Eye on the News

Nicole Gelinas
Tangled Power Lines
It’s 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 York’s power transmission and distribution company can avoid a large-scale power failure this summer. Strike or not, it’s 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 average—despite some small-scale power cuts during an early June heat wave—and Washington’s blackout a few days later showed that New York isn’t 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, isn’t 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 isn’t 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. There’s money to be made upgrading power plants, ensuring reliability, and adding new generation capacity, and private capital is stepping in to do that. That doesn’t 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 Ed’s efforts to encourage big clients to conserve through technology and incentives). But there’s 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 Ed’s job, and its performance hasn’t been stellar. The massive blackout of summer 2003, which actually started in Ohio, wasn’t Con Ed’s fault. But the 2006 Queens failure was, and so was the 1999 failure in upper Manhattan.

The first problem is that Con Ed’s 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, it’s hard to pinpoint failures until they’ve 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 city’s 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, it’s difficult to know what’s going on, and we can’t rely on competitive pressure to make sure that Con Ed either does its job or risks seeing someone else take it over—after all, Con Ed doesn’t benefit from competition, since you can’t fit two sets of competing power lines underneath New York City. Nor would another fix proposed by Con Ed’s 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 what’s 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 Albany’s public-service commission—which approves the regular rate hikes that Con Ed needs for its system investments and sets shareholders’ maximum profit levels—has 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 don’t 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 haven’t 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. It’s 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 & Poor’s cut Con Ed’s credit rating, likely making future borrowing more expensive. Plus, Con Ed has spent more in infrastructure than it has won “permission” for in recent years—evidence that the company is worried about asset deterioration, falling behind in its cost management, or both. After the rate announcement, though, it reduced this year’s 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 hasn’t 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. It’s levying $100 million in higher property taxes on Con Ed’s assets this year because the commodities they’re made out of, including copper, are worth more.

New York—both city and state—should 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 aren’t foolproof, of course, even with independent engineering input. Con Ed would also be unlikely to get all of the funding for such a plan—or even most of it.

But if such a blueprint existed, observers could at least evaluate Con Ed’s spending in the context of what kind of investment the system requires and assess the utility’s performance in achieving its goals. We could know, for example, whether $1.7 billion spent annually represents progress—or 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.

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