I’m currently living in NYC, where we’ve put up with summer brownouts, blackouts, transformer fires, etc. for the past few summers. The NYTimes recently ran an article predicting more of the same as equipment ages and demand increases.
The second part of the problem is that the current deregulated system doesn’t provide much incentive for anyone to upgrade their equipment/capacity. Typical capitalistic reasons–if someone’s product sucks, buy their competitor’s instead–doesn’t seem to be applying. Though I, personally, still buy power from ConEd, I could get it from another ESCO. So my power might be cheaper, but I still won’t get it at peak times. And what ESCO is going to sink money into building new plants, thereby increasing their rates, when the main thing they have going for them (other than “green energy” ESCOs, which is more conscience than economics) over their competitors is cost?
Anyone have any bright ideas?
I haven’t time to put up a good response, but this is a good topic and deserves a response within a day.
Utilities are pretty close to what economists call natural monopolies. It is not in general a good idea to have more than one network, but if you only have one the owner can charge above the cost of supplying incremental units of electricity, which is bad for consumers and for efficiency.
There are three basic approaches, and none of them are a solution:[ul][li]Unregulated monopoly. []Nationalisation (government ownership) []Regulation.[/ul] As I said, none of these work. As a professional economist, I will cheerfully predict that there is no solution to this problem. [/li]
Option 1 is giving up: let the monopolist rip people off and distort the market. This is not a totally stupid choice - governments can make things worse and sometime monopolies disappear over time with technical change.
Option 2 tends to fail because governments are lousy at running businesses. The textbook instruction is for the nationalised firm to be instructed to price at marginal cost (given the economies of scale, this means operate at a loss), but it is hard to get a government entity to maximise profit and the loss either tends to blow out and/or the public monpopoly starts acting like a private one.
Option 3 is the popular one these days: privatise the monopoly and regulate it so it can’t exploit its power. In principle you leave the monopoly with the incentive to profit maximise (and therefore cost minimise) but prevent it from extracting rents from ownership of the network. This can be done in a variety of ways: rate of return regulation aims to limit the return to capital in the industry to those of competitive industries. The major problem here is that the industry does as you said in your OP - run down the infrastructure because it is prevented from making money from it. Price cap regulation seeks to get around this by setting a price (the popular method at the moment is “CPI-X” pricing: inflation less something) which allows the monopoly to make whatever profits it can given the price cap and therefore gives the monopoly the incentive to maintain and improve infrastructure since it is allowed to make profit on it.
The flaw in this is that the regulator doesn’t know in detail the costs of the firm and so - at least over the medium term - can’t set the cap sensibly. The information problem means that in the medium term regulation is either ineffectual or discourages sensible investment behaviour.
All that means I wouldn’t hold your breath for a good solution, although there are shorter term regulatory ways of improving things.