taxpayers ultimately spent hundreds of billions of dollars to rescue the industry from greedy, incompetent managements. Federal oversight and price controls governing the natural gas and oil industries in the 1970s and 1980s led to panic buying of gasoline during two Arab oil embargoes and frequent, weather-induced spot shortages of natural gas. As State and Federal governments have become more involved in the nation’s health care system, more and more people have been denied access and costs have spiraled out of control. If this historical record is any guide, electric reliability is likely to worsen rather than improve in an environment of more stringent federal oversight.
NERC, the power industry’s self-regulating organization, has the technical competence to provide adequate supervision. It simply needs credible enforcement powers and the authority to make its heretofore voluntary rules mandatory. If the industry is unable or unwilling to grant NERC the necessary authority to impose fines and sanctions, then that power should be granted via federal legislation.
Electricity is a vital part of our daily lives. It provides the underpinning for nearly every facet of our economy, our health and our comfort. An informed debate supported by facts will allow us to maintain our secure, reliable supply of electricity at reasonable cost. By seeing the five myths outlined in this article for what they are, we can focus on the real issues that need to be addressed.
Readers Comments
| Date | Comment |
| Len Gould 9.19.03 |
Almost the only
article I have seen so far in this debate where
I agree with every point made. Good wide-ranging
topic coverage and sensible recommendations. Kudos.
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| Stephen Chappell 9.19.03 |
Analysis based
on science and economics rather than politics?
How refreshing!
I would take exception to one point: the Tennessee Valley Authority and Bonneville Power are prime examples of the government doing it far better than the profit-motivated sector. Wouldn't it be nice if all Americans could enjoy the same high reliability and reasonable rates as those of us served by TVA or BPA?
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| David West 9.19.03 |
Great article,
Jack.
Mr. Chappell, I would hardly call TVA a prime example of a government utility operating more efficiently than the private sector. TVA is straddled with $25 billion of debt and is faced with delimma of ever increasing rates to distributors to pay down this debt. Additionally, distributors have to option of competitive choice in wholesale power suppy as early as 2008, potentially stranding this debt burden with remaining distributors and federal tax payers. David West Energy Consulting Group dwest@ecg-llc.com
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| Doug Strahm 9.19.03 |
Jack, Thank you
for your well timed and researched article. The
flood of rhetoric and finger pointing has gotten
old. You hit the nail squarely on the head! Doug
Strahm National Sales Director Optiron Corporation
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| Ryan Ferris 9.19.03 |
This is an excellent
article. It's conclusion that favors more local
generation of power is completely consistent with
those of us who are network engineers and have
known for years that reliability of any network
is dependent upon a decentralized, fault tolerant
locality. TCP/IP as designed by DARPA was created
by design with this type of fault tolerance built
into the protocol and architecture.
So perhaps the comparison of stable electrical power grids should be between the U.S. and countries like Germany or Japan where I have heard that rooftop generation of household power is subsidized and encouraged by both governments. That's about as local as one can get. Still the problem I have with this article is that although it debunks popular explanations and suggests more local generation as solution to the problems of the electrical grid, this article *does not* explain what happened on August 14th any more than any of the other myths help explain *exactly and specifically* why such a huge section of the power grid failed at that particular moment. Perhaps we will just have to wait until a long, boring,expensive, and poorly substantiated study is finally released by some government agency. At that point, I predict we will know very little more than we do now about the *exact cause and sequence of events* that plunged arguably the most significant economic and political region in the world into darkness. You can call me a conspiracy theorist, but I will tell you that (much like the Shuttle investigation), I find the lack of quantative understanding of the actual event disturbing. At least as disturbing is the surfeit of essentially big-picture oriented, if not downright sophistic analysis, coming from energy professionals who should be steeped in a quantative background. If anyone knows of or has seen a more quantative and specific analysis of the actual event in print, please let me know about. Thank you, rferris@rmfdevelopment.com.
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| Charles Stigers 9.19.03 |
Jack:
This is a well written and important commentary. I think your first point RE: Bill Richardson's comments is right on target. Mr. Richardson was off-base to suggest that the grid is "3rd world". It is very interesting to contrast his remarks while he was Energy Secretary during the August 10, 1996 blackout in the west, and this one. Whether (or not) the blackout was a direct result of underinvestment in transmission infrastructure strongly depends on you opinion as to whether generators should be allowed to build willy nilly wherever they like. Unfortunately, the by-product of the (partial) deregulation we do have is that new merchant plant builders are building plants as sites where they "minimize the cost of interconnecting with fuel supply and electric transmission" as you have stated. Although this is not willy nilly wherever they like, it is not careful siting such as you have suggested (near load centers). By deregulation of the wholesale market place, the FERC has sent a signal to generator owners that they should be free to build wherever economics indicates that a plant would be profitable, not where it would be reliable. Another important point, is that generation unit commitment during operations is often governed by economic conditions that bear no relationship to the transmission system's ability to deliver that power. Transmission line outages are an appropriate reason to make changes in the generation unit commitment, but merchant generators that are not part of a fully integrated utility are prone to resist requests for changes that do not suit their economic goals. The transmission operator is somewhat limited in his ability to force generators to comply in some cases. Your remarks are somewhat conflicted when you suggest that deregulation is not a part of the cause of this blackout. (Really, the jury is still out on this particular blackout.) The fact that generators are locating far from load centers is likely a part of the cause for most blackouts (including this one). And, deregulation certainly has not done anything to encourage generators to build close to load centers (but the trend to build them far from load centers started long ago). While it is early to be blaming this blackout on deregulation, it is clear from the news stories that have been released so far, that the ISO operator (an entity that was created by the deregulation rules) was very slow in determining whether the situation was dangerous enough to issue a "TLR". They were still trying to decide after it was too late. It is also apparent that the ISO operators did not believe that they had the power to force generators to reduce output even when lines were overloaded (see transcripts that have been released tot he press). This suggests that the operators of the transmission whose responsibility was to protect the reliability were placed in the position of begging persuasively to get generator operators to change their generator dispatch. That is not very encouraging. In the pre-regulation days a single entity (the integrated utility management) would be responsible for the reliable operation of both the generator and the grid. As for incentives, all utilities are struggling with decisions about whether to build transmission lines. It is not clear how one would make a reasonable business decision to build a line whose only purpose is to strengthen the grid, since it is not clear whether increased revenue would be generated, or whether that revenue would be sufficient to justify the cost. It might be a little harsh to generalize as you have. Your characterization of this process as risk free does not line up with the fact that virtually all utilities are shying away from building lines. If this was such a sure money maker, there would be more takers! Chuck Stigers
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| Peter Manos 9.22.03 |
Excellent article.
I note two comments above we have a network engineer
(Ryan Ferris) also providing good comments. I
have a question for Ryan and others with his expertise,
regarding the description in the NY Times regarding
why NY State could not isolate itself from the
blackout. The explanation is supposedly that New
York State opened its breakers to isolate itself
from the cascading failures, but at that moment,
NY was actually exporting power to Ontario. According
to the Times, the reason NY State then crashed
was that the in-state generation, which was sufficient
to meet in-state load, was running at such a high
level there was not sufficient time to back off,
so generation had to be shed.
Does this make sense? Why couldn't some sub-set of the generators in NY state have been run in a no-load state temporarily to balance generation with demand? Peter.Manos@WBCausey.com
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| Bob Fesmire 9.23.03 |
Ryan,
FERC has published an initial report from the joint US-Canada task force that provides a specific chronology of events (plant outages, breaker openings, etc.) leading up to the blackout. They don't discuss anything related to "why", however. For what it's worth: http://www.ferc.gov/cust-protect/moi/09-12-03-blackout-sum.pdf
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| Sam Mullen 9.24.03 |
This article
was well written and I strongly agree with the
generation-near-the-load-center remarks, however,
not much is being said of the underlying problems
with contingency plans and emergency communications
between and among utilities and governing bodies
as being problematic. Therein lies many of our
problems as I see it. It seems that we also have
fundamental problems with reporting on these incidents,
since it takes weeks, and months in this case,
to ferret out the clues and get moving toward
partial solutions in the various areas. "Partial"
because there will always be blackouts just like
there will always be storms and electronic and
mechanical failures. Anyone who is going about
preaching "cures" is dreaming and obviously has
never controlled the electric system.
I like this forum and hope we can continue to collectively add value (and information) to the factfinding process. samuel.mullen@att.net Author, Emergency Planning Guide for Utilities
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| Jack Ellis 9.29.03 |
Many thanks to
those who commented on the article. I'm particularly
pleased that the discussion has been polite, orderly
and relatively non-partisan, and in that spirit
I'd like to respond to some of the remarks:
I can only respond to Mr. Ferris's concerns about why there's no explanation for what happened by pointing out that investigating events like this is not unlike investigating an aircraft accident. They demand time, patience, and an open mind. In many instances the singular cause of an air accidents or a blackout is obvious, but more often than we might realize the obvious answers are also the wrong answers. Mr. Stigers suggests I'm being inconsistent when I absolve deregulation of any blame even though the investigation is incomplete. One might take that view. I take the view that siting, construction, operation and pricing of wholesale transmission service was never deregulated to begin with, so it is difficult to pin the blame on "deregulation". The tendency of merchant plant developers to site plants based on availability of fuel supply and transmission access comes came about largely because merchant generators did not think about the price and availability of transmission service. Had they done so (and had there been transparent transmission pricing to guide them), the twin objectives of profit maximization (for merchant plant developers) and high grid reliability (for transmission operators, utilities and utility customers) would have coincided very nicely. Mr. Stigers notes that grid reinforcement projects don't necessarily have clearly defined investment prospects. I disagree with him. If a utility (or an RTO or ISO) has identified the need for grid reinforcement, then it can build a business case that lays out alternatives and associated costs. Moreover, I can think of numerous investors and investor groups who would be quite happy to receive a 12.88 percent return on their equity investment that is guaranteed for 30 years or more. Thank you again for your comments.
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| TERRY MEYER 10.19.03 |
Jack, Of course
it’s true on its face that deregulation
can’t be the cause since deregulation has
never been tried, but that’s just semantics.
It can NOT be said that REregulation does not
negatively impact grid reliability merely because
its never been tried because REregualtion HAS
been tried. I think we all know that when someone
refers to the current state of “deregulation”,
they are really referring to the current state
of affairs that is really REregulation. I still
love it whenever someone points this out the way
you did, since we really don’t know if true
deregulation would eventually work or not. Your
point was best made by your examples of ’65,
’77, & ’96 pre-REregulation uncontrolled
cascading outages. But from the trenches I have
to say I’ve seen a leap in system stress
since reregulation that outpaced the rate of change
from increases in load demand that we saw before
reregulation.
Peter, Interesting Times article. Most units are not designed to run at no load, by the way. While I have no doubt that taking all the online generators to their design minimums quickly enough would have accomplished the same thing you are suggesting, the problem was probably their inability to do so quickly enough. Thermal turbines are high precision pieces of machinery weighing hundreds of tons that are not designed to withstand such heat and stress changes, so they don’t move quickly. They ARE designed to survive TRIPS without disabling damage, but then it takes a while to restart them, especially nukes. It sounds like the sudden decrease in export demand maybe caused too many units in New York to trip to leave enough online to meet the demand that was still connected, at least until enough were restarted along with whatever quick start units were available.
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