Topical thread

A natural monopoly without close public supervision is like Hamlet without the Prince. Economic rents pursued within natural monopoly frameworks create bizarre inversions of incentives. The denser the market then the higher the profits and the more reason there is to invest in production capacity instead of distribution availability and redundancy. Sell more, fail more. Where are your customers going to go for power? Fail-over protection is expensive and does not generate new revenues.

Dominion Energy Virginia has found that sophisticated distribution networks with automatic switching and rerouting are much cheaper than burying lines already on poles. They have done a very good job because the cost of damage repairs is less quickly recovered here with our lower distribution density than in the Northeast, where outages can last for weeks. By reducing outages where it is most cost effective then repair resources can be dedicated to large area outages beyond the scope of simple automatic switching.

https://www.huffpost.com/entry/derecho-iowa-national-response_n_5f3b0c44c5b670ab17aecf7b

In the aftermath of last week’s horrible derecho, which the national media virtually ignored, Iowa didn’t deserve this:
“Iowa helped foist Trump on us… I guess God’s Wrath is really a thing.”
“Heard but don’t care.”
“You get what you sow.”
And as for the national media mostly ignoring you? “Suck it up.”
—–
Are we going to underground wiring to prevent storm damage?

Paul Krugman began writing about the problem of electricity supply in California in 2000:

https://www.nytimes.com/2000/12/10/opinion/reckonings-california-screaming.html

December 10, 2000

California Screaming
By Paul Krugman

https://www.nytimes.com/2000/12/31/opinion/reckonings-real-reality-s-revenge.html

December 31, 2000

Real Reality’s Revenge
By Paul Krugman

https://www.nytimes.com/2020/08/20/business/energy-environment/california-blackout-electric-grid.html

August 20, 2020

Poor Planning Left California Short of Electricity in a Heat Wave
Scores of power plants were down or operating below their capacity just as hot weather drove up demand.
By Ivan Penn

https://www.nytimes.com/2000/12/10/opinion/reckonings-california-screaming.html

December 10, 2000

California Screaming
By Paul Krugman

California’s deregulated power industry, in which producers can sell electricity for whatever the traffic will bear, was supposed to deliver cheaper, cleaner power. But instead the state faces an electricity shortage so severe that the governor has turned off the lights on the official Christmas tree — a shortage that has proved highly profitable to power companies, and raised suspicions of market manipulation.

The experience raises questions about deregulation. And more broadly, it is a warning about the dangers of placing blind faith in markets.

True, part of California’s problem is an unexpected surge in electricity demand, the byproduct of a booming economy. It’s possible that the crisis would have happened even without deregulation.

But probably not. In the bad old days, monopolistic power companies were guaranteed a good profit even if their industry had excess capacity. So they built more capacity than they needed, enough to meet even unexpectedly high demand. But in the deregulated market, where prices fluctuate constantly, companies knew that if they over-invested, prices and profits would plunge. So they were reluctant to build new plants — which is why unexpectedly strong demand has led to shortages and soaring prices.

Now you could say that in the long run there is nothing wrong with that. Building extra generating capacity was costly, and the costs were passed on to consumers; while prices may fluctuate in a system with less slack, on average consumers will pay less. In fact, textbook economics suggests that it’s actually a good thing that electricity prices skyrocket when supply runs short: that’s what gives the power companies an incentive to invest. And so you could argue that no public intervention is warranted — indeed, that the caps that still place an upper limit on electricity prices only worsen the problem, that we should rely on market competition to solve the crisis.

But how competitive is the electricity market? What makes California’s power crisis politically explosive is the suspicion that it’s not just about inadequate capacity, but also about artificially inflated prices.

How might market manipulation work? Suppose that it’s a hot July, with air-conditioners across the state running full blast and the power industry near the limits of its capacity. If some of that capacity suddenly went off line for whatever reason, the resulting shortage would send wholesale electricity prices sky high. So a large producer could actually increase its profits by inventing technical problems that shut down some of its generators, thereby driving up the price it gets on its remaining output.

Does this really happen? A recent National Bureau of Economic Research working paper * by Severin Borenstein, James Bushnell and Frank Wolak cites evidence that exactly this kind of market manipulation took place in Britain before 1996 and in California during the summers of 1998 and 1999.

You wouldn’t normally expect this to happen in colder months, when demand is lower. Still, state officials have understandably become suspicious about California’s current power emergency — an emergency precipitated by the odd fact that about a quarter of the state’s generating capacity is off line as the result of either scheduled repairs or breakdowns.

Maybe California power companies aren’t rigging electricity prices. But they clearly have both the means and the incentive to do so — and you have to wonder why the deregulators didn’t worry about this, why they didn’t ask seemingly obvious questions about whether the market they proposed to create would really work as advertised.

And maybe that is the broader lesson of the debacle: Don’t rush into a market solution when there are serious questions about whether the market will work. Both economic analysis and British experience should have rung warning bells about California’s deregulation scheme; but those warnings were ignored — just as similar warnings are being ignored by enthusiasts for market solutions for everything from prescription drug coverage to education.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=240776

(It’s long been known that
excess brush does make
for many wildfires.)

Fuels Management

US Interior Department

The fuels program supports the strategic removal of grasses, shrubs, and trees to restore and maintain ecosystems and limit the negative impacts of wildfires.

… Wildland fires can be devastating, but not all fire is bad. Fire plays a natural and necessary role in many landscapes. Periodic low-intensity fires speed up the process of forest decomposition, create open patches for new plants to grow, improve habitat and food for animals and deliver nutrients to the plants that survive. Some research indicates fire may also improve ground water recharge and water flow to aquatic habitats. They build resilience to fires by reducing immature trees, brush, dead branches and limbs (a.k.a. ladder fuels) and creating a mosaic of burned, partially-burned, and unburned areas (which makes it less likely that future fires will torch an entire landscape). …