The Economics of Pepco: What happens when there is no market for reliability?
A recent storm in the Washington, D.C. area left many households without power for days. Customers served by one company, Pepco, appeared to suffer the worst. Pepco had the slowest rate of power restoration of all the area’s electricity suppliers.
As an economist and a Pepco customer, I am concerned by two factors that insulate Pepco from facing market discipline concerning reliability. The first is that Pepco is a regulated monopoly. The second is that there is no price indicating the benefits of reliability.
The fact that Pepco is a monopoly means that its incentive to improve its operations is limited. Regulators may cajole and threaten, but ultimately Pepco is like an employee with tenure—no matter how badly it performs, it can never be fired.
The fact that there is no market price for reliability makes matters even worse. The amount that Pepco invests in ensuring reliable provision of electricity does not have to bear any relationship whatsoever to the value that consumers place on reliability.
Break Up Pepco?
Electric utilities have long been considered natural monopolies. Supposedly, it is inefficient to have multiple service providers in the same area.
However, there might be other ways to organize the maintenance of the local electricity infrastructure. One can imagine breaking the Pepco service area into smaller districts, with each district having its own maintenance contract. The maintenance contract could be put up for bid every five years. To the extent that other utilities have acquired organizational knowledge that makes them better at preventing and restoring power outages, those utilities would have an advantage in bidding for district maintenance contracts. Over time, the least cost-effective competitors would be weeded out.
I am not saying that such a breakup would be simple or costless. Its drawbacks would have to be measured against the benefits of competition.