Archive for August, 2009

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Vero Beach Florida could become a hothouse of dynamic competition in retail electric power

August 10, 2009

Michael Giberson

Vero Beach, Florida, could become a hothouse of dynamic competition in retail electric power, if only the city would follow the recommendations of economist Dom Armentano.

According to the Vero Beach [Florida] Electric Utility, they aim to provide “reliable, cost competitive electrical energy and services to our customers in a manner that exceeds their expectations.”  They aren’t meeting this standard.  Dom Armentano reports that his local municipal power monopoly offers rates that are “an incredible 58 percent” higher than rates available from the state-regulated monopoly serving the surrounding area.

Most of this economic nonsense started back in 1979 when state and federal agencies stopped a referendum-authorized city sale of the electric utility to [Florida Power & Light]. Then in 1981 a notorious “territorial agreement” was crafted to divide up the electric grid between the city and FPL. Finally, in 1983, the state Legislature removed the bulk of the PSC’s regulation of Vero’s electric system, including rates.

Since then, customers of the city’s utility (61 percent of whom live outside the city) have been at the mercy of whatever service and price structure the utility determines is appropriate. As one could predict, this has proven to be a recipe for inefficiency and price gouging.

Armentano recommends several possible ways forward:

One way is to simply require that the city of Vero Beach sell its utility operations to any willing buyer. A second alternative would be to force the city utility to charge “competitive” rates or, third, allow customers to switch to a competitor. This latter proposal would create “competition” between utility providers and would tend over time to lead to lower rates generally.

In addition, in order to encourage non-traditional suppliers of electric power, any and all supply restrictions on the sale of electricity in Indian River County should be removed.

The first option would likely result in a sale of the utility to FPL and prices equal to that available in the surrounding area.

The second option would likely gain the same lower price level, but leaves the city with significant cost management issues.

The third option, depending upon just how it is implemented, could result in FPL competing for customers by building new distribution wires, eventually producing duopoly like Lubbock, Texas; or, by unbundling the city’s wires and power supply businesses, could allow for a “retail choice” environment.  I’m not aware that anyone has tried retail choice in such a small market.  Even many large states pursuing retail choice have had difficulty finding the right mix of policies. But the city’s current rates do offer a lot of “headroom” for potential competitors, so maybe this approach could work.

Armentano’s last suggestion is most radical and offers the most potential for consumer benefits.  Simply by removing “any and all supply restrictions on the sale of electricity,” Vero Beach would become a hothouse of dynamic competition in retail electric power. FPL could wire neighborhoods to offer duopoly distribution capability.  Retailers could negotiate for delivery of power over city or FPL wires (though negotiating with monopolies is fraught with dangers).  Most importantly, local businesses or real estate developers could invest in microgeneration and bypass the city grid, likely contracting with the city for backup power or building a wire out to FPL.  Likely, several distributed power businesses would link up to self-supply backup power capability.  Obviously, smart grid-based coordination would be vital to such an effort.

Even though these developments may take some time to emerge, the very possibility of competition emerging would motivate the city to reduce costs and cut rates.

Moves in this direction would be strongly opposed by both state-regulated and municipal power utilities.  The prospects of significant consumer value are likely no match for the status quo political interests that would rise up to defeat it.  Still, it would be interesting, even educational, to watch the parade of industry lobbyists pretending to be the consumer’s friend even as they argue against giving consumers the ability to escape monopoly suppliers.  I’m in favor.

Posted in Electricity, Energy markets, Regulation | Tagged , | 3 Comments »

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Evolving competition: Whole Foods, Costco, Trader Joe’s

August 10, 2009

Lynne Kiesling

I really appreciated this Wall Street Journal article on how Whole Foods is adapting its corporate strategy to the current economic downturn. Their direction: shift away from a gourmet/”Whole Paycheck” focus and toward “healthy eating”. Founder and CEO John Mackey sees this adaptation as a movement in focus back toward his original commercial impetus:

After 15 years as a gourmet destination selling prime beef, crusty white bread and rich chocolate cake, Whole Foods will re-embrace its original emphasis, mirroring Mr. Mackey’s personal conversion to healthier eating — and reflecting consumers’ reluctance to spend money on the company’s pricier foods. …

… The blunt-speaking Mr. Mackey said the company’s product selection had veered off-course.

“We sell a bunch of junk,” he said, vowing to promote healthier lifestyles for its customers and employees. “We’ve decided if Whole Foods doesn’t take a leadership role in educating people about a healthy diet, who the heck is going to do it?”

This tweak (and it does seem to be a tweak to me, not a major geologic shift) makes sense when the shopping population shifts toward being more cost-conscious. More interesting to me, though, were Mackey’s comments on the extent to which Whole Foods competes with both Trader Joe’s and Costco, and how the economic downturn has amplified that competition:

The company is also keeping a closer eye on low-cost rivals, such as Trader Joe’s and Costco Wholesale Corp.

“We have a policy that our 365 private label has to match Trader Joe’s prices, unless there is a significant difference in quality, in which case it probably shouldn’t be a 365 product,” he said.

Costco, which Whole Foods tended to ignore two years ago, is now considered an important competitor. The warehouse store is even tougher than Trader Joe’s, because it is “harder to match Costco without going bankrupt,” he said. In some regions, Whole Foods has started to bundle items — a dozen pork chops or several boxes of breakfast cereal — to offer volume discounts.

I have long seen this dynamic at work in my neighborhood between Trader Joe’s and Whole Foods, and the attention to Costco is also interesting. Mackey is right that they can’t compete with Costco by matching prices, but if they can find a way to combine volume discounts with product differentiation along quality dimensions, I can see that being effective. Extrapolating from my own experience, we go to Whole Foods once a week/every 10 days in the summer (we subscribe to a farm, so from June to October we don’t need to buy vegetables), but I only go to Costco 4 times a year, in large part because of the volume purchases, but also because it’s always so crowded and the parking lot is a nightmare. In other words, high transaction costs! If consumers with shopping patterns like that can get some volume discounts at Whole Foods, they should see some revenue effects.

Note also the antitrust implication of this rivalry. It implies that the market definition for evaluating the Whole Foods-Wild Oats merger in 2007 should not have been restricted to “natural” or organic stores, and thus reinforces the critique of the FTC’s challenge of that merger.

Posted in Economics | Tagged | 4 Comments »

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Natural gas imports: From Russia, with love?

August 7, 2009

Michael Giberson

Well, maybe not “with love,” but as Platts reports, Russian LNG could arrive in the U.S. as early as this Winter. (HT to NewsWatch: Energy.)  Of course with the ongoing natural gas glut, that LNG may find itself “all compressed up with no place to go.”  The WSJ Environmental Capital blog notes that underground storage is being filled up, pressure is rising in long-distance gas pipelines and gathering systems, and sooner or later production will have to be cut. (See current EIA gas storage data here.)

A Bloomberg item reports that the natural gas “mid majors” that have been increasing output the fastest have tended to outperform investor expectations, perhaps offering an incentive to keep production up. The article also notes that exploration budgets have been cut, so the current oversupply should tend to come back into balance. See also here and here.

That is, of course, if the U.S. market isn’t flooded with LNG.

(RELATED: For more on Russian LNG and the Russia-ExxonMobil relationship, see the Streetwise Professor.)

Posted in Energy markets | Tagged , | 2 Comments »

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My own private Idaho Stop Law

August 6, 2009

Michael Giberson

Danny Morris at Common Tragedies explains and advocates for wider adoption of the Idaho Stop Law:

The law, named after the clever state that instituted it in 1982, says that cyclists may treat stop signs as yield signs (they must stop for those w/ the right of way, but can proceed w/o stopping if the coast is clear) and may treat stop lights as stop signs (they must stop, but can proceed when the coast is clear, even if the light is still red).

Morris links to a report at The Athletes Lawyer that said:

Meanwhile, in the past 27 years, Idaho motorists and police have grown to accept the legislation as sensible public policy, said Jason Meggs, a UC-Berkeley researcher who spent last summer crunching years of traffic data, conducting interviews and observing cyclist behavior in the state. Boise, home to Idaho’s biggest bike population, “has actually become safer for bicyclists than other cities which don’t have the law,” Meggs said.”

I guess I’ve been operating under my own private Idaho Stop Law, the description fits my usual riding habits pretty well.

Casual observation suggests the Idaho Stop is widely practiced by cyclists.  (See, for example, this article from The Oregonian where the author came up with the same Gus Van Sant movie reference that I’m using.) Perhaps one reason that the law improves safety is that it helps coordinate expectations of cyclists and motor vehicle operators.

Posted in Miscellany, Politics, Sport and fitness | Tagged , , , | 3 Comments »

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Wind power, birds, public policy, and the irrational fears of non-voters

August 5, 2009

Michael Giberson

Should public policy accommodate the irrational fears of non-voters?

In this case, the phrase “irrational fears” refers to a seemingly innate overwhelming aversion to vertical structures, namely wind turbines and high-voltage transmission lines, and “non-voters” refers to the lesser prairie chicken.

A few weeks ago the Lubbock Avalanche-Journal ran a story on wildlife issues surrounding wind power development that focused particularly on a relatively local issue: the potential impact of wind power development on populations of the lesser prairie chicken.  The lesser prairie chicken is said to have an innate fear of vertical structures, so wind towers and transmission lines contribute to fragmentation of habitat.

Lesser prairie chicken are considered “vulnerable,” not yet “endangered” or “threatened,” but wildlife biologists anticipate that within a year or two the species may become listed.  An Associated Press article, “Ground bird is a wind issue,” observes that, if the species is listed “there would be significant restrictions on companies hoping to plant towering turbines across a five-state region believed to have some of the nation’s best wind energy potential.” That “five state region” is centered around the Texas Panhandle and includes nearby areas in eastern New Mexico, Oklahoma, and southern Colorado and southern Kansas.

Currently the U.S. Fish and Wildlife Service asks companies not to build turbines within five miles of a lek (a prairie chicken breeding area, see Wikipedia if you want to know more about lekking).  The science of the five-mile limit has been questioned, the guidelines are being reviewed and updated, and a report is expected this fall.  The Associated Press noted, “For energy companies, it’s a race. If transmission towers to bring the energy from the turbines to utility companies are up before the bird is listed, the structures would be grandfathered. If not, they probably would have to avoid the birds’ habitat.”

In print the Lubbock A-J story was headlined KILLER BLADES is very large print (if you come by my office in the next few weeks, I’ve got a copy you can look at).  I thought the title a bit overdramatic for a couple of reasons:

  • First, discussions of wind power’s “avian mortality” issue are very focused on what is easy to see – some dead birds near turbines – and tend to ignore what is hard to see – birds still alive due to reduced emissions from fossil fuel plants. (More commentary here on the “seen and the unseen.”)
  • Second, since the article focused on the lesser prairie chicken, a ground bird rarely more than five or ten feet off of the ground, the likelihood that one of the birds would ever come into contact with a wind turbine blade is essentially zero.
  • Third, this really is an irrational fear on the part of the lesser prairie chicken.  The AP article suggests that the fear is due to an “evolutionary aversion to tall structures around its breeding and nesting grounds because its predators include raptors, which perch in high places.”  To the extent that wind turbine blades and power lines are threats to birds, they are particularly threats to raptors and other fast-flying predators.  The lesser prairie chicken would likely be safer under the sheltering protection of a fast-spinning wind turbine.

So rather than a public policy process which may be inducing a wasteful race to invest before potentially stringent (and still more wasteful) resource restrictions are put into place, why doesn’t the U.S. Fish and Wildlife service just hire some wildlife psychologists to offer the little birds therapy sessions to help them with their irrational fears?

GEOGRAPHIC NOTE: The region to the south of the Texas Panhandle is sometimes referred to as the Llano Estacado, Spanish for “staked plains” (okay, technically, a better translation is “palisaded plains,” but now you don’t know what I’m talking about, and anyway, most people around here say “staked plains”).

OMITTED HUMOROUS MOVIE REFERENCE NOTE: I thought about titling this post “Stakes on a Plain,” because, you know, which is funny since in this case the “stakes” are scary to the lesser prairie chicken just like the … in the … oh, you got it? Okay.

Posted in Electricity, Environmental policy, Politics | Tagged , | 1 Comment »

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Home energy management and home security product bundling

August 5, 2009

Lynne Kiesling

In a Cnet Green Tech article, Martin LaMonica points to some developments in an area that I’ve been pushing on for years: the potential consumer value creation from bundling residential electricity service with home security services. The potential for such bundling is one example of why I argue so emphatically for retail competition: in an industry with government-generated entry barriers, a company like ADT or Brinks cannot legally enter and provide retail electricity service to residential consumers.

LaMonica’s article describes a start-up company called iControl, that could be a technology provider to such a company:

iControl’s approach is to create a hub, connected to a home broadband connection that has wireless connections to IP cameras and security boards as well as thermostats and lighting. To control energy-related devices, it uses the Z-Wave wireless standard for home automation which can also control doors and locks.

iControl intends to sell its technology through other providers, such as home-security companies and utilities looking to offer networked services to consumers.

Posted in Economics, Electricity | Tagged , , , | Comments Off

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7 individual energy management iPhone apps

August 5, 2009

Lynne Kiesling

I’ve had several conversations with people my age and younger who work in the electricity end-use technology space in which we use a particular shorthand for the change in culture and mindset that we want to see happen in the retail electricity industry: “there’s an app for that.” In our conversations it’s shorthand for frustration and exasperation with the utility-centric, hierarchical control, non-consumer oriented retail electricity industry as it currently exists, and how far that traditional mindset and culture is from the potential that exists with highly distributed, mobile, and even transactive end-use technology. We are working to move the industry toward more of a consumer-oriented, “there’s an app for that” culture and level of consumer value-creating innovation.

It’s starting. Katie Fehrenbacher at Earth2Tech points out 7 different individual energy management iPhone apps. Some are from companies that are familiar to KP readers, such as Tendril and Ecobee. Some require manual data entry, which is time consuming and probably not very interesting unless you are a total energy geek. In fact, she cites the idea that these are apps ahead of their time:

Energy management tools designed to help you curb unnecessary power used in your home have yet to break into the mainstream, and only 13 percent of people say they would want to manage home energy consumption via a mobile device, according to Clint Wheelock of Pike Research (via GigaOM Pro subscription required). But hey, who needs a market for this stuff, when energy management startups can build a slick iPhone app on the cheap and use the mobile version as marketing for their main products.

Technology at the edge is there, and developing it gets cheaper and cheaper.

Posted in Economics, Electricity | Tagged , , | 1 Comment »

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Keeping some speculators out of the oil market may lead to higher oil prices

August 4, 2009

Michael Giberson

From Fortune-Investor Daily:

If Congress or the CFTC forces through stiff curbs on futures trading by so-called “speculators” — i.e. investors who use futures to bet on future price movements but don’t buy actual oil — it may lead to higher, not lower, oil prices over the long term.

Why? Imagine you’re an oil company CEO thinking about drilling a new oil well that won’t produce until 2011. Given the high upfront costs of drilling, you’re going to be more likely to undertake the project if you can use the futures market to lock in oil prices in 2011 that will justify your drilling costs. The buyer on the other end of your futures trade is probably an investor — someone who will commit to paying you $75 a barrel for oil in 2011 because he believes actual price in 2011 will be even higher.

However, if fewer investors are allowed to take the other side of your trade, you will have a harder time locking in a good price for your 2011 oil. That could make it harder for you to justify the upfront cost of building the new well. Less investment in new oil wells means less future supply, and less supply means higher oil prices.

Posted in Economics, Energy markets, Politics | Tagged , , | 2 Comments »

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Newsweek smart grid article

August 4, 2009

Lynne Kiesling

Last week Newsweek had an article on smart grid investments and projects that provides a good overview, focusing on the newly-funded Department of Energy demonstration projects. Many of you will already know more about these than the details provide in the article, but it’s a good overview if you don’t.

Posted in Economics, Electricity | Tagged , , | Comments Off

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NIST Smart Grid Workshop

August 4, 2009

Lynne Kiesling

I’m at a NIST smart grid workshop, where the objective is to take the identified, prioritized smart grid interoperability standards requirements and start working on the game plan for developing interoperability standards out of them. Toby Considine sat next to me yesterday morning and wrote about his observations, so I’ll spare you mine, except for one: as he points out, there seems to be more coalescence around the theme of “light, loose integration and a loosely-coupled system of systems” than I feared there would be, but still too often some stakeholders advocate for decisions based on the perpetuation of existing business models, and not based on the idea of having simple common data models that don’t forclose future evolutions of technology, business models, and consumer value propositions.

Posted in Economics, Electricity | Tagged , , | 1 Comment »

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