Knowledge Problem

Lynne Kiesling

Even though most of this article with investment analyst comments on generation capacity and the recent heat wave focuses on how growing demand means there’s profit in building more generation, the article does finally get to the good stuff at the end:

Added generating capacity would boost the reserve cushion, but Hartley at Rice University said consumers also could be encouraged to trim energy use in peak hours.

“What we need is smart metering which allows people to sign up with electricity providers to switch power use to off-peak hours and get reduced rates,” he said.

“Send a price signal to consumers to conserve and that can free up more power for the peaks,” he said.

Gee, what a concept …

Lynne Kiesling

There was a blackout in Queens, New York late last week, and some customers are still without power. At City Journal, Nicole Gelinas pins responsibility right where it belongs: political institutions do not have a profit motive for investing in infrastructure:

This neglect goes unnoticed when the electricity is actually on. But beginning early last week, for 100,000 residents and business owners in northwest Queens, it wasn’t (and, for several thousand, at press time, it still isn’t).

Until Queens citizens’ and politicians’ fury reached a crescendo by Friday, Bloomberg didn’t even seem to think it was his job to worry much about the blackout. He got annoyed at reporters who badgered him about it last Wednesday, and said testily that he would visit Queens only if he could fit it into his schedule. As late as Saturday, though he’d finally made it to Queens, he described borough residents’ weeklong ordeal as a mere “inconvenience.�

Can commercial enterprises get away with such indifference to their customers? No. Gelinas goes on to provide a concise analysis of the web of incentives facing utilities and independent generators:

While most media attention centers on the need to build new power plants to meet this demand, independent power producers do a reasonable job on this task themselves. During the Bloomberg years, competing power generation companies have quietly built, or begun work on, five new plants to serve New York City, enough to meet about two-thirds of projected demand through the end of the decade.

Why? Because competition works: despite permitting and environmental obstacles that politicians and community activists have thrown up, power generators want to build in New York, since they know they can make money here.

But competition doesn’t work at Con Ed. Since 1990s-era deregulation, Con Ed produces little power itself. Instead, it buys the power from the independent generators and distributes it to New Yorkers. Con Ed, as a monopoly, faces none of the competitive pressures that the independent generators face. So it must operate under close supervision by New York City and State to ensure that it’s doing a good job.

She hones right in on the underlying problem:

Because Con Ed doesn’t face competitive pressures to do what’s best for New York City, it’s the mayor who must ensure that the company does so, or New York’s growth suffers. Due to the Queens blackout, one of the borough’s largest employers, Citigroup, lacked a reliable supply of electricity. Next time, it might be Midtown Manhattan without power for a week. Faced with such a crisis, what would a responsible CEO conclude about his company’s future in Gotham?

A responsible CEO, if in the presence of competing electricity retailers, would have a range of attractive product and service options from which to choose. Those options might include an onsite combined heat and power generation facility, so Citigroup could go off-grid and take control of their own reliability issues. But as long as regulation restricts the availability of such options for customers, real people suffer.