What’s Wrong Here?

New York University sent out the following message to all of its faculty and staff this morning:

Due to today’s forecast of very hot weather, New York City and Con Edison have issued another request to users throughout the city to reduce electrical consumption.  These efforts help reduce the chance of brown-outs, black-outs, and damage from over-heating to the city’s electrical system.

In response, beginning around midday today the University will take steps to reduce non-critical electrical loads, including shutting off some non-essential lighting, turning off some redundant elevator banks, and re-setting some thermostats to slightly higher temperatures to reduce air conditioning related power consumption.

Individual members of the NYU community can also make important contributions to this effort by shutting off lights, appliances, and personal computers when not in use.

As you may know, many of our buildings around Washington Square get their power from NYU’s co-generation plant.  Nonetheless, maximum conservation is still important:  our system is connected to Con Ed’s grid, and by conserving power, we are able to contribute more to the grid, or – if demand gets very high — draw less power from the grid during peak periods of electrical demand.

This is not the first time NYU has sent out similar messages. It seems like such a strange thing. Why would a company caution people to use less of its product? My phone company doesn’t ever send me a message telling me that a lot of people will be making calls today so perhaps I should only call or text when absolutely necessary. Imagine your television provider telling you on Superbowl Sunday that, well, a whole lot of people will be watching today, which might lead to some overloads, so please don’t turn your TV on unless you absolutely must. How absurd. Can you imagine the outrage?

And yet, every single summer, we’re all shocked, shocked to find out that it gets hot, and the electricity companies plead with us not to use too much. The mayor issues similar pleas. Major organizations, like NYU, issue similar pleas. But why shouldn’t I be able to run my air conditioning 24/7 and keep my house like an ice box if I want to, as long as I pay for it?

Isn’t there something wrong with this picture?

18 thoughts on “What’s Wrong Here?

  1. “But why shouldn’t I be able to run my air conditioning 24/7 and keep my house like an ice box if I want to, as long as I pay for it?”

    The amount(?) of available electricity doesn’t depend on how much money people are willing to pay for it at any given moment. The same for water, food, minerals, shoes, cars and clothes. They all require a production structure and time to produce.

    Why don’t these companies invest of production means to satisfy peak demand? The answer is obvious: because that wouldn’t be an efficient allocation of resources.
    If production means were designed for peak demand, they would be under performing the rest of the time. And while shoes and food can be stored for later use, electricity can’t (at industrial levels). Most of it has to be produced just-in-time. Therefore, there will be times when demand of electricity will be higher than the supply, no matter how much you are willing to pay for it.

    Electric companies can raise prices to lower demand but only so much. Not only because of regulations but because the more they are seen as taking advantage of consumers the more consumers will turn against them, demanding more regulation and looking for alternate suppliers.
    And brown-outs and black-outs cost a lot of money to electrical companies so the plead makes perfect sense.

    This is Economics 101 and you know this. So, what is really the point of your article?

    1. Thank you for your reply. Speaking of Economics 101, what was that you mentioned about regulations again? (Also, you didn’t mention legal protection from competition, but I’m sure you had that in mind too.)

      1. I’m not familiar with the regulations for the electrical sector in the US (I live in Portugal) but I assumed that, being electricity an essential commodity, electric companies couldn’t raise their prices at will, particularly if there is some sort of legal protection from competition (as I believe you are implying).

        And in “alternate suppliers” I would include microgeneration (for domestic consumers) and self-generation (for industrial consumers).

        Should I infer that the point of your article is that this seasonal plead has something obscure behind it and can’t just be the consequence of sensible business decisions?
        If I infered correctly, what do you think it could be?

    2. I disagree with Joaquim. Excess capacity can be efficient. This is why barbershops have empty chairs and supermarkets have registers that are rarely used. Utilities, especially highly-regulated ones, seldom face enough competition to worry about satisfying peak demand. In the case of natural monopolies, it is just as important for governments to regulate quality of service (including the capacity to meet peak demand) as it is for them regulate price.

      The persistent problems with the grid in big cities seem to be more a problem of regulatory failure than of market failure.

      1. Sven,
        “Excess capacity” in relation to what? Peak demand? Average demand?

        Neither barbershops nor supermarkets are dimensioned for peak demand. That is why that, both in barbershops and supermarkets, many times there are lines and sometimes even long lines.
        As people don’t like to wait in lines for too long, both barbers and supermarkets advice their customers to cut their hair or shop outside peak hours. This way those customers won’t feel inclined to take their business elsewhere, which would cost more than losing some business during those peak hours.

      2. “Neither barbershops nor supermarkets are dimensioned for peak demand.”

        This may be true in Portugal, but not in the US. When I worked at a retail store, we used 30% of our registers on weekends, less on weekdays, and all before Christmas. (Land / Space is much cheaper here than in Europe).

        I have never seen my barber shop full.

    3. “The amount(?) of available electricity doesn’t depend on how much money people are willing to pay for it at any given moment.”

      This statement couldn’t be more wrong. How much money people are willing to pay determines the amount of available electricity.

      1. I can only assume that you stoped reading on the quoted phrase.

        Try this.
        Go to an average restaurant with 100 million dollars in a suitcase and demand 10 000 meals within 15 minutes. Report to us what they replyed.

      2. This analogy doesn’t apply to this case, Joaquim, because the electric companies have years—decades, even—of past historical precedent to know what demand will be during every month of the year. The first time you walked into the average restaurant, no, of course they could not give you what you wanted, no matter how much money you had. But if they knew you’d be coming back again in June, July, and August, then they would be prepared. Or, if not, they’d go out of business—which is my point.

      3. I did read everything that you read, and I think I see where the disconnect is. You are thinking like an engineer*, but this is an economic/behavior problem.

        *Nothing wrong with that BTW. I’m an engineer.

  2. Yes, perhaps I was being too cryptic. The electrical utilities are tightly regulated regarding, among other things, whom and under what conditions they may hire or fire employees, and what the prices for their product may be. They are also legally protected from competition, though the exact scope and extent of protection varies somewhat in different places in America. The “sensible business decisions” you cite are sensible only given these regulations and legal circumstances, and given the realities they create.

    My post was meant to raise the possibility that they should not be protected from competition, and that their hiring/firing, pricing, etc. should be allowed greater leeway—as is the case in the cell phone industry and the television industry. My implied but unstated suggestion was that if open competition were allowed many of the perennial service problems people face of outages, brown-outs, etc.—which, though entirely predictable, never seem to go away—would in fact go away, or at least get progressively less bad, as companies compete for customers.

    Do you disagree?

  3. We don’t have these problems in Texas. Permitting a power plant, excepting nuclear is very easy compared to other states. Electric producers are legally separated from the companies who maintain the transmission infrastructure.

    Electricity is sold through various brokers who may or may not own their own generating capacity. These brokers compete on rates and service. The transmission infrastructure is maintained by regulated monopolies who charge a uniform toll to any user who transmits across the lines.

    In spite of the regulatory light touch, Texas produces more renewable energy than any state in the union.

  4. The regulations, including protections from competition and on pricing, are precisely the reason the electric company does not size their generation capacity to peak demand levels. There are no non-regulatory barriers that I can think of that prevent the utility from anticipating and servicing peak demand. We have the technology to do so, which when coupled with a market mechanism would provide a smoothly functioning system.

  5. The best comparison here is the mobile phone network. I can think of one time in my lifetime when I got the “all circuits are busy, try again” routine, and that was the morning of 9/11. The mobile phone network is heavily regulated, minimally competitive, and has the same sort of zipf distributions you find in the energy network.

    If you really want to see what a lack of regulation and open competition can do to the ‘problem’ of network capacity, you need look no further than Amazon’s cloud services. They figured out how to meet their peak demand and lease out that capacity for the other 11.9 months of the year.

    1. My question is: how much would it cost to build and maintain capacity for peak demand and how much does a company lose in revenue for not doing it?
      Consider that peak demand in utilities like electricity is always rising and that there is no efficient way to store electricity to compensate for not having capacity for peak demand.

      Regarding the comparison of electric companies and cell phone operators, “all circuits are busy” rarily cause a cascading black-out that can take down the whole system.

      1. To your first question – Who knows? I can tell you that, given the right incentives and the freedom to experiment, people have solved an isomorphic problem in different domains.

        To your second paragraph – that point bolsters my position The cell network doesn’t (usually) cascade when at capacity, so the cell providers have *even less* incentive to solve the network capacity problem and yet they still do.

  6. On a different tack: How come NYU has so many redundant elevators, non essential lighting, and “over” cooled rooms? Could it have something to do with its non profit status, and failure to be cost conscious with its scarce resources?

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