Montgomery Co. Councilman’s Pepco Flip-Flop Demonstrates Why America’s Statist Electricity Industry Needs To Change

by William Yeatman on July 18, 2011

in Blog, Features

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America is a beacon of capitalism, so it can be jarring to discover one of its largest industries operates under the thumb of the state. As my colleague Iain Murray and I noted in National Review,

The $330 billion industry has been a redoubt of state control for almost 100 years. Early in the 20th century, pro-intervention Progressives concluded that electric companies would consolidate into “natural” monopolies that would exploit consumers. This was a curious conclusion to reach at a time when electric companies were competing vigorously in many cities, but for those who put faith in the regulatory state, theory trumps observation at every turn.

The Progressives’ remedy for this theoretical drift toward natural monopoly, offered without any apparent appreciation of irony, was to establish government-mandated monopolies. States created commissions with the regulatory power to outlaw competition among utilities and set electricity rates for consumers. By the end of the Great Depression, almost all Americans bought their electricity from government-backed monopolies, and they continue to do so to this day, whatever regulation advocates might say about electricity deregulation in the 1990s.

The upshot is that your utility is controlled by your local government, so it is only as good as your local government. With that in mind, Pepco’s status as the “most hated” company in America reflects poorly on politicians in Maryland, the utility’s primary service area.

Case in point: In the wake of January 2011 ice and snow storms that left many Marylanders without power for a prolonged period of time, local officials were spanking mad. Pepco issued an apology, but Montgomery County Councilman Roger Berliner (D-District 1), chairman of the Transportation Infrastructure, Energy, and Environment Committee, wasn’t hearing it. On February 7, he convened a snap-hearing on the January storms, which he opened by saying, “We’re tired of the excuses and TV and paper feel-good ads. It’s time for performance and accountability.”

As a result of such political pressure, Pepco promised to ramp up its Reliability Improvement Plan. The first component of this plan is “Enhanced Vegetation Management,” i.e., “tree-trimming.” During inclement weather like the January 2011 storms, felled tree branches are the primary cause of power outages.

Fast forward to last Friday. Again, Pepco was the subject of bad news. The Washington Examiner headline says it all: “Pepco Blasted for Wanton Tree Killing.” The article, by Rachel Baye, featured an angry quote from Councilman Berliner, who said, “The community that I represent feels that Pepco’s tree-trimming processes are grossly inadequate. They butcher trees instead of trimming them.” Earlier in the article, Councilman Berliner called Joe Rigby, Pepco’s CEO, “the Paul Bunyan of trees.”

There are many problems with Councilman Berliner’s green populism. For starters, Pepco operates under more stringent tree-trimming guidelines in Montgomery County than do utilities in neighboring service areas. According to the Washington Examiner article, Pepco is allowed to cut trees within 10 feet of a power line. In Virginia, Dominion Power can trim trees within 15 feet of a power line. Indeed, the utility actively has been lobbying the Transportation Infrastructure, Energy, and Environment Committee for expanded tree-cutting prerogatives in order to better implement “Enhanced Vegetation Management.”

Also, the difference between “trimming” and “butchering” lies in the eye of the beholder. That is, a utility’s definition of “trimming” easily can comport with an environmentalist’s definition of “butchering.” Another outraged Montgomery Councilman, Marc Elrich (D-At-large), inadvertently made this point when he suggested that difference between “trimming” (good) and “butchering” (bad) is “skilled cutting.” The devil is in the details, I guess.

Finally, there’s the fact that Pepco is “butchering” trees at the request of Councilman Berliner, whose palpable anger in the wake of the January winter storms helped compel Pepco to ramp up its “Enhanced Vegetation Management.” Only a couple months ago, Councilman Berliner seemed pleased with Pepco’s response. In a June interview with WTOP, he said, “They (Pepco) have gotten the message they have to get better. Are they working to get better? I think they are.”

It’s not a risk-free world; rather, we live in a world of tradeoffs. In this instance, the wellbeing of hundreds of trees is diametrically opposed to the betterment of electricity service. That’s the tradeoff. And it’s a good one, in my opinion. Last February, Councilman Berliner seemed to agree. Back then, he had power outages and winter storms on his mind. Today, he disagrees, because he has “butchered” trees on his mind. Unfortunately, Councilman Berliner has the power to demand policy changes to track his fickle demands. No wonder Pepco is a basket-case.

Electricity is the backbone of the American economy. Every act of economic production requires an energy input. This industry is far too important to be controlled by flip-flopping politicians, for whom expediency is paramount. There is a better way: Deregulation. As Iain Murray and I explained in the aforementioned article,

Without competition, there is no spur for innovation. For that reason, the systems of electricity transmission and distribution — the wires, towers, and poles that transmit electricity from the power plant to your home — have undergone very little upgrading since the regulators stepped in.

Suppose that an entrepreneur invents a wind-power technology that could provide affordable, reliable electricity to 50 houses, and that a developer wants to use this technology to power a small housing project he plans to build. The entrepreneur sells his product; the developer gets affordable, reliable energy; and environmentalists get their clean energy. It is win-win-win. It is also illegal, because it would violate the local utility’s government-granted monopoly. Only one company is allowed to string a wire.

Under the Progressive-era regulatory model, government sets the price of power. It was this sort of price control — not deregulation — that led to the California blackouts in 2000 and 2001. In a summer when hydroelectric power was down, owing to decreased water availability after a mild winter, California utilities had to buy electricity at high rates from the deregulated sector but sell it at capped rates. As a result, the utilities’ creditworthiness declined, which pushed them near bankruptcy. Then, instead of removing the cap on retail rates, California imposed a cap on wholesale rates. An Econ 101 student could have foreseen the result. The generators simply made less power available to California utilities while selling the rest in other states where they could actually get a fair market rate. Blackouts followed.

Rate regulation simply defies logic. If electricity were priced in accordance with market forces rather than government mandates, demand would decrease during peak hours, when electricity was more expensive. Decreased peak demand, in turn, would diminish the need for new transmission towers and distribution poles. If energy entrepreneurs were allowed to compete in a free electricity market, the possibilities would be endless for distributed, renewable generation technologies, such as small-scale wind and solar power.

In a truly competitive market, independent power producers could team up with telecom firms and property developers to share the cost of building underground networks to carry both energy and information. Recognition of utilities’ property rights — in the form of underground and overhead rights-of-way currently occupied by transmission lines and cables — would make such enterprises even more attractive, and the resulting competition would lower prices for consumers.

The existing regulatory regime provides no incentive for energy entrepreneurs to emulate the sort of private partnerships that have been instrumental to the growth of the next-generation fiberoptic-telecommunications infrastructure. The chance of small, innovative neighborhood generators’ emerging to challenge the behemoths that date from the Progressive era is much diminished by this regulatory stranglehold.

Predictably, government continues to miss the mark. In Washington, the administration and congressional Democrats want to overhaul the system by spending a king’s ransom on technologies designed to give utilities the ability to moderate consumer demand — by, say, remotely turning down millions of thermostats during periods of peak use. Proponents call this a “smart grid,” but it’s a dumb policy, given that the U.S. could modernize the system without spending a taxpayer penny. This would require little more than encouraging states to dismantle the barriers to energy competition and recognizing the property rights of electricity producers. It would constitute genuine deregulation, and a genuinely innovative approach to energy policy.

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