If you've been following D.C. Metropolitan area news lately, you no doubt have heard that the State of Maryland is taking Pepco to task again this winter season for the length of time it is taking them to restore electricity to homes and business during (and after) "weather related events."  There's lots of talk from state politicians about fines, etc.  Here' my $.02 on the whole mess.

I can understand why there's a problem

When you have an industry where prices are regulated, the only way to increase profits is to; 1) Increase consumption, 2) Venture into other industries, or 3) Reduce the production costs of the goods being sold. (In this case electricity).

In today's "green" environment convincing people to use more electricity is not only politically incorrect (which generates bad publicity), but also, given that during the summer months, many power companies (including Pepco) are running out of capacity, the concept of increasing consumption is difficult, if not impossible.   So increasing consumption as a way of increasing revenue is taken off the table.

While a company like Pepco could venture into other industries,  the company has focused the vast majority of its resources into one area, that of power consumption.   To force the company to take on new projects that may not fit their current resource set (including skill sets of employees) is also unlikely to happen.   Pepco might as well just buy up other non power companies that are profitable rather than entering into new businesses.   Plus because people is a regulated industry, it can get dicey to get into new areas, particularly in Maryland.

That leaves us with the possibility of reducing the costs of production.   With the price of fossil fuels going up, and alternative energy investment having an extreme long term effect, other approaches become necessary.   The costs of maintenance (and the human resources required for maintenance) can potentially be a significant way to generate revenue.

In any industry the cost of Human Resources is typically a major factor in the costs of production.   Just small modifications in the number of employees (and their work environment) can have an enormous effect on your profitability.     Particularly in the case here, where you have restoration crews that have very specific skills, and work in dangerous environments in inclement weather, the costs of these crews can be quite large.

On top of that, since Pepco has no "real" competitors in Maryland, its not like a consumer who is unhappy with the reliability of their service can select an alternative.   Even if you go with a third party reseller, when it comes to this level of restoration, Pepco ultimately becomes responsible.

So, as Pepco looks for ways to increase profitability, reducing the number of crews that are sitting "idle" is an attractive way to reduce costs.   Why would you want to keep 100 crews around for a year, when nine months out of the year you can operate on 10?   With the skill requirement of these jobs being what they are, it becomes difficult to do seasonal hires, like is done in the retail industry.

So, I can understand why Pepco doesn't maintain "sufficient" crews to get power restored to all  locations within 24 hours.   From a business perspective it doesn't make any sense at all, since you don't really have to keep your customer very happy.   After all, how many people have moved from one house to another simply so they could change power companies?

But that doesn't excuse the problem

Just because there are solid business reasons for what has happened with respect to power restoration times during weather events, doesn't mean they are excusable.   When you have an industry that operates in a government sanctioned monopoly (or effective monopoly) it becomes the responsibility of government to guarantee that the company adheres to a minimum standard with respect to services.

Now in an ideal environment, there would be competition.   We've seen some public utilities (such as cellular phone service) where competition has been incredibly effective.   However with electricity (and gas, etc.) you've got the unique problem of right of way that has to be solved.   After all, we all complain about the wires hanging from the power poles with one electricity supplier.   Are we prepare for twice as many?   Also, is there a company that's prepared to go to the significant investment into providing power when there's already a competitor in the marketplace that is ahead of them?

If we're going to continue to operate certain public utilities as an effective monopoly, it becomes incumbent upon the government to establish some minimum standard of acceptable service (Quality of Service for you catch phrase lovers) with respect to the respective public utility.

Government reaction so far

Immediately after the weather related incident, there were several state politicians that called for fines to be leveled against Pepco for failure to restore service in a timely manner.   The idea was that if they punished the public utility like hitting a dog on the nose with a rolled up newspaper, that it might learn its lesson.   Unfortunately, corporations are not animals, and don't often learn from this type of punishment.   More likely, corporations will do a cost benefit analysis long term, comparing the costs of maintaining the additional repair crews vs. the risk of their being a weather related event and failure to restore service that causes a fine.   They'll lobby the politicians based upon this calculation so that it ultimately becomes cheaper to pay the fine then it does to keep the crews in place.

In addition, this proposal called for the penalty money to be turned over to the government.    Governments (especially Maryland) require money to function, and they always like to have more revenue to spend on various projects.   From a politicians perspective, its more beneficial for Pepco to fail to meet the restoration standards than it is to meet them.   If Pepco meets the standards, we don't give the credit to the politicians, we give it to Pepco.   If Pepco ends up paying a fine, the government has more money to spend, and the politician can point to the fine and say "see, your government is punishing Pepco for providing bad service."

As a result, the proposed penalty becomes ineffective in serving its true goals.  Instead, it serves as a tax the Pepco pays to the government.

The second suggested solution was that Pepco be forced to pay the individual for "reasonable hotel rates" for each day their power is out.   From a policy standpoint this looks good on its face.  Pepco can still do the cost/benefit analysis, but from a political standpoint, government doesn't "want" Pepco to have to pay it (assuming that it does not count as income that can be taxed.)    Theoretically the penalties that Pepco would pay would be so expensive that it would provide significant incentive to resolve power outages.

But, there's an implementation issue.    What is a reasonable rate for a hotel, and if I have four  people in my house, do I get one hotel room, or two?  What about companies, such as my local grocery store, and my gas station?   Do they now go to the bottom of the list of work?   Is this necessarily the best thing?  Also is it fair that a family of six get a bigger payment than a family of two?"

Also, if its just one house out of power, its likely that they are going to be at the bottom of the list, but is the cost of paying the persons hotel bill cheaper than actually doing the repair.

In addition, from an economics standpoint, I presume that Pepco would pay the individual or company that suffered the power outage some time after service has been restored.  Given past experience, it would probably come as a credit on the customer's bill.

For those that are economically underprivileged,  it is unlikely that right at the time of the incident they can't afford a hotel for a night (or multiple nights).   The result is they stay in their house without electricity, and the goal of getting people out of the cold into a livable environment does not occur.

A proposed solution

First, rather than having Pepco pay the individual for  the reasonable cost of the hotel room, there should be a second option, Pepco can 'book and pay for' a room for the person(s) suffering the outage.   You call Pepco, tell them your power is out, and ask them what hotel you should check into.   Pepco pays the bill.   It creates significant responsibility on Pepco's part,  but would achieve the goal of getting people into decent living conditions.

Second, as a long term goal, the state should mandate all power lines be moved underground when possible.   I did a quick check in my office of people who had underground power lines vs. above ground power lines.   No one in an underground power line area suffered an outage.  Virtually everyone in an above ground area suffered at least some outage.    The State, along with Pepco, should develop a long term strategy to bury all power lines, since the reliability of these lines is significantly greater than above ground lines.

My $.02 on a Wednesday.