Blackouts: Blame It on NIMBY

Well, obviously, it's Canada's fault. We should invade. Or, at least, take this opportunity to say really mean things about them while their computers are out.

Here's a hot tip for you -- after the blackout in the Northeast is over, there will be a few companies who will have won, big time. Top of the list is RadioShack (NYSE: RSH - News). Need a battery, go to the Shack. Need a flashlight? Flashlights and batteries galore come from Energizer (NYSE: ENR - News). For these companies, the blackout created a second Christmas. Good thing RadioShack no longer requires putting your life history into a computer before you buy anything.

The list of companies for which the blackout is an economic disaster is long. The airlines and the power companies, neither of which have had a good go of things lately, are obvious victims. MGM's (NYSE: MGG - News) casino in Detroit went dark for the first time since it opened in 1999 -- not that Thursdays are big nights for the house. Ford (NYSE: F - News), GM (NYSE: GM - News), and their suppliers reported massive shutdowns in the Detroit area. Retailers, restaurants, you name it... last night, they were all dark. Of course, many of these companies have business interruption insurance, and as such the insurance companies, which had been blessing their lucky stars through 2003 for the lack of large-scale disasters, have just seen their streak come to an end.

We're going to see a tremendous amount of blame over the next few days and weeks. Not like my blame Canada farce, but real finger pointing. But here's a news flash: Just like in California -- where ridiculous plant siting and approval processes kept any large-scale power generation from being built for a decade before the 2001 crisis -- people in the industry have known for years that the Northeastern power grid was at risk but could do nothing about it. The culprit in this case is good old NIMBY -- Not In My Back Yard. No one wants to have high-tensile transmission facilities built near them, and in the densely populated Northeast, any facility built is by definition going to be built near someone.

The economics of electricity is a very tricky thing. Companies must have enough capacity on hand to handle not only the highest peaks experienced in the past, but what they think will happen in the future, even with plants and other facilities taken offline for periods of time. Facilities that are designated as "peaking power" generation can stay offline more than 90% of the time, and yet must be kept ready to go into service at once. The cost to do this can be substantial, and yet it is entirely necessary, as we discovered in California, where insufficient capacity and bad regulation created the environment that invited disaster. And disaster they got.

Utilities used to be looked upon as the safest of investments. Between deregulation, power trading scandals, and lower credit ratings, we can see clearly that this is no longer the case. As long as the utilities are left to deal with the gross patchwork of local regulations and restrictions, even if they have the foresight and financial wherewithal to prevent such disasters, they will not be allowed to fix the problem.

You want to blame someone for your long walk to a dark home yesterday? Start with the thousands of litigious neighborhood associations and work your way up.

To say this is all NIMBY is a cop out. There has been hard core partisan politics leading the NIMBY folks. I think back to my Freshman year in college, 1976. Like many schools we had one of Ralph Nader's "Public Interest Groups" leading most of the rabble rousing there, in our case MPIRG. Unlike most schools our chief rabble rouser was memorable, a young PoliSci prof starting to take over the state named Paul Wellstone. What was the number one liberal issue being fed to students in Minnesota that year? The alleged dangers of high tension power lines! Wellstone would take students on field trips to protest any construction of such. Don't let the Greenies get a pass on this!

I would suggest that a more fundamental problem is that there is no market way, under current "deregulation" plans, for customers to trade off price for reliability, either in broad or narrow terms. If customers who were willing to pay more for electricity could receive more reliable service as a result, this would encourage different electricity suppliers to compete on the basis of reliability. This would in turn promote the development of more reliable infrastructure.

One approach to accomplish this would be to have the distribution companies supply customers with "smart" meters which (1) would report in real-time (or close to it) how much electricity individual customers were using, and (2) would allow the distribution company to switch off customers to shed load.

Suppose, then, that half of the electric customers are signed up for Reliable Electric service and the other half are signed up with Acme Electric. The distribution company could then track in real time how much power was being drawn by customers of each company, and how much was being supplied by each company. If a company was unable to supply (either directly or through purchase arrangements) enough current to supply its customers, the distribution company would shed load until the amount of power drawn by the company's customers equalled the amount of power it was supplying. The net effect would be that if Reliable Electric able to consistently supply all the power its customers needed, its customers would avoid interruptions. If Acme Electric was unable to consistently supply power (e.g. if, when spot prices exceeded $0.25/hWh it simply refused to pay) its customers would have to suffer periodic blackouts.

Under this scenario, customers who want reliable electricity would be able to get it, but it wouldn't be cheap; those who wanted cheap electricity would be able to get it, but it wouldn't be reliable. Allowing customers to trade off price for reliability would provide suppliers with an incentive to compete on the basis of reliability--something they don't do now. This should end up leading to improvements in reliability for some customers and price for others.

Only problem is how to make the meters cheap and secure.

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