Upgrading the National Power Grid: Electric Companies Need an Economic Incentive to Invest in New Technology

I. INTRODUCTION On August 14, 2003, 50 million Americans lost power (1) in what marked the worst blackout in United States and Canadian history. (2) The cascading power outage first hit Toronto, then Rochester, Boston and, finally, New York. (3) It took just 13 minutes for the blackout to spread throughout the 80,000 square-mile Canada-United States Eastern Interconnection power grid. (4) Industry analysts have been predicting a failure of this magnitude for some time. In 2001, the North American Electric Reliability Council warned Congress that the grid was not designed to be used the way it is being used today. (5) The grid was originally built to transfer power from monopolistic utilities to local customers, a movement of relatively small amounts of power over short distances. (6) But deregulation of the electric power industry over the last decade has created a market-driven system in which power can be immediately traded over long distances from a region with a temporary surplus to a region with a temporary deficit. (7) This system was intended to provide consumers with access to cheaper electricity from various suppliers. (8) However, the resulting increase in the flow of electricity over congested transmission lines drastically increased the risk of major power outages and ultimately led to the blackout of August 14, 2003. (9) Currently, there is [n]o single authority ... in charge of the grid, and few have an incentive to invest the money needed to improve its reliability. (10) In this note, I examine the effects and possible causes of the blackout that occurred on August 14, 2003. I look at the regulatory history that led up to this event, as well as the case history surrounding similar events in the past. Finally, I determine: (1) whether utility companies will be held liable for damage caused to consumers for the August 14, 2003 blackout; (2) whether such liability will provide power companies with an incentive to improve the power grid; and (3) whether current regulation should be altered to provide power companies with a greater incentive to invest in the power grid. II. BACKGROUND This section will examine the regulatory history in the electricity industry as well as the case history surrounding the 1977 blackout. A. The History of the Electric Utility Industry Capitalist societies such as the United States are based on the premise that free market industry serves a valuable economic function. Free markets foster economic efficiency, technological innovation, and the creation of wealth. (11) However, in some industries, market imperfections prevent the realization of such benefits. When the market fails, the government provides regulation intended to mend the imperfections. (12) But regulation, like any human invention, is also flawed and, over time, will inevitably fail to properly balance the industry so that the desired economic effects are realized. When government regulation fails, it must be replaced with more effective regulation, or the industry must be deregulated. (13) As a natural monopoly, (14) the electricity industry only survived a short time before government regulators stepped in to curb the market power that electric companies wielded over consumers. (15) In the last century, this industry has moved from its inception, when it was totally unregulated, through periods of regulatory buildup and reform, to its current status where governments have begun to deregulate the industry. (16) 1. Competition and Consolidation In the late 1800s, the electricity industry was an unregulated competitive market. (17) It began when Thomas Edison powered up the Pearl Street Station in New York City on September 4, 1882, thereby providing electricity to eighty-five consumers. (18) Demand for the new technology grew rapidly and investors raced to enter the market. By 1922 there were 3,774 different companies producing and distributing electricity. …

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