Make Better Mistakes

It was clear from the nervous voices that the discussion had found a tension point. The small group of consultants, academics, energy companies, and a single utility regulator – all attending a large conference on the new energy economy – had been assigned by the conference organizer to discuss barriers to increased use of intermittent renewable energy, energy storage utilities, electric cars, and the like. I was in this group.

Our host country had been a pioneer in electricity reforms, having broken up and privatized its state-owned electricity monopoly in the 1980s. However, it appeared to our small group that the country’s vertically disaggregated electricity system wasn’t up to the challenge of a creating new energy economy. We had no answers: We didn’t know what the right structure should be, which companies could or should reform their cultures and business models, which laws should be repealed, which new laws should be adopted, etc. All we knew for sure is that no one in the group was safe: Each of our roles in the current energy system was at risk. As one might expect, we quickly discovered that talking about whether customers would recharge their cars at home or at work was less unsettling, so we moved on to that topic.

Ignoring a problem doesn’t solve it. The electricity sector, its customers, its suppliers, and its regulators are at a complex crossroad. We generally accept that increased use of renewable energy sources, more efficient use of power, improved grid management, and new uses for and new ways of pricing electricity are imminent. We could be wrong. Even if we aren’t wrong, we don’t know the best way to effect these changes, nor can we describe what the changes should look like.

How do we resolve this complexity and uncertainty? We don’t. As economics writer Tim Harford explains in his TED talk on the dangers of thinking we have the answer (which he refers to as the God complex), we have to start making better mistakes.

Most of us are not good at this because it means admitting our own incompetence. Economists and engineers like developing deterministic solutions and then moving on. Lawyers like writing laws and finding legal conclusions. Voters cast their ballots for politicians who make promises about the future and who vow to fight the bad guys, namely the other political party. Our desires to protect our professional reputations drive us to believe we have answers even when none exist.

Some traditional regulatory practices work against us when the future is uncertain and complex. Several jurisdictions have laws that require utilities to provide energy at least cost. What is least cost in a complex environment? Some costs, such as risk and foreclosed options, cannot be readily quantified. Sometimes a company incurs costs on behalf of others, perhaps decreasing system costs, but making the company’s service more costly. The ultimate effects of utility investment decisions are unknowable for years, making fact-based judgment difficult at best.

Finding the future is a trial and error process, so costs of errors are necessary for finding the future. How can regulators assess whether the learning has been efficient? And how should the regulator value the spillover benefits of errors when other utilities, regulators, customers, and others learn? Our normal view of prudency, and the way regulatory and utility work is scrutinized in the media and in the political arena encourages people to prefer errors of omission rather than errors of commission, because the former are harder for others to see.

Sometimes regulatory laws restrict business models, for example, by precluding companies from vertically integrating. This was the situation in the country hosting the conference, where some companies were refusing to introduce new energy services because they were uncertain whether the new services should be classified as providing energy, distributing energy, marketing energy, or something else. That classification would determine who could provide the services.

What can we do? We should view our next step as a next step and nothing more. We should encourage energy companies, customers, and regulators to experiment without risk of reprisal for errors as long as experiments are openly discussed, openly analyzed, and openly discarded when they fail to be part of the next step.

Most of all, we should embrace the notion that no one has the answer. As Mr. Harford said, “I see the God complex around me all the time in my fellow economists. I see it in our business leaders. I see it in the politicians we vote for — people who, in the face of an incredibly complicated world, are nevertheless absolutely convinced that they understand the way that the world works.”

Ex Ante Regulation of Google?

Recent calls for ex ante regulation of Google are reminiscent of other calls for regulation of IT companies. Remember the calls to treat Windows like a public utility, or iTunes as an essential facility? These were all misguided because they misconstrued the basics of the proposed regulations. The calls for regulation then and now also contain an unstated premise that rules designed for truly monopoly industries with public franchises and stable, long-lived technologies could be successfully applied to companies whose technologies change daily and whose customers readily move on when something better comes along.

Find the paper, “Should Google Search Be Regulated as a Public Utility?” on SSRN.

Hurricanes and Electric Utilities: Lessons from Florida

What’s the best way to divert hurricanes and avoid damage to electric infrastructure? Maybe it’s being ready to learn from the experience.

That is one way of interpreting Florida’s experience. In the aftermath of the 2004-2005 hurricane season, when eight named storms caused a total of $15.5 million in customer losses from power outages, Florida embarked on a comprehensive reform preparing electric utilities for hurricanes. This effort included coordinated research through PURC on electric infrastructure and storm damage.

This research – funded by Florida’s utilities and done in collaboration with them – included an in-depth look at the economics of hardening the state’s electric system. A computer model developed for that purpose helps analyze the costs and benefits of undergrounding and other forms of hardening at a micro level. The research also included the deployment of an extensive network of weather monitoring devices to gather storm data and a companion software system for mapping the weather data to infrastructure damage.

But now that we in Florida are ready to test our model against real storm damage, no hurricanes have hit the state. Maybe our preparedness hasn’t caused hurricanes to go elsewhere these past six years, but we are better prepared now for extreme storm events than we were in 2004.

Florida’s experiences may provide other states with an approach to better prepare for extreme weather events. The work done in Florida was the foundation for a study in Texas of the economics of hardening electric infrastructure following hurricanes there a few years ago. States in the northeast are beginning to review the impacts of Hurricane Irene. As they move forward with their investigations and plans, we at PURC look forward to collaborating with them and sharing Florida’s strategies to minimize losses from extreme weather.

What exactly can other states gain from the Florida experience? One key lesson is to have a coordinated plan for dealing with storms and their aftermaths, and to have practice runs of the plan. This isn’t something that PURC has been involved in, and I am sure that at least some other states in the hurricane belt have similar systems in place. However, states without such plans would benefit from talking with Florida’s Division of Emergency Management.

Another key lesson is to develop a system of shared knowledge and shared research. This has been PURC’s role in Florida. At the request of the Florida Public Service Commission, the electric utilities and PURC conducted workshops on the effects of the hurricanes, identified areas where research could improve utilities’ abilities to serve their customers when hurricanes hit, and worked together to address the research needs. A more comprehensive description of this work is available in The Electricity Journal article “Florida’s Storm Hardening Effort: A New Paradigm for State Utility Regulators” by PURC researchers Lynne Holt and Ted Kury.

While it is a standing joke in Florida that the 50+ weather monitoring stations that WeatherFlow and our collaborative research team installed after 2005 have kept hurricanes away, the real service to the state’s utilities and customers is that both are better positioned to manage hurricane damage in the future and to continue to improve as we learn from experiences.