Public Versus Private Power – It Is Time To Reopen The Discussion
As a student of the electrical power industry’s history, I have found many stories of a long running competition between public and private power suppliers. For most of my life, this discussion has been rather muted, with private forces seeming to have conquered the battlefield. The vast majority of the electrical power in the US is currently supplied by investor owned utilities or merchant power generators who have primary fiduciary responsibilities to their shareholders, not the public and not their customers.
It is time to reopen the competition and allow people more freedom to choose the way they want electricity to be produced and distributed.
The trouble with an electrical power supply system that is dominated by private interests is that electricity is a vital ingredient in every other business as well as being a vital resource for modern living. All Americans have a large investment in tools, entertainment systems, and life support systems that become useless the moment the power goes out. Businesses often must shutdown when their power supply disappears and some experience costs associated with process interruptions or food spoilage that vastly outweigh the economic losses of mere interruptions.
Electricity, therefore, is often far more valuable to customers than its actual market price. If there is a shortage of supply, prices can escalate very rapidly. Since production costs do not change at the same rate, those spurts of price escalation can be extremely profitable for the suppliers.
Since the suppliers are numbers driven businessmen who are focused on improving the bottom line for their shareholders and managers, it would be difficult to assume that they would fail to recognize that restraining new supplies will produce a situation where there are more frequent mismatches between supply and demand that result in demand outstripping supply. It would strain credibility to assert that those managers with sole fiduciary responsibility to their shareholders would ignore the advice of their business analysts and decide to build or restore any capacity that could be seen as excessive – from the supplier’s point of view.
Since the local supply of electricity is still dominated by either sanctioned monopolies or by regionally powerful suppliers that are a left-over from the days of strong regulated monopolies that had a legal “responsibility to serve”, there is little real competition in the electrical power supply business that can serve to restrain the natural tendency to maximize profit. The people who are deeply embedded in the business recognize that they run a risk of alienating their customers with behavior that results in unpredictable price increases, but they know that their customers have little choice and will purchase electricity anyway. However, they also have employ some skilled opinion shapers who have worked to convince a lot of policy makers and customers that it is somehow a good thing to keep new supplies out of the market.
This is an interesting aspect of the discussion that needs a logic check. In the days when public power systems or rate regulated utilities were charged with long range planning responsibility, there was a legitimate case to be made for keeping the cost of new investment under control and carefully reviewing new building plans. (Engineers have a natural tendency to want to build new things.) In those situations, the customers would be responsible for the cost of building and maintaining the new supply, even if it was far above what was needed. The system included some strong reviews of the public need for the new supply.
Today, there is still a strong system of public reviews that slows down any new supply project, even though the developers are often merchant suppliers without any rate setting process that guarantees them a return on their investment. In those situations, the public is not put at a financial risk if they allow or even encourage the new supply. The only entities that bear a financial risk in that case are the developers of the new supply AND (this is an important concept) the current suppliers in the market that will have to adjust – i. e. lower – their prices to compete with the new supply!
I have been thinking about this a lot as I hear more about “smart grids” that allow electrical suppliers to provide stable electricity even when the loads temporarily exceed supplies. Computer controlled grids perform this feat by sending millions of signals to preselected “non vital loads” or “unnecessary electrical appliances” to tell them to turn off. I often wonder if the people hearing the “smart grid” sales pitches listen closely and realize that means that the power supplier will install automated equipment that will reach into their homes or places of business and turn off certain devices. A clothes dryer running at 5:00 pm might seem like an unnecessary load to the “smart grid” controllers, but the customer who is trying to get ready for a night on the town by a quick wash and dry of a favorite garment might not agree.
However, the story that has really attracted my attention to this issue and encouraged me to write about it today – not sometime in the fuzzy future – was an article in the Chicago Tribune titled Zion plant powers up for teardown. According to that article, Exelon has until November to transfer the license of the Zion Nuclear Power Station to EnergySolutions, which will then begin a seven year process of dismantling the two unit, 2080 MWe nuclear power station that operated for approximately 25 years before having temporary outages extended into an indefinite (the company calls it “permanent”) shutdown.
I have written on this issue before in a post titled Could Zion be the Next Browns Ferry. Since that time, I have continued to probe and find additional sources that tell me that restoring Zion would not be terribly difficult from a technical point of view. It would not be “cheap”, but for something in the general neighborhood of $1-5 billion dollars, the plant could become a fully licensed and operable greenhouse gas emission-free nuclear plant with perhaps 20-40 more years of operational life remaining. (Those are big ranges for both cost and lifetime, but I do not have access to detailed technical and financial information that would allow a more refined set of numbers. However, they should be reasonably compelling in a time when Southern Company is going full steam ahead to build a similarly sized two unit addition to Vogtle for an estimated cost of $14-18 billion.)
My general understanding of the physical condition of Zion was reinforced by the following statement in Friday’s Chicago Tribune article:
Inside, the control room remains staffed by engineers who check radiation levels throughout the plant. But their numbers are far fewer than before 1998, when the two reactors went permanently dark.
“A lot of people are surprised, because they think they’re going to find tumbleweeds and the place just falling apart,” plant manager Ron Schuster said.
In other words, the
plant is still intact and it is still being patrolled and monitored. No one has been selling off components for scrap. NRC standards have changed a good deal since Zion was first constructed, and there is probably a need to do some component replacement (steam generators, for example) and system upgrading, but there is apparently no technical issue that is too large to overcome.
My sources tell me that the issue is not technical, but financial. The financial issue is not whether or not the project cost is too much for the amount of capacity that can be delivered, but the effect that the additional capacity will have on the market price for electricity in the service territory. These people were classically trained businessmen, they think it is perfectly legitimate to make the determination that if adding capacity lowers customer prices to the point where the total company revenue would be less than it was before, the investment in restoration would be wasted and should be avoided.
When I compare that market driven attitude to what I experienced in France when I was touring Areva facilities in France last week, in a system where capacity is under construction in anticipation of it being needed in the future to keep the entire economy moving forward, I thought about the days when we had that same kind of long range thinking in the US.
I am old enough to have watched “Leave it to Beaver” when the show was not in reruns. My father worked for an investor owned utility that was still under rate regulation with a responsibility to serve. They built a sufficient quantity of power stations to keep the lights on with a very high percentage of uptime and did not benefit when there was any imbalance between supply and demand. Their philosophy was closer to the tag line from the 1980s vintage Doritos chip commercial “Crunch all you want. We’ll make more.”
Electricity is a vital commodity whose supply has a major impact on all other portions of the economy and on the health and safety of us all. It’s supply should not be in the sole control of entities who are focused only on serving the needs of their shareholders and managers because those interests are often in conflict with the needs of all other stakeholders. When a company like Exelon ends up in control of an asset that was built with rate payer money under the old system of a regulated rate of return on investment and decides that it is more financially lucrative to destroy than to restore, I think it is time for a reevaluation of the system.
I am not saying there is no place for private interests in power generation or that everything should be publicly owned. (Heck, I have been a government employee – including both full and part time assignments – for 33 years. I know that government agencies can move quite slowly and that some public servants are not serving anyone but themselves.) I am sure that it is time for a new discussion about the balance between public and private interests in electrical power supplies. There is also a need for a better understanding of the value for the customers of building more capacity than is absolutely needed, especially when the new capacity has features that are not available in the existing capacity.
Additional Reading
PBS Frontline – Public Versus Private Power: From FDR to Today
Disclosure: I have a small quantity of stock in EnergySolutions in my personal portfolio. I think that means that I might personally benefit if the contract to destroy Zion is actually exercised. I would prefer for that not to happen.
Competition is good even when that competition is between private and not-for-profit public companies. And I think there’s a place for both profit motivated energy production and public service motivated Federal, State, and Municipal energy production.
When private industry saw no profit in supply electricity to rural areas in the South during the Great Depression, the Federal government created the TVA to fill in that niche. The TVA provides electricity for 9 million people in the Tennessee Valley region. I just wish the TVA would completely get out of the fossil fuel energy production business by selling their coal and natural gas power facilities to regional utilities so that the TVA can have more funds to build more nuclear power plants. This would create more jobs and a lot more clean carbon neutral energy.
Hi Rod…wel…you’d get no argument from me on the need for public power. We have tried to municipalize PG&E here for 5 decades but their money is too powerful (paid for by rate payers). The suffered a HUGE defeat when they tried to lie their way into creating a needed “2/3 vote” of the electorate for any kind of public power takeover of investor owned utilities. The initiative went down to defeat last week.
I’ve worked on public power campaigns in San Francisco for 10 years. Ubonownst to many “Government Run Electricity” (the bogey man PG&E tried to tie to their iniative, and thus the ‘healthcare’ debate) public power entities already are about 15% of the grid, nationally. On average, they charge between 10 and 15% less than comparable private utilities: no dividends to pay, a vastly smaller legal staff, no or little advertizing. There is a national association of Public power entities in the US and they function more or less like any trade group. Public utilities are run more often than not like any large enterprise, sometimes witht he same problems and issues,but almost always accountable to the rate payer *directly* thought their PUCs.
It is also possible for voters and ratepayers to get publoic companies to inest in things they normally wouldn’t do on a for profit basis.
David Walters
Rod,
I am presently working on the Watts Bar Unit 2 completion. Thus I am ver suprised that Exelon has taken such a different approach than TVA, Brown’s Ferry Watts Bar 2 and soon Bellefonte 1.
Suppressing the supply seems to be the only logocal conclusion.
Do the ratepayers have any power through their PUC ? What about the decommissioning fund which was funded by the public. Do they have any purse string powers in this area?
Rod, It seems like the private utilities are in the worst of two worlds. They have an monopoly / cartel – granted by the government restricting the players that can supply electricity. But they get to make decisions to benefit their stockholders, who may or may not be their customers. It is a simple principle of free market capitalism that it only works when Government regulates how something can be produced (60 htz, 110 volts, OSAH working standards, EPA environmental standards, etc), but not who can produce it. I have heard of Steel plants who were forbidden from using the excess heat to produce co-generation electric because there was a monopoly on WHO could produce electric. Companies who enjoy this restricted access become like the vendors in an Airport. Prices rise because there is little to no competition. Another part of the problem is the regulation that sets the value of the electric at the rate charged by the highest cost producer. This warps competition, because you are hoping that a company who cannot compete with you is forced to produce high cost electric, your company bottom line is greatly enhanced.
Changing that regulation to something like a variable rate based on the cost of production would be good. Those who can produce for less would get a slightly higher rate – fixed, but those who are more expensive would get a slightly lower rate. The total costs should be charged so that every power producer needs to pay the cost of waste for the next 1000 years and the cost of clean up as a part of their rate charge.
Either the government needs to allow greater access to production or regulate the prices and profits of a utility.
I am a strong free market capitalist, love business, believe it is the best way to help the poor, but I am wary of many business people and recognize how quickly you can be cheated if you are not careful. I am very very wary of business who rent seek the government to either restrict competition or to subsidize directly their product. This always means the consumer gets high prices, and at times poor service.
Power is a basic need. I agree that we need to work to make it as inexpensive as possible. In fact, if you follow some people’s conclusions, this is the reason for the last few wars – to keep oil inexpensive. I think that is simplistic, but if true it shows the value some understand in having inexpensive power.
In this case we don’t need to go to war, we just need to invest about 50 cents a watt to produce a product that is very valuable to the rest of the economy. I believe that Gary In. is in the service area of these plants. The economy there has been destroyed as steel has moved out. Cheep electric could revive that industry and that city.
An excellent article on the subject is here:
http://thetyee.ca/Opinion/2010/05/17/FinancingCleanEnergy/
This concerns BC Hydro, which the corrupt British Columbia Gov’t is slowing dismantling and selling off to Independant Power Producers. A few quotes:
…BC Hydro borrows capital at 1 per cent, private power firms pay 12 per cent or more. Campbell chose builders sure to make green power far more expensive…
…For W.A.C. Bennett, those two facts meant that it was far less expensive for British Columbia’s public sector to build electricity-generating facilities than it was for the private sector. And that view directly led to Bennett’s decision in 1961 to create the British Columbia Hydro and Power Authority..
…Interest rates in Canada today are at historic lows. And BC Hydro, the province’s publicly-owned utility, is paying an average interest rate of about one per cent per annum on its short-term, revolving borrowings” of $1.691 billion.
In contrast, many of the independent power producers (IPPs) — the companies that have been directed by Gordon Campbell and his BC Liberal government to build the province’s clean-energy infrastructure — currently pay sky-high interest charges of 12 per cent and more.. ”
…How much of the cost of electricity from IPPs is for sky-high interest charges? British Columbians may never know, for on April 28 the Campbell-Liberal government unveiled its new Clean Energy Act, which specifically exempts IPP contracts through BC Hydro’s Clean Power Call and Standing Offer Program from review by the B.C. Utilities Commission…
Rod,
You touch on a several good subjects.
Specifically about the smart grid and how it is being sold to the rate payers. It is being sold as a cost-effective mechanism of getting more from the current generation and transmission infrastructure instead of just building new generation. All good stuff; doing more with the existing resources we have invested billions into developing and maintaining is a good thing. Personally, though, I am concerned we may end up spending $10 to get $5 back which is always my concern when anyone uses the word
<rant>
‘The “Smart Grid”? Naah. “Idiot Savant Grid” is more like it.’
I dislike having “smart” devices control anything too complex…or too important…as often, “smart” devices are too smart for their own good. For recent examples, see the recent “non-halting” problems with the software of the “drive by wire” Toyota Prius, pun intended – or the South Carolina primary elections where some precincts using computer voting reported more votes for single candidates than total voters. Computers are the solutions to many things – they are fast, cheap, powerful, scalable, and adaptable: however, they are not the solution to everything – as computers are usually not reliable, are incapable of self-adapting, and are almost never resilient or robust. Computers are far less smart than their programmers – even the smartest computer is just an idiot savant – and every programmer worth their paycheck knows this.
The power grid is a socially-critical system, and therefore implicitly is a life-critical system. You do not want idiot savants in charge of life-critical systems unless the life-critical system can withstand the idiot savant going insane or disappearing (and always at the worst possible moment).
Any control of critical systems by computing technologies ought to be considered very, very, very carefully and only done when absolutely necessary: it must be thought out well ahead of time, planned in detail, specified intricately, documented completely, programmed precisely, open-sourced (absolutely no software “black boxes”), and tested completely beyond the range of expected circumstances, even in conditions involving very “screwy” failure modes – erroneous or false inter-node communications (byzantine modes) – failures caused by unexpected, complex, or dynamical behavior of the software of a node (dynamical modes) – failures caused by unexpected, complex, or dynamical behavior of other nodes (harmonic modes) – failures caused by load rebalancing due to failure of other nodes (cascading modes) – failures caused by “smart” attempts to cause nodes to fail (hackers, viruses) – brute force attacks on the ability of the “smarts” to perform their functions from unexpected directions (power conditioning problems, ground faults, geomagnetic storms, solar flares, EMI, RFI, to include full-scale high-altitude N-EMP) – etc.
There should be very simple, hard-coded (ROM-based – no firmware) and hard-wired interlocks constantly checking the “sanity” of the software’s output values; these should disengage the computer from the controlled hardware at the first sign of instability. Life-critical hardware controlled by a computer should be fail-operational; it must perform its intended function at a reasonable level even with the “failsafes” engaged and computer control removed from it.
This is why you find the front ranks of the movement against fully computerized voting (as opposed to computer counting of optically scanned ballots that are retained – and randomly audit counted – to verify the optical scanner accuracy) occupied mainly by computer scientists, systems administrators, security researchers, information technologists, and programmers, for example. They’re scared of turning our democracy over to computers to count the votes with no backup – they know what this means! Likewise, you should be scared of computers controlling the electrical grid – you should know what this means!
Lacking sufficiently resilient, robust, fail-operational, field-serviceable, and, fundamentally EXPENSIVE (no outsourcing to third-world countries here) software and hardware – a smart grid is a social collapse – and a national catastrophe – waiting to happen.
Those who engineer the power grid, build it, operate it, and maintain it ought to be the smarts of the grid – the grid itself ought to be kept as non-complex as possible and as robust as possible to perform its intended function. Humans are – and ought to remain – the smarts of the grid. Humans, though they may have individual smarts that a computer can beat – also naturally have wisdom which no computer can match. Humans – in proper numbers – can naturally work as a team – a multiplied whole far greater than the sum of its parts. And a human system – when properly equipped, sufficiently trained, rightly directed, fairly disciplined, and sufficiently experienced have a much lower failure rate than any computer or network thereof, even if properly debugged.
Let us not take the chance that our computerized “idiot savant” grid controllers do not turn back into just plain idiots.
</RANT>