The Northeast Blackout and Fixing the Electric Grid
08/29/2003

(In light of the recent Northeast blackout, the National Rural Electric Cooperative Association (NRECA) - the association for over 1,000 member-owned electric cooperatives - made a statement in regard to Northeast blackout.)


As U.S. and Canadian authorities investigate the causes of the blackout in the Northeast last week, the U.S. Congress is in the final stage of hammering out a national energy policy to send to the President. An overall national energy policy is important, but if we have learned any lessons from recent history like the Midwest price spikes, the California electricity crisis, and the massive Northeast blackout, it is that we cannot afford to make mistakes in the electricity part of the legislation. 

What Got Us To Where We Are Today
Electricity is unlike any other energy commodity. It cannot be stored. It must be used in the instant it is produced. It must be transported by wire. And it is not easily substituted for, particularly in the short-term. Because of this, the nation’s electric system is ripe for manipulation, price gouging, and miscalculation. That has happened, and that is the dark side.

The bright side is the North American electric system, the largest machine invented by mankind, has worked amazingly well over the last seventy-five years. The manipulation and price gouging by large power companies in the late 1920s were corrected when Congress enacted the Public Utility Holding Company Act and the Federal Power Act. Consumer-owned electric cooperatives were the last piece of the puzzle as the new electric industry grew, giving people an opportunity to provide themselves with electricity by relying on their own initiative and good judgment to act in the interests of themselves and their communities. The combination of adequate federal and state regulation of profit-making utilities, while relying on the good judgment of consumers to manage the electric cooperatives they had formed, has been a successful formula. 

In 1992, Congress repealed a portion of the Public Utility Holding Company Act and modified the Federal Power Act to promote wider access to the existing transmission system and wholesale competition in the generation of electricity. That experiment obviously has had mixed results. California compounded the problem by preventing utilities from owning the electric generation needed to serve their customers, and instituting a poorly designed market with flawed market rules. While the intent was to create a market not dominated by utilities, the actual result was to separate generation from the utility’s responsibility to serve customers. California and the entire West are still paying the price for that big mistake.

Where We Are Today
Today, Congress is faced with a very clear choice. The House of Representatives passed a bill that ignores, or wishes away, the dark side. The Senate bill relies on the good that has been accomplished over the last three quarters of a century.

The House bill would totally repeal the Public Utility Holding Company Act and modify the Federal Power Act, resulting in vastly reduced protections for consumers and investors. It seriously reduces federal regulation of the big power companies that manipulated the California market, and increases federal regulation of consumer-owned and operated not-for-profit cooperatives, which had no part of the manipulation in the California market. 

That may sound silly, but it gets worse. The House bill also seeks to take more money from consumers in transmission charges and give it to the big power companies with only a hope and a prayer that they will use the money for some positive purpose. The Senate bill also repeals the Public Utility Holding Company Act, but replaces it with good consumer protections that require big power companies to show they are actually benefiting consumers. The Senate leadership position emphasizes the “just and reasonable” test for transmission pricing and recognizes the important differences in motivation between absentee-owned, for-profit, investor-owned utilities, and consumer-owned, not-for-profit electric cooperatives, by mandating federal regulation of big power companies and relying on consumer regulation of cooperative electric utilities.

Legislative Goals
Again, the choice is clear. The goal is a modern, reliable, affordable electric system capable of meeting the requirements of today’s electronic society. The Senate electricity proposals look at the past and the future in a realistic way. Congress should pass the Senate’s version of electricity legislation.

The House bill ignores the lessons of the past, demonstrates a blind faith in market forces, and provides no guarantee that the millions of dollars prescribed for upgrades will actually improve service or otherwise benefit consumers. Congress should oppose the House’s version of electricity legislation.

Members of Congress and Federal authorities are already calling for investigations of the recent Northeast blackout. The big power companies undoubtedly will complain that uncertainty in the market, inadequate return on transmission investments, and too much government regulation are to blame. The solution, they will claim, is to give them even more money and to trust them to invest it in improvements to the transmission system and not CEO bonuses or stock options. They will no doubt call for elimination of the few remaining consumer protections, hoping that we will forget that it is the shareholder, not consumer, whom they are organized to benefit.

Electric cooperatives agree the electric transmission system is inadequate. But the solution is not to take more money from consumers and taxpayers and give it to the big power companies, hoping they will decide to invest it in transmission to serve themselves and their competitors.

A better solution is to reduce the financial risk associated with transmission investments. Cooperatives believe that once a new piece of transmission is proven to be necessary, and approved by the appropriate regional authority, its cost should be rolled into the rate base and recovered like other transmission assets over its useful life.

If the government can substantially reduce the financial risk, transmission will become a safer investment and require a lower rate of return to attract the necessary investment. That is not just our opinion. That view is shared by a Wall Street investment house, which testified to that effect in Congress two years ago. 

We also need a set of national standards to assure the system operates well. Electric cooperatives operate a well-maintained electric infrastructure in some of the toughest terrain in the nation, and have done it for years. The Rural Utilities Service, formerly the Rural Electrification Administration, has played a critical role in reducing risk by (1) assuring that prices to consumers are adequate to pay for the system, and (2) requiring electric cooperatives to adhere to a set of design and operating standards for the system. 

Electric cooperatives have a model that is working both for consumers and the nation. Let’s hope that this investigation ushers in a new approach to the creation of a national transmission grid -- one based on the principle that in exchange for a just and reasonable rate of return on low-risk transmission investment, owners must adopt appropriate national standards for the construction and maintenance of the national transmission system and must be held accountable for its safe and reliable operation.

On the other hand, if the investigation of the blackout is used only to paper over the big power companies’ desire for more and more money, then it will not serve the people well. If the investigation is a serious attempt to find the causes of the blackout, and proposes realistic solutions for investing in and improving the transmission system, it will conclude that the electric cooperatives’ “national standards” and “reduced risk” model should be the preferred alternative.

Kentucky Association of Electric Cooperatives, Inc. 4515 Bishop Lane * Louisville, KY  40218 502-451-2430 * FAX: 502-459-3209 Terms of Use