Quote of the Week (Post-Blackout Edition)

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A bon mot from the economist Roy Cordato, posting to an e-mail list:

I think one of the most outward signs that the electricity "market" is clearly perverse is that the industry spends huge sums of advertising dollars encouraging people to buy less of their product.

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  1. Only government (free ride) monopolies can afford to do this.

  2. Oh come on. The reason they want people to buy less electricity is that they will then need to build fewer new power plants, which are expensive and cut down on their profits.

  3. They can make a higher profit selling less than the total quantity of a good at their disposal, than they can by selling the whole quantity. Isn’t that the classic definition of a monopoly seller?

  4. This is a real question, not a wisenheimer question:

    How can an electric utiltity not be a monopoly?

    My question isn’t with the principle but with the mechanics. Given the huge mechanisms necessary for generation, the need to wire and service each and every node, the expectation of constant, uninterrupted supply, and various other practical factors, electricity always seemed to me the ultimate vindication of J.P. Morgan’s idea that everything should be controlled by non-competing, otherworldly wise men. Ditto plumbing. And what about cable tv? How can you have six different cable lines going into your house just for the competition? At some point, you need to have only one line, so how does that not become a monopoly?

    If anybody can say how such utilities could be opened to competition, I’d love to hear it. Seriously, I really would love to hear it.

  5. tim – that’s why the electricity business is a “natural monopoly”. To suggest otherwise is to ignore physical and economic reality.

  6. How can Microsoft not be a monopoly?

    My question isn’t with the principle but with computing time. Given the huge amount of time necessary for software setup, the need to install and tweak each and every program, the expectation of constant, uninterrupted connections, and various other practical factors, Windows and NT always seemed to me the ultimate vindication of J.P. Morgan’s idea that everything should be controlled by non-competing, otherworldly wise men. Ditto Internet Explorer. And what about Media Player? How can you have six different media players going into your computer just for the competition? At some point, you need to use only one browser or media player, so how does that not become a monopoly?

    If anybody can say how such other operating systems could be opened to competition, I’d love to hear it. Seriously, I really would love to hear it.

  7. Tim,

    I just read your post at 3:33, so this is entirely off-the-cuff. My first impulse was to say, “Let it be government-owned, contractor-operated, like the National Laboratory system.” But then I thought, “NOT gov’t-owned — citizen owned.” Issue 285 million shares of stock in the electrical grid infra-structure, and give one to each citizen (the government would have to purchase the grid from the utilities and hand it over to the citizens). Perhaps a special new kind of corporation would be needed for this – I’m not sure. Hire an executive committee of, say, 3-5 people with all oversight responsibilities. Give them an initial budget with which to hire their staffs and ALL contractors. The committee would have to pay all salaries from this budget (including their own) as well as hire the contractors. They would then have to run the whole thing for profit, with incentives for themselves (like splitting 5% of the profits). The remainder can be split into a fund (10% to 50%, depending on anticipated needs) for future improvements/ expansion and the rest paid out to the shareholders (citizens). Subsequent budgets would have to come out of the previous year’s proceeds, as well……….

    There is a lot of stuff that needs to be filled in, or maybe the whole thing should be scrapped….Hey, this is just an exercise, ya know!

  8. Fuel cells could make electric utilities go away. Wells and leeching fields, or large water storage and septic tanks which could be pumped by the lowest bidder would make plumbing less problematic, and wireless broadband will eventually make cable TV, and phone lines go away.

    I don’t think the water and septic tanks idea would be very efficient, but the rest could work pretty well.

  9. JDM,

    I’m curious. How would you suppose that fuel cells would make the utils. go away?

  10. Tim,

    Trying to think outside the electrical box here.

    Seems the monopoly is bypassed by hospitals and others when the blackouts occur. With solar and wind technologies, it is possible to be more self-sufficient for electricity. Sure the reliability may not be there yet, and maybe some customers prefer the convenience of the “natural monopoly”, but that’s really only the monopoly of the distribution system.

    Didn’t AT&T make the same natural monopoly argument, rendered moot to some extent by cellular service?

    Staellite TV trumps cable, and septic systems are an alternative to municipal plumbing. In many cases, alternative technologies are outlawed by governments for public health and safety reasons. Then again, people used to throw their garbage in the gutters, too. But these can be and often are done at the extrme local level.

    It’s nice to have some kind of central group making sure consumers know who plays nice and who doesn’t, but that’s not the same thing as making their decisions for them.

  11. “Hire an executive committee of, say, 3-5 people with all oversight responsibilities.”

    NO WAY!!! This scheme is used in hundreds of municipal and state boondoggles as it is!

  12. The only thing oversight committees do is overlook problems.

  13. Are you trying to poo-poo my brainstorm? Tsk, tsk, tsk 🙂

    Note that A) I have acknowledged the incompleteness of the (extemperaneous) idea; and B) unlike in the case of the local municipal officials, this group has a profit incentive (even in this openly acknowledged, rudimentary idea).

    It occurs to me that this board would have to be directly accountable to the owners and resistant (somehow) to the (almost certain) machinations of the contractors.

    Hmmmmmmmm…… I shall give it further thought. In the meantime, flame away!

  14. Tim, Electric utilities can be opened to competition–but it means breaking product (the electric service) from the retail distribution. If retail distribution is owned separately from generation, power company A can compete on the basis of price, service, whatever with power company B-Z, with all generators paying a fee to the distribution firm or organization. It’s the AT&T breakup/Regional Bell Operating Company model, so I know it isn’t perfect–but it is a way of injecting competition into a closed electricity marketplace.

  15. Mark A.

    I’m not sure I do, just that they could. You would just have a fuel cell in your home that you could replace or recharge when necessary. It would eliminate the eminant domain issues that stifle competition, which is what I think tim was asking for ideas about.

    I don’t really have any strong opinions about whether any of that other than wireless broadband will come to pass.

    I also have this great idea where everyone puts a box on their front porch, and a truck delivers milk every morning so you don’t have to trundle off to the dairy mart twice a week.

  16. The apparent natural monopoly in electricity, cable and telephone service comes from the physical transmission infrastructure.

    There is no reason that the providing/generating of these services cannot be open to competition. The difficulty arises with access to the transmission lines. I say that there should be one complany per region (yes, a monopoly) that has the right-of-way to build the poles. Building poles and providing access to these poles to electrical, cable and telephone complanies is all this company does. It is in their best interest to sell as many hook-ups as possible on each pole. this complany would thrive when there was competition, and suffer when there were monopolies.

    There would still be a problem with the “pole company” charging monopoly rates, but most “pole companies” would realize that the more hook-ups they sell, the more money they can make.

    Anmyone have any ideas on how to improve this idea?

  17. I read an article in Ideas on Liberty a couple of years ago that said cable rates were about 20% lower on average in areas where competing companies served the same town. Regulation is just a way of dividing up the market and preventing competition.

  18. Mark:

    One thing that has been bugging me, and where I tend to agree with some of your theory, is that before a lot of the utilities were deregulated and privatized, it was our tax dollars that built the infrastructure. Our tax dollars were involved, whether via government ownership or corporate welfare. So, based on that, it seems nearly immoral to hand off something that we funded to an unregulated, private monopoly. We _should_ be able to claim some ownership because our money was used as venture capital.

    More explicitly, if democracy represents the people, and the government owns a utility, that is the people’s utility. If the government sells the utility, either the taxpayers should be reimbursed for their investments or even earn a profit from the sale. If that does not happen, how is that not theft?

  19. “#1 – get out of the PUC-mandated business of charging every consumer the same rate per kWh, but actuaally base the charge on the obnoxiousness of the location;”

    Hey — that’s not right! I want you to help me pay for the cost of electircity in my new country home!

  20. What really has to happen is that consumers of electricity who need uninterrupted power 24/7 or are located in rural areas NEED TO PAY MORE. Presently, dense urban areas subsidize the utility needs of the hinterlands. If the utilities
    #1 – get out of the PUC-mandated business of charging every consumer the same rate per kWh, but actuaally base the charge on the obnoxiousness of the location; and
    2# – can enable price discrimination to the degree that those who need the power full time (hospitals, manufacturers or data centers willing to pay) pay more than those willing to take a blackout.
    2A – alternately, all consumers pay spot prices and can set a ceiling on their meter of what they’re willing to pay. And allow the devolution of futures trading to the retail level for additonal hedging.

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