You've been there: You're just about to have dinner, or you finally get all your homework done and sit down to watch TV - and the lights go out. It happens often enough that we don't do much except grumble. In fact, when you were little, you probably thought it was fun, putting candles on the dinner table and reading bedtime stories with a flashlight. True, it wasn't ever convenient and sometimes you thought "Oh, fine! Why us?!" when you looked across the street and the neighbors' lights were still on.
Electrical outages - no big deal. At least, they weren't a big deal until August 14, 2003. That night, there were no lights next door. No lights across the street, no lights across town, no . . . . The good news is that some kids in the Northeast saw the Milky Way for the first time. The bad news is that astronauts looking back from space saw . . . nothing - a big, dark hole in the light map of North America.
Millions of Americans and Canadians were without lights and air conditioning. Outages disrupted the activities of citizens, businesses and governments alike. Traffic signals and street lights were out, public transportation systems shut down, stores and hotels closed, and municipal governments couldn't provide basic services. It stopped being fun long before it was over.
While the specific cause of the outage is not, and may never be, clearly pinpointed, the process was clear. A surge, or overload, of energy moved though the power grid, causing substation after substation to shut down. The shut-downs were an automatic response, programmed into the transmission grid to prevent the damage that a power overload can cause to critical components of the system. The idea is that short-term inconvenience is better than long term damage, and sure enough, the system survived. Once it was reactivated - which, granted, took awhile - the lights came back on again.
Even though the debate over who's to blame will probably go on for awhile, there has emerged a growing consensus that the massive power transmission system (the "grid") that stretches from the Northeast through Canada and into the upper Midwest is outdated and unreliable. The questions now being asked are why has something as important as our power grid become so out dated and what can be done to improve it?
Most of us picture electricity generation and transmission as one of those massive undertakings that we imagine being beyond the power of individuals. Picture Hoover Dam or the Tennessee Valley Authority. Only the government, the traditional thinking goes, could run something that massive. Many people also assume that ensuring that we have lights and the power to cook our food and heat and cool our homes is government's responsibility. It's not surprising then, that in the aftermath of the August power failure, we've heard much in the media about what government must do to prevent the next blackout. Over the past decade, under both Republican and Democratic Presidents, government regulation of electricity generation, transmission, distribution and sales has been reduced. In the aftermath of the August blackout, it seems as if there is a chorus of those pointing to "deregulation" as the culprit. The demand for increased government regulation is based on the assumption that government controls and a system of fines and accountability can fix the aging transmission grid and prevent the next blackout.
But there is a small voice of dissent. If you're not already familiar with the prevailing attitude that government must "do something!" to prevent this ever happening again, look in your local newspaper or news magazine, or search the Internet for recent articles on electricity regulation. Then, read the following articles for a different perspective.
"Blackout underscores Need for Responsible National energy Policy," by Charli E. Coon, J.D., The Heritage Foundation."The Right Way to Fix the Grid," by Jerry Taylor and Peter VanDoren, Cato Institute.
"Demand, Not Supply," by Vernon L. Smith and Lynne Kiesling.
Small Group Discussions: Incentives and Electricity
Incentives are rewards or punishments for behavior. Economics teaches us that people respond to incentives in predictable ways. In other words, if we want to understand why people behave the way they do, we must identify the incentives (the rewards and/or punishments) they face for their behavior.
- As the electric grid became outdated over the years, no
one invested in updating it. How can that make sense when
its importance to the people and businesses it served was
growing year by year? The authors of the 3 articles don't
think that's much of a mystery. They think that not
investing was a predictable and rational response to the
existing system of incentives.
According to each author, what are the incentives not to invest in upgrading the power grid?
"Blackout underscores Need for Responsible National Energy Policy", by Charli E. Coon
Incentives not to invest in upgrading the power grid:
"The Right Way to Fix the Grid", by Jerry Taylor and Peter VanDoren
Incentives not to invest in upgrading the power grid:
"Demand, Not Supply", by Vernon L. Smith and Lynne Kiesling
Incentives not to invest in upgrading the power grid:
-
Do you think the authors of these articles believe that increasing regulation will create the incentives necessary to significantly reduce the chance of another massive blackout? Explain.
Teacher Notes
The current debate over energy policy regarding electric power generation and transmission is so complex and emotionally charged that it lends itself poorly to the classroom. However, it is - as it should be - of interest to students. Instead of attempting (vainly, we believe) a balanced portrayal ending in a clear analysis, we've decided to adopt a limited approach and wait to see how the issue plays out in Congress. The articles in this hot topic offer only one perspective, one we believe doesn't get much play in mainstream news coverage. As students get involved in their fall semester of economics, they should be learning the power of incentives. This discussion may help them to sharpen their ability to identify incentives and to discern their effects.
An important point for students to see is that it is the incentives in place that determine energy outcomes. People and businesses respond to incentives, and a poorly structured system of incentives encourages people to make choices that are good for them individually but which don't bring about the most desirable outcome for the society as a whole.
Suggested plan for a 1 period discussion:
- Distribute pages 1 & 2 as a student handout (either
in class or as homework the night before the planned discussion).
Assign 1/3 of the students to read each of the 3 linked
articles. (Under copyright restrictions, you may print the
articles as handouts, even though we cannot reproduce them
here.
- Create discussion groups of 3 or 6, so that all articles
are represented in each discussion.
- Instruct students to share the results of their reading
in round-robin fashion.
- Distribute 1 discussion handout per group and allow time
for groups to complete it.
- Share results in full class discussion.
Guide to discussion questions
- "Blackout underscores Need for Responsible National
Energy Policy", by Charli E. Coon
Incentives not to invest in upgrading the power grid:- Transmission and distribution highly regulated
- Lack of private investment in grid
Incentives not to invest in upgrading the power grid:- Transmission projects are approved and paid for at state level, but the benefits cross state lines. State decision-makers resist paying for investments to help out-of-staters. They face incentives to reward businesses and citizens in their own states.
- Companies fear that a more robust transmission system would increase competition.
- Politicians fear that better transmission would make it easier for out-of-state customers to bid away cheap power from in-state consumers.
- Because returns on transmission are regulated, utilities can make more money by investing in things besides transmission infrastructure
Incentives not to invest in upgrading the power grid:- Regulatory efforts have focused exclusively on supply
- Retail customers pay averaged rates - no incentives to reduce usage at peak times
- Demand is unresponsive to changes in supply cost
- Lack of free entry, exit and pricing in energy markets keeps prices high
- Help students to understand that regulation imposes costs
on businesses, so increasing regulation is not
likely to increase incentives for investment.
(Optional extension) The discussion may create the opportunity to also address the common assumption that only government can successfully undertake large production projects - and that generating and transmitting electricity is that type of project. Add the following reading as an example that big may not be necessary for electricity generation. Some companies are making investments that allow them to produce their own power and not be reliant on the power grid or public producers. These companies are finding the investment to be economically viable. See the article "Do-It-Yourself Power Catching On." Also, see September 4, 2003 issue of The Economist for short highlights of micro-generation enterprises in Great Britain, and grid innovations in the European Union.