Deregulation Caused the Blackout

Deregulation is the ignored underlying cause of Thursday's blackout

Published: 19-Aug-2003

In the search for the source of Thursday's blackout, the underlying cause has been all but ignored: deregulation.

In principle, deregulation of the U.S. power industry was supposed to use the discipline of free markets to generate just the right amount of electricity at the right price. But electric power is not like ordinary commodities. Electricity can't be stored in large quantities, and the system needs a lot of spare generating and transmission capacity for periods of peak demand like hot days in August. The power system also requires a great deal of planning and coordination, and it needs incentives for somebody to maintain and upgrade transmission lines. Deregulation has failed on all these grounds.

Yet it has few critics. Evidently, even calamities like the most serious blackout in American history are not enough to shake faith in the theory. Ten years ago, most public utilities were regulated monopolies. They were guaranteed a fair rate of return, based on their capital investment and costs. So the government compensated them for building spare generating capacity and maintaining transmission lines. Regulators, of course, sometimes made mistakes and the industry oversold technologies like nuclear power.



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