Is there any place else in the country that does this? If anything, I don't think utilities should be penalized if a hurricane or other natural disaster wreaks havoc on electrical grid.

Perhaps it would be best to suspend the fees during a declared disaster emergency. For example, the disaster declaration for the last big snow storm covered a couple days during the brunt of the storm and a day after. During that period, the utilities wouldn't be penalized. However, for each day/hour/whatever following the expiration of the emergency declaration, the fee could apply.

by Adam L on Dec 10, 2010 1:45 pm • link • report

This is a good idea, except there needs to be a window of time after emergencies when there's no penalty. I can't speak for Pepco specifically, but after a big storm utilities usually work like hell to restore service. It's the more mundane outages, where there's no particular reason for lost service other than incompetence, where Pepco needs a prod to improve.

Perhaps also the clock shouldn't start from the beginning of the outage but from the time it's first reported. If a tree knocks down lines in your neighborhood, there should be a reasonable chance to respond -- sort of like Domino's old motto, "If it's not there in 30 minutes, it's free."

by Gavin on Dec 10, 2010 2:04 pm • link • report

Adam,

Good question asking if anyone else in the country does this. What about the world?

Excluding disasters kind of misses the whole point. Pepco knows storms will eventually hit our region. The more prepared Pepco is the less damage the storms will do. More preparation also means less repair time. There are ways Pepco could be protected from a giant financial hit and still coaxed with incentives to provide better service.

Speaking of service, I'm a very unsatisfied Pepco customer this year. Lost power a bunch of times over the last 12 months. Pepco's on-line and phone repair updates were abysmal. Led me to leave stuff in the fridge I could have moved and saved. Maybe we could add some incentives for accurate assessment of repair times.

by mike on Dec 10, 2010 2:08 pm • link • report

The obvious question is whether the proposed penalty is an allowable cost for calculating rate of returns in rate setting. If so, then this seems like a good measure in that both Pepco and the rate commission will internalize the cost of increased reliability--if $2/outage-hour is actually the cost of an outage. Pepco would make whatever investments it thinks will cost less than $2/customer-hour of outage avoided. There will be fewer outages and higher electricity rates, but customers are happy to pay the higher rate to avoid the outage that costs them even more.

Of course, if $2/hour over-estimates the cost of an outage, then customers will not want to pay the higher rates to avoid outages that cost less than what it costs to make the system more reliable. A short outage on weekends does not make you throw away your food, but a 24-hour outage would. But on a weekday, businesses shut down withy the first hour and another 4 hours may not make much difference.

However, if the penalty is not an allowable cost, then this idea just causes Pepco to over-do it. System reliability investments are chargeable capital costs, so if the penalty is not an allowable cost, Pepco will do whatever it can to avoid the penalty, passing along costs that are far more than what the penalty would have otherwise been.

by Jim Titus on Dec 10, 2010 2:15 pm • link • report

Thank you, Jim, from saving me from explaining rate and cost of capital, etc. Excellent points.

by Jess on Dec 10, 2010 2:24 pm • link • report

This is an interesting idea, based on the ideas of Ronald Coase. But the big problem here is transaction costs. With millions of customers, enforcement would be expensive. Each customer would need to prove his loss. The costs of doing so would outweigh the benefits.

Using a regulator can solve some problems and it's a solution that works well in some circumstances. Apparently not in this area, however. Regulated electric utilities work when the company gets a fair (meaning "large") return on capital in exchange for investment in their property and equipment. The good regulators must strike a careful balance: allow fees that are "too high" and the ratepayers (taxpayers/voters) complain and we get new regulators. Set rates too low and the company can't or won't invest.

This proposal is a roundabout way of using a market mechanism anyway. A truly "free market" solution would involve multiple power companies. If Pepco provided poor reliability at a lower price, consumers would use them. If consumers wanted higher reliability, they would chose a company that charged more but had a better distribution mechanism. Each would have a choice, and the customer's bargaining power would be greatly improved by breaking the monopoly.

Alas, this isn't feasible because of the enormous fixed costs required to duplicate the distribution system already in place. So we should try the next-best solution.

Perhaps the second-best solution is greater deregulation: separate the power delivery companies, who own the lines, from the producers (who own the plants).

This hopefully solves the problems I outlined. First, regulators don't set the rates and therefore can't screw things up. The market does, by looking at demand, cost of production, cost of transmission upkeep, etc. It also encourages better efficiency by using peak-load pricing, something I don't think we do here.

Second, it reduces the transaction costs because the big loser when power goes out are the power producers themselves. It gives the owners of the power plants the ability to go after the transmission company. By reducing the number of companies and increasing their stake in a good outcome, the transaction problem is mitigated somewhat.

Obviously there are problems with this idea. It's not the only one out there nor is it the best. However I really believe a firmer regulatory hand is NOT the proper solution to the Pepco issue.

by WRD on Dec 10, 2010 2:27 pm • link • report

Let's have a little sense of scale about the cost of insurance here.

No rational person would install a natural gas generator for $9,400 unless they had substantial power generation needs. These might include some businesses, but few residences could possibly justify such an expense for rare power failures.

You can buy a gasoline powered generator that is perfectly adequate for running a fridge or two, lights and probably a lot of other stuff for about $500. This would be more than adequate for providing backup for a homeowner.

At the end of the day, any financial burden that you would impose on Pepco to improve reliability will ultimately be paid for by everyone in the form of higher rates, so it's kind of pointless anyway.

by Jamie on Dec 10, 2010 2:54 pm • link • report

I admit I used to feel pretty smug every time the news was filled with stories about Pepco outages. I have Dominion, and in 14 years I never had an outage lasting more than a few minutes. Until this past summer when a storm hit Del Ray and I was out for nearly 3 days. That sucked, so I sympathize with the Pepco customers who put up with this crap a heck of lot more.

by spookiness on Dec 10, 2010 3:03 pm • link • report

Coase is a monkey-boy.

Very difficult to measure externalities.

Was that thousands of dollars of ice cream really only several hundred? What price do you charge? You either come up with a systems likes workers comp -- set schedule of fines -- or the transaction costs kill everything.

Regulations are far from perfect, but the can work. ALso, while the post series was interesting, I didn't really find any hard conclusions in there.

by charlie on Dec 10, 2010 3:03 pm • link • report

I have advocated this very idea for a while. The problem is how much....for that, Jim Titus is right on the money. Unless the actual cost to Pepco is the same (or close to) the cost to consumers, Pepco will not have an adequate incentive to improve service.

As for whether this happens in other places: I do not know about standard utilities, but supply contracts with dates and reliability are standard in the commercial world. This may require higher standard rates, but greater reliability. It is clear that some customers are willing to pay for the increased reliability.

by SJE on Dec 10, 2010 3:23 pm • link • report

WRD -- Perhaps the second-best solution is greater deregulation: separate the power delivery companies, who own the lines, from the producers (who own the plants).

This has been done for at least a decade or more in DC and MD. I don't see what it has to do with maintaining a reliable power distribution system though.

It would be interesting to compare municipally owned systems such as Los Angeles, on this particular factor.

It certainly made a difference in the Enron era in terms of cost of electricity, which skyrocketed, once production and distribution/transmission of electricity was in fact separated through a deregulatory push.

by Richard Layman on Dec 10, 2010 3:32 pm • link • report

I guess my problem with this is that there are certain rare events where the expectation of having uninterrupted power is unreasonable. Things like a hurricane or a 2 foot snowstorm come to mind.

by JackRussell on Dec 10, 2010 3:49 pm • link • report

Just a quibble - Pepco would be purchasing insurance, not reinsurance. Reinsurance is insurance purchased by insurance companies to reduce risk exposure.

by jcm on Dec 10, 2010 3:53 pm • link • report

Richard: Pepco is largely a distributor in this region, and not a producer. It buys most of its power from others (according to the WashPost article). THus, much of what you have proposed has already happened, and there is lousy reliability. I can bet that Pepco has reliability in its contracts with its providers. If you are locked into service with Pepco, there needs to be a mechanism to introduce accountability, since you cannot switch. Thus, the costs to consumers need to be internalized.

I'd propose that customers be given the right to enter into a reliability contract with Pepco. So, for a higher rate, Pepco must give you better service, and pay a fee for any interuption.

by SJE on Dec 10, 2010 4:11 pm • link • report

I really like this idea but would makes the fees progressive as the length of the outage increases. Something like $2/hr for hours 1 (give them one hour free since immediate restoration is not always possible) to 12, $5/hr for hours 13-24, $10/hr after 24 hours. Occasional outages are unavoidable but the fact that Pepco frequently takes days to restore service is simply unacceptable.

by Jacob on Dec 10, 2010 4:14 pm • link • report

Jacob: I agree that the amount should increase non-linearly over time, so that it reflects the costs of a serious outage.

There should be an initial charge merely for an outage. If your computer (or oxygen machine, etc), goes dead, you are already inconvenienced. Do you have to reset all your clocks? Were any of your machines damaged by an outage? etc. If you cannot rely on uninterrupted power, can you work from home, or must you have an office in VA or DC without the reliability problems. If a movie theater loses power, and everything goes dark, people freak out, so do you need some back up supply. Thus, the mere fact of outages can impose a serious cost.

by SJE on Dec 10, 2010 5:39 pm • link • report

Moved here from Charlottesville, VA. Wasn't here last winter, so can't comment. However, down there, the slightest hint of rain or wind meant the power would flicker. Dominion Power. A real rain storm, like we've had in the last month or two in the DC area, meant out for an hour or more. Wind? Forget it, guaranteed out. Today's flurry? Likely a brown out or flicker.

Heat? Also guaranteed power issues. Wifes building was shut down, had to go home from work because they didn't have the capacity to keep the AC running.

I could not imagine if a hurricane had come through, as the remnants often would further south where I am from. I've slept through tropical storms in NC without losing power.

Since I've been here in the DC area, 4 months, I've had power not once go out. Not at all. It has rained hard. It has been windy. Not once have I lost it.

For what its worth, and after having come from CVille where it was incredibly awful, seems like PEPCO has its act together.

by JustMovedHere on Dec 10, 2010 6:07 pm • link • report

We rarely experience power outages in the more central parts of DC. You know why? The overhead wires ban .... Most electrical cabling is underground.

by Lance on Dec 11, 2010 7:35 am • link • report

We seldom have manhole covers and street fires in the outer parts of town. You know why? We have overhead wires. It is a lot more cost effective to maintain and repair wires when technicians have easy access to them.

by William on Dec 11, 2010 9:03 am • link • report

@Mike "Excluding disasters kind of misses the whole point. Pepco knows storms will eventually hit our region. The more prepared Pepco is the less damage the storms will do. More preparation also means less repair time."

Yes, but there is always going to be some down-time during a natural disaster. The biggest problem is that PEPCO takes an inordinately long time to repair lines following a storm and that the power goes out for seemingly no reason. For example, during the last big storm, the disaster declaration covered a period of two days. However, many customers were out of power for a week or more. Any outage that lasts longer than the time of the declared disaster emergency would be eligible for fines. I don't think that's unreasonable.

by Adam L on Dec 11, 2010 10:40 am • link • report

@ Lance: We rarely experience power outages in the more central parts of DC. You know why? The overhead wires ban .... Most electrical cabling is underground.

We rarely experience power outages here in southern fairfax county. You know why? The overhead wires ban .... Most electrical cabling is underground.

by Jasper on Dec 11, 2010 12:45 pm • link • report

Adam L: What are even worse are the frequent power outages during normal weather. I live just West of downtown Silver Spring, and we have regular "service interuptions."

by SJE on Dec 11, 2010 10:26 pm • link • report

As the effects of tropical storm Isabel were mentioned, lets look at what caused the outages. It was predominantly trees uprooting due to rain saturated soils.

So, you might think undergrounding is the solution. There are just two snags. A study done by the NC Public Service Commission staff in the aftermath of a massive ice storm found that undergrounding the distribution system would take about 25 years, involve over 5000 additional employees and utlimately raise rates 127%. The second difficulty is that undergrounding also needs a route and if there are trees in the way the roots will be severed during undergrounding, possibly killing the trees.

I'm not saying trees are the only problem impacting PEPCO's reliability. However, when it comes to storm-caused outages, trees are a common major contributor. What then? How about the utility charges the landowner of the tree that caused the outage the full penalty they have to pay to the affected customers?

by Sig Guggenmoos on Dec 11, 2010 10:38 pm • link • report

Perhaps it would be more efficient for Pepco to simply charge all of the houses of worship for these acts of God?

by Jim Titus on Dec 12, 2010 11:28 am • link • report

SJE -- that's what I said. I was merely quoting (but without italics) what WRD said, before making the verysame point that you did.

by Richard Layman on Dec 12, 2010 2:42 pm • link • report

Richard, I see now.

by SJE on Dec 12, 2010 10:24 pm • link • report