Sending the wrong signals in California
Recently, it has come to light, thanks to this article by Joseph Somsel in the American Thinker, that buried deep in a revision of newly proposed building codes for the state of California is a requirement for something called a “programmable communicating thermostat” or PCT. This is a special sort of thermostat that is fitted with an FM radio receiver that cannot be removed will allow power authorities in the state to control customers’ air conditioner set point on hot days or heater’s set point on cold days.
This would be done in a limited way during “price events,” which would be, I would think, times when electricity prices spike, especially due to higher fuel costs or higher wholesale prices of electricity (the peculiar form of electricity “deregulation” in California has had some strange results). The problem of electricity price spikes can be traced back, not to deregulation of electricity, but to the half-baked and half-thought out half-deregulaiton of electricity in California. For a good background, see this article from 2001.
During these so-called “price events” the power authorities can raise or lower customers’ thermostat setpoint by four degrees F and customers would be allowed to manually override the changes. So, if prices spike, the power authorities can take control of customers’ thermostats and cut them back. People can then choose to override the authority-determined setpoint, with some understanding that electricity prices are, at that time, higher than normal.
At times of “emergency events” which do not seem to be defined, the authorities are able to completely override customer setpoints with no alteration possible by the customer.
As Joseph Somsel points out well, the real problem is that California has taken measures to shield Californians from price changes. Price changes, though, are signals, in the same way that the radio waves that transmit thermostat changes in the proposed regulation is a signal. Price signals, however, enable people to remain in control of their thermostats, in control of the temperature in their own homes, but with the knowledge of the prices that they pay. If there is only so much electricity being supplied at some price, and customers want more at that price because of particularly hot or cold weather, the electric companies have an incentive to raise prices and they will. The higher prices for electricity will get some to cut back on their electricity use. Higher prices will also give electricity companies to increase the amount of electricity that they provide, bringing the customers and providers in balance, in what economists call “equilibrium.”
What has happened so far is that California has been faced with rolling blackouts, where electricity is cut to entire areas of California at one time, then another area is shut off to bring electricity back to the first blacked out area, and so forth. The new regulations are designed to prevent these rolling blackouts, but by having state power authorities take control of people’s thermostat. In the case of the so-called “emergency events” price incentives are taken away from customers and providers altogether. With no price incentives in people will continue to use electricity in other ways than heating and cooling that they value far less than the extra comfort in their homes and offices.
What is also pointed out in the Somsel article is that the burden of this fix is not equal over the population of California. In poorer areas, such as Bakerfield, where temperatures often climb into sauna ranges, cutting back people’s air conditioning can be particularly unfair, while wealthier coastal residents have no need for air conditioning in the first place and are unlikely to ever feel any discomfort from any restting of thermostats.
If the state would only take control of thermostats during “price events,” allowing customers to re-set their thermostats, noticing that the price of electricity must have gone up, this would not be such a bad regulation. People would be aware of the price they were being charged and could respond to it. This would have transformed California’s electricity pricing to something called “peak-load pricing.”
I have a course note on peak-load pricing that was based on an article I published years ago. The idea is that when there are capacity constraints, as there are with a fixed amount of classroom space in universities or a fixed amount of generating capacity and transmission capacity with retail electricity, the price goes up when everyone wants electricity at the same time. Very hot or cold weather, pushing electricity use to capacity, leads to higher prices, as prices are adjusted to bring use and capacity in line. Faced with higher prices during peak-use times, some consumers just cut their air conditioner or heater back, while some consumers shift certain uses of electricity, such as drying clothes, to non-peak times.
Peak-load pricing is a long-discussed way of dealing with capacity constraints in markets such as electricity, which both reduces the need to build expensive extra capacity to meet peak demands or peak use and also eliminates the shortages when attempted use outstrips capacity. In addition, peak-load pricing provides the needed funds to expand capacity when it is cheaper to build new capacity than to restrict use or even for customers to continue to pay peak prices.
The “emergency event” regulation does block the needed price signals so that users and producers of electricity have no incentive to come into balance with one another. The “price event” reglation might be closer to the more-effective peak-load pricing which does provide the needed price signals for customers to cut back now when there are peaks or spikes in attempted use, and at the same time, provide signals to power providers to build new capacity. Of course, one of the problems in California is the NIMBY (“not in my back yard”) regulations that have prevented expansion of generation and transmission capacity. Overcoming NIMBY is another ingredient in bringing sanity to California’s energy markets.
We do not need to replace price signals to homes, with radio signals to corrdinate electricity use and capacity. Prices (particularly with peak-load pricing) are much better signals than radio signals to thermostats, allowing customers to choose whether they want to cut back on their air conditioners, their lights, their dryer, or something else when prices go up. What makes regulators think that they have better knowledge of what are more valuable and less valuable uses of electricity and know better than customers what uses should be cut back? It is called arrogance.
–MC
January 14th, 2008 at 10:32 am
I understand that California has a power problem and certain areas of the state have had electricity cuts to meet the power demands of the state but, I’m sure that the government officials of the state can think of a better way to solve this problem. I don’t like the idea of the state taking control over an individual’s air-conditioner. It seems as though the state is taking some of the rights away from the citizens by doing this. Another problem I have with this is that the state declares this control will only take effect in times of “emergency events†but, the state does not give a definition “emergency eventsâ€. Because of the lack of explanation of “emergency events†I can only visualize the state abusing their power.
January 18th, 2008 at 11:18 pm
Hi Robert,
Good reply, but to be fair to the regulators in California, thy might define “emergency events,” but it was just not to be found in the article. You are quite right that when government officials get to do special things during emergencies and then can declare those emergencies, abuse is sure to take place.
-MC
January 25th, 2008 at 6:40 pm
At first, I fully disagreed with California’s proposed solution to their energy shortages; however, I am beginning to understand their reasoning. On average, air-conditioners use around sixty percent of the energy consumed by residential homes. By the government slightly adjusting the thermostat on certain homes, California’s power plants will hopefully be able to keep up with the slightly adjusted demand for electricity. Although it does seem slightly unfair, ask yourself this: would you rather have your thermostat kept in check by the government or would you rather rolling blackouts to occur on a regular basis instead? In all reality, plus or minus four degrees is much better than having NO electricity for not only air-conditioning, but also: lights, televisions, microwaves, refrigerators, and so on, which occurs with such blackouts. It is a small price to pay to hopefully ensure the lights will stay on. In comparison, enforcing speed limits is a similar situation; although it would be nice to be able to drive however fast we wanted, is it worth the many increased lives that would be lost due to traffic accidents at high rates of speed? Sometimes it is better for such regulations to be instituted in order to preserve society’s well-being, just as long as the government doesn’t abuse their power.
January 29th, 2008 at 10:06 pm
At first glance at this article, I liked this Californiaâ€PCT†idea and felt it was a novel way to control energy consumption or energy abuse. After reading the article a second time, I am not in agreement with this idea. Looking at it from a consumer point of view, this is state intervention. I understand that this “PCT†idea would save money for all participants, but this seems to me to be too much government control.
My initial concern is what constitutes “an emergency event†or a “price event†that would allow the government to rise or lower prices and/or thermostats in individual homes. Next, who actually controls the prices of the electrical power during events? If the responsibility falls to the power company or to the state of California, who will ensure that these regulation are done fairly and in the best interest of the consumer? In our U.S. constitution we have checks and balances to make sure that one group doesn’t overstep its boundaries. I think that while this may be a novel idea, more research must be done by the State to make sure that individual’s rights are protected while at the same time conserving energy.
So in conclusion, I am not sure that the State of California’s “PCT†idea will have the consumer’s best interest at heart when these prices are set.
January 30th, 2008 at 6:26 pm
I think that the wrong signals are definately being sent in California. The state needs to consider all sorts of things when making decisions such as a signaled radar idea. Social status, income, age, and family size are some of the few things that should be considered when trying to pass a law as such. I understand that California has to find a way of cutting back on these resources, but you can’t control people’s resources for them, especially if it’s against there will. A problem that California can face with such a law is that many people who are against the idea will eventually move to another location where they feel they have the freedom to make decisions based on their needs and income. There are probably others ways the state can discuss to fix the problem of its limited resources.