NYT on Electricity: Metering and Asymmetric Information in Retail Markets

Lynne Kiesling

Monday’s front-page article on electricity metering and pricing by David Cay Johnston highlights two important developments in modernizing electricity policy. One overarching theme in the article is that markets cannot function up to their potential when buyers and sellers face systematic asymmetric information. In the case of electricity, retail customers do not see price changes until after those changes have taken effect, because under existing regulation they pay averaged rates and only receive information about the prices they face at the end of the month when they receive their bill. However, underlying costs of serving those customers can change hourly, so with customers paying averaged prices there is a mismatch between the prices they pay and the costs of serving them.

We could improve efficiency (and thus enable conservation and lower costs) if we had pricing that allowed for a better match of the price the customer pays with the cost, but unless the customer has some way of gaining information about prices in advance, but if we don’t do that, then we have the aforementioned asymmetric information problem. The information focus of Johnston’s article is vital to understanding the value of using digital technology and dynamic pricing to empower consumers to stand up and say “no, I won’t pay that price”.

The other crucial innovation Johnston discusses in the article is the Center for Neighborhood Technology’s Energy Smart Pricing Plan in Chicago (I have written extensively about this program over the past three years).

Just as cellphone customers delay personal calls until they become free at night and on weekends, and just as millions of people fly at less popular times because air fares are lower, people who know the price of electricity at any given moment can cut back when prices are high and use more when prices are low. Participants in the Community Energy Cooperative program, for example, can check a Web site that tells them, hour by hour, how much their electricity costs; they get e-mail alerts when the price is set to rise above 20 cents a kilowatt-hour.

If just a fraction of all Americans had this information and could adjust their power use accordingly, the savings would be huge. Consumers would save nearly $23 billion a year if they shifted just 7 percent of their usage during peak periods to less costly times, research at Carnegie Mellon University indicates. That is the equivalent of the entire nation getting a free month of power every year.

I would only add two points to Johnston’s articulation of the benefits of dynamic pricing and digital metering. The technology can’t create all of these benefits on its own: rate redesign to allow dynamic pricing is imperative. What good is having technology to enable responsive demand if the meter just gets the same old, same old averaged price signal? Not much. Digital technology and dynamic pricing are symbiotic. Furthermore, the most significant benefits of digital technology and dynamic pricing are largely unseen by us in advance, which is why it’s so bloody hard to get them enacted in regulation!

The most substantial benefits of the retail competition that technology + pricing enable come from product differentiation and innovation in the products and services available to customers. Think about telecom: we got some benefit from the reduction in prices for long-distance service, but the real value proposition has been in the proliferation of new products and services that have transformed our lives. There are entrepreneurs out there thinking about ways to do that in electric power retail service, and the potential exists, if we will but let it happen.

See also Jonathan Adler’s post at Volokh on the article. This NYT article is the most recent in a series called “Power Play”.


11 thoughts on “NYT on Electricity: Metering and Asymmetric Information in Retail Markets

  1. Hey, David Cay Johnston. I know you read this blog. Good job on this article. For once, you just provided the facts, without any manipulative “narritive”. In fact, I can’t tell from the article your opinion on smart meters.

    I thought from the article that the smart meter trial in Illinois did have some serious variable procing. >30 cents per kWhr at the peaks, and an unbelievable

  2. Lynne is exactly right, the rules must allow for time-sensitive pricing or the metering issue is mere byplay.

    This rate design issue goes all the way back to the debate, a century ago, about the Barstow versus Wright pricing methods. You can read more at (among other places):
    “The Making of an Industry: Electricity in the United States” available at

    http://www.stanford.edu/dept/soc/people/faculty/granovetter/Making%20of%20Industry%201998.PDF

    Regarding Buzzcut’s post, four plus decades of experience have taught me that readers project their own thoughts onto what they read, which is why on the same article reporters often get diametrically opposed responses.

    I have written pieces that generated letters accusing me of being both anti-police and a tool of the cops; a fan of free markets and a promoter of monopolies; a economic genius and an economic idiot.

    All that matters is telling readers that which they did not know and that, in my view, is important. That’s the only issue on which reporters express opinions — what is worth reporting. As Jigsaw John, the famopus homicide detective, once observed — he didn’t care who the killer was, only that he caught the actual murderer.

    Part 6 of my series differs from the other parts only in its subject, the asymmetrical nature of electricity pricing rules.

    My overall goal was to break into easily digestible pieces the arcane, but crucial, economics and rules of this core industry.

    Because it lacks the inherent appeal of Wall Street or airlines or movies, electricity gets little attention from journalists — and very little coverage about the underlying principles, as opposed to the news of the day (such as the filing or approval of a rate hike request). It is, in this sense, of a piece with the kinds of orphan issues I have devoted my career to — tax policy, the administration of policing, charities, construction safety rules, enforcement of environmental laws and casino regulation.

    The object is to explain to people, who may not be steeped in economic theory or policy, the issues in plain English so they can draw their own conclusions from the facts about policy. As to whether I have accomplished that — well, opinions vary.

  3. Yes, opinions do vary, even within single observers over an entire series of articles. It is important to get the facts right, and in some cases you failed to do that. And in a way you sensationalized some points that may barely be worth mentioning, and ignored some good points, vice versa. Nevertheless, I accept that this was an honest effort, and I appreciate the attention given to the industry. Some issues, such as the potential benefits of hourly pricing, came through nicely.

    Almost as an aside, I would argue that if you think hourly pricing is a good idea, then a careful application of logic and fact would have you in full agreement with some of the things that you described in less favorable terms in prior articles. You don’t get to proper hourly price signals without single-price auctions [or security-constrained economic dispatch on marginal cost… same principle] or locational price differences, as may be caused by congestion or losses. There’s a package of things that has to go together to get this right. Most of it was included in FERC’s failed Standard Market Design effort. And maybe that’s what was missing in the series, the big picture that ties all of this together. You took on lots of disparate details, but had trouble putting them together in a coherent way. As I said before, it was sometimes an ugly quilt assembled from disparate anecdotes.

    Also, pause to consider again that many of us on the theoretical side of this just want to get it right. We don’t necessarily have a financial dog in the hunt. Some of us are sincere and we’re in it for the benefit of consumers and the economy in general. Some of us are just weird that way, and sometimes we have to fight the industry from the inside, trying to get it to do the right thing. The thing is, coming from that perspective, I’m not convinced that you knew when you were helping and when you were hurting. At the same time, though, we all have moments when we question whether we’re doing/believing the right thing.

    I encourage you to continue to give the industry a bit of time and attention. There’s quite a bit to be understood, and I’d love to see you delve further into it, as you do with tax law.

  4. Yes, opinions do vary, even within single observers over an entire series of articles. It is important to get the facts right, and in some cases you failed to do that. And in a way you sensationalized some points that may barely be worth mentioning, and ignored some good points, vice versa. Nevertheless, I accept that this was an honest effort, and I appreciate the attention given to the industry. Some issues, such as the potential benefits of hourly pricing, came through nicely.

    Almost as an aside, I would argue that if you think hourly pricing is a good idea, then a careful application of logic and fact would have you in full agreement with some of the things that you described in less favorable terms in prior articles. You don’t get to proper hourly price signals without single-price auctions [or security-constrained economic dispatch on marginal cost… same principle] or locational price differences, as may be caused by congestion or losses. There’s a package of things that has to go together to get this right. Most of it was included in FERC’s failed Standard Market Design effort. And maybe that’s what was missing in the series, the big picture that ties all of this together. You took on lots of disparate details, but had trouble putting them together in a coherent way. As I said before, it was sometimes an ugly quilt assembled from disparate anecdotes.

    Also, pause to consider again that many of us on the theoretical side of this just want to get it right. We don’t necessarily have a financial dog in the hunt. Some of us are sincere and we’re in it for the benefit of consumers and the economy in general. Some of us are just weird that way, and sometimes we have to fight the industry from the inside, trying to get it to do the right thing. The thing is, coming from that perspective, I’m not convinced that you knew when you were helping and when you were hurting. At the same time, though, we all have moments when we question whether we’re doing/believing the right thing.

    I encourage you to continue to give the industry a bit of time and attention. There’s quite a bit to be understood, and I’d love to see you delve further into it, as you do with tax law.

  5. DCJ, I read the letters section of the NYT, and you know as well as I do that it is representative of your paper’s readership. That you don’t write to your audience is dellusional, at best.

    I’d recommend the “Overcoming Bias” blog, and the recent posts there about the bias of so called educated elites. Just because you read Adam Smith in the original doesn’t mean that you aren’t any less biased than us unwashed.

  6. DCJ, I read the letters section of the NYT, and you know as well as I do that it is representative of your paper’s readership. That you don’t write to your audience is dellusional, at best.

    I’d recommend the “Overcoming Bias” blog, and the recent posts there about the bias of so called educated elites. Just because you read Adam Smith in the original doesn’t mean that you aren’t any less biased than us unwashed.

  7. Oh, for Pete’s sake, Buzzcut… take a bath! 😉

    BTW, I’m thinkin’ about get’n a buzz cut myself.

  8. Again, Buzzcut projects.
    Out of necessity I started working at age 10, have worked full-time since I was 13, initially had to drop out of college because I was too poor to buy textbooks (the GI Bill benefits for children of totaly disabled veterans being unchanged from 1946 to 1967, the year I finished night high school).
    I later went part-time to junior and state colleges (and for five months, on a competitive grant, to one elite college). I never graduated.
    My brother is a security guard, my sister was a clerk. One of my sons is a truck driver, another a surrogate parent in a group home for displaced children.
    Assuming there is an unrecognized bias it would seem, on the facts, to be far from the elite perspective that Buzzcut imagines I come from or pander to.
    Whatever my faults — and they are many, including being peeved at people who write without facts — thoughtful critics, even those who are antagonistic, have certified my bona fides as a maverick.

  9. Again, Buzzcut projects.
    Out of necessity I started working at age 10, have worked full-time since I was 13, initially had to drop out of college because I was too poor to buy textbooks (the GI Bill benefits for children of totaly disabled veterans being unchanged from 1946 to 1967, the year I finished night high school).
    I later went part-time to junior and state colleges (and for five months, on a competitive grant, to one elite college). I never graduated.
    My brother is a security guard, my sister was a clerk. One of my sons is a truck driver, another a surrogate parent in a group home for displaced children.
    Assuming there is an unrecognized bias it would seem, on the facts, to be far from the elite perspective that Buzzcut imagines I come from or pander to.
    Whatever my faults — and they are many, including being peeved at people who write without facts — thoughtful critics, even those who are antagonistic, have certified my bona fides as a maverick.

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