My favorite question on my electric power industry final exam

Michael Giberson

  • What is unusual about the retail electric power market in Lubbock? Is this regard is Lubbock a harbinger of the industry’s future or a relic of the industry’s past? Why?

This turned out to be my favorite question on the final exam I gave in my electric power industry class.

It wasn’t the most complicated of questions, nor did it elicit the deepest of answers. But most of the answers demonstrated mastery of the fundamental concepts involved in the question and put the Lubbock case into the broader context of industry restructuring. Some students cited possibilities related to distributed energy resources and referred to related readings in ways I had not considered when drafting the question.

Positive surprises are always good when grading page after page after page after page of short essays. Fortunately, I’m done now.

If you’re not from around here, you may be surprised to learn that Lubbock is served by two distribution utilities and most of the city is double-wired (a small part of the city actually can choose from among three distribution companies).  Some of the students who grew up in Lubbock thought it was normal to have more than one electric utility in town and to be able to switch if you were unhappy with your current service.

I didn’t keep score while grading, harbinger vs. relic, but the clear preponderance of responses argued that Lubbock’s competitive wires companies were a harbinger of the future. I’m sure most in the industry would regard double-wiring a city as unnecessarily wasteful, and therefore unlikely to happen.

Ten years ago, folks in the phone and cable industries probably thought the same thing.


11 thoughts on “My favorite question on my electric power industry final exam

  1. Very interesting. Clyde, OH is double wired, though one set is essentially inactive. If I recall, Toledo Edison tried to play hardball with Clyde’s muni effort, so Clyde built their own distribution system rather than purchase Toledo Edison’s. Ouch.

  2. The story in Lubbock is similar – in the 1910s city leaders were unhappy with the cost and quality of service provided by the local private electric company, and negotiations to fix the problem went so badly that the city decided to build its own system rather than purchase the existing wires.

  3. Walter Primeaux’s book on electric utility competition lists 10 ‘competitive’ cities in Texas as of 1966. A little internet searching reveals that 5 of the 10 seem to still offer municipal power service (though it is harder to tell whether an IOU also still serves the towns).

    Here is the list of 5: Electra, Floydada, Garland, Lubbock, and Seymour.

    Other than Lubbock (~200,000 population) and Garland (Dallas suburb of ~200,000), these are small towns with populations of 2,500 – 4,500.

    Any readers know the current status of distribution wires competition in Electra, Floydada, Garland and Seymour?

  4. Dr. Tim Todreas in his Phd research at Boston University studied several jurisdictions with 2 cable providers.

    The phenomenon about 2 communication providers to the home is NOT fundamentally about 2 sets of wires into the home (although there is cable v. phone line) but about technology change:

    – different providers can use the same ‘local loop’ (analogies to electricity now)
    – wireless allows bypass
    – cable could be adapted to provide communication which hitherto was not the case

    I am not aware of any emergent technologies which would parallel that for electricity distribution. Ie you still need a physical cable into the house.

    Therefore economies of scale pervade, there is no economic advantage to having 2 sets of wires into the home.

    So at that physical level, I don’t see competition in electricity distribution. Choosing between electricity suppliers, who use the same set of cables, is of course perfectly possible– UK electricity is organized that way, now.

  5. Just because “economies of scale pervade” does not mean “there is no economic advantage to having 2 sets of wires into the home.”

    From the consumer point of view, it matters whether the price and quality of service are higher or lower than otherwise, not whether it is theoretically the case that a monopoly provider could be more efficient. In a broader economic view it matters whether monopolies actually are lower cost providers than duopolies.

    I’m reading Primeaux’s twenty-year old book on Direct Electric Utility Competition, and his analysis suggested that, on average, costs and prices were lower in duopoly communities as compared to monopoly communities. I suspect there are fewer examples of duopoly around these days, developments in Clyde OH notwithstanding, but it would be interesting to see an update of the book.

  6. Michael

    Difficult to see how the second set of wires can enter, if the effective marginal cost for delivery by the first provider is zero (up to the capacity of the wire).

    They simply compete out of existence the new entrant.

    Question: do US households choose between different electricity suppliers at the retail level?

    The UK one does, but the switching costs have proven to be much higher than anticipated, and so customer ‘stickiness’.

    In addition, the industry is reconsolidating around a handful of large suppliers, each with predominant market share in their home area.

    This is all done with one set of wires though (UK wires are underground, thus massively increasing the cost of creating a second entrant– in fact, making it virtually physically impossible in most areas).

    The consumer is thus getting a competitive market solution (IF the wire provider is separate, and well regulated).

  7. In the US, whether households can choose between suppliers depends on state policy. In parts of Texas, yes, and in a number of other states, too. But I think most households in the U.S. do not have a choice of either electric supplier or wires company. Even in areas with choice, the same stickiness problem is experienced.

    In the U.S., most transmission and distribution wires are above ground, except in newer, more expensive neighborhoods and city centers. Interestingly, in dual-wired Lubbock, one of the two companies offered to underground wires in a new neighborhood back in the mid-1960s, the other followed suit for competitive reasons, and I think all new neighborhoods since have wires undergrounded.

  8. Michael

    The question then, I think, is what would be the advantage to the consumer of ‘2 wires’ vs. ‘1 wire and deregulated supply’?

    I can’t think of any advantage. The former solution should always have lower costs to the consumer *if* the wire owner is regulated in the supply business (a big if, if they are allowed to be in that business ie competing as a supplier, not just a carrier).

    So Transco (part of National Grid) in the UK owns the gas pipes– 2 sets of gas pipes would be physically impossible. It is a regulated distributor of gas, and it does not supply gas to customers.

    Most UKians don’t realize it, but British Gas is actually the trading name of Centrica (Direct Energy in Ontario) and is not BG Group (the gas exploration company) nor Transco. It doesn’t own the pipes.

    Electricity the local suppliers tend to own the wires as well. So unless regulation is very tight on separability, in principle the consumer could wind up with a worse solution.

    However it’s hard to imagine that anyone could enter. Because they would have to get a ‘homes passed’ number and then sell those homes additional electricity connections, and I can’t see it. Since choice of supplier already exists.

    Again, what I don’t see is the technology change in electricity that made multiple broadband providers possible, and also the metering technology change that allowed one to pick one’s gas or electricity supplier.

    It just doesn’t make sense to have 2 electricity pipes into each home, or even each street. Not when the marginal cost of the network of an additional unit distributed is, essentially, zero (up to quite high volumes).

    BTW that shift created huge inefficiencies: there are hundreds of millions of pounds out there of unpaid or mispaid bills because of the vertical disintegration of the gas and electricity industries. There is a whole sub industry of trying to collect them.

    Water and gas you can’t have 2 distribution networks, at least not on British streets.

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