Power, Water and Roads Could Benefit from Smarter Pricing

Climate Change, Commentary, Energy, Environment, Information Technology, Les Routledge (historic), Taxation, Transportation, Uncategorized, Water

For over 15 years, the technology has existed to effectively meter the use of roads and to add congestion costs to user fees. Very few cities have taken advantage of this technology. Instead, they rely on gridlock to ration limited road capacity. Cities like Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver need to wake up to the fact that they have to manage their road networks more intelligently. Out here in the boondocks, we have to recognize that every fully loaded truck causes more than 100 times the road damage of the typical passenger vehicle.

In England, the City of London offers an excellent example of how implementing road user fees can provide public benefits. In 2003, the left-leaning leadership of the City of London instituted road tolls in the inner city. Congestion levels fell dramatically, and for the first time in 25 years traffic is moving in the old city.

One should wonder why it took a London Mayor Ken Livingston to come up with this effective market-based solution to the costs associated with gridlock.

This situation should also make us think about our electrical supply systems, where for 15 years we have had the capability to install intelligent meters that measure time of use as well as total consumption. This, along with price differentials, can shift demand to off-peak hours.

Manitoba Hydro in particular could benefit from this shift, because it would enable the company to capture maximum value in spot export markets.

Instead, we are stuck with out-dated power-at-cost regulation and policy objectives. When will our policy developers understand that a kilowatt hour of electricity sold at peak demand is worth much more than the same product sold in the middle of the night?

Along with time-of-use charges on energy, perhaps we could also look at marginal cost of new demand. While Manitoba benefits from past investment in cheap hydro power, the future cost of producing additional power is much higher. Despite consumers’ objections, perhaps we need to consider charging additional electricity usage at cost or even at market rates instead of cross-subsidizing rates.

Our water supply infrastructure is almost as badly managed as our roads are. The implicit assumption in the legislative, policy and regulatory frameworks is that an infinite water supply will be available to satisfy the needs of all potential users. The only allowable cost recovery from users is the cost of the treatment and distribution systems. It is assumed the capital costs are magically paid for by government with no costs accruing to the consumers.

Governments around the world are learning that water supplies are not infinite. Choices have to be made about who does and does not merit a supply of water. In the American Midwest and Western Canada, ethanol production has been widely promoted. Unfortunately, this has not been accompanied by an analysis of how plants can secure a sustainable water supply. There are many good business plans that have serious problems when it comes to securing adequate water supplies.

From an economist’s viewpoint, all three of these systems suffer from a market failure that is called the “tragedy of the commons.” When users do not receive appropriate price signals for their consumption of a scarce resource, they tend to consume excess amounts of that resource. The subsidization of road use, water supply and electricity by the public sector is creating that exact situation in these sectors.

The technologies exist to enable intelligent metering and pricing of these scarce resources.

The impediment to implementing these technology and market systems is a lack of political insight and fortitude.

We need to alter infrastructure policy discussions in Western Canada before we encounter the market failures of traffic congestion in many cities, the water supply restrictions in Australia and the Southwestern United States and the power blackouts that are forecast in the United Kingdom.

Perhaps we need to illuminate how these sacred cows of public policy are not “golden idols of public policy” but instead scrap metal covered with fool’s gold.