Are utilities overspending on electric power resilience? How can that be?

Abstract

Few people doubt that the U.S. will encounter future electric power outages of long durations, disrupting a large number of people and businesses. Most industry observers believe that any improvement in the resilience of the U.S. electric-power network would be cost-beneficial. From an economic perspective, the desirability of improved resilience depends on the marginal benefits and marginal costs. Marginal benefits are especially hard to measure. There is also the question of whether utilities are applying the most cost-effective actions to improve resilience, which is difficult to judge but often ignored by state utility regulators in evaluating utility “resilience” plans. State utility regulators and electric system operators face the burden of answering to the heated public after an extended power outage. They will, not surprisingly, tend to err on the side of excessive resilience, which translates into higher electricity prices. Two probable explanations for this behavior are probability neglect and the precautionary principle. This essay concludes by posing less standard alternatives for policymakers to consider in addressing electric power resilience and the “outage” problem. Two alternatives are exploiting the price mechanism and compensating utility customers for extended power outages.