New factories for the natural monopoly

Utility plans exclude conservation:

[NC's] largest utilities say they'll need to spend more than $10 billion on three new nuclear reactors and two coal-burning plants to meet projected electricity demand within a decade.

But environmental groups say the utilities' forecasts leave out two key factors: conservation and alternative energy sources. Adding those to the mix could delay the need for new plants, they say.

Electric utilities are natural monopolies -- business firms that must operate on a massive scale in order to bring costs down so that the product can be priced affordably. The natural inclination of monopolies is to raise prices so that profit is maximized (e.g., movie popcorn) but electric utilities are heavily regulated in return for government's gift of monopoly status.

So, the regulators can tell the natural monopolies to do whatever they want. Conservation is a good idea, for a variety of reasons. Electric utilties will resist the notion because no firm wants demand for their product to fall.

Last year, the Georgia Utilities Commission required Georgia Power to offer four programs to help residential customers save energy. In January, the California Public Utilities Commission created a 10-year solar initiative to help bring down the costs of solar electricity for customers.

The latest stop for the debate is North Carolina. At the first of three planned public hearings this month and next, dozens of people urged the state Utilities Commission to require power companies to take into account conservation measures.

In lieu of my attendance at the next public hearing, I don't want to create a mob scene, papparazzi and all that, let me declare, here, today, that I am in favor of the regulators mandating that the natural monopolies encourage their customers to reduce the demand for the natural monopolies' product:

Conserving electricity not only helps people cut power bills but also reduces pollution from power plants. Concerns that coal plants contribute to greenhouse gases and higher costs of fuel have driven the resurgence in conservation programs.

Note: I'm down with all of this quote except the part about coal plants leading to higher costs of fuel. Say what?

Comments

[Dean]

The obvious way to encourage conservation is to tell the utility to raise the prices it charges. I'm not sure they'd mind that.

[John Whitehead]

Great point. Allow the monopolies to behave like monopolies!

[Michael]

"Note: I'm down with all of this quote except the part about coal plants leading to higher costs of fuel. Say what?"

I think those are two seperate concerns. Concerns that coal plants contribute to greenhouse gases, and then Concerns about higher costs of fuel. It could have been worded better.

[Duncan Brown]

John, When you say," I am in favor of the regulators mandating that the natural monopolies encourage their customers to reduce the demand for the natural monopolies' product," you are neglecting a a few decades of utility history. Starting in the 1970s, regulated utilities in many if not most states were required to include "demand-side management" measures such as programs to encourage storm windows in their rate bases. [The rate base is the total capital investment of generating plants, transformers, transmission lines, etc.] This was not entirely successful, because utility engineers, in those days, just didn't think that way.

Second, generating companies nationwide have been forced to compete in providing for wholesale power.

Check out Lynn Keisling and Michael Giberson's weblog, Knowledge Problem, for coverage of utility issues: http://www.knowledgeproblem.com/.

[Robert Schwartz]

"Electric utilities are natural monopolies"

Only transmission fits that definition. Generation can, and should, be separate.

[John Whitehead]

Duncan,

I'm focusing on the latest development:

"The latest stop for the debate is North Carolina. At the first of three planned public hearings this month and next, dozens of people urged the state Utilities Commission to require power companies to take into account conservation measures."

John

[Eric H]

"Electric utilities are natural monopolies -- business firms that must operate on a massive scale in order to bring costs down so that the product can be priced affordably."

Er, can you please define "affordably"? It sounds like you have determined that there is a True Price of electricity - do you mean they need to be regulated to keep the prices down to that arbitrary level? But now you're arguing to raise them? And what about the rent-seeking opportunities that regulation creates? And what would happen if providers were instead unregulated and power were more expensive? Wouldn't people either find a competing alternative or select a different means of powering their homes by a combination of conservation and small scale power, i.e. power generation and delivery would be more distributed and conservation would be more valued? Wouldn't renewable look a little more promising to the consumer in such an environment? I've been looking at old photos lately of older mills and ranches that all seemed to feature windmills with the word "Aeromotor" - what happened to that trend, and what was the influence of the REA on it? Didn't Posner arrive at a different conclusion about so-called natural monopolies? How many companies were in existence when AT&T secured their legal natural monopoly, and what happened after? Etc.

[joshua corning]

if FDR spending billions of dollars to extend the durration of the depression is a natural monopoly then can i have a some of what you are smoking?

by the way why when i drive out into the country are there all these derilict wood wind towers made circa 1928?