Better Ethics Needed to Improve Energy Distribution

by Terry Costlow

Not long ago, American energy market leaders viewed deregulation as way to improve profits and trim consumer pricing by managing electricity and natural gas creation and distribution more efficiently. Unfortunately, Enron’s accounting shenanigans, rolling blackouts in California, and the 2003 Northeast blackout clouded that view significantly.

Energy leaders recently began making a more concerted effort to make sure that the industry begins living up to the expectations that come with an open market. Experts outlined and discussed the myriad factors involved in this new era of energy distribution at an IEEE-USA-cosponsored seminar, held in October at Notre Dame University on “Ethics and the Changing Energy Markets.” All agreed that the stakes are high, since electricity is a basic part of the American infrastructure. “This industry is second only to agriculture in its importance to society,” Frank Incropera, Dean of Notre Dame’s College of Engineering, told the audience.

Though early attempts to let open markets define the industry bordered on disastrous, many decision makers believe that things can settle down and run smoothly. Eventually, consumers will enjoy the benefits of better pricing, and well-run utilities will realize the rewards associated with efficient management.

“There’s nothing about electric power that makes it impervious to regulation by the market, said George Mason University professor Vernon L. Smith, an EE and Nobel Prize-winning economist. “But the market design has to honor the features of the industry, acknowledging engineering and technical constraints.”

Conference Focused on Electrical Grid

Many speakers focused on the electrical grid, noting that electric companies can follow the model set by other deregulated energy fields. “Natural gas is the best example of an industry working well after deregulation,” said William Hederman, director of the Federal Energy Regulatory Commission’s (FERC) Office of Market Oversight and Investigations.

Hederman, sometimes referred to as the “cop on the beat,” said electricity providers have a long way to go before the electric industry can even be considered to be a model for anyone. He noted that that unethical action by Enron and others caused a loss of faith on every side. Investors became reticent, holding down the amount of available capital, while customers and elected officials lost confidence in information provided by utilities and doubted that regulators were protecting the public interest.

FERC responded by improving the response infrastructure and providing more vigilant oversight and rules enforcement, Hederman continued. He said utilities and related companies must operate with more regulation than many other fields, so deregulation is not a precise description of the industry’s move to open markets. “It’s more restructuring than deregulating,” he said.

What Went Wrong?

Before setting rules for the future, the industry has to understand why problems occurred in the first place. According to Hederman, last year’s rolling blackouts and bankruptcies in California won’t help create a model for making the link between problems and deregulation. “You can’t learn any more about deregulation from looking at California than you can learn about plastic surgery from looking at Michael Jackson,” Hederman said.

That’s because most analysts contend that California’s regulations actually created the problem. Foremost among them was the law that fixed pricing for retail with market pricing for wholesale, which made it difficult to maintain profitability.

“One essential fact is that the problems in California were not created by deregulation, but by strong regulatory rules,” said James Sweeney, a Stanford University professor and author of The California Energy Crisis.

Experts have analyzed the Enron debacle heavily, laying bare the interconnection between auditors, Wall Street companies and others. These interconnections prompted people to ignore suspicious activity in order to boost profits. More recently, watchdogs have been given more insight into corporate activities which, in turn, has created an atmosphere that’s more conducive to efficient operations. “Markets depend on good faith and ethical actions,” Hederman said.

Looking Ahead

Most energy providers accept the idea that regulations will help ensure that energy gets delivered with few problems. Many are working closely with regulators to make sure that regulations don’t produce unexpected results, as they did in California and elsewhere.

“Good market rules facilitate competition and limit market power,” said Joseph Bowring, manager of the market-monitoring unit at PJM Interconnection, an energy provider headquartered in Valley Forge, Pa.

As on the financial side of the issue, industry watchdogs will pay closer attention to detail and will enforce the rules strictly. The enormous scope of the 2003 Northeast blackout, which affected states from New York to Michigan, affected tens of millions of people. “The 2003 blackout was a turning point,” said Michehl Gent, president of the North American Electric Reliability Council (NERC), a Princeton, N.J., group that sets standards and monitors compliance by bulk electrical providers around the country. “We’ve taken an oath that this will not happen again.”

Gent promised that NERC wouldn’t hesitate to take definitive action when it discovers problems. In the past, the fraternal feel throughout the industry may have prompted NERC and others to overlook what they knew needed to be done. Those days are now gone. “We’re beyond voluntary compliance,” he said. “We will measure performance and disclose lapses. We have put in sanctions for failure to comply with standards.”

NERC worked within the ANSI process to create a readiness audit program that it then integrated with existing compliance programs. The combined audits will be conducted every three years to determine how well utilities are performing. “That was the single most effective thing NERC has ever done,” Gent said.

Separate Generation and Delivery?

Another suggestion for service improvements is to lessen the market power of large entities by spinning out some of their services. Prof. Smith suggested separating power generation from power delivery. “We have to separate the wires from the energy providers. That principle should be supported at the retail level right down to the plug,” he commented.

In New Zealand, this approach led to the emergence of five retail energy companies and common use of controls for turning off water heaters and other products when necessary. Using some equipment at off-peak times should be a key part of energy plans, Smith said. “There should be higher charges for consumers who buy at peak times,” he added.

However, several hurdles will have to be overcome before this approach can work. For starters, to turn off equipment to minimize peak usage, companies will have to install technology in homes and offices. The necessary microprocessor-controlled meters are available, but the industry has been slow to adopt them.

“This is an age of sophisticated monitoring and metering, but not in the electric power industry,” Smith said. “Local franchise monopolies are not well-motivated to start using technology,” partly because the “costs are not trivial.”

Terry Costlow has been writing about engineering issues for more than 20 years. He can be reached at todaysengineer@ieee.org.