Expert View: Too short-sighted to see the light

Earlier this month some 50 million North Americans, including the inhabitants of major cities such as New York, Detroit and Toronto, had no electricity for more than 24 hours. Chaos was widespread, with the New York subway closed, the air conditioning and lifts out of action, and hotel guests forced to sleep in their cars. How exactly this could have happened in two countries so dependent on electricity is still being debated, as Americans and Canadians blame each other. One important contributing factor, however, was undoubtedly the dilapidated state of the region's electrical grid, which has suffered from years of underinvestment.

The blackout should not have come as a surprise. The former US Energy Secretary Bill Richardson concluded several years ago that the national grid was comparable to that of a developing country, and the present Energy Secretary, Spencer Abraham, warned of problems as recently as this spring. Two years ago, Vice-President Dick Cheney proposed a nationwide energy strategy, calling for new investment to modernise the grid and add generating capacity.

So why is the US electrical grid in such a state? The primary reason is short-termism. US utility companies are mostly part-privatised and driven by the need to deliver quarterly returns to keep their investors happy. For this reason, long-term investments are not prioritised. This situation is not unique to the US, however. In Europe, profits have increasingly not been reinvested in the infrastructure but have been given back to shareholders in the form of dividends.

There is also the cost issue. The late Professor Aaron Wildavsky of the University of California at Berkeley demonstrated 20 years ago that short-term risk management, driven by trial and error, is considerably cheaper than long-term risk management. The latter involves companies and governments attempting to predict likely consequences using advanced risk analysis techniques. As a result, energy companies (with the notable exception of the nuclear industry) tend to adopt a short-term perspective.

This policy is brought home forcefully if you have to travel on one of the dilapidated, 40-year-old "slam-door" trains operating on commuter routes in the UK. Clearly, these trains should have been junked for safety reasons many years ago. But only now is funding for replacements becoming available.

Utility companies have not been forced to take a long-term view, either by shareholders, competitors or the markets they operate in. Matters have been made worse by confusing political signals. For example, in Germany and Sweden, the phasing-out of nuclear reactors has taken place alongside a reduction in the use of fossil fuels in order to meet commitments made under the Kyoto Protocol and to comply with legislation to prevent acid rain.

The recent blackout was a costly lesson for the US. Britain and other European countries where utility companies have also been privatised should take note. Maintaining the electricity grid and adding new generating capacity require considerable advance planning. If the skylines of London, Berlin or Washington are not to be seen, like that of New York, in near-complete darkness, the utilities and their shareholders - and the politicians - need to bite the bullet of long-term risk management. The issue is crucial now in Europe as generating capacity starts to shrink with the consolidation of utility companies and the political imperatives of dealing with nuclear power and climate change.

Professor Ragnar Lofstedt is director of the King's Centre for Risk Management, King's College London