Whenever I see an essay attributed to either Vernon Smith or Lynne Kiesling I take notice. When I see something attributed to both of them I'm especially interested. They've authored an essay in today's Wall Street Journal on electrical power reform which is well worth reading.
The Journal isn't available online without a subscription, but here's a link to a couple of paragraphs from it on Kiesling's blog: "Smith and Kiesling in the Wall Street Journal"
Here are some extracts:
"When a transmission line is stressed to capacity, and its congestion cost spikes upward, the market is signaling the need for increased capacity in any of three components of the delivery system: increased investment in technologies for achieving price responsive demand at end use appliances; increased generation nearer to the consumer on the delivery end of the line; or increased investment in transmission capacity..."
Their focus is on the pricing component. Our current retail electricity price regime is very rigid. Prices are unable to change in resonse to short-term shifts in electricity supply and demand curves. The result is a meat-ax approach to allocating available electricity supplies:
"When the inevitable occurs...and unresponsive demand exceeds supply, demand must be cut off. Your utility sheds load by switching off entire substations - darkening entire regions - because the utility has no way to prioritize and price the more valuable uses of power...This is why people get stuck in elevators and high-value uses of power are shut off along with all the lowest priority uses of energy..."
With more flexible retail prices (that vary by hour or day, for example) people would be prompted to cut off less important uses of electricity during periods of otherwise high demand or low supplies. Evidently the technologies exist that would allow this:
"...The simplest and cheapest is a signal controlled switch installed on an electrical appliance, such as an air conditioner, coupled with a contract that pays the customer for the right to cut off the appliance for specified limited periods during peak consumption times of the day..."
In addition, policy changes that separate electrical generation and transmission are needed.
And then there's this:
"...If you were to design an electrical system maximizing the vulnerability to attack [they are thinking of terrorist attack - Ben], it is hard to imagine a better design than what has evolved in response to regulation. If a terrorist attack took out half the energy supply to Chicago, the only viable response would be to shut down half the substations. Demand response [in response to flexible prices - Ben] would allow a prioritization of energy use, shutting down only the lowest priority of power consumption while supplying high valued uses..."
The war on terror is a misnomer. Terror is a tactic. We are at war with al Qaeda. The operatives who drove the planes into the World Trade Center and the Pentagon were innovators. They've pushed the terror-tactic envelope out. The prospect of terror attacks is now a permanent part of our lives.
Terror requires a military and a police response. But a response is required at another level as well. If we are going to protect ourselves, while protecting what is important about our way of life - including our liberties - we are going to have to innovate and change many of the ways we do things. We are going to have to create a society whose institutions and physical infrastructure can, so far as possible, absorb terrorist attacks with minimal damage. There is work here for city planners, architects, transportation planners, and so on. There is also, apparently, work here for economists. Smith and Kiesling are right on the money in pointing to the need for institutions that have the flexibility to survive with minimal damage when they are under attack.