Daily Archives: June 5, 2012

Price gouging in literature: Little House on the Prairie’s “The Long Winter”

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Michael Giberson

Jeremy’s Blog at LDSLiberty.org comments on a price gouging episode in The Long Winter, the sixth book in the Little House on the Prairie series by Laura Ingalls Wilder.

Due to a long winter of snow and storms, the people in the town of De Smet are at the point of starving.  Suddenly the shop owner in town has a large supply of wheat at his disposal and rather than selling it for the normal mark-up amount above costs, he decides to sell each bushel for over two times what he paid.

After Loftus, the store owner, states “That wheat’s mine and I’ve got a right to charge any prices I want to for it.”  Pa Ingalls responds:

“That’s so, Loftus, you have,”…”This is a free country and every man’s got a right to do as he pleases with his own property.”  He said to the crowd, “You know that’s a fact, boys”.

… However, Pa decided to use persuasion to get the store owner to lower the price.  In addition to petitioning the humanitarian side of the business owner, Pa also goes on to state:

Don’t forget every one of us is free and independent, Loftus.  This winter won’t last forever and maybe you want us to go on doing business after it’s over…  You’ve got us down now.  That’s your business, as you say.  But your business depends on our good will.  You maybe don’t notice that now, but along next summer you’ll likely notice it.

Loftus decided to sell the wheat at cost, due to persuasion and not force.

I haven’t read the Little House on the Prairie books myself, so I can’t authoritatively comment on what market alternatives the people of De Smet may have the next summer. But the small group scenario posed in the story may reasonably support different conclusions about the prudence of price increases under difficult market conditions than might be reached when considering more anonymous consumer-retailer interactions under typical conditions today.

QUIRKY NOTE: Laura Ingalls Wilder’s daughter Rose, who was born in De Smet in 1886, became a prominent and noted early libertarian.  (Consider this story of a state trooper appearing at Rose Wilder Lane’s door in response to a postcard objecting to Social Security. Not the most significant event, but clearly she was a lively character.)

(HT to my brother Todd for mentioning the price gouging post.)

Competitive power market in Texas faces supply concerns. Now what?

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Michael Giberson

The question troubling some folks in Texas’s competitive power market: Will Texas consumers want to consume more electric power than suppliers are able to supply? A resource adequacy review by ERCOT, the power system and market operator for most of the state, suggests that consumer demand may outstrip resources available as early as 2014. ERCOT officials have also warned that extreme temperatures this summer could result in reliability concerns, though the most recent review reveals resources will likely be adequate.

The longer-term resource review has attracted a number of media reports, including this morning’s story by Rebecca Smith in the Wall Street Journal, “Power Shortage Vexes Texas: Report Urges Price Increase to Spur Industry to Build More Generating Plants.” See links to other stories at the end of this post.

The “report urging price increases” is that of the Brattle Group, “ERCOT Investment Incentives and Resource Adequacy,” June 1, 2012. ERCOT asked Brattle to study generator investment criteria, the connections between incentives, investments, and resource adequacy, and policy options to support resource adequacy. The Brattle report will bear further study, but for now a few comments about it and the WSJ article.

The newspaper story, following the main thrust of ERCOT’s request and therefore the main part of Brattle’s response, is focused almost entirely on price incentives to potential investors in additional generation resources. The story mentions several of the relevant factors: demand growth, low power prices due to low natural gas prices, ERCOT’s “energy-only” market design, and the lack of significant connections to neighboring grids. The rest of the story plays out as expected: generators say the current offer cap is too low and consumer representatives express horror at the prospect of paying extreme prices to generators who might refuse to expand.  The story entirely misses the possibility that consumers are not complete idiots willing to sit idly by in their air-conditioned palaces and pay 100 times the usual power prices.

Consumers have two easy ways of avoiding any potential $9,000 MWh price: (1) have a fixed price contract with a retailer or (2) simply cut power consumption during pricing peaks. Few consumers actually paid $3,000 MWh last year during February 2011′s few hours of rolling blackouts or the summer’s infrequent emergency conditions. Instead what happened in February and summer 2011 is that retailers who did not secure all of the power their customers wanted by short- or long-term contracts ended up paying the $3,000 price (but just for the additional supplies they needed) AND power generators under contract to supply power who found themselves unable to meet their commitments also ended up paying the $3,000 price (for any committed capacity that they could not deliver). The market risks are divided up between retailers and generators and very little of it is pushed out directly onto the consumer.

Obviously, whatever risks generators take on will be reflected in the prices they’ll seek in contracts with retailers, and whatever risks retailers take on will be reflected in the prices that retailers offer to consumers. But competition among generators to contract with retailers and competition among retailers to sell to consumers should work to do well one thing that the usual rate-regulated monopoly power systems do poorly: competition should shift risks onto the market participant who can most efficiently manage the risks. Consumers typically are not the best able to handle the risks, so competitive markets usually won’t stick them with the risks.

The Brattle report makes a couple of additional valuable points. First, the study assumes only the current level of demand response activity, but additional price-responsiveness on the consumer side of the market would provide additional resource adequacy support. Second, the “1-in-10″ reliability standard typically employed in power systems reliability analyses has rarely been studied from an economic standpoint. The report suggests that overall reliability of delivered power to consumers could be improved and costs reduced by shifting some of the expense away from the bulk power system and toward distribution systems.

So far as I have noticed, the report itself doesn’t recommend a particular policy course, but simply reports on some of the likely advantages and disadvantages of several resource adequacy policy options. The Brattle press release accompanying the report does, however, indicate a clear preference for adding a centralized forward capacity market (similar to that employed by PJM; though note not everyone is happy with PJM’s capacity market).

One last bit of perspective. It is the goal of a resource adequacy study to be excessively cautious. Things probably will not turn out as bad as projected, in part because suppliers, retailers, and consumers will continue to adjust to changing conditions.  But things could be as bad as projected, and that is exactly what the study is intended to highlight.

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NOTE: Prices above are all quoted in $ per Megawatt Hour (MWh), a typical price metric for wholesale markets, but consumer bills are usually quoted in cents per kilowatt hour (kwh). Typical wholesale prices in ERCOT have been running between $20 and $50 MWh, the equivalent of between 2 and 5 cents kwh. Typical consumer prices in ERCOT range between 8 and 14 cents kwh. The $3,000 MWh price cap is equal to $3 kwh (so $9,000 MWh is the same as $9 kwh or about 100 times  typical retail prices).