In my neighborhood, power was out for less than an hour. A few blocks away, it didn’t go out at all. In parts of New York City, it’s still not back. This morning, New York governor George Pataki said: “If you have power now, in addition to looking out for your neighbors, making sure everyone is OK, conserve energy. Don’t turn on the dishwasher, don’t use the air conditioner unless it’s absolutely essential.”
Now I’m all in favor of conserving energy, and pitching in to do one’s share is certainly a good thing, especially during a crisis. But I can’t help feeling some resentment, here. After all, we’ve decided to rely on market mechanisms and profit-making corporations to supply electricity. I’m not necessarily opposed to deregulation – frankly, I don’t know enough to say either way. But once that decision has been made, I do resent being told that my civic duty requires certain market behavior. After all, in this case, it’s the power companies that are not living up to their end of the bargain, not the consumers. It’s not that they are now making a windfall profit from the blackout – they’ve already done that by sticking with an “old and antiquated” infrastructure and not investing in the necessary upgrades that would have prevented this in the first place.
Instead of admonishing consumers to modify their behavior, why not force the power companies to adopt a market-based solution? When the power companies are unable to meet demand, force them to offer consumers an incentive to conserve – say, a voucher for each kilowatt hour they use below their average that can be redeemed for free power when the crisis is over. Otherwise, appeals to one’s civic duty smack of being just another marketing ploy.
{ 35 comments }
Hoodie Craw 08.15.03 at 7:41 pm
The market “incentive to conserve” in California is a 3x rate penalty on your electric bill, should you overstep their estimate of how much power you should consume in your home.
Keeps the air-conditioning off, though.
In the short-term – until everybody is re-connected – conservation will actually help to them get re-connected. Every time an “On” button is hit to plug some other neighborhood back-in, there is a huge surge in loading as all those drinks blenders that people forgot to switch-off come back on all at once. You are helping the power companies by giving them a bit of playing-room to absorb the spikes.
eric 08.15.03 at 8:30 pm
What I see here is the typical ivory-tower response–“Greedy power companies are screwing the consumer”.
Given that nobody knows what caused the outage in the first place, its kinda hard to say that anything would have prevented it.
As hoodie points out, The request for power conservation by Gov. Pataki is so that the ensuing loads from turning the power back on won’t overload the system as it comes back on line. Which you could have figured out if you actually taken the time to figure out why he said that.
Abiola Lapite 08.15.03 at 9:01 pm
“But I can’t help feeling some resentment, here.”
Who exactly are you feeling resentment towards, and are you sure they deserve it?
“It’s not that they are now making a windfall profit from the blackout – they’ve already done that by sticking with an “old and antiquated†infrastructure and not investing in the necessary upgrades that would have prevented this in the first place.”
I find this contention of yours both laughable and easy to disprove. Why not do the following – take a look at the SEC filings for your local power companies for the last few years, and have someone calculate their Return on Investment (ROI) for you. Compare the resulting figures to those for the S&P 500 as a whole. How likely do you think it is that this exercise will verify your suspicions? I’m willing to stick my neck out and say “not at all likely.”
There’s nothing more ridiculous than seeing someone who is able to think rationally and carefully in one field jumping to illogical and far-fetched conclusions when discussing another. I’ve never heard of anyone in the investment world speaking of power companies as some sort of exceptionally profitable investment, and their share prices do not reflect what they ought to be if they were the rapacious cheapskates that you insinuate they are. To the contrary, many power utilities are limited by regulations as to the maximum rate of return they are allowed to earn.
Sometimes a power failure is just a power failure, and if the power companies were to implement the sort of market-based scheme you suggest, there’d be many amongst those who share your worldview who’d be screaming about a conspiracy to shaft the innocent consumer.
yoni 08.15.03 at 9:15 pm
Damn, it’s refreshing to see people like eric and abiola stick up for the little g– er, corporations and the “ivory tower” hotheads that protest them (god, i abhor that term, as if no conservatives go to school.)
Yes, it would tremendously sad to blame the state of energy crises on utility companies who were responsbile for the mess in CA in the last couple of years. It’s not like benevolent entities like Enron deserve any criticsm, god no, it’s simply the consumer’s fault that everything happens, not billions in government subsidies and nudge-nudge regulations from the friendly powers-that-be.
give me a fucking break.
Silbey 08.15.03 at 9:22 pm
You may well have a point. You should probably still leave your dishwasher off and not use the air conditioner unless absolutely necessary.
(If your neighbor’s house is on fire, you probably don’t want to have a long discussion about the evils of the water utilities. You probably want to lend him your hose).
Dell Adams 08.15.03 at 9:48 pm
That’s right. Governor Pataki, at least in the article linked in the post, didn’t say anything about it being a civic duty to conserve energy, he simply said, “Conserve energy”. He could have as easily intended an appeal to New Yorkers’ self-interest – speeding the return to full supply, as several commenters have explained. Indeed, in this case it’s hard to see how the two can be separated, given the physical state of affairs.
Abiola Lapite 08.15.03 at 9:54 pm
And what exactly have you proved by this little rant of yours? Does this sort of vacuous nonsense pass for an argument in your circles?
I suggest you lose the vulgarity and attempt to mount some sort of reasoned critique if you want to be taken seriously. If not, there’s always Democratic Underground and Indymedia, where you can indulge in childish whining to your heart’s content.
Walt Pohl 08.15.03 at 11:08 pm
Abiola: But you don’t really have an argument either. Just some handwaving towards some conventional wisdom about overregulated electricity markets.
At this point, after the whole California fiasco, misbehavior by power companies is lot more plausible than it was say ten years ago.
Abiola Lapite 08.15.03 at 11:13 pm
Here is an excerpt from a more level-headed take on the blackout, to be found on the Economist’s website:
We see that, far from being clear that “greedy” corporations are to blame for the power outage, it may well be that the real problem is the lack of sufficient profit opportunities to encourage the level of investment needed. So much for the conspiracy theorizing then.
Abiola Lapite 08.15.03 at 11:27 pm
“Just some handwaving towards some conventional wisdom about overregulated electricity markets.”
I don’t need to make any sort of “constructive” argument to tear down a faulty one; there simply is no logical necessity to do so. If Party A makes a non-obvious claim about the state of reality, then it isn’t incumbent upon Party B to somehow disprove A’s argument – I might as well ask you to disprove my claim that there are pink unicorns on Neptune. To the contrary, the onus is on A’s part to provide evidence in support of his assertion.
I responded to an allegation that the blackout had to do with past profiteering by electricity companies, by pointing out that if there has been such profiteering, then it ought to have been reflected either in the past financial statements of the power companies, or in their current stock prices. Since I am not the one claiming past malfeasance, I’m not going to take it upon myself to do the number crunching on anyone else’s behalf. My point is made regardless – if anyone wants to maintain that corporate greed is to blame, it is straightforward to settle the issue one way or another.
Now, unless I’m shown calculations indicating that past financial statements or current stock prices suggest unusually high profits in the power industry, I am under no obligation to take rantings about corporate greed as anything but a reflection of the claimant’s paranoia.
back40 08.15.03 at 11:49 pm
“I’m not necessarily opposed to deregulation…”
As the Economist article above notes utilities are highly regulated, but that doesn’t mean that they are well regulated.
There’s a damned if you do and damned if you don’t aspect to regulation. When utilities are fully regulated they have a guaranteed margin and so no incentive to good performance. They are essentially a government service in that case and you get expensive yet shoddy products, poor service and rude employees.
When they are partially deregulated (nothing is ever fully deregulated) then the incentive is to game the regulations just as any other cost of business. Upgraded generation and transmission capabilities may trigger higher regulatory regimes (they do in this case) which would cost more than the utility would gain in lowered operational costs and increased production. The hurrier they go the behinder they get.
A competent regulatory structure is a sophisticated thing not easily created in a politicized atmosphere. Lack of comprehension doesn’t prevent people from having strong opinions and being easily manipulated by demagogues with ulterior motives and agendas.
Walt Pohl 08.16.03 at 1:06 am
Abiola: You still have no argument. The Economist has, shall we say, certain biases in its explanations. (I see it’s still peddling the “California energy crisis was caused by regulation” line — unless that’s an old article.) The truth is that you know nothing about the subject, but you were pissed off at Jon for taking anti-market line so you ranted away about how he was totally ignorant on the subject. (Given that you’re totally ignorant on the subject, I don’t know how you would know.) That’s fine, which is why I didn’t complain then; but then you went off on yoni, who’s complaint, while content free, was not much more content free than your post.
The fact remains that electricity markets have been deregulated in recent years. Maybe more deregulation is the answer. More more regulation is the answer. Since you know nothing about the subject other than your ideological biases, it’s pretty absurd for you to badmouth someone else who knows nothing about the subject other than their ideological biases.
brian burgess 08.16.03 at 1:32 am
“To the contrary, many power utilities are limited by regulations as to the maximum rate of return they are allowed to earn.”
True, but if you look their returns over time you will find they are right skewed. The reason is it take regulators a long time to intervene when rates of return get too high but utilities no time at all to ring up their attorneys when the rate of return drops (in order to lobby for a rate increase). Risk vs. return.
Michefelder at Rutgers (previous utility exec and consultant on rate issues) has done some work in this area.
Abiola Lapite 08.16.03 at 2:33 am
“The truth is that you know nothing about the subject, but you were pissed off at Jon for taking anti-market line so you ranted away about how he was totally ignorant on the subject. (Given that you’re totally ignorant on the subject, I don’t know how you would know.) That’s fine, which is why I didn’t complain then; but then you went off on yoni, who’s complaint, while content free, was not much more content free than your post.”
Don’t make me laugh! You really are a presumptious fellow, aren’t you? What’s next – you’ll deign to teach me elementary microeconomics, reveal to me the secrets of balance-sheet analysis, or initiate me into the art of discounted cash-flow modelling?
Your chutzpah’s really something – I’m bundled over in hilarity! To think I actually mistook you for an intelligent person!
Abiola Lapite 08.16.03 at 2:55 am
For those out there who have better reading comprehension skills than this walt pohl fellow, please keep in mind that there is a difference between the deregulation of power generation and the deregulation of power transmission.
Deregulating power generation is (relatively speaking) easy, particularly when decoupled from distribution. It is power transmission that is the natural monopoly; consequently, this aspect of power generation is usually highly regulated, to avoid a “wasteful” situation in which power generators unecessarily replicate transmission infrastructure.
The problem with this sort of regulation is that, to the extent that my investment in the transmission infrastructure will be used to carry your electricity, I have no incentive to invest more than the barest minimum I can get away with – think of the Baby Bells and the CLECs wrt to upgrading the local loop.
There are other complications to the electricity deregulation issue, such as stranded costs and so on, which I won’t go into here. For a more in-depth introduction to the topic, take a look at the following:
The Deregulation of the Electricity Industry: A Primer
Abiola Lapite 08.16.03 at 2:58 am
“Michefelder at Rutgers (previous utility exec and consultant on rate issues) has done some work in this area.”
Brian, thanks, your response I actually have to think carefully about. I’ll go look at what this guy has to say on the matter.
brian burgess 08.16.03 at 3:46 am
It’s Richard Michelfelder, I dropped the “L” in my first post. Bio is here, sure you could dig up one of his papers.
http://camden-sbc.rutgers.edu/FacultyStaff/Directory/michelfelder.htm
Poin D 08.16.03 at 5:09 am
Y’all need to listen to that dirtdigger extraordinaire, Greg Palast:
http://www.zmag.org/content/print_article.cfm?itemID=4051§ionID=10
“Power Outage Traced To Dim Bulb In White House: The Tale Of The Brits Who Swiped 800 Jobs From New York, Carted Off $90 Million, Then Tonight, Turned Off Our Lights”
by Greg Palast; August 15, 2003
Excerpt: “Is tonight’s black-out a surprise? Heck, no, not to us in the field who’ve watched Bush’s buddies flick the switches across the globe. In Brazil, Houston Industries seized ownership of Rio de Janeiro’s electric company. The Texans (aided by their French partners) fired workers, raised prices, cut maintenance expenditures and, CLICK! the juice went out so often the locals now call it, ‘Rio Dark.’
“So too the free-market cowboys of Niagara Mohawk raised prices, slashed staff, cut maintenance and CLICK! — New York joins Brazil in the Dark Ages.”
Prometheus 6 08.16.03 at 6:59 am
We see that, far from being clear that “greedy” corporations are to blame for the power outage, it may well be that the real problem is the lack of sufficient profit opportunities to encourage the level of investment needed.
I have a problem with the whole rate of return argument.
Upgrading and inproving infrastructure is a legitimate expense. The cost of it would therefore be taken into account in setting rates because regulation didn’t set a maximum rate of return, it set a fixed rate of return.
More that that, the greater expenditure would create a greater profit in actual dollar amount terms. Any investment disincentive is the result of the chosen point of view.
Jon 08.16.03 at 2:27 pm
I really want to avoid the personal nastiness of some of the comments above, but I also want to clarify a few points.
First, the “old and antiquated” quote was not from some anti-corporate hack – that was George Bush.
Second, I didn’t say that “Greedy power companies are screwing the consumer.” I don’t think that. They are doing what is expected of them in a market: attempting to maximize profts. That’s also why I don’t care how their return on investment compares to the S&P 500.
Third, I don’t know what one can infer about my “worldview” from that post – I did not take an “anti-market line” or oppose de-regulation. I proposed a specific reform that worked through market mechanisms.
Finally, the evidence of market failure that I’m talking aobut is not that the power went out (or not only that). It’s the fact that politicians had to try to convince people that in addition to “looking out for your neighbors, making sure they are OK” those who have electricity shouldn’t use it. I’ll repeat: I proposed a market-based mechanism that would give people an incentive to conserve. My resentment is toward politicians who want markets on the producer side but not on the consumer side. When they say that it’s okay for corporations to be governed by market mechanisms but that consumers should sacrifice, they become little more than corporate shills.
eric 08.16.03 at 3:00 pm
If it was really a market failure, then we’d be seeing these blackouts all the time. It would be like Nairobi or something.
If this morning’s NY Times is to be believed, (and I’ll leave you all to that one), the power flux that caused this was unprecedented, and caused the whole event to pretty much take place with 9 or 10 seconds. One of the engineers the Times talked to said he’d never seen anything like it.
And I’ve got plenty of incentive to conserve. If I don’t use power, I don’t have to pay for it. It’s pretty simple.
Walt Pohl 08.16.03 at 3:14 pm
Abiola: I’m not objecting to your opinion. I’m objecting to the level of vituperation you have brought to almost every single post you made on this thread.
And a link to the Cato Institute? There’s someone with even less of an agenda than the Economist. :-)
JLowe 08.16.03 at 7:35 pm
The Cato Institute article isn’t that bad, even if it comes close to advocating distributed generation (the utilities would hate that).
I don’t think we’re deregulated enough. If there was more deregulation and everyone was a player in the marketplace, then we would all have to understand way more about our electricity than sticking a plug in the wall or flipping a switch. Developing the understanding of our electrical system would be somewhat difficult and time-consuming, and for most people, a real hassle. Perhaps then we all would stop using so much of the stuff.
Prometheus 6 08.16.03 at 11:21 pm
jlowe:
Can you name an industry that was deregulated that wound up with more players, more competition and lower prices?
Snot Rocket 08.17.03 at 1:46 am
Don’t make me laugh! You really are a presumptious fellow, aren’t you? What’s next – you’ll deign to teach me elementary microeconomics, reveal to me the secrets of balance-sheet analysis, or initiate me into the art of discounted cash-flow modelling?
OK, so I ask you. Please make your argument. A reasoned, considered message would probably be well recieved here.
I’m waiting.
Micha Ghertner 08.17.03 at 3:40 am
Y’all need to listen to that dirtdigger extraordinaire, Greg Palast:
http://www.zmag.org/content/print_article.cfm?itemID=4051§ionID=10
Wow. Zmag presented as a credible source of information. Shall I counter with a link to the John Birch Society’s website? Everyone who isn’t in on the conspiracy knows that this blackout was a communist plot.
Micha Ghertner 08.17.03 at 3:46 am
Can you name an industry that was deregulated that wound up with more players, more competition and lower prices?
Airline deregulation, although not perfect, has been pretty darn successful. Here is a pretty balanced article on the subject:
Prometheus 6 08.17.03 at 2:40 pm
micha:
That was indeed a balanced look at airline deregulation. I particularly liked this statement:
These problems drive home the lesson that the dismantling of comprehensive regulation should not be understood as synonymous with total government laissez-faire. The principal failures over the last fifteen years have been failures on the part of government to vigorously and imaginatively fulfill responsibilities that we, in deregulating the industry, never intended it to abdicate.
Based purely on observation, total government laissez-faire is a central part current deregulation philosophy (“philosophy” may not be the proper term). It’s what makes me resist the plans of the deregulators as strongly as I resist the plans of the tax-cutters. Absolute deregulation tends to benefit the previously regulated monopolies because their position is already intrenched. At best it merely restructures the monopoly (the telephone and cable systems are good examples of this) and at worst it enables manipulation of vital markets that consumers have no choice but to participate in (the West Coast electrical market manipulation being the best example of this).
Lorenzo 08.18.03 at 6:00 pm
Power generation is also at the very least a natural oligopoly, if not a monopsony or monopoly. The barriers to entry are very high, and there is an active disincentive to build generating capacity (because the demand for electricity is very price inelastic). Any generating capacity beyond the bare minimum necessary must go idle or drive down prices with no benefit in sales volume, therefore it is in the rational self interest of electricity producers not to invest in expensive to build, and costly to idle power generation plants that can do nothing but hurt profits past the bare minimum necessary for current conditions.
David Yaseen 08.18.03 at 7:52 pm
If the (U.S.) airlines were so successfully deregulated, why have we (U.S.) taxpayers had to bail them out? Will we be repaid? At what rate of interest? Personally, I might have freely decided to put my money somewhere with a higher rate of return.
I look forward to the energy bill to see what forms will be advanced of giving energy companies the benefits of “free” markets while absolving them of the corresponding risks.
rvman 08.18.03 at 10:03 pm
>At best it merely restructures the monopoly (the
>telephone and cable systems are good examples of
>this)
In what universe have cable systems been deregulated? Regulatory capture is not the same as deregulation. As for telephone, long distance has dropped from $0.67 per minute in 1980 to $0.14 now. And how many competitors are there?
It isn’t like “deregulation” means the regulators go away. Texas “deregulation” didn’t mean there is no longer a Public Utility Commission. It just means they have a lighter hand at the wheel. The Texas PUC’s electricity market “rules” run 2 inches thick, with another several inches of rules at ERCOT (Texas’ ISO). Most of those inches are rules applicable primarily to “deregulated” companies. Believe me, Cato may be asking for a free market when they ask for deregulation, but they aren’t getting it.
California didn’t just turn off the lights at their PUC and say “have at”. They very carefully regulated how and where power would be sold. Which created a highly artificial and easily gamed “market” which both Enron and company, and the California utilities, manipulated repeatedly. The FERC study of the California market splits the blame about equally between the utilities, the power marketers, and the folks who wrote the law.
Prometheus 6 08.19.03 at 4:08 pm
rvman:
In what universe have cable systems been deregulated?
In the universe where the Telecommunications Act of 1996 was passed. I quote from
The FCC’s Deregulation and Cable
FAQ
As part of the Telecommunications Act of 1996, Congress deregulated most aspects of cable rate regulation. The Federal Communications Commission (FCC) no longer has the authority to accept or resolve complaints about cable rates.
Who Regulates Rates?
Your local franchising authority (LFA), which is the local city, county or other governmental organization authorized by your state to regulate cable television service, still retains the authority to regulate the rates for the basic services tier. The basic services tier is the service tier that contains your local broadcast, public, educational and government channels. However, if the FCC has found that effective competition exists in your community, the LFA may not regulate the rates for even the basic services tier. In addition, the rates of certain small cable companies are not regulated.
The rates for any tier of service other than the basic services tier, and for any pay-per-channel programming (for example, a premium movie channel) and pay-per-program services (for example, pay-per-view sports events) are not regulated. Your cable company is free to charge an unregulated rate for these services. However, in general, your cable company may not require you to purchase any additional services other than the basic services tier in order to have access to pay-per-view events or premium channels offered on an “a la carte” or individual basis. On the other hand, there is no law that requires a cable company to allow you to select and pay for only the channels that you like from a tier of service.
As for telephones, I quote a 2002 report by the Consumers Union:
Local telephone charges have increased 17 percent since the Telecommunications Act became law.(3) Local phone bills are expected to go up another 5 percent in July 2002 as the result of ongoing deregulatory policies at the Federal Communications Commission (FCC) to raise subscriber line charges.(4)
In 1996 there were eight major companies providing local phone service, each to a different area of the country. Today those eight companies have shrunk to four as a result of massive consolidation. The two biggest companies, Verizon and SBC, each control 30 to 40 percent of the nation’s local phone business. Local phone monopolies have skillfully used their size and influence to avoid opening their markets to competitors as the Telecommunications Act intended.
Meanwhile, the nation’s largest long-distance providers – AT&T, MCI Worldcom, and Sprint – have either raised or are planning to raise their basic long-distance rates in coming weeks to as much as 35 cents a minute during the day from about 26 cents a minute in 2000. They are also raising evening rates from about 16 cents a minute to as much as 30 cents, and weekend rates are rising from about 12 cents to as much as 19 cents.(5) These price hikes come at the same time that long distance companies are saving $3 billion a year for the cost of connecting calls to their customers. Long-distance companies have largely failed to expand their business into local phone markets, except in New York where regulators have intervened to promote competition and reasonable prices.
Technically, in the six years since the Telecommunications Act became law, long-distance rates have dropped 14 percent.(6) However, that figure hides the inequitable distribution of costs and benefits to consumers. When long distance companies lowered their per-minute rates, they increased their monthly fees. Some of the most popular calling plans charge a few pennies for each minute of long distance calling. But the plans also charge a tall stack of fees, including monthly service charges, universal service fees, and in-state service fees for people in certain states. At least one company has even started charging a fee for its property tax.
The increase in fees has left many consumers paying more, not less, for long distance
On the impact on consumers of deregulation in general, I refer you to Consumer Reports, where you ca download a pdf named Deregulated.
“Our research concluded that while consumers have made some gains under deregulation, on balance they’ve lost ground. Service has typically deteriorated. Consumer rights have sometimes suffered. Claimed price cuts are often not all they seem. And when free markets have gone bad, deregulated industries have seen no contradiction in getting multibillion-dollar government bailouts,” reports Jeff Blyskal, Associate Editor at CR.
Prometheus 6 08.19.03 at 7:38 pm
Lorenzo:
Any generating capacity beyond the bare minimum necessary must go idle or drive down prices with no benefit in sales volume, therefore it is in the rational self interest of electricity producers not to invest in expensive to build, and costly to idle power generation plants that can do nothing but hurt profits past the bare minimum necessary for current conditions.
We’re talking about a regulated monopoly, with a fixed rate of return. Whatever their operating expense, a percentage is to be added on. They suffer no loss by building sufficient capacity for optimum service because it’s a legitimate business expense that is taken into account when setting rates. It literally can’t drive prices, or profitability, down.
W. Kiernan 08.21.03 at 2:58 am
Prometheus 6 sez: They suffer no loss by building sufficient capacity for optimum service because it’s a legitimate business expense that is taken into account when setting rates. It literally can’t drive prices, or profitability, down.
Not only can it but it must assuming the customers are “rational,” that is, cheap. Suppose the local electric power vendor raises price by a significant amount, their customers will use less electricity; it changes the balance point toward where they’ll spend more on new, more thermally efficient equipment. If profits are a fixed percentage of revenue, then they decline too.
Upthread about five minutes ago I was wondering where one finds the market force in a monopoly for a necessary good. Hey, I’m no economist, it’s not obvious to a layman. Thanks for helping me figure it out.
Prometheus 6 08.21.03 at 5:43 pm
W. Kiernan:
Not only can it but it must assuming the customers are “rational,†that is, cheap.
That’s a large assumption, one I can find little support for.
People tend to buy based on desire rather than reason. If it weren’t for the “Energy Star” marketing campaign no one would even look at energy efficiency ratings. Telephone and cable rates are a good example; people complain and still make the phone calls and buy those additional tiers of programming. Our use of electrical equipment just continues to increase, and the more efficient equipment costs more because increased efficiency does add value…and the most efficient equipment is priced out of the range of those who can least afford the price of energy.
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