The September 28, 2003, blackout was the largest in Italy since the electric system was nationalized in the 1960s. The cause, it is thought, stems from a break in a major transmission line from Switzerland that caused lines coming from France to become overloaded and "trip off", shutting down the network. This highlighted the fact that Italy still continues to import a great deal of power. Despite this catastrophe, the Italian government remains confident that the effects of deregulation and liberalization will lower domestic generation costs by 2005: some observers expect a 25 percent fall in prices for Italian consumers between 2005 and 2008. Indeed the advent of competition in new capacity generation is expected to alleviate future power blackouts rather than contribute to blackout problems.

London's blackout occurred at the end of the workday, lasted about 38 minutes and affected 250,000 commuters stranded in the Underground. The cause of the outage was discovered quickly and attributed to two transformer failures at a single electric substation. While the blackout was a minor event compared to the North American experience, critics of the uk's energy policy were quick to point out that the grid operator also owned an electric system involved in the U.S. blackout a month earlier. Yet, other than that coincidence, there is not much else in common, since the British grid system is among the most competitive in the world.

During the Thatcher era, Britain's nationalized electric, gas, water and telephone utilities were both privatized and restructured. The electric system was divided in 1989 between a number of generation companies, a single national grid company and multiple electric distribution companies. New entrants into the power supply and marketing markets were also encouraged, and a national electric power market was established. To facilitate the attraction of private investment and to monitor the electric power markets, the uk established an independent regulator: the Office of Gas and Electric Markets.

Britain has experienced problems in establishing a viable wholesale power market exchange. The initial power pool was closed because of declining generator costs and after it both failed to reflect demand/supply balances and remained unable to evolve to meet new market realities. In response to the power pool's failure, the government replaced it with the New Electricity Trading Arrangements (neta). This was implemented a year ago, and prices have fallen by as much as 25 percent.

So, the uk's decade-long experiment with privatization, competition and regulation is a success. There has been a demonstrable decrease in electric rates in addition to an increase in efficiency. (There is a debate, however, over the share of the efficiency gains attributable to privatization versus that attributable to the restructuring and separation of generation, transmission, distribution and marketing.) Since the uk has had Europe's longest and most successful experience with a competitive electric power market regulated by an independent office, the European Commission was emboldened to move ahead with its dramatic proposals for the liberalization (coupled with regulation) of Europe's electric power markets.

DROP CAP

Notwithstanding the summer 2003 blackouts in North America, the uk and Italy, the proposition that a sustainable energy policy can be obtained by relying on competition, the availability of private capital and appropriate regulatory policies remains viable. In no case has it been demonstrated that the implementation of these policies was the cause of the power grid failures. Certainly, each country has had problems introducing competition into the electric energy markets. (Consider California's rolling blackouts, the uk's original power pool and Italy's lack of native power generation.) Nevertheless, both the United States and the European Union are modifying their regulatory policies to allow markets to operate more efficiently and to encourage private investment in critical infrastructure. Any sustainable energy policy requires attracting private investment at reasonable terms to build and maintain the critical energy infrastructure necessary for the maintenance of national security and competitive economies. In turn, the needs of both consumers and investors require balancing competition with responsible regulation.

Though the emerging international consensus in favor of "regulated competition" may not be perfect, it has been proven to work. As the World Energy Council concluded in its 2000 report Energy for Tomorrow's World: "The experience of liberalization in the energy sector will on balance prove beneficial." Of course, mistakes will be made, but the current model for sustainable energy development is the best way to extend reliable electric service to the rest of the globe. After all, the occasional rolling blackout is far better than no power at all.

Greg Aliff is national managing partner of the Energy & Resources Group at Deloitte. Branko Terzic, a former ferc Commissioner, is director of regulatory services for Deloitte.

1A study commissioned by the Electric Power Supply Association released in July 2001 claimed significant benefits in the form of inflation-adjusted electric price decreases of 30 percent for all customer classes during the fifteen year period 1985-1999 as a result of limited competition.