Utilities and Economic development

So a while back I caught this article in Atlanta Business Chronicle that Georgia Power Co. is "among the best utilities for economic development, according to Site Selection magazine."

 

I tweet the article and go about my day. Then the Dad, who works as a consultant in the energy/power sector in the Philippines, sent me a comment...

  

From the inbox:

Ha. Your link on Georgia Power looks a lot like the link on Alabama Power.

 

Site Selection magazine, of course, is a product of a special interest group - industrials.

 

The Alabama Power article mentions that utilities joining Ga. Pwr. and Ala. Pwr. are the likes of DTE Energy, Duke Power, Entergy, and TVA - and the thing that strikes me about those is that the all burn a lot of coal. Coal is cheap (actually it's not but it's priced cheap to utilities that don't have to pay the externalities and subsidies).

 

Industrials love cheap electricity. They hand out awards to utilities that hand out cheap electricity to them. Even if it comes at the expense of Commercial and Residential ratepayers and tax payers.

 

I'm not saying that's all necessarily bad - you'd have to ask that question to an economist! :)

 

It got me to thinking... What does it (should it) mean to be a utility company that is good for economic development? 

  

What should the goal of utilities be?  How do we go about to improve on that goal?

  

So I shot off the question to a few people online.  Here are their responses...

 

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Economist Mark Thoma at University of Oregon:

What does it (should it) mean to be a utility company that is good for economic development? 
 
The social benefits should exceed the cost. The private sector will not provide certain goods (so called public goods), so the gov. must do so instead. The good are produced until the social benefit of one more dollar of investment is greater than the cost.
 
What should the goal of utilities be?  How do we go about to improve on that goal?
 
The goal should be to maximize the net social benefit. That requires surveys or some other means to determine the demand of the public (and is one of the roles of what you want to be, a politician representing those interests).

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Dean Baker at the Center for Economic and Policy Research:

there are some complex issues here. First, most states impose a rate structure that subsidizes electricity for homes and small businesses by charging higher prices to industrial users. You can have lower cost power for these users, but at the cost of higher prices to small users. Deregulation went a big step in this direction.

 

You want a utility that provides reliable electricity. outages are at least a costly inconvenience and can endanger life and health.

 

It would be good to have utilities that promote clean energy, but this is unlikely to happen on a big scale without mandates and/or subsidies. Coal is cheap, as your dad said. If you have a for profit utility that is trying to make money, it will burn lots of coal. it might be bad for global warming, but it is good for the bottom line.

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one of my former economics professor at GSU:

Regarding public utilities, here are my observations:

 

There is a reason why utilities who produce electricity, and who provide the infrastructure for the distribution of natural gas, and to a diminishing extent the telecommunications infrastructure, have traditionally been called "public" utilities.  They have a more complex mandate than maximizing profits on behalf of their shareholder owners, hence the ongoing (although changing) role for regulation of these entities.   Because no (modern) economy can function without energy or sophisticated communications systems, and because there are elements of natural monopoly in at least some segments of these industries, the policy goals have included establishing a rate structure that allows prices to be as close as possible to actual social marginal costs of production and distribution without requiring excess tax financed subsidies, which can cause other distortions in the economy. 

 

For that reason, considerable price discrimination has been allowed by regulatory agencies such that different rate structures for electricity and gas can apply to residential, commercial, and industrial customers, and in the case of electricity, different prices per kilowatt hour can apply to different quantities of kilowatt hours consumed (ideally peak and off peak pricing should also be used, along with updated current time of day price information provided on line to customers so that they can adjust their consumption accordingly).  This allows the private sector providers to generate enough revenues to cover their costs without subsidies, with the goal also of allowing no more than a "normal" rate of return on assets sufficient to maintain their existing infrastructure
while also expanding production capacity to meet expected increases in future demand.

 

There are clearly differences across these separate industries: natural gas, as in Georgia, has been deregulated at the marketing level, while maintaining ongoing regulation of the natural monopoly "essential facilities" of the pipelines connecting service locations to the entire gas distribution network (hence Gas South, SCANA, Georgia Natural Gas, and the smaller gas marketers charge customers an access fee to be paid to Atlanta Gas and Light for the provision of those essential facilities).  And although landline phone service is a rapidly declining industry, the post-AT&T divestiture world was characterized by considerable competition for long distance service with limited competition for the local "switching equipment network," for which once again access fees were charged to the many competitive companies providing phone service.  All such access fees have been controversial regarding how high they need to be to allow the local "natural monopolies" to maintain and expand those systems. 

 

Of course, the wireless and digital age is continuing in a dramatic way the movement away from such natural monopoly conditions, but it is clear that regulatory policy in the broader public interest remains an issue - as with the debate about "net neutrality" currently absorbing so much attention at the Federal Communications Commission (FCC). 

 

How to move industries, such as the energy sector, toward more environmentally sound and less geopolitically vulnerable sources of energy such as coal and oil, without requiring excessive governmental intervention remains a key challenge.  But at least the cap and trade proposals that have been part of Obama administration policy incorporate the key issue - pricing incentives must be created to reflect the real social opportunity costs of using such seemingly (and falsely) "cheaper" sources of energy -and when those prices are corrected upward for current sources of energy, the profit motive and private sector creativity should kick in to find the alternatives sources that viable.  

 

But the transition from the current energy world to a greener world is clearly tortuous, and will have differing regional and sectoral impacts that will themselves present public policy challenges so that ongoing trends toward greater inequality in income and wealth are not further exacerbated.  Hence, such fundamental changes must be induced in a persistent way, but not in a precipitously rapid way - and since, of course, the interpretation of persistent and precipitous will remain controversial, the policy challenge is considerable.

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Doug Henwood over at the Left Business Observer:

Don't really know all that much about the topic. I've long thought, though, that creating municipal power supply companies - i.e., publicly owned utilities - would be interesting. The rate structure could serve the ends of economic development (and justice) - e.g., providing concessional rates for entities that were deemed crucial to economic development. But to do that, there'd have to be some sort of municipal/regional economic plan going on. That's a long story, but the quickie version would be not to chase individual plants with subsidies, but identify potentially dynamic sectors and provide incubator services for them. The Communist governments of northern Italy did that for decades, with specialized textiles as designated sectors, for example. The main sector would provide leadership, but also provide demand for ancillary services and skilled workers necessary to provide them. The municipal power company could then provide cheap power for the favored sector. Obviously this could be rich grounds for stupidity, waste, and corruption, but if done right, it could be interesting. Plus, if the utility threw off some profits, it could fund government services without raising taxes.

Feel free to chime in with your thoughts....