A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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Tangled Power Lines
Its time Con Ed had a long-term capital improvement plan.
30 June 2008
Nine thousand Con Ed workers may go on strike this week, adding to the uncertainty over whether New Yorks power transmission and distribution company can avoid a large-scale power failure this summer. Strike or not, its hard to know how Con Ed is doing, because neither it nor its regulator provides clear, concise information about what it takes to keep the system going and whether Con Ed has the financial and managerial resources to do the job.
To be fair, Con Ed performs better than the national averagedespite some small-scale power cuts during an early June heat waveand Washingtons blackout a few days later showed that New York isnt the only city with power trouble. But the continued uncertainty over a repeat of the summer of 2006, in which tens of thousands of Queens customers lost power for a week and Con Ed seemed to have no idea what was going on, isnt acceptable in New York, which Mayor Michael Bloomberg calls a luxury city. Unpredictable power failures add to its growing reputation as a city unable to provide twenty-first-century infrastructure. They also mean transit delays, business losses, and huge efforts to keep order.
The most serious challenge that New York faces in keeping the lights on isnt a lack of power. Since New York State deregulated its power plants in the nineties, getting Con Ed out of the power generation business, competition has worked. Theres money to be made upgrading power plants, ensuring reliability, and adding new generation capacity, and private capital is stepping in to do that. That doesnt mean that we can afford to be complacent about generation. New York should revive an expired law to speed up new-plant permitting so that supply can continue to keep up with demand, which has surged 23 percent in a decade (despite Con Eds efforts to encourage big clients to conserve through technology and incentives). But theres no imminent shortfall.
The real trouble lurks in how to carry electricity from a Queens power station to where you are. This is still Con Eds job, and its performance hasnt been stellar. The massive blackout of summer 2003, which actually started in Ohio, wasnt Con Eds fault. But the 2006 Queens failure was, and so was the 1999 failure in upper Manhattan.
The first problem is that Con Eds aging infrastructure is struggling to handle the power pushing through it, especially as hot summers smash power-usage records in electricity-hungry New York. Because the lines and transformers are underground, its hard to pinpoint failures until theyve caused outages. After the 2006 blackout, state officials found an alarming rate of corrosion among . . . underground transformers, and we have no reason to believe this high rate of corrosion does not exist elsewhere in the city. And the system that failed in that instance was 25 percent newer than the citys entire system.
The second problem is Con Ed itself, which responded abysmally to the 2006 outage. The utility claims that since then it has improved its infrastructure and its tactics to keep small problems from turning into big ones. Con Ed also points to its $1.7 billion worth of upgrades this year as evidence of greater reliability. But it said the same thing two years ago, when it touted a $1.2 billion investment six weeks before the 2006 blackout. In fact, its difficult to know whats going on, and we cant rely on competitive pressure to make sure that Con Ed either does its job or risks seeing someone else take it overafter all, Con Ed doesnt benefit from competition, since you cant fit two sets of competing power lines underneath New York City. Nor would another fix proposed by Con Eds critics help: mandating a regular expiration and recertification of its franchise. Con Ed could never get debt financing without government guarantee if it risked losing its only assets every decade or so.
So Con Ed needs a regulator who knows exactly whats going on and who can act as an honest broker, making sure the utility gets the money it needs to upgrade the system without fleecing ratepayers who have nowhere else to turn. But Albanys public-service commissionwhich approves the regular rate hikes that Con Ed needs for its system investments and sets shareholders maximum profit levelshas fallen short in this role. The commission is only now performing its first operational audit of the company in 18 years.
Despite the thousands of pages of testimony and material that each rate review produces, neither Con Ed nor its regulator produces a snapshot document that spells out what level of investment the company would require to build the modern, reliable power infrastructure New York needs. That includes wires that dont heat as quickly; newer grid technology, like that used in some Asian cities, that offers more redundancies and fail-safe mechanisms; and increased use of technology to identify problems early.
The results of the rate-hike process havent been reassuring, either. Con Ed asked for $1.2 billion to improve and upgrade its system over the next year, but it got only a third of that. The request would have amounted to a 30 percent hike in revenues that the utility uses for its power systems, after increases of about 3 percent for each of the previous three years. Its impossible to know whether regulators were acting responsibly in denying Con Ed a windfall or shortsightedly protecting themselves from outcry over sharp but necessary electric-bill hikes. Some evidence shows, though, that Con Ed may be falling behind. Right after the rate announcement, Standard & Poors cut Con Eds credit rating, likely making future borrowing more expensive. Plus, Con Ed has spent more in infrastructure than it has won permission for in recent yearsevidence that the company is worried about asset deterioration, falling behind in its cost management, or both. After the rate announcement, though, it reduced this years expected capital spending by about 10 percent. And as the current labor dispute shows, the utility faces a tough task controlling salaries and benefits as inflation, and workers cost of living, rise, meaning that less money is available for infrastructure investment.
New York City hasnt been much help. As Con Ed has felt the squeeze of quickly rising materials costs, the city has twisted those increases to its own advantage. Its levying $100 million in higher property taxes on Con Eds assets this year because the commodities theyre made out of, including copper, are worth more.
New Yorkboth city and stateshould instead work with Con Ed to create a long-term capital plan similar to the one offered by that other monopoly, the state-run Metropolitan Transportation Authority. Con Ed and its overseers should produce a ten-year blueprint that discloses, in 100 pages at most, estimates of how much money and time it would take to get the system into a state of good repair, and how much will be needed to make twenty-first-century improvements. Cost and program estimates arent foolproof, of course, even with independent engineering input. Con Ed would also be unlikely to get all of the funding for such a planor even most of it.
But if such a blueprint existed, observers could at least evaluate Con Eds spending in the context of what kind of investment the system requires and assess the utilitys performance in achieving its goals. We could know, for example, whether $1.7 billion spent annually represents progressor evidence that our vital power infrastructure is falling dangerously behind.
Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst.