Acton Commentary

Shedding Some Light on the Blackout: Is Deregulation the Culprit?


Following the massive blackout in the Eastern U.S. last August, many media outlets jumped at the chance to blame the outages on power industry deregulation. While investigative agencies are still, almost two months later, attempting to determine the cause and course of events that led to the blackout, anti-market pundits immediately claimed to have uncovered the problem: too much freedom in energy markets.

The massive power failure is a sure pointer that there are problems in the electricity industry. Although many insist that more government regulation is the solution, actions that result in the stunting of human creativity undermine the foundations of successful enterprise. The power generation business is no exception.

Still, venomous attacks have been spewed against the market forces that push for deregulation. For example, David Hughes, the executive director of Citizen Power , wrote about the “demon of deregulation,” using alarmist rhetoric, “The recent blackout was bound to happen and more are coming.”

Richard F. Hirsh, a professor of history of technology and science and technology studies at Virginia Tech, writes , “Investigators say there was a failure in the transmission system. And, thanks to deregulation, there is growing concern and confusion over how these systems should be monitored and who should pay for them.” Deregulation is to blame then for the “confusion” that penetrates the power industry. Hirsch writes further, “The electric utility industry still remains in flux. This uncertainty puts investors and utility managers in a bad position, since they do not know what is going to happen in the future. Independent generating companies also hesitate to act because they do not know if they will be operating in a competitive market, a more regulated environment, or some mixture of the two.” This sums up the situation well, and the implied solution is easy to see. More government control would easily reduce “confusion,” albeit at the expense of free trade.

On the basis of this kind of analysis, many reflexively looked to Congress as the purveyor of aid during the power crisis. Broad bi-partisan support for power industry regulation cast the government as the solution to the problems. As Rep. Joe Barton (R-TX) said, “If the people of New York and the Northeast don't want another blackout, they'll support my bill.”

The primary agency concerned with government regulation is the Federal Energy Regulatory Commission (FERC). According to The Progress & Freedom Foundation, while Barton’s bill, HR 1644 , does have some positive deregulatory provisions, its major flaw is that it fails to “limit FERC’s imposition of SMD [Standard Marketing Design] regulations,” which could “allow the agency to increase its size and power.” A policy study in November 2002 by the Reason Public Policy Institute noted that SMD regulations risk “locking the electricity industry into a regulatory structure that ignores technological advances and is unable to adapt to changing market conditions.” While further regulation of the power industry would, according to Hirsch, have the added benefit of eliminating “confusion,” this should not come at the cost of restricting free and creative innovation. Congress certainly has a role to play, but perhaps the nation would be better served if legislators pursued an agenda that would not result in greater government intrusion.

After all, there is an alternative way to eliminate confusion. Hirsch touches upon this alternative himself, when he writes, “In some states, the transmission system is run by the state agency, an Independent System Operator. While the utilities companies own the lines themselves, they do not have control over them and are not eager to invest billions of dollars into them. In other states, the companies own the transmission lines, but the rates remain regulated by the Federal Energy Regulatory Commission, so that they cannot make as much as they could if they built new power plants and could sell the power at market rates.” The difficulty here is perhaps too much federal oversight and regulation, rather than the opposite. The private sector has no incentive to invest in upgrading the expensive power infrastructure when the specter of greater government regulation is always looming. The problem then is not government deregulation, but that deregulation has not gone far enough. These half-measures did not effectively empower the utilities to invest in and take ownership of the electrical infrastructure.

The extent to which government regulation dampens the motivation for reinvestment in the power industry underscores the importance of a free economy, which is successful in large part due to the proper recognition of property rights. The fuller realization of human potential is dependent on the ability to freely and creatively utilize high technology, and the electricity industry plays a key role in this. Excessive government regulation can disenfranchise both the power companies and their customers of technology that is necessary to improve people’s lives.

While the exact causes of the blackout are yet to be determined, we should be cautious in assigning blame. This is especially true of the favorite target for alarmists, the “demon of deregulation.”