Electricity reliability

The Washington area prepares for yet another storm and yet another potential loss of power. On our recent trip back to Malaysia I commented that in general we prepare for at least 1-2 power losses per year - by which I mean losses that extend beyond 12 hours. (I was met with raised eyebrows - as in, really? In USA? The supposedly most powerful nation in the world?)

These power losses need to be managed better. A suggestion was made here which if I understand correctly places the burden on the consumer: If the consumer values reliable power then he pays more. Unfortunately, it assumes, in the parlance of economics, that power restoration is infinitely divisible. I pay more but my neighbor doesn’t so I get my power back before he does. Maybe I understood it wrong but in any case, my understanding is that power restoration doesn’t work that way - it may work that way in the future with the so-called yet to exist ‘smart grid’ but as of now there is nothing but unreliability.

This suggestion assumes that power losses generate negative externalities e.g. data centers are unable to provide internet service, traffic fatalities from non functioning traffic lights, electric cars that aren’t able to charge up, etc. (A bit of a stretch perhaps.) Like all externalities it needs to be taxed (or fined) which utility companies don’t seem to have to bear at this time. The analogy here is on-time airline arrival when airline companies were fined for late arrivals (or something to that effect) which in turn led to more accurate (some would say conservative) estimates of expected time of arrival.

For the first 12 hours (an arbitrary cut-off) the utility company doesn’t face any penalties if power is fully restored. After that penalties kick in at 12-hourly or perhaps 6-hourly intervals at an increasing rate. (If you’ve ever called a plumber you’ll know what I mean - e.g. the first half hour might cost me $75 and then $50 for every 15 minutes thereafter.) The penalties go into a fund that can be used either to rebate affected consumers or as a fund for insurance payouts.

In the case of insurance payouts (I know lots of asymmetric information problems here) the customer doesn’t claim from the fund directly. He claims from his insurance company as he would if he were in an accident. It might affect his premiums or it might not depending on how much the insurance companies can claim back from this fund.

Right now utility companies do not face any real incentives to improve on electricity delivery. Apart from the direct costs of power restoration there is very little incentive to redesign what may be a flawed system. So they do the minimum - e.g. tree trimming, replacing equipment after it blows up rather than before, etc. This idea is to coerce them to bear some of the private (customer) costs. I use insurance companies here only because they may have a larger influence on the outcome than customers themselves.