Did Deregulation of the Energy Sector Cause the Blackout of 2003? A Debate Between Greg Palast, the Competitive Enterprise Institute and a Former Utility Executive

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'Sham? Shame! Inside the Electric Power Industry.' That’s the title of a book by former energy insider Jack Casazza who predicted the nation would face a major blackout in part due to deregulation of the energy industry. Democracy Now! hosts a debate on deregulation with Casazza, best-selling author Greg Palast and Fred Smith of the Competitive Enterprise Institute. [Includes transcript]

Click here to read to full transcript

“Major Midwest blackout of seven states. Essential services, water supply, sewage, interrupted for up to four days; 176 deaths attributed to power interruption” This is not a news report from Thursday of last week when most of the North Eastern US and parts of Canada were plunged into darkness in the fourth and biggest blackout in US history but the prediction that power engineer Jack Casazza formerly with the PSE & G of New Jersey made in his 2001 book 'Sham? Shame!Inside the Electric Power Industry.'

He quit PSE&G dissatisfied with the management and now heads the American Education Institute in Washington, DC. As we examine the de-regulation debate and the reasons for the blackout we are joined by Jack Casazza and Greg Palast bestselling author of 'The Best Democracy Money Can Buy' and also co-author of 'Democracy and Regulation'.

  • Fred Smith, president of the Competitive Enterprise Institute in Washington D.C., a public policy group dedicated to the principles of free enterprise and limited government
  • * Greg Palast*, investigative reporter with the BBC and author of the books 'The Best Democracy Money can Buy' and 'Democracy and Regulation'
  • Jack Casazza, engineer and former utility executive with Public Service Electric and Gas Company (PSE&G) in New Jersey. He is the author of “Sham? Shame! Inside The Electric Power Industry,” a book he wrote in 2001 book in which he predicted a major blackout similar would happen in August 2004. He serves as the president of the American Education Institute in Washington, D.C.


AMY GOODMAN: Here on Democracy Now! The War and Peace Report. I’m Amy Goodman, as we continue our discussion in the aftermath of the biggest blackout in U.S. history. We’re joined on the telephone now from Detroit by Fred Smith. He is the C.E.O. of C.E.I., that’s the Competitive Enterprise Institute. We’re joined on the phone from Long Island, New York by Greg Palast, investigative reporter with the BBC, author of the book The Best Democracy Money Can Buy. His piece, “Power Outage Traced to Dim Bulb in White House’, has been circulating, swirling around the Internet in the aftermath of the blackout. We’re also joined on the phone by Jack Casazza, who worked for the utilities for more than three decades, a power engineer working with Public Service Electric and Gas Company, PSE&G, and left, dissatisfied with the direction the utilities were going. He’s written the book, Sham? Shame! Inside the Electric Power Industry. And Harvey Wasserman is with us. He is long time energy activist, has written for Seven Stories Press, The Last Energy War: The Battle Over Utility Deregulation. We’ll begin with Fred Smith, who has just landed in Detroit. Now that the planes are back on their feet or have got their wings, welcome to Democracy Now!

FRED SMITH: It sounds like an interesting program.

AMY GOODMAN: Well, you got a chance to hear some of what Congress member Kucinich had to say. Can you talk about what you see as the cause of this blackout and what are some of the solutions?

FRED SMITH: Well, first I think it’s useful to have a kind of electricity 101. Electricity, like a lot of other network industries—telecommunications, the airplanes themselves, ground transportation—those are all situations where you have two components. You have the stuff that flows around—the electricity, the airplane and passengers, the messages over the telephone system, and the thing it flows over, the grid —- the wires, the cables, the airports, the air traffic control system. And it’s the interplay between those flows and grid that create either reliable or less reliable service, consumer friendly or less consumer services. Historically, we’ve tended either to regulate those grids, the network industries, very heavily. Or, in some cases, actually government handles very critical parts of things, the airports, for example. And that creates a lot of rigidities. Politics has improved the very consumer friendly way of managing resources, so we began this process of liberalizing the system: freeing up the airlines and freeing up other things, transportation and electricity. But we didn’t really think about it very well, and we certainly haven’t done a very good job of doing it. We sort of had botched freeing up deregulation, as it’s called. First we broke up the network into the flow portion—- the electricity generation— and the distribution system — the transmission lines. So we took a system that’s naturally integrated and we fragmented it. And then, we basically freed up the generation, we made it a market, and it worked. We’ve had dramatic expansions in generation capacity in the last decade, but we did nothing at all to the transmission grid, so we had all that new electricity, but nowhere to go. It hit that new demand, hit the rigid grid, and the result was congestion, or as we call it in the electricity area, blackouts. And, you know, it was a disaster waiting to happen. We didn’t do the job, we didn’t free the system up, and that’s what happens when you do a half-assed job.

AMY GOODMAN: Greg Palast, can you respond, you’re assessment of the blackout, its causes and solutions.

GREG PALAST: Fred just gave you this third grade power 101. Let’s look at the players here. It starts out at Toledo Edison, which, by the way, was the model for the film “The China Syndrome”, about a company that faked its safety and reliability records, if you don’t remember that. Then it moves to their division, Met Ed, which was the owner of, and still owns, the Three Mile Island Nuclear Plant. Then it really accelerates when it hits the Niagara Mohawk System, which I investigated for the state of New York, where they were lying about the costs of the Nine Mile Point Nuclear Plant. So what you have here is the Three Stooges of the electricity industry knocking their heads together. Toledo Edison had one hour of messing around with the downed power, Niagara Mohawk has lost 800 jobs to deregulation, almost its entire maintenance and service staff. That utility has been sucked dry by British owners, so that when that power surge came out of the Ohio region they couldn’t handle it, and they just spread the disease of power failure like Typhoid Mary there. So what you’re looking at here—I used to investigate these guys. I investigated Toledo Edison for the governor of Ohio and Pennsylvania system for the utility commission there. And what you have here, in the gold old days, we used to be able to catch these guys. We used to tell them how much exactly to spend on maintenance. We told them exactly how reliable their systems would be. And they were reliable. We have the cheapest, best electric system on this planet until a disease hit us called deregulation.

FRED SMITH: Oh, come on.

GREG PALAST: Just a second—pushed by Fred Smith’s funders. I that it would be helpful if Fred would admit that his funders include the guys that just blacked us out. And we have—and when you want to talk about the interplay of systems and networks, the big interplay is the interplay between cash for politicians and the deregulation scurge. We used to have a rule, set up by Franklin Delano Roosevelt, the Public Utility Holding Company Act, which said that electric companies could not give money to politicians. When that rule was eliminated—so it was deregulation not only of the pricing of the system, and the deregulation of the quality controls and budgeting of the system, but the deregulation of the political giving in the system, which ended up with a complete disaster—blackouts from California to New York. And this is the first of many coming.

AMY GOODMAN: Fred Smith, you have the right of response, head of the Competitive Enterprise Institute.

FRED SMITH: What he’s doing is, I mean, look. White hat, black hat analysis is fun and investigative journalists do it. But really, think of what is going on in the first place. Under government controlled, or politically controlled electricity, rates were incredibly high in some communities, very low in others. And communities were getting screwed around the country because politicians couldn’t incentivize the system. But let’s look at what happens when we freed up partially the system. And we only did it partially, as I’ve said. The grids in America, the various pieces of electrical grids, were fragmented. There is law called the Public Utility Holding Company Act which artificially Balkanized the electrical system. People are complaining, why don’t we have a national electricity superhighway. Well we don’t, because the laws make it illegal for anyone to provide that. America had the same situation in banking where we have thousands of banks whereas Canada had ten, because they didn’t have laws that artificially restricted the ability of companies to provide services nationwide. We’ve now got to eliminate that law. That is one of the things that might come out of this crisis, the realization that we should put no barriers to companies providing consumer friendly services. But the other thing is, we’ve got to recognize that a grid is every bit as important, and leaking grids together is important. In a way, we’re climbing an energy mountain. We’re mountain climbers, in a way. And, of course, climbing a mountain can be a risky thing, you’ve got to be very careful. But you’re safer if you can rope in with a partner, and, indeed, if you can rope in with several partners, if the ropes are strong enough to sustain you and you’re signaling back and forth when you’re getting into trouble. And the problem with the electric grids were that, in effect, we have had no incentive for anyone—not the electric companies, not the politicians, not anyone—to think about how adequate those interconnections are between communities and how we invest in technology to quickly respond if one of our grids gets in trouble. That’s what failed. It was a failure of the —if the political system suppressed investments in these where you could have had a 21st century electrical grid, we don’t.

AMY GOODMAN: Let me bring Jack Casazza into this conversation. These two lines, “Major Midwest blackout of seven states. Essential services, water supplies, sewage interrupted up to four days”. This isn’t a news report from last Thursday or Friday. This is the beginning, or a prediction in the book “Sham? Shame! Inside the Electric Power Industry”. Jack Casazza wrote it several years ago, formerly with the PSE&G of New Jersey, quit that company, dissatisfied with the management and the direction of the whole electric industry in this country. Jack Casazza, as you listen to Fred Smith, what is your response? You worked in the industry for more than 30 years.

JACK CASAZZA: First, this comment that there’s no incentive and no checks of adequacy, and so on, is just plain wrong, Fred. This is being done through the reliability councils, being done through NERC. I served for a couple of years on the executive committee of the New York Reliability Council, where I chaired the task force, checking up on whether they were meeting their reliability requirements. There were incentives, there were rules and then you say well, why did it happen. Part of the problem comes, and I agree with some of the previous speakers, from the way we deregulated or restructured. Basically we focused on implementing market forces. Market forces was the name of the game. Competition was good. I’m a believer in competition. I play golf and I like to win. And it drives me. But what happened in the electric power industry is that some of the companies, after we Balkanized, and made all these individual companies, became more interested in their individual profits than the welfare of the grid of the whole. We lost sight of federal policy, completely lost sight of the need to provide a technically adequate grid. We have had in this country and we still have, I disagree with secretary Richardson who doesn’t know what he’s talking about, we still have the best grid in the world. The problem is we’re trying to use it in ways that are not intended. This is being a product of the people in Washington and in some of the states who are passing regulations without analysis A. good friend of mine was Joe Swidler, former chairman of the Federal Power Commission. He wrote quite a number of articles—he died recently— about why are we going forward doing these things without analysis. We continue to do that at the present time. In fact, I see statements from secretary Abrams. We’ve got to spend $50 billion, get that right, for new transmission. Why do we have to spend this? Because we’re trying to do a lot of new and different things with the transmission system which cost a lot of money and do not predict any benefits to the public. The general conclusion that has been reached worldwide is that deregulation is not lowering prices. It lowers prices in some areas but increases costs in another. If we go ahead with this transmission reinforcement, it’s $50 billion more to charge against deregulation. Most of which we would not need if we didn’t do this. The problem is the failure by government to coordinate our, let’s call it our institutional requirements or institutional procedures, with our technology. I’m an engineer, and I can tell you, there are dozens of engineers out here who are very angry with what has happened and the failure of our government to listen to us. Generally, our federal is technically incompetent, and still is. That’s unfortunate that we don’t get better people to work for the federal government. The motivation is, defend yourself politically, and that’s the way it goes. That’s one comment I’d like to make. One other comment Fred Smith made is that we’ve done generation and it’s worked. Like heck it is, Fred. The generation costs have gone up massively. We used to charge $30 and $40 a megawatt hour, at times it’s gotten to $2,000. Why is this? Because in some cases they are paying for generation on what is called the market clearing price, not the actual bid price. In other words, I can bid for generation $100. If the highest accepted bid is $1000, I get $1000. There’s no other market that works this way they’re doing with electricity. So, we have a lot of problems. I think the key is the failure to coordinate the institutional economic and other procedures with our technical requirements of the system.

AMY GOODMAN: We have to break for 60 seconds, and we’ll be back with Jack Cassaza, author of “Sham? Shame! Inside the electric power industry”, the C.E.O of C.E.I., competitive Enterprise Institute, Fred Smith. Also on the line with us, Greg Palast, who wrote the book The Best Democracy Money Can Buy. But before he became an investigative reporter for BBC, wrote a major book on regulation and utilities for the United Nations. We’ll also be joined by Harvey Wasserman, author of The Last Energy War. Stay with us.

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