For the past 70 years, federal laws have played a vital and necessary role in the operation, production, distribution and protection of the electrical power grid throughout the United States. Federal laws in concert with state regulations have ensured that the power grid not be subject to criminal behavior and market manipulation, for most of that time. However, over the past several years, the fragility of the power grid's infrastructure combined with mandated deregulation of the utilities industry has seen less necessary routine maintenance, upgrades in technology as well as necessary investment in research and development.
While it seems that most everyone believes that the power grid woes culminated with the rolling blackouts of 2000-2001 in California, the initial concerns with major outages go back to November 1965 when power went out from New York City, New York state, all of New England and parts of Pennsylvania. That outage however was not caused by insufficient capacity, but a surplus of capacity which the New York grid was unable to accept from the interconnected New England grid.
The excess supply during the '65 blackout was too much of a surge for most of the utilities whose power went out for over 30 million people. It was not a supply problem but insufficient line capacity. In 2003, 50 million customers were without power for almost the entire Northeast. Again, it was not lack of supply but a downed power generator near Cleveland, Ohio combined with a downed line from lack of tree trimming which failed to provide full capacity for the areas' needs; a domino effect of failures, human error and lack of compatibility of computer programs. In addition, some competing generating companies did not share data and there was a failure by the Ohio utility to be able to interpret computer data they did receive outside of its local geographic region.
In 1968, the North American Electric Reliability Council (NERC) was formed by the federal government in response to the 1965 blackout to serve as a watchdog group for monitoring operational compliance of the national electric grid. In 1972, the Electric Reliability Institute (EPRI) was formed to help in delivering high-value technological inroads through research and development. Yet, it has been recently and incorrectly reported that the NERC was just recently formed to comply with the 2005 Energy Policy Act.
The "energy crisis" in California has now been well-documented that there was not a shortage of power but a manipulation of the electricity market which was to blame. However, the federal government must bear some of that blame due to the exemption of federal statutes which holding companies such as Enron were able to overcome in its blind greed.
Once again, the heat wave of the summer of 2006 has resurrected the age-old question of power production in the U.S. But equally as revealing is the non-disclosure of the basis for the primary problems with the grid's operational capacity. While transmission lines were added since 1965 and nuclear reactors proliferated in the U.S. primarily in the 1970's as national growth ensued, little has been done to ensure the reliability of the local infrastructure of the power grid. Its accountability has been based upon a good faith measure. And most consumers have no idea that the divestiture of their utility companies nationwide contributed to their now captivity by several holding companies in many cases owning their once reliable power provider.
While the 2005 Energy Policy Act has been rolled out as a cure-all to ensure compliance with reliability standards and a preventative to market manipulation, it is far from what it has been touted to be, with some of its provisions given a grace period of 18 months since its passage August 8, 2005. Yet, it is necessary to grasp a basic understanding of how the system provides power to your home in order appreciate the grid's remaining unaddressed flaws.
The basic structure consists of a control center which monitors the utility's generating plants, transmission and subtransmission systems, distribution systems and customer loads. With 140 control centers and 3,000 utilities combined over essentially two power grids țuone east and one west as Texas has its ownțu it is an overwhelming task. The interconnectivity and delivery of power in many cases is incompatible with widely varying levels of equipment, data systems and personnel training.
It is the secondary system which supplies the distribution of electricity to consumers where most of the failures take place and require time to repair. The network of substations feeding electricity to neighborhoods via feeders which flow to transformers is often where supposed problems arise during local outages. And then there is the inadequacy of often aged equipment, such as in New York City, which has cables, feeders and circuit breakers anywhere from 30 -70 years old.
But the source of bottlenecks stem from a provider inflicted problem relative to the 1992 Energy Policy Act which changed the way in which electricity was sold to local consumers for the first time. Utility companies were allowed to install their own plants and sought customers anywhere in the country and not necessarily in the same geographic region that historically provided the grid with its reliability.
Energy brokers entered the picture and utilized the open market to buy and sell power. And thus the marketĄŻs restructuring had a direct correlation between the industry buying electricity from plants hundreds of miles away putting unprecedented burdens upon the transmission system and raising the likelihood of blackouts. The grid, as it was established, was never designed to absorb the transmission of high voltage across the country without the comparable and upgraded systems in place.
Although Enron has become the poster child for manipulating the power market, the industry and the federal government must be held responsible for even further erosion of federal regulations and of the industry as now provided by the 2005 Energy Policy Act. It provides for Federal Energy Regulatory Commission (FERC) to appoint the NERC to now be certified as a regulatory agency as opposed to its former role as voluntary watchdog. However, the Security Exchange Commission (SEC) which always was responsible for signing-off on mergers and takeovers in the utility industry will now relegate its role to the FERC. So instead of more oversight, there in fact will be less for mergers of holding company acquisitions within the electricity delivery system.
The other landmark change in the 2005 Energy Policy Act is the abolition of the Public Utility Holding Company Act (PUHCA) of 1935. Specifically, it repeals restrictions on ownership of electric and gas utilities. Not only will the SEC no longer have a role in the power industry, but repeal of PUHCA will no longer limit the variety of businesses that may be owned by holding companies purchasing utilities. Formerly, holdings of a company were required to be specific to the operation of a utility. And further, requiring that a holding company's utility operations be primarily located in a single or contiguous state has also been repealed. Additionally, any foreign country or foreign government is open to buy U.S. utilities and no longer subject to SEC OR FERC review.
The reason for the restriction of PUHCA for a company to limit its holdings was paramount in ensuring the integrity of the power grid for the public good. The idea was preventative in disallowing a company owner from taking profits from the power company to be used for maintenance, staff, or upgrades and then invest them in another far more risky business, with less of a rate of return. The customers lose and there is no guarantee of service.
What has already become evident in the past several months since the 2005 Energy Policy Act was revised is the direct foreign investment of utilities. Many have been former bankrupt utilities such as Montana Power which Northwestern Power Co. now owns, providing service to Montana, Nebraska and South Dakota. It accepted a $2.2. billion bid in August 2006 by Australia's Babcock & Brown Infrastructure after rejecting several domestic public power companies' offers.
Similarly, Macquerie Infrastructure & Diversified Utility & Energy Trust of Australia plan to purchase Duquesne Light Holdings based in Pittsburgh, PA for $2.36 billion. National Grid, a London-based holding company received approval in July 2006 to purchase KeySpan Energy. This is National Grid's fifth U.S utility purchase. KeySpan provides service to New York state customers outside of New York City. National Grid will provide $7.3 billion for its purchase of KeySpan. It previously was approved to purchase four other utilities in the upstate NY area and Massachusetts. All buyouts supposedly will be reviewed by the Committee For Foreign Investments in the U.S. (CFIUS) and must be reviewed by state Public Service Commissions.
In light of the changes in the law, the volatility of the transmission lines and local upkeep of the local power infrastructures compounded by the distancing of consumer disclosure both figuratively and literally, will put more pressure upon the state Public Service Commissions to seek a larger and more vigilant role in pursuing utility accountability. While on paper it may appear that the NERC will have the ability to penalize companies who do not comply with standards, it will be overwhelmed given its history of voluntary oversight. And many in the industry believe that the FERC will be forced to cherry pick and manage oversight of fewer mergers and acquisitions than were done in the past.
And while consumers should always make an effort to conserve energy, the systemic problems of this aging electrical grid are far more about balance sheets and politics than about adjusting the thermostat. Get out the candles and make a wish.