Economic Principals

What went so spectacularly wrong in the northeast power grid that 50 million people did without power for nearly a day? The newspapers have gone to work discovering the truth, or a pretty good approximation of it. As usual, journalists will do a dandy job.

Everyone seems to agree that there needs to be massive investment in transmission infrastructure in North America. Get ready for a primer on independent system operators, auction rules for day-ahead and real-time balancing, the merchant investment model, congestion revenue rights and all the rest of the arcana of maintaining and managing the institutions of a modern transmission network.

We'll learn how Bush administration economists and lawyers have been pushing, fairly single-mindedly, for relatively-pure "market-driven" system of investment. Meanwhile, students of the California power crisis want to engineer better safeguards against mendacious businessmen and foolish politicians -- a balancing task of a different sort.

It's another fascinating skirmish in a technological revolution that has been underway for 25 years now, and that probably has another quarter century to go.

Indeed, nothing may be more helpful in understanding what is happening in the present day than to consult Networks of Power: Electrification in Western Society 1880-1930, by historian of technology Thomas P. Hughes. That magisterial book, twenty years old now but fresh as the day it rolled off the Johns Hopkins University Press, begins this way:

"Of the great construction projects of the last century, none has been more impressive in its technical, economic, and scientific aspects, none has been more influential in its social effects, and none has engaged more thoroughly our constructive instincts and capabilities than the electric power system."

Hughes' narrow topic is how three cities and California wired themselves in the fifty years when the manufacture of electricity was new. In Chicago, technology drove the process. In London, politics were paramount. In Berlin, politics and technology were merged. And when California turned to hydroelectric power ("white coal"), the technical problems of long-distance transmission were solved.

And yet the striking thing is that in virtually every country around the world the electricity industry evolved the same form. Big monopolies made the power and distributed it to local customers. It didn't matter whether these companies were privately-owned (and heavily-regulated), or owned and operated by the state. They became highly-integrated businesses, protected from competition both by the cost of entering the business and by political authority, engaged in the generation, transmission, distribution and sale of electricity.

It's as if every city in the world had bought airplanes, run airlines and operated airports.

To see the electricity industry in its nascent form is to better understand what is happening to it today. The possibilities have changed -- just as they changed when the means of city lighting were first discovered. Then it was electrical engineers and financiers who drove the process. Today the engineering is largely economic. All around the world, governments are encouraging the industry to tease itself apart -- to dis-integrate, like nearly every other -- in order to create more efficient companies participating in competitive markets, at least for the wholesale power.

There's nothing mysterious about this process -- at least no more mysterious than when electrical engineers, politicians and entrepreneurs fought and resolved those initial issues over technological design and system governance a hundred years a go. It is intensely political, however, and plenty of interesting battles lie ahead.

Meanwhile, Economic Principals is vacationing in the cool Michigan woods.

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