Avalanche Economics

Deck: 

Alaskan crisis demonstrates pocketbook power.

Fortnightly Magazine - September 2008

A series of avalanches thundered down the sides of coastal mountains near Juneau, Alaska, early in the morning on April 16. No people were hurt—not directly. But the avalanches took out several transmission towers that carried electricity from the Snettisham hydroelectric dam, cutting Juneau off from its primary source of power.

The resulting crisis turned into an instructive experiment for Alaska Electric Light & Power Co.—Juneau’s privately held utility—as well as the industry in general. Namely, it showed that consumers can and will take extreme measures to reduce their power consumption when electricity rates go through the roof.

More interestingly, though, it showed that consumption won’t necessarily spring back to normal when rates come back down.

Elasticity Experiment

Like many cities and towns in rugged and sparsely populated Alaska, Juneau’s power grid is an isolated system. Fortunately AEL&P had anticipated it might get cut off from the Snettisham plant someday. So when the avalanche fell in April, the company fired up the fleet of diesel generators it keeps on standby, averting a power crisis that could have crippled Alaska’s capital city.

That doesn’t mean, however, that all was well in Juneau. Burning $3.50-a-gallon diesel fuel to serve the electricity appetite of 31,000 residents (about 1,000 MWh on April 15) caused a secondary crisis in the city—a financial one.

“My diesel power is 10 times more expensive than hydro,” says Scott Willis, vice president of generation for AEL&P. The company asked the Alaska Regulatory Commission to approve an emergency fuel-cost surcharge that would quintuple its retail electric rates—from 11 cents to 52 cents a kilowatt hour.

The commission approved AEL&P’s surcharge within days of the company’s filing, and the company spread the word, telling customers their bills would skyrocket if they continued consuming power as they had before the avalanche.

Customers responded in multiple ways, not all of them helpful. More than 100 protestors assembled on the steps of Alaska’s state house in May, and a group calling itself the Juneau People’s Power Project urged utility customers to tear up their utility bills, alleging AEL&P mismanaged the power lines that were wrecked by the avalanche.

“There was a tremendous amount of fear and anger in the community about these high electric bills,” Willis says.

But despite such reactions, most utility customers in Juneau responded constructively. “Once they realized they had the power to control their consumption, everybody in town started really aggressive conservation,” Willis says. They kept their lights off unless absolutely necessary. They minimized TV viewing and shortened the length of their showers. “Overall, we cut our energy use by about 30 percent within a few days of the avalanche. It was an interesting experiment in price elasticity.”

The results of that “experiment” attracted widespread attention because they showed just how much electricity consumers can conserve—when utilities give them a good reason to do so. As the emergency rates took effect in May, environmental advocates predicted the Juneau avalanche would teach the utility industry a potent lesson. It would dispel the myth once and for all that people can’t or won’t change their energy consumption patterns. A New York Times article speculated, “[T]he electricity challenge, and the conservation it prompted, might spur new economic creativity for a city recommitted to energy efficiency.”

However, such speculation seemed premature, and quite possibly naïve. Juneau residents who brushed their teeth in the dark and air-dried their clothes weren’t motivated by an urge to save the planet. They were motivated by the prospect of outrageous electric bills. If the Juneau experiment taught anything, it taught the power of economic self-interest. It said nothing about environmentalism, or the power of green guilt.

To AEL&P’s astonishment, however, two months after rates went back to 11 cents, Juneau’s daily power consumption remains about 10 percent below normal. It seems many Juneau residents got into the habit of taking quick showers.

Demand Destruction

When AEL&P called upon its customers to conserve electricity, the company expected some of that conservation would be permanent. “There was a run on compact fluorescent light bulbs in town,” Willis says. “Those bulbs will stay in place, and we’ve lost that demand.”

AEL&P expected that apart from such physical changes, most of the behavioral changes would be temporary. People would resume baking cookies when electric rates went back down, and everyone would put away their flashlights and candles and switch their lights back on. As it turned out, however, the crisis changed many customers’ behaviors and attitudes about the way they use electricity.

“Yesterday a man told me that since the power crisis, he’s more aware of parasitic and phantom loads,” Willis says. “He unplugs his TV and computer when he turns them off. He also said he’s more aware of turning out a light when he leaves a room. Some of the habits we developed during that six-week crisis seem to be sticking.”

Some of the apparent “habits” Juneau developed during its crisis might not be behavioral, however. Businesses throughout Juneau disconnected about half of their light bulbs during the crisis, and some simply haven’t gotten around to connecting them again—in part because daylight hours last very long during summers in Juneau, about 18 hours a day in June and July. That seems likely to change with the onset of winter and its equally interminable nights.

“When it gets really dark here in a few months, the lighting load will come back,” Willis says. “We’ll see some reductions, but I don’t think we’ll have 10 percent permanent conservation. It will be more like 2 or 3 percent.”

For AEL&P, that demand reduction translates into lost sales—probably about 5 percent for the year, according to Willis. That, combined with increased operating costs and bad-debt expense incurred during the emergency, has had a significant effect on AEL&P’s finances. “We’ve tightened our belts a bit around here,” Willis says.

Thus utilities can take another lesson from the Juneau experiment: Be careful what you ask your customers to do. They just might do it.