Gridlock: California Could Be Just the Beginning

By Aaron Pressman

Issue Date: Jun 25 2001

Deregulation has sparked a battle for control of the nation's aging power lines.

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WASHINGTON - On June 25, 1998, temperatures hit a blistering 95 degrees in Chicago, but it was even hotter for the Midwest's electric utilities. As sweltering consumers cranked up their air conditioners, the demand for electricity skyrocketed. Overtaxed power plants couldn't keep up. Plenty of power was available in the eastern United States, but Midwesterners couldn't get access to it: The high-voltage lines needed to move the electricity into the region were overloaded, and the juice couldn't flow to where it was most needed. With blackouts looming, the price of electricity shot to record levels, hitting $2,600 a megawatt hour compared with about $25 a few days earlier.

The incident revealed what could be the weakest link in the nation's energy system: the 157,000 miles of high-voltage lines strung across North America connecting power producers with utilities and, ultimately, consumers. While Congress last week debated solutions to California's energy crisis, it seems no one is paying much attention to the power grid's long-running decline. Without major investments or regulatory reforms, the grid won't be able to keep pace with the growing demand for electricity this decade.

The consequence could be the Californication of the country, with increasingly frequent - and unpredictable - price spikes and even blackouts. In the two years following the 1998 Midwest meltdown, the number of overloaded power line incidents leaped from 24 per month to 89. And now that many utilities have sold off their power plants and buy electricity from independent suppliers, gridlock comes at a high price. In just the month of June last year, utilities in the Northeast and Mid-Atlantic regions had to pay $120 million more for power than they would have if the grid had been able to deliver available, out-of-region supplies. Meanwhile, power plants in remote states like Wyoming produce electricity they can't export because of a shortage of transmission lines.

Industry officials estimate that the nation's overcrowded power lines are costing businesses and consumers billions of dollars a year. By 2008, electricity supplies are projected to grow by nearly a third, and demand will rise by 19 percent. But the grid's capacity to carry that power will decline 12 percent. It's as if airlines doubled the number of planes they operate but no one built new runways. Or farmers harvested twice as much wheat without adding more trucks to ship the grain to market. "We need a very substantial amount of investment in the grid, and it hasn't been happening," says Joe Graves, an energy consultant at PA Consulting Group. "So what we're running into more and more is a lot of congestion and a system that can't satisfy all the demand."

Behind this lockup is a battle for control of the nation's power grid unleashed by the federal government's move to deregulate the transmission system.

On one side are independent power producers and traders like Enron, the Houston energy titan whose chairman, Kenneth Lay, is a close friend of President George W. Bush. Lay wants the Federal Energy Regulatory Commission to force grid operators to give his company better deals when it needs to move electricity across the country. And he'd like to see greater financial incentives for independent companies to own and operate power grids.

Almost as influential is Allen Franklin, CEO of Southern Company, an Atlanta utility that owns power plants and transmission lines across the Southeast. He met with Bush's energy task force to push a completely contrary agenda. Utilities like Southern that own power plants and the transmission systems resist cutting prices for their competitors on transmission charges, and they oppose the creation of independent regional or national grid operators.

Then there are consumer advocates and elected officials who argue that the power grid should be owned and operated by the government. They point to failed deregulation in the West as a dire warning that efforts to promote further private ownership of the grid will put the fate of consumers into the hands of profiteering energy traders who are already making a killing in California.

The grid's current problems originate in the changing dynamics of the power industry. For decades, electricity was a closely regulated monopoly. A utility offered service to captive customers with no other options in their area. The utility built power plants and strung cables to meet the expected needs of those customers. In exchange for fulfilling its obligations to the public, utility companies could count on a steady rate of return on its investments.

As a result, there is no national power grid, but rather three essentially separate networks. One serves the eastern half of the country, the other the western half, while a third much smaller grid covers Texas. Connections among the three grids are few, meaning extra power generated in Buffalo can't easily be shipped off to Phoenix or Dallas on an unusually hot day. Rival utilities own most of the systems, although New York's power authority owns the wires there. In the mid-Atlantic states, California and other areas, utilities have banded together to form regional grid operations to coordinate power flows within each area.

Regional management is becoming a necessity as federal and state regulators move to break electricity monopolies and offer consumers and businesses a choice. Low-cost power generators have sprung up with the goal of selling their electricity to utilities or big businesses anywhere in the country they can reach. By the end of last year, utilities had sold or spun off 16 percent of their power generating capacity to unregulated companies.

And as the utilities divested themselves of power plants, their investment in new transmission lines has fallen, from $1.2 billion in 1990 to less than $800 million in 1998, after adjusting for inflation, according to PA Consulting Group.

The Federal Energy Regulatory Commission is trying to stop that slide by opening the grid to independent competitors. Last month, the agency raised the rates it allows power grid operators to charge if the operators build new transmission lines in the West to help California. And similar rate relief to encourage independent grid operations around the country could be forthcoming. But the agency isn't forcing anyone into a regional grid, and some utilities are dragging their feet. Enron and its allies want the FERC to move faster to encourage utilities to open their lines or hand over the grid networks to independent operators. Trans-Elect, a Washington, D.C., startup, is planning its entire business around buying transmission networks from utilities. [See "Grid Runners."]

"FERC holds the key to making the system fully, finally and fairly open," says Steve Kean, Enron executive VP. Big utilities are keeping control of the grid because "it's a nice way of preventing people from competing with you," he adds.

Southern, the Atlanta utility, has enlisted former Republican National Committee Chairman Haley Barbour to fight further moves to loosen its grip on transmission. The company and its allies don't want big independent grid operators telling them how to run their lines. Ultimately, they don't want much out-of-region power flowing to their customers. "We are concerned about the ultimate cost to the consumer," say Southern Senior VP Andy Dearman. "Generation ought to be located as close as possible" to the consumer, he adds.

But the California energy crisis has added a new dimension to the struggle for control of the grid. Gov. Gray Davis, a Democrat, has proposed that the state acquire transmission lines from California's near-bankrupt utility companies. Such a move would give ammunition to consumer advocates who favor re-regulation through the ballot box.

"The only way to ensure that we have consumer-friendly policies is to have public control of the grid," says Tyson Slocum, senior researcher at Ralph Nader's Public Citizen. "Utilities are being left with too much control and too much influence over who gets access."

With voters outraged by high energy costs, even some conservatives are worried about "market failures." Last week, for instance, Republicans who had opposed price caps on electricity rates in the West threw their support behind a plan to limit power prices.

For its part, the Bush administration's national energy policy favors relaxing environmental rules to make it easier for construction of new transmission lines. The plan also suggested using the power of eminent domain to force property owners to sell land for needed facilities.

Yet Congress may not be able to overcome deep divisions among utilities, energy traders and other key constituents. In the short run, continued inaction will favor the utilities that control their local lines and have electricity to sell. There are only so many electrons that power lines can carry, and at some point the country's inexorable appetite for energy will begin to bring down the grid. California, here we come.

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