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.

Con Ed, of course, puts a different face on the recent Queens debacle. "We did not meet our standards or those of our customers, and we understand their frustration," says spokesman Alfonso Quiroz. "We're going to continue to work on the reliability of our system, but we're one of the most reliable utilities in the country."

Asked whether Con Ed's incentive for maintenance has eroded—a crucial issue for an overtaxed system—Quiroz talks about "customers," saying, "Our incentive is our customers and getting them back in our system. They are our business and we take that very seriously."

The paradox affecting New Yorkers the most is that Con Ed, having effectively gotten out of the generation business under the deregulation plan, simply has to maintain the cables. Under deregulation, new companies are encouraged to purchase or build local power plants and sell the electricity to the local utility, which is to serve as a broker rather than a producer. The 2003 blackout—although it originated from a power surge in Ohio—was the first indication that New York's grid was seriously vulnerable. The Queens blackout shows that those vulnerabilities persist, says Slocum, who adds, "There's plenty of power to go around, but the grid was overloaded."

Queens residents are especially miffed that their borough hosts a disproportionately large share of the city's power plants, which have been the focus of local citizen campaigns around their health impacts. The three major plants in western Queens have all been sold off by Con Ed. The largest is the 1,750-megawatt Ravenswood Generating Station, owned by KeySpan Energy; the 1,090-megawatt Astoria Generating Station is owned by Reliant Energy, and the 1,600-megawatt Poletti Power Plant is owned by the public New York Power Authority (which actually purchased it from Con Ed when it was first built in the '70s).

Trying to keep track of the new network of ownership can seem like watching a game of musical chairs. KeySpan, owner of the massive Ravenswood, is the successor company to the Long Island Lighting Company (LILCO), which was forced to relinquish control of the grid in Nassau and Suffolk counties by state regulators in 1998 as the price of a bailout of its debt-crippled Shoreham nuclear power plant. Relieved of its Shoreham debt, LILCO's new incarnation moved from suburban Long Island to inner-city Queens. KeySpan is now seeking approval from federal and state authorities for its pending $11.8 billion takeover by the British energy giant National Grid.

In June 2000, after a brief blackout on Manhattan's Upper East Side, then City Council speaker Peter Vallone publicly suggested that Con Ed, in connivance with its new deregulation partners, was using power disruptions to pressure the PSC to approve yet more power plants for the city.

Peter Vallone Jr., the former speaker's son, is now councilman for Astoria, the neighborhood at the epicenter of last month's blackout. As a pro bono lawyer for the local Coalition Helping Organize a Kleaner Environment (CHOKE), Vallone fought in state court against the Power Authority during his election campaign in 2002. Under a settlement he won, the Power Authority agreed to phase out the dirty oil-burning Poletti generator in favor of a new, cleaner, gas-burning generator at the site. He still takes a hard line against any new power plants in Queens.

"This blackout had nothing to do with lack of power," Vallone says. "This is a transmission problem. They have a grid down there that was built postwar to handle the demand of a whole different era. And if new plants are needed they shouldn't be in a community that already has more than anywhere on the planet. This isn't about 'not in my backyard'—my backyard is already full. Western Queens was already providing 60 percent of the city's power before they started up Astoria Energy earlier this year. Now it's more like 65 percent."

Vallone had also fought that one, a 500-megawatt plant built by the firm SCS, and succeeded in stopping the state from allowing the use of Liberty Bonds— created for post–9-11 rebuilding—for its construction. Vallone charges that Governor George Pataki "rammed it through" against the wishes of the community. Additionally, the firm NRG has built small "peaking units" near the Poletti plant, and the Power Authority also runs mini-turbines near the 59th Street Bridge. These mini-turbines are supposed to be removed under the Poletti settlement.

When Vallone spoke with the Voice on July 31 he had just returned from hearing Con Ed CEO Kevin Burke testify before the City Council on the blackout. "In 1999 after the Washington Heights blackout," Vallone says, "they said the same thing they said at today's hearing, that they'd spend all this money and take care of the problem. I said at the hearing, 'We have absolutely no reason to believe anything you say to us.' We need a federal monitor over Con Ed."

He also calls for the resignations of the responsible parties at Con Ed. Asked for names, he replies: "The buck stops at Kevin Burke."

Con Ed's Quiroz responds to Vallone's call for a federal overseer by saying: "We understand his frustrations. We plan to continue working with him."

And the demand that the CEO step down? "Kevin Burke has no plans to resign."

Vallone is clearly echoing the views of at least some of his constituents. Tony Gigantiello, president of CHOKE and also of the co-op board at Astoria's North Queensview Homes, recalls that on July 16, the first day of the blackouts, manholes exploded around Astoria; residents were virtually trapped in their homes as fumes filled the street for several hours between 30th and 31st avenues in the Forties—emphasizing the irony of the situation. "The major pollution is here in Astoria," Gigantiello says. "We bear the brunt."

Not exactly a fan of deregulation, Gigantiello adds, "We pay a separate charge for transmission on our bill now. But they didn't change a thing. They didn't upgrade anything. Con Ed is the biggest criminal in the city of New York."

There are those who take an opposite tack from the advocacy groups, seeing the Queens debacle as indicative of insufficient deregulation. Jim Lesczynski, the Libertarian Party candidate for Sheldon Silver's Lower Manhattan assembly district, calls the New York State plan "phony deregulation" and adds, "They tweaked their regs and called it deregulation. What we really need is real deregulation. What we really need is a free market in electricity. Then you'd have lots of suppliers rushing in to fill that demand."

But the Queens blackout had nothing to do with inadequate supply; it had to do with grid deterioration. Lesczynski has a quick answer to this observation too: "They can afford to let their equipment go to pot," he says, "because they're a monopoly and what are we gonna do, go elsewhere? If they had someone threatening to compete against them, we would have reliable electricity."

Various competing companies, each with its own lines? Sounds like a lot of potential for chaos.

"The free market has a lot of potential for chaos," he says, "but it has a way of working itself out. If you don't perform you don't stay in business."

Norlander, whose Public Utility Law Project has been working on more traditional solutions than Lesczynski's, sees the problem as inherent to the new order. "We switched to performance-based regulation rather than a general audit of costs," he notes. "The PSC told the utilities, 'We won't micromanage you. Just run the system the way you want to run it and keep the power up and we'll give you a financial slap if you don't.' "

Slocum's prescriptions recall the old line about how the most progressive step you can take when standing at the edge of a cliff is backward.

"The quicker we come to the conclusion that deregulation has failed, the quicker we can improve the reliability of our system," he says. "That means putting Con Ed on a path to being a fully accountable system where the federal government and the state of New York have full regulatory powers. A century ago it was recognized that electricity is a unique commodity and requires unique treatment. Then the Berlin Wall came down and any sort of government intervention in the marketplace was seen as taboo. All the old rules were seen as removed. A century of accepted practice was overturned, and we're paying the price now."

The free-market dogma still reigns, the blackouts and Enron scandal notwithstanding. The federal Energy Policy Act of 2005, passed exactly a year ago, offers transmission companies bigger profit margins as an inducement to build new lines. But Slocum points out that the law applies to lines already built as well. The law also included subsidies to coal and nuclear development. Slocum calls it a "grab bag of giveaways to well-placed special interests. It's the most expensive energy bill in America's history, and there was nothing for mass transit, nothing about fuel-economy standards or conservation. It's not going to help America's energy problems. It just helps the energy companies."

This history also seems poised to repeat itself. Just as power was being restored to the last suffering residents of western Queens last week, the U.S. Senate began debate on a new energy bill that would expand oil drilling in the Gulf of Mexico and seems assured of passage. The House version goes even further in removing federal controls on offshore drilling.

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