The Loophole of the Privatization of US Electricity

Although electricity supply has resumed after a blackout that had cast darkness on 50 million Americans and Canadians, the aftermath does not seem easy to deal with. Controversy is heating up on the issue of taxes and preventive measures regarding the privatization and deregulation of power companies, which played a significant role in bringing about the outage.

▽The cascading blackout=The experts are raising questions concerning “why the first blackout, which occurred on 3 transmission lines at 4pm, August 14, was not controlled?” The 3 power lines near Cleveland, Ohio, are managed by FirstEnergy Corp., which provides electricity to millions of residents in Ohio, Pennsylvania and New Jersey. According to the Newsweek, FirstEnergy Corp. had been suffering considerable legal and financial difficulties recently.

What shocked US citizens most was that it only took a few minutes to simply paralyze 8 Northeastern states of the US and part of Canada. Even during summer, when power demand for air-conditioning soars, everyday electricity consumption only amounts to 75% of the power provision capacity in these parts of the two countries. Failures in transmission lines have paralyzed the whole system despite the fact that the equipments had not been overloaded.

Transmission lines of North America are interlocked with each other like a giant spider web. A vast voltage surge suddenly changing directions and threatening power plants triggered the baffle system, resulting in a large-scale blackout.

▽ Privatization of the electricity market= The US power grid, which was designed back in the 1930s, is somewhat like a spider web. The nature of electricity demands that power be consumed instantly after production. Therefore, the grid was initially devised to borrow power from the neighbors, should a region lack electricity.

At first, a certain company was supposed to be in charge of both power generation and transmission in a certain area, but with the deregulation procedures in the power industry, the generation and the transmission businesses were separated. Consequently, small-sized companies that were not equipped with power generation facilities were able to buy cheap electricity from other regions and sell it to the consumers. For instance, a New York power company provides cheap Michigan electricity to the New York citizens.

The number of utility companies- production, wholesale and retail combined- exceeded 850 as of 2001, which means that the electricity industry is currently operating in a free competition market. Accordingly, households and commercial power rates were reduced by 13% and the industrial rate by 4.8% in 2001, compared to 1996.

▽The loophole of privatization, investment in power transmission= However, with the outbreak of the outage, the loophole of privatization also became clear. The economy doubled its volume from 1975 up to now, but annual investment in the power transmission sector was reduced from 5 billion to 2 billion dollars. Britain`s Financial Times pointed out on August 18 that, “the amount of investment made by 250 American transmission companies over the last 10 years is equivalent to that of 3 British companies, which conduct business in a much smaller market and territory.”

Last year, US Energy Secretary Spencer Abraham expressed his concerns that, “the US power system will be unable to keep up with the country`s economic capabilities within 10 years.” The George W. Bush administration`s policies focusing excessively on developing new energy sources and improving the billing system is being evaluated to have resulted in generating “lobby wars” between interest groups.

▽Supplementing the “market failure”= Currently the US utility companies have no reasons to invest in the power grid. Since they are connected like a web, it is difficult to find parts that need adjustment, and even if a large amount of investments are made to establish more facilities, it will only allow the competitors to get a free ride. There are also environmental issues to deal with.

Experts are suggesting supplementary measures for privatization, such as providing government subsidies to power generating companies that invest in transmission facilities or convincing the federal government to replace outworn transmission lines. In addition, in order to overcome the “not-in-my-back-yard” sentiment, measures to grant the federal government to hold the transmission grid license is also being considered.

Rae-Jeong Park Seung-Jin Kim ecopark@donga.com sarafina@donga.com