Enough Short-Sightedness to Go Around

By Mike Koetting February 21, 2021

From a blog-standpoint, the weather-related debacle in Texas offers as much low hanging fruit as a frozen grapefruit orchard.

But I want to address what I see as the ultimately underlying problem—democracy. Okay, That’s a solution as well as a problem but we better start off with an honest assessment of the problem. People like low energy bills. They really like them in Texas where temperatures and humidity make for extremely uncomfortable summers. (Baseball great Stan Musial described his time in the Texas minor league as playing in three seasons–summer, July and August.)

Texas politicians recognize that. So they give the voters low energy bills. While comparing energy costs across different circumstances has pitfalls, one estimate is that Texas per unit energy costs to consumers are about 50% lower than the rest of the country. Which is a very good thing if you are going to use a lot of energy.

But why? Some of that is an accident of location: because Texas is such an energy rich state, they don’t have to spend as much on transportation. But a lot of it is a result of specific choice. As much of the country has learned this week, Texas has gone to some lengths to insulate itself from the kind of Federal oversight that would result from being in one of the two major interstate systems that are the basis of the electricity grid for the rest of the country. Texas has used that freedom, among other things, to establish a very market-driven system for acquisition of electricity at the consumer level. The result has been wild-west market competition in driving down the cost of electricity. Which voters appreciate.

Of course, one of the ways of driving down costs is to avoid costs that are not absolutely necessary. Or, to put it more starkly, to take risks, since the determination of what expenditures are “necessary” is in reality a judgement about the likely consequences of not making a particular expenditure. If winterizing production systems adds cost, a business will estimate how likely certain winter conditions are and make expenditures accordingly. Obviously, what has happened in Texas is that electricity providers concluded that really low temperatures were such a low risk that they need not protect against them. This may not be an unreasonable bet. But it is a bet.

With hindsight, it is apparent that the downside on this bet were steep, in both human and economic terms. But consider the actual business dynamic of an individual producer that led to making this bet: other firms were doing it. In a price-sensitive market, there is always a tendency toward the bottom. In some markets (e.g. automobiles or food) it is relatively easy to differentiate on quality, real or perceived. It is much more difficult to do so on something like electricity where multiple producers are feeding into a larger system that is then re-packaging and distributing through a common system.

While it may be technically possible to design electricity packages that provide extra insurance in case of unusual weather, the practical constraints of doing so are so significant that it is hard to imagine. Thus, even if some folks wanted to purchase this kind of package, they would not be able to do so. (I suppose the freedom to fly off to Cancun on short notice is protection of a sort, but no need to dwell on that.)

Societies often attempt to bound the risks that can be created by the market through government regulation. The wisdom of this seems obvious when faced with the kind of situation we have seen in Texas this week. On the other hand, it is pretty easy to imagine the hoots of derision that would have arisen had a Texas “bureaucrat”—it has to be in quotes to indicate the full pejorative use of the term—were to require that utilities prepare for Siberian conditions. And, in fact, even in full hindsight, there may be people who think the cost savings over many years is worth the horrible week.

Rick Perry’s comments about Texans’ preference for cold over Federal oversight, while depressing from a former Secretary of Energy, do highlight the fact that whatever course of action is pursued, it is a communal political choice. For better and for worse, people tend to make most of their decisions with a relatively narrow time horizon. While for the next few months there will be great enthusiasm for building more weather protection into Texas utilities (as there was in 1989 and 2011 after previous freezes), I’m guessing it will melt like a snowball under the Texas sun before any legislation hits the floor. People want cheap utilities. And the immediate concern of paying more for utilities is likely to overwhelm memories of the past winter, let alone more abstract considerations about risk corridors and the likely impact of global climate change on weather patterns.

So is Texas condemned to repeat what happened last week? Probably. Is there a way out? Sure. But it is not likely to be taken until politicians face up to what is required of leadership in this day and age, which is to deal less in political slogans and more in honest presentations of risk, costs and benefits. You can see why I would be pessimistic.

A more honest assessment of policy options requires things that are in short political supply—accepting the best knowledge available, recognizing the uncertainty nevertheless associated with that knowledge, acknowledging the role of chance and reflecting the fact that there is enormous connectedness among issues. The latter seems particularly hard for people to embrace, in part, I suspect, because once you start down that road, it is hard to know where to get off. If Texans are worried about the implications of being part of a national power grid, it is going to be very hard to get them to acknowledge that what happens in the Amazon rain forest will affect the degree to which Texas needs to winterize its utility production.

And beyond that is dealing with the illusion that any limitation on personal freedom is illegitimate. I gather this has always been a problem for America, but the last year has made it clear that we are going to suffer as a society if people don’t get over this attitude. No telling how many Covid deaths resulted from people being unwilling to give up some of their personal freedom, but the number is material. The issue of utilities in Texas will be the same, but it will be expressed in consumer unwillingness to accept the idea that putting limits on the market will, on longer-run balance, improve the quality of life.

In some respects, this is the fundamental question facing America. Are we willing to limit personal freedom as a bet on a better common future? Markets don’t have any way of acting like that. They operate on their own laws and firms will inevitably lower costs if that improves market position, even if that entails greater risk to individuals. Risk, to individuals or to the larger society, is simply not their problem.

But democracy can be different. It can be, should be, the mechanism for balancing personal freedom and risk against common good. While theoretically any form of government could do that, it is only democracy that openly embraces that tension and asks the governed how to strike those balances. If people work openly and thoughtfully with these tensions, we presumably get better results. And that will often include recognizing that we need to accept the best knowledge available, even knowing that will sometimes be wrong. It must also recognize that there will be costs associated with reducing risk, although over a long-enough term they may even out.

If we fail to take our responsibilities seriously, we wind up creating a tyranny that is different in some respects from the tyranny of the market, but not so much so in the final outcome. Regardless of the exact reasons that could result in Texas not investing more in winterizing their utilities, if they don’t, people will be just as cold come the next deep freeze.