America’s Power System is Powerless

America is a beacon of capitalism, so it can be jarring to discover one of its largest industries is a redoubt of socialism. State governments have been running the electricity business, currently a $330-billion-a-year industry, since Theodore Roosevelt pounded his White House bully pulpit.

Central planning of the electricity industry started during the Progressive Era, as is the case with many misguided policies. Early in the 20th century, intervention-minded progressives, such as Wisconsin's Robert "Fighting Bob" La Follette, concluded that electric companies would consolidate into "natural" monopolies that preyed on consumers. This was a curious conclusion to reach at a time when electric companies were competing vigorously in many cities.

Their remedy for this theoretical drift toward natural monopoly was, incredibly, to establish real government-mandated monopolies. States created commissions with the regulatory power to outlaw competition among utilities and set the price of electricity for consumers. By the end of the Great Depression, almost all Americans bought their electricity from government-backed monopolies, and it remains so to this day.

The progressives reasoned that electricity providers couldn't abuse consumers if they labored under the state's thumb, but it's far from that simple. Without competition, there is no spur for innovation, which is why electricity transmission and distribution–the system of wires, towers and poles that transmits electricity from the power plant to your home–haven't changed much since the regulators stepped in.

That's unfortunate, because while the power system remains frozen in time, American society as a whole has changed dramatically. The U.S. has become a wired nation, a people wholly dependent on reliable electricity to power their computers, phones and iPods. And America's anachronistic electricity supply chain is failing to keep pace with demand. Massive blackouts in California (2005), Florida (2008) and the entire Northeast (2003) serve as stark reminders of the fragility of the U.S. grid.

Congress wants to overhaul the system by spending a king's ransom on technologies that would give utilities the ability to moderate consumer demand–by, say, remotely turning down millions of thermostats during periods of peak use. In theory, this might avoid the supply crunches that can stress the system to the breaking point, leading to blackouts. Proponents call this a "smart grid" approach, but it's really a stupid policy, especially when the U.S. could modernize the system without spending a penny from the government treasury.

It could do so by simply freeing the electricity market from state-sponsored socialism. Under the Progressive Era regulatory model that persists to this day, state regulators set a flat rate for electricity, so it costs consumers the same amount of money whether they use it at 5 p.m. or 5 a.m., even though the cost of generation is much greater in the afternoon, when demand is higher. If electricity were priced based on demand rather than on government mandates, demand would gradually decrease during peak hours when it was more expensive. Consumers would buy "smart grid" technologies of their own volition, to save money on their utility bills.

Or consider the ugly transmission lines. Thanks to a state ban on competition among utilities, the manner in which electricity is provided hasn't changed for 100 years. Enormous power plants in remote locations generate the juice, which is then transported hundreds of miles on transmission towers and distribution poles on its way to homes and businesses. It's a long and tenuous supply chain, which makes it leaky and vulnerable. The blackout that darkened the Northeast in 2003 was caused by a tree branch in Ohio.

Engineers have developed small-scale generation technologies (micro-nuclear power plants, mini-gas turbines, solar panels and the like) that can dramatically shorten the distance from generation to end-use. These technologies could make the grid more reliable and eliminate the need for eyesore transmission towers. This can't happen right now, however, because state regulators allow only one provider of electricity in each service area keeping the energy industry locked into the old energy generation model.

If Congress were serious about addressing the problem of America's outdated grid, it would encourage states to dismantle the barriers to energy competition. Instead, it is pushing smart-grid subsidies to further entrench the electric industry's broken regulatory regime by funneling billions of dollars through monopolistic utilities and their bureaucratic benefactors in local government. These subsidies will simply prop up a broken and ossified system.