Man Without Qualities

Tuesday, August 19, 2003

Herr Doktorprofessor In Spite Of Himself

Paul Krugman should be fulsomely praised, in the hope that positive reinforcement may help, for not yet fixating on a Washington Post report that [t]he top two executives of FirstEnergy Corp., the Ohio-based utility that is a focus of investigations into last week's cascading blackouts, are key financial supporters of President Bush, according to campaign records. If he was aware of the Washington Post report, then it must have been an epic internal struggle not to seize on it as the basis of insinuations that the recent Eastern blackout was the result of some shadowy, Bush Administration conspiracy. But perhaps he simply didn't know about the report, or will relapse, in which case we will see him experiencing such fixation in the near future - and he does lapse into Bush-bashing when he turns to considering the power grid investments needed for the future. He should also be commended for not alleging that the energy task force headed by Vice President Cheney was somehow responsible. Once again, we are with you, Paul!

As it happens, the only effort Herr Doktorprofessor makes in his current column to insinuate that Bush Administration policies were somehow responsible is a weird assertion that neglect of the power grid is a result of faith-based deregulation, where "faith-based" is, of course, strongly associated with Bush Administration policies. [And where did Herr Doktorprofessor pick up this entertaining barb? Why, he lifted it from one of Don Luskin's recent criticisms of Herr Doktorprofessor himself: The United Nations is to liberals what faith-based institutions are to conservatives -- the answer to all difficult problems. At least Herr Doktorprofessor knows to steal only from the most effective and best, even if his use of Luskin's barb is inappropriate and awkward in this context, unlike Luskin's original.]

But while the paranoia quotient is below average in this column, the adult attention deficit disorder symptoms are sadly prominent as Herr Doktorprofessor leaps from California to New York and back again, but without the redeeming poetry of Woody Guthrie.

He begins his analysis:

Then came the deregulation movement. It argued that a competitive market could be created in power generation (though not in transmission and distribution), and in much of the country utilities were forced to sell off their power plants.

So far, so good. Herr Doktorprofessor wants us to remember that power transmission companies do not own as many generating plants today as they used to - and tells us that his analysis will make this assumption. The recent Eastern blackout was caused by a transmission breakdown - not a generation shortage. OK. Off we go!

But, what's this? We go off to an irrelevant and confusing detour to California and its power crisis, a crisis which - unlike the recent blackout - was triggered by lack of generating capacity! Anyway, he never does tie up this loose end - except as a general smear to the effect that the California experience is evidence that the power companies will get you if you don't watch out - so the Man Without Qualities redacts the California digression. Which means we arrive at this charming passage:

[E]nergy experts have long warned that deregulation would lead to neglect of the grid. Under the old regulatory system, power companies had strong incentives to ensure the integrity of power transmission — they would catch the flak if something went wrong. But those incentives went away with deregulation: because effective competition in transmission wasn't possible, the companies providing transmission still had to be regulated. But because regulation limited their profits, they had little financial incentive to invest in maintaining and upgrading the system. And because of deregulation elsewhere, responsibility was diffused: nobody had a strong stake in keeping the system reliable. The result was a failure not just to add capacity, but to maintain and upgrade capacity that already existed.

These experts didn't necessarily oppose deregulation; their point was that deregulation could lead to disaster unless accompanied by policies not just to keep the grid reliable, but to expand it. (To make competition possible, a deregulated system needs considerably more transmission capacity than one based on regulated monopolies.) But their warnings weren't taken seriously; politicians and deregulation enthusiasts simply had faith that somehow "the market" would take care of the problem.

Of course, the deregulation to which he refers occurred mostly during the Clintonian Era - which makes his faith-based deregulation allusion even more peculiar and distracting.

Truly huge investments are needed to update the power grid - and Herr Doktorprofessor is correct that it is not easy to structure transmission facilities to approximate an efficient, competitive market. But he obscures the key point: Government regulation has limited returns to investors on transmission facilities - generally to 10% - 11% annually. Such returns are trivial considering the immense investment transmission facility investors must be incentivized to make, and the even more immense risks they are asked to accept. Regulation continues to treat transmission facilities absurdly, as if they were a coupon-clipping business. That's making for true disasters, of which the recent blackout is probably just an early sample.

Unfortunately, Herr Doktorprofessor's closing remarks indicate that he simply cannot bring himself to admit that huge rates of returns on transmission facility investments are both appropriate and efficient:

This nation needs to invest billions in its power grid, yet given recent history, it's crucial that this investment not be simply another occasion for energy-industry profiteering. Somehow, I'm not optimistic.

Somehow, I'm not optomistic that Herr Doktorprofessor can accept the high rates of return needed - way north of 11% annually - as something other than energy-industry profiteering. For example, to counter President Bush's obvious claim that "our grid needs to be modernized . . . and I've said so all along," Herr Doktorprofessor argues that:

Two years ago Tom DeLay blocked a modest Democratic plan for loan guarantees for system upgrades, calling it "pure demagoguery." And press reports say that despite the blackout, the administration will bow to pressure from Senate Republicans and drop the only part of its energy plan that had any relevance to the blackout, a FERC proposal for expanded oversight of the transmission system.

The power grid needs huge investments - probably more than $50 billion in the near term. That is, to be restored and updated, the grid requires the full creative energy of the free market - not some government loan guarantees for system upgrades or some bloated energy bill that essentially leaves intact the status quo. Herr Doktorprofessor may also be correct to endorse the FERC plan (although it has some serious problem) - but, as is his custom, contrives to obscure that the FERC is reflective of the Administration's position.

The entire subject is dealt with much more efficiently and transparently by this Wall Street Journal opinion piece:

Why not build more transmission lines? Well, people don't want hideous lines running through their back yards, and the 50 states, which have jurisdiction over siting, aren't eager to force lines on communities if the power those lines carry is going elsewhere. Second, new lines are expensive and firms don't want to make huge investments because of the political uncertainty of electricity deregulation. Third, utilities say the rate of return allowed on transmission lines is too low.

And, as an aside, one might ask why Herr Doktorprofessor keeps presenting (as here) FERC findings that a small portion of the California power costs run-up was attributable to rule breaking by power companies, where there was no FERC analysis of whether the rules enhanced the market or efficiency, as non-existent findings by the FERC that the bulk of the California run-up was caused by the power companies engaging in inefficient, market-power dependent activities.

MORE: Tom Maguire and Lynne Kiesling and Don Luskin (with lots of great links). More Kiesling - and more Luskin.

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