Addressing PEPCO Problem — for real

I thought it best to follow up on the snarky approach from my post on PEPCO solutions.  How about something a little more practical?

The problems that need to be addressed include (apparently) better maintenance of the infrastructure for distributing electricity, and improvement of PEPCO’s responsiveness, especially to repairing wiring and connections when storms cause outages.

How can these problems best be addressed?

First, forget about Councilman Berliner’s dream of a publically owned power company.  There is little empirical evidence to suggest that a publically owned utility would be more efficient or responsive than an investor-owned utility like PEPCO.

Keep in mind that PEPCO is already a monopoly – granted and enforced by the state.  The main problem with a government-granted monopoly like PEPCO is that the firm has little incentive to improve service.  Since the law precludes any competition with PEPCO, they don’t have to fear that customers will abandon them in favor of a different electricity provider.

How, then, can we provide incentive for PEPCO to do better?  In theory, oversight from the state is designed to pressure them to be more responsive to consumer needs.  And there have been many cries for the Public Service Commission to “crack down” on PEPCO.  But the PSC doesn’t seem to have successfully induced PEPCO to better service.  In fact, it almost seems like PSC has done the opposite.

The policy solution may go back to that problem of incentives.  Despite the monopoly they are granted, there are ways to improve the utility’s performance incentives.

1)      Emphasize competition, wherever possible.  Maryland law has already been changed to allow some flexibility and competition in generation of electricity.  You can choose which of several firms you would like to buy power from.  But in distribution  of electricity – that is, bringing it into your home — we have no competition yet allowed by law.  One way to do this is to emulate the model that is used for pay television services.  In much of the county, you can choose your service provider for pay television.  In addition to satellite services like Direct TV and Dish Network, service is provided by Comcast, RCN, and Verizon.   If you get junk mail, or see television commercials, you know how fiercely those three firms battle for customers.  For the most part, they are not building redundant wiring networks.  They are competing for the right to use the existing network infrastructure (both cable and telephone) to provide services to customers.   A similar model is used in telephone service.  You don’t have to purchase your telephone service from Verizon; there is an array of CLECs (competitive local exchange carriers) that you can contract with.  This doesn’t even discuss VOIP or other options.  All of this competition has helped lower rates and improve service;  wouldn’t it be nice to see the same thing happen for electricity distribution?

2)      Reduce barriers to entry.  We need to make sure that the legal framework for electricity is advancing to meet the technological framework, which is changing all the time.  Cogeneration, home solar, local generation – these are just a few ways for people to get electricity and (at least partially) bypass the PEPCO network.  Any legal or administrative obstacles to increasing these options need to be removed.

3)       Fix the “decoupling” policy.  Decoupling was the legislative solution to an apparent paradox (or conflict of interest) that confronts electric utilities.  On the one hand, the state wants to conserve energy, and utilities are required to subsidize energy efficiency programs for consumers.  That left the utilities in the awkward position of urging customers to buy less from their businesses.   The decoupling policy was the remedy: it guaranteed income to the utilities even if power consumption dropped.

The problem is that this creates a tremendous disincentive for utilities to be efficient about restoring power.  As UMBC economist Tim Brennan phrases it, “[T]he silliest thing we could do would be to promise these utilities the same profits regardless of how much electricity they deliver.”   The PSC has already taken steps to limit the charges that utilities can make, but the issue needs to be addressed more comprehensively.

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One Comment on “Addressing PEPCO Problem — for real”

  1. Zinzindor Says:

    Now it seems that the Public Service Commission is looking to do something about the decoupling problem. Lots of people annoyed that PEPCO will get paid for not providing service — I can’t imagine why!


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