Behind the Blackout

Thanks to deregulation, Queens merely a pawn in the utilities' board game

While people in western Queens are directing their anger at Con Ed and demanding answers about last month's blackout, public advocacy groups that monitor the energy industry say the problem goes beyond the local utility. They warn that the Queens blackout is a symptom of a deeper problem—how the entire system that brings us electricity has been massively changed over the past 10 years, with little public debate.

Con Ed was supposedly taken unawares by the blackout. Yet as early as January 2003, Con Ed and other New York utilities were petitioning the Federal Energy Regulatory Commission (FERC) for new rules that would reduce their liability for damages arising from blackouts. This was portrayed as a natural evolution of deregulation, which was mandated by New York's Public Service Commission (PSC) in 1996 and took effect three years later.

While the Queens blackouts were neither as dramatic nor as apparently contrived as those that shook California in 2001—and have become emblematic of the perceived failures of deregulation—some draw a connection between the two.

Tyson Slocum, senior researcher with Public Citizen's Critical Mass Energy Program in D.C., notes that in 1995, when New York State was moving toward deregulation, Enron lobbied the PSC for the program—as well as prodded the federal government to encourage the states to deregulate. "Enron's legacy lives on, and it lives on big-time," he says.

With deregulation has come less accountability for failures. Con Ed was slapped with a $10 million fine for a 2002 outage in Queens. But Gerald Norlander of the Public Utility Law Project of New York, a consumer protection group formed during the '70s energy crisis, says that fine was "deferred as a rate-payer credit, so the $10 million is almost statistic noise in the big-dollar crush. The penalty for the Queens blackout will be deferred to the next rate case to be completed in 2008."

That's when Con Ed will make a case before the PSC for what it gets to charge the consumer. But the new system is a dual and complicated one, based on both old-style contracts with power suppliers and a new "spot market" overseen by the New York Independent System Operator, an entity created by the PSC that crosses utilities' service boundaries to route power to the highest-paying buyer. It's a process that Norlander describes as "very volatile and very secret."

In fact, a recent PSC analysis of the spot market raised the possibility that power companies had used manipulative strategies—known as "gaming"—to artificially jack up prices in New York City last month. Paul Tonko, chair of the state Assembly's energy committee, is calling on FERC to probe the matter. Shenanigans aside, deregulation has allowed Con Ed to base its rates on wholesale market costs tied to the price of oil—not to an analysis of its own costs and revenues.

Con Ed itself was broken up into unregulated subsidiaries. New Yorkers still pay their bills to Consolidated Edison of New York, but Con Edison Development was formed to generate energy for other regional utilities outside Con Ed's traditional operating area. The only significant plant Con Ed still operates in its traditional area is the East River plant on Manhattan's 14th Street. Adjacent to public housing projects on Avenue D, it has expanded capacity to compensate for the closure of its plant up the river near the United Nations—where a luxury residential high-rise is planned.

"They undid the old Federal Power Act without repealing it," Norlander says. "There are no more monopolies, hence the law doesn't apply." He calls the Queens blackout the "fruit of a decade or more" of deregulation.

Tyson Slocum says deregulation allows, even encourages, the deterioration of the grid—and points to this as the root of the Queens blackout. "Ten years ago Con Ed was a heavily regulated monopoly with a legal obligation to serve all customers in their service area, with an obligation to reinvest," he says, "Under deregulation, forget all that. Con Ed was broken up and no longer has its books pored over by the PSC, and is no longer required to reinvest big portions of its profits into maintenance."

The new model relies on competitive pressures to compel maintenance. "It's ridiculous," says Slocum. "It doesn't work. It just gives Con Ed an incentive to not replace equipment until it blows out. We have seen a steady erosion of reliability. The blackouts that are happening now are more often and for longer periods than before deregulation. The system we have now is demonstrably worse."

For all the recent emphasis on new plants, he adds, "the PSC has allowed Con Ed to skimp on preventative maintenance, all under the guise of competition and deregulation. There's a perverse incentive to put money into only those areas where they're gonna get a high rate of return—power production, not distributing power. You can have all the power in the world, but if you have a crappy distribution system—which you in New York are finding out that you do—it does you no good."

In addition to abetting the erosion of local distribution systems, deregulation places new pressures on long-distance transmission. "The transmission system was built to accommodate the needs of local utilities," Slocum says. "Now they are moving power between utilities' systems, and the system was not designed for that." He asserts this reality lies partially behind the "voluntary blackouts" that California utilities have induced large businesses to accept in recent weeks as a measure to avoid big, involuntary ones such as the ones that crippled Queens and (briefly) Staten Island, as well as parts of Missouri and Illinois this summer.

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