HIGH WIRE ACT: Reforming the Electricity Industry

Monday, November 24, 2003

Building America's electricity system was one of the great achievements of the twentieth century, providing inexpensive energy to homes and businesses throughout the country. But in the twenty-first century, two crises occurred. In 2001, California experienced massive electricity shortages, leading to rolling blackouts and skyrocketing electrical bills. And in 2003, a blackout swept across eight states in the Midwest and Northeast, leaving tens of millions in the dark. Why did these problems arise now, after a century of progress? Were they the result of ill-advised attempts to deregulate the utility industry? Or is more deregulation actually the solution?

Recorded on Monday, November 24, 2003

Peter Robinson: Today on Uncommon Knowledge: sparks will fly...

Announcer: Funding for this program is provided by the John M. Olin Foundation.


Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Today, an especially electrifying program. The nation's electricity system represented one of the great achievements of the 20th century, providing inexpensive energy to homes and businesses across an entire continent. Then in the 21st century, two crises. 2001, California, skyrocketing electrical bills and rolling blackouts. 2003, eight states in the Midwest and Northeast, a sudden blackout that left tens of millions in the dark. After a century of progress, why these problems and what should we do to prevent more?

Joining us today, two guests. Ralph Cavanagh is director of the Energy Program of the Natural Resources Defense Council. Vernon Smith is a professor of law and economics at George Mason University. In 2002, he won the Nobel Prize for economics.

Title: Power to the People

Peter Robinson: Neela Banerjee and David Firestone in the New York Times, "Deregulation increased the vulnerability of the grid to failure." Has energy deregulation--electricity deregulation--been a mistake? Vernon?

Vernon Smith: Not been a mistake.

Peter Robinson: Not?

Vernon Smith: No, it's not been a mistake.

Peter Robinson: Ralph?

Ralph Cavanagh: We don't know because we've never deregulated.

Peter Robinson: All right. An inscrutable answer. We will now seek to make that scrutable. All right. Let's just dive right in to one of the two big crises in the first few years of the 21st century. 2001, California, I was here at the time--skyrocketing electrical bills and rolling blackouts, actually 2000 through to 2001. What went wrong? Ralph? Why was there suddenly not enough electricity?

Ralph Cavanagh: Well, there was suddenly not enough electricity because throughout the west for at least five years before the rolling blackouts began, we systematically shut down our investment in our electrical infrastructure. We stopped…

Peter Robinson: We…

Ralph Cavanagh: We meaning all of the Western states. And I believe…

Peter Robinson: Utility companies?

Ralph Cavanagh: Utility companies but not just utility companies. There is a…

Peter Robinson: Matter of policy--the regu…

Ralph Cavanagh: No, it was a matter of uncertainty. We didn't know what the rules were going to be. We did not know the future of the system and there was an enormous and still is an enormous raging debate over who should be investing long-term. In California, what we decided to do was to remove our hometown utilities as the long-term investors in infrastructure, both energy efficiency and generation…

Peter Robinson: Right.

Ralph Cavanagh: …and replace them with what the Public Utilities Commission in its wisdom called the genius of the marketplace. The genius of the marketplace flunked its midterms at least in California, did not execute long-term investment and to be fair, the deregulatory agenda never really--that Vernon probably wants never really evolved fully and it was really in that era of uncertainty that we stopped investing and then the shortages came on.

Peter Robinson: Hang on then. Hang on just one second because I want--you talked about deregulation. 1996, correct me if I make a mistake here…

Ralph Cavanagh: Sure.

Peter Robinson: The California Legislature unanimously approved and then Governor Pete Wilson signed a bill that was widely reported on in the press as a deregulation bill. You said we've never deregulated. So I'd like you to tell me why this wasn't deregulation. In particular, the bill broke up the old investor owned monopolies, Pacific Gas and Electric principally, such that the generation, on the one hand, and transmission, on the other, of electricity would be in separate hands. Why? What's the sense behind that?

Vernon Smith: That was part of deregulating the wholesale markets but they did not deregulate the retail markets.

Peter Robinson: Okay.

Vernon Smith: And your local utility still ties the rental of the wires in with the sale of the energy to you. When you rent your car…

Peter Robinson: Yeah.

Vernon Smith: …you don't buy your gasoline from the person who rented…

Peter Robinson: From Hertz or Avis…

Vernon Smith: …you your car.

Peter Robinson: Right.

Vernon Smith: But in the local utility you have to.

Peter Robinson: And that's why you said it wasn't a deregulation?

Ralph Cavanagh: Well I said that because so much of the system then and now remains regulated.

Peter Robinson: I see.

Ralph Cavanagh: Nothing was pure commodity competition as any classical economist would have understood it. And yet clearly the effort was to open up--it has been for a quarter century, by the way--break up the old monopolies, introduce more competition. In some ways, I think that's a good thing but they made one awful mistake which is they forgot about the fundamental responsibility for the long-term investments that bind the system together and sustain its environmental and economic force over time.

Peter Robinson: That 1996 piece of legislation intends to open up the wholesale level and presumably if they're going to let competition flourish, the notion is that private investors would pool their resources and start building more generating plants. Is that the idea, the notion that this would produce more electricity out there at the plant? What were they hoping for?

Vernon Smith: But that's looking at it through the wrong end of the telescope. You see, they started with wholesale markets, which we already knew were going to be very volatile.

Peter Robinson: We knew that?

Vernon Smith: Yes, you know how we knew it?

Peter Robinson: How?

Vernon Smith: All you have to look at is the cost of producing a kilowatt of energy and at 3 a.m. in the morning and compare it with 3 p.m. in the afternoon. It's much higher at 3 p.m. afternoon. There's a huge variation in the wholesale--just the generation cost.

Peter Robinson: Cost and production or demand…

Vernon Smith: Cost.

Peter Robinson: …because demand is higher.

Vernon Smith: Demand is higher and as a result, you bring on more expensive generators, load followers and peakers. Peaking generators, most of the time, just serve by waiting. You don't use them at all. You typically don't use them on the weekend. You only use them in the afternoons on a hot day. They serve by waiting. Okay. If you didn't have this big move in demand, off peak to peak, you wouldn't need peakers.

Peter Robinson: All right.

Vernon Smith: But our pricing system at the retail level does not load the peaking costs onto the peak users.

Peter Robinson: So why did California enact this horribly flawed energy deregulation bill?

Title: High Wire Act

Peter Robinson: This piece of legislation which seems to have been an unholy mess nevertheless passed unanimously. So what were they thinking? That's what I want to know. What did they hope?

Ralph Cavanagh: It's terribly important to remember. This did not happen in a vacuum. There were two years of activity before that bill passed and the bill was basically following on an initiative by the Public Utilities Commission. This is often forgotten. Now this wasn't the legislature's idea. The Public Utilities Commission had this vision first.

Peter Robinson: Which is an appointed body?

Ralph Cavanagh: Appointed body. Essentially what they were trying to--in their minds, what they were trying to do was to turn electricity into a fully competitive commodity, remove monopoly utilities from their traditional role. And the fundamental notion was that every Californian would develop his or her own portfolio of electricity resources. I was once skeptical about this. I asked--I thought, Vernon, this was not the greatest idea I'd ever heard of. And I asked what was in this for my mother and one of the retailers shot back at me because he had anticipated that question. He said, you know, for the first time in history, she's going to be able to hedge her own fuel price risks in the marketplace. And this, I'm afraid, was the thinking of that particular age.

Peter Robinson: Well, what's wrong with that thinking? We have 50 years of academic work suggesting that free markets are good.

Ralph Cavanagh: How eager are you to go home and develop your own electricity portfolio on your laptop?

Vernon Smith: She's not better off because she can hedge. If the prices are right at the retail level, she will find that in her interest to not dry her clothes at 3 p.m. in the afternoon and to do it 6:00 in the morning because there'll be a big enough difference in the rates that she will want to do that.

Ralph Cavanagh: But Vernon, you could solve that problem with better price signals.

Peter Robinson: I still want to know what went wrong? It sounds--I mean, if nobody's--the general experience of America in the last 50 years is that when you deregulate and open a market, airlines, oil, coal, you get more of the product at lower prices. Right? And instead here in California, little Robinson discovers that his energy bills are going up and up and up and I can't buy it even at this price because up here we got brownouts, down south they got blackouts. Why?

Ralph Cavanagh: There are long-term investments that are required to maintain an affordable and reliable supply of electricity. And the notion that you can simply--I don't know--let me not put your words in Vernon's mouth. Vernon argues strongly for better price signals, hour to hour, day to day, so that my mother doesn't dry her clothes at the wrong time. But those price signals by themselves, don't tell her--don't tell me either--what the best mix of investments in power plants, in energy efficiency and the host of resources that's needed to keep the lights on. And utilities historically had done that. They had developed a mix of long-term investments and short-term. They didn't always do it well. But at least someone was in charge. Someone was responsible.

Peter Robinson: But they had decades of experience.

Ralph Cavanagh: And we basically threw them out of that role, didn't substitute anyone else and relied on the market to take care of it. The argument that was made by folks who were advocating before the PUC was that utilities didn't have the skill-sets to do this, that a new group of companies would come forward, of whom the leader, the shining star was Enron. And they would do it for us better than the utilities.

Peter Robinson: So they were crooks? You have a Nobel Prize in economics. Tell me why the market didn't provide these investments.

Vernon Smith: Look, there's charlatans in business, there's charlatans in education and there's charlatans in the church. And they're going to come in and the problem with the Enrons is first of all, to get the rules right. And when we design market rules in the laboratory, we want our subjects to behave like the Enrons. We want them to find out where the holes in the system are.

Peter Robinson: The classical economist wants rapacious behavior.

Vernon Smith: And then we try to find rules you see that will enable--when they're arbitraging, you want that to make the system work better.

Peter Robinson: Right.

Vernon Smith: Not worse.

Peter Robinson: Right. So how come California messed that up? Why didn't it work in this case?

Vernon Smith: Didn't give the consumers the opportunity to arbitrage.

Peter Robinson: Let me ask our Nobel Prize winner what California should do now.

Title: Peak-a-Boo Boo

Peter Robinson: I'm going to quote you to yourself, Vernon. Governor Schwarzenegger "has a rare opportunity to address the critical deficiency of the California energy system, the unfair subsidy to costly peak power use from off-peak users." Now you've mentioned this several--explain that.

Vernon Smith: Yes, yes. Well I think the opportunity now is to do the deregulation correct and to begin first with retail markets. You see…

Peter Robinson: Start at the other end?

Vernon Smith: Start at the…

Peter Robinson: Close to the consumer?

Vernon Smith: Yes, yeah.

Ralph Cavanagh: With my mother?

Vernon Smith: Yes, with her mother. Give her a chance to decide what time of day she wants to consume, based upon the prices, you see. She already does that if she takes a trip. She--if she wants to save on her hotel room, she goes off-season.

Peter Robinson: Right.

Vernon Smith: And she does a lot of things in response to prices out there that came about--for example, in the airline industry, as a result of deregulation. You see, we have much better utilization of the capital stock.

Peter Robinson: Now in my little household, we bought a new washing machine not long ago. And this splendid device has a button that we can push to delay the start time. Aside from sheer curiosity, I can't find any reason why I should set it to start at 2:00 in the morning or 3:00 in the morning. So what you're saying is, somehow or other, the system should tell me that I'll save money…

Vernon Smith: You should have a schedule of prices that you would expect to pay at night versus day.

Peter Robinson: That's it. I get a schedule of--this is so simple…

Vernon Smith: Of course, I would get that through deregulation of the retail energy sector. In other words…

Peter Robinson: So tell me how--PG&E suddenly has...

Vernon Smith: ...competitors to sell energy. All PG&E does is provide the wires. They maintain the wires and that's regulated.

Peter Robinson: What's wrong with that? That's brilliant and simple. Done!

Ralph Cavanagh: The Vernon Smith regime was enacted into law by California in 1996 by that very Legislature . We tried this. It turned out…

Peter Robinson: But did it address this critical problem of peak versus off-peak?

Ralph Cavanagh: Well, but wait a second. No, Vernon's right about that. It didn't do--but that's surely not the only thing…

Peter Robinson: But that's his whole point.

Ralph Cavanagh: That's not the only thing--well no, if that's…

[Talking at same time]

Vernon Smith: The entrants will do that because the profit is made at night, not in the middle of the afternoon.

Ralph Cavanagh: If that's his whole point, we can solve his problem without deregulating as he just described. We can simply price--we can charge more for using…

Vernon Smith: But we don't know what price to charge.

Peter Robinson: So what's your plan for California? We had the Vernon Smith plan…

Ralph Cavanagh: My plan for California is what we're doing, in fact. So let's spend just a minute on what we're doing. We haven't been having blackouts lately. The prices of power are back where they were before the crisis. What we're doing is we--the most important single thing we've done is we've restored PG&E's fundamental responsibility to make long-term investments in an affordable resource portfolio.

Peter Robinson: We've gone back--to a certain extent, we've gone back to the original regulatory regime?

Ralph Cavanagh: In one sense but in one sense, we've gone--in important ways, we've gone Vernon's way. We're moving toward more accurate on-peak and off-peak prices and we are giving large customers a chance to shop around.

Peter Robinson: Okay. Now he speaks with great passion about the need for these…

Vernon Smith: Oh yes.

Peter Robinson: …people to plan their investments, have some stability and so forth.

Vernon Smith: Yes, yes. But I think at the retail level, we don't know how much alternative energy suppliers are going to invade the small residential customers. We don't know until we let them try. And that's the reason why I would…

Peter Robinson: Hence what's being done now is not…

Vernon Smith: I would open that up to free competition. I don't think that the planning model of the local utility is a good one to give them.

Peter Robinson: From the electricity crisis on the West Coast, we turn to the crisis on the East Coast.

Title: A Grid Too Far

Peter Robinson: August 14th, 2003, the lights go out in eight states in the Midwest and Northeast, affecting tens of millions of Americans. How come? We now know that the original glitch was in Ohio but it trickled through all these eight states. What happened?

Ralph Cavanagh: Well, let's be clear for starters. It's no one glitch that can bring down an entire multi-state system. It requires multiple failures. The system is designed--electrical systems fail all the time. Lines go down all the time. Power plants trip off all the time. The system's designed to handle that. In order for a cascading failure like August 14th, 2003, there have to be multiple failures. It's my view and I think this is backed up by the new report just issued by the Secretary of Energy and his counterpart in Canada--that the most important single factor here were systematic violations of what are now, you'll be surprised to hear, voluntary rules for operating interstate power grid. That is, we had this enormous complex interstate machine operating at the speed of light and the reliability rules are voluntary. But that's a flaw in the system we've got right now. Buried deep in the pork barrel energy bill now sitting over at the Congress is one valuable provision that I'm betting both Vernon and I feel reasonably good about--to make those voluntary rules mandatory and establish some real teeth in the system that oversees that interstate power grid.

Peter Robinson: You like that?

Vernon Smith: No, no. No, I think that the first order of business in the utility industry still has to be reliability of that system. And I think…

Peter Robinson: And you're willing to accept regulation to achieve that?

Vernon Smith: And this is a system-wide problem. For example, we do not price what's called reactive power. We produce two kinds of power…

Peter Robinson: All right.

Vernon Smith: …in order for the electrons to get through. There's the real power, that's the thing you consume when you turn on your lights.

Peter Robinson: All right.

Vernon Smith: There is another aspect of power that has to be produced by a generator that maintains voltage--voltage and frequency. If you don't maintain voltage, you can't get the real power through a power line.

Peter Robinson: All right.

Vernon Smith: You've got to be able to maintain sufficient voltage difference.

Peter Robinson: Is this something like keeping up the steam pressure in a pipe?

Vernon Smith: Yes, yes. It's very much…

Peter Robinson: Thank goodness, there's something simple I can hang onto.

Vernon Smith: It's very much like that. It is very similar to that although the analogy is not perfect. And…

Peter Robinson: Close enough will do.

Vernon Smith: And the thing is we price real power in the market but we don't have at the wholesale level--we've not instituted good systems for also pricing the what's called the VARS or the reactive power. See if you only get paid for the real power and you don't get paid for the reactive power, why…

Peter Robinson: You won't produce the reactive power. Even I can grasp that. All right, so what he's saying here, needless to say, there's a certain amount that went over my head but he's talking prices, prices, prices, prices.

Ralph Cavanagh: And in the short-term…

Peter Robinson: Is that good with you?

Ralph Cavanagh: In the short-term, I think Vernon's absolutely right. There is a commodity product and there's a reliability product. You get paid for the commodity product. You don't get paid for the reliability product. So what do you think people want to produce?

Peter Robinson: Right.

Ralph Cavanagh: And in the short-term again, no argument. I think if we have an argument, it is that there is a--you said there's the wires, there's the power plants. Vernon and I both don't see any reason why you need monopolies over power plants. No reason not to have competition in electric generation. The place where I think there is, if you want to put it this way, a natural monopoly and where I don't--Vernon obviously doesn't agree but it's important at least to frame it--is in the fundamental responsibility for managing the portfolio of electric resources that defines reliable power for a power system. I want you to think about PG&E, a giant service territory covering millions of people--somebody has to, I believe, have responsibility for assembling the inventory of power plants and wires and all of the different services, both the reliability services and the economic services that are needed to keep those people's lights on affordably. Now I don't think the power plants have to be a monopoly but I think someone has to make those decisions about the investments.

Peter Robinson: Why is that different from the oil industry or the natural--these are huge operations, capital intensive, plants here, plants there infrastructure?

Ralph Cavanagh: This was the argument that was made in California between 1994 and 1996. This is exactly…

Peter Robinson: I'm just asking a question. I promise you. I'm not making an argument.

Ralph Cavanagh: And the best response is what happened to us in 2000-2001. It was a catastrophic failure. That is, treating this as if it were a fully competitive opportunity. Just let everybody go out and build their own electric portfolio. It didn't work. There is no disagreement possible. Not only did it not work. It was one of the worst catastrophic failures in the modern history of economic policy in the world. We really don't want to try that again.

Peter Robinson: Ralph says that the system needs regulation but just who should regulate?

Title: The Ion King

Peter Robinson: Who needs to be in charge? States or the Feds?

Ralph Cavanagh: For the portfolio--I actually think it's the hometown utility regulated by the states or, in some cases, their own boards. If they're a publicly owned utility like Palo Alto or Silicon Valley.

Peter Robinson: Can I just ask another--this is another one of those extremely basic questions. You talk about a system. You're talking about a grid. These things tend to be contained within states. That is to say…

Ralph Cavanagh: Often they're inter-state.

Peter Robinson: Often they're inter-state. Okay, well, isn't that a pretty--that's a pretty clear case for federal…

Ralph Cavanagh: Or it's a case for better regional governance. In many cases, we're talking about three or four states but they tend to be in one region. There's a lot of hostility to Washington, D.C. particularly in the West, stepping in and taking over. And so there are some precedents starting to emerge for regional institutions to take a stronger role.

Peter Robinson: That's all right with you?

Vernon Smith: No, but the previous regulated system which is perceived as broken and I think it was broken and to some extent, I think Ralph wants to return to that.

Peter Robinson: He's right. To some extent, you do.

Ralph Cavanagh: The best of it, yes.

Peter Robinson: All right.

Vernon Smith: The worst of it was that it didn't--the regulatory apparatus put both the utilities and the regulators into a frame of mind where you talk about must serve demand. Whatever the demand is and that was always interpreted as a fixed price demand--we're going to serve that.

Ralph Cavanagh: Whatever it takes.

Vernon Smith: Come storm, wind, high water, we're always going to serve that. It's a fantasy. We can't do it.

Peter Robinson: So if everybody turns on his air conditioner at noon throughout Southern California, once a year, you have to have a system that'll meet that demand.

Vernon Smith: Yeah.

Peter Robinson: That's what you're saying?

Vernon Smith: And also look at the enormous cost of this.

Peter Robinson: Right.

Vernon Smith: Because you have to keep in mind that the capacity of the generation system, the capacity of the transmission system, the wires that transform everything is determined by peak demand.

Peter Robinson: And it is fantastically expensive.

Vernon Smith: It's the maximum demand…

Peter Robinson: I will now announce a grand compromise. You give him a little bit of supply regulation. He'll set up his regional authorities and they'll get in the business of a little bit of assembling these power plants if you give him metering in people's homes throughout Southern California so people have some reason to close the blinds instead of crank up the…

Ralph Cavanagh: And price signals.

Vernon Smith: And here's the thing. There's the potential for saving enormously on the amount of investment that we'll have to make but fairly small investments on increased flexibility and demand.

Ralph Cavanagh: But hang on one second.

Peter Robinson: So you're both happy about this?

Ralph Cavanagh: Not yet because there's one other thing I need him to give me. No, Vernon's right to emphasize the demand but more is at stake here than short-term, moving hourly fluctuations in sales. Let's think about long-term efficiencies. Let's think about what it takes to get more work out of less energy on our system. And here Vernon, you're right in this sense, the 1950's thinking was we spend whatever it takes to hit the peak. But the 1980s and 1990s saw an understanding of energy efficiency and demand as a resource for utility systems. Utilities began paying incentives to make air conditioners more efficient, refrigerators more efficient. The average refrigerator today uses ¼ as much electricity as the average refrigerator of the '70s.

Peter Robinson: You know, that always struck me as a pretty good sign that something was cockamamie in the electricity business. If PG&E was on the one hand, selling me electricity and on the other hand, giving me vouchers and incentives to use less of it…

Vernon Smith: But that refrigerator is still consuming too much power on peak relative to what it needs to…

Ralph Cavanagh: But wait. Your good question is why is PG&E paying me to use less of its product because you're not understanding the product fully and PG&E is for once. That is the product is the service. You don't buy kilowatt hours. You buy cooling and heating and mechanical drive. You don't plug yourself into a socket for the sheer physical joy of it.

Peter Robinson: No, seldom.

Ralph Cavanagh: And the point was to find the least--only occasionally at midnight on New Year's--the point was to find the least costly way to deliver the service. And if doing that meant supplying some energy efficiency along with the kilowatt hours to get you better quality energy services, PG&E was prepared to do that. That is the system to which, by the way, we are returning in California. Utilities will be investing in energy efficiency on equal terms with power plants. They'll be picking the best buys first…

Peter Robinson: Because the regulators are telling them to?

Ralph Cavanagh: The regulators are telling them to and they're getting financial incentives.

Peter Robinson: Why are you so resistant to his price signals?

Ralph Cavanagh: And I'm not--the good news is Vernon's price signals are also happening.

Vernon Smith: Yes, but they cost money. It takes some investment. And my point is that that investment reduces the peak demand requirements and it's the peak demand requirements that require Ralph to build bigger transmission lines and more generation.

Peter Robinson: It's an investment with an obvious return.

Vernon Smith: Yes.

Peter Robinson: One last question about Vernon's plan for retail price signals.

Title: They Come Out Pay at Night

Peter Robinson: Let me quote Vernon Smith, "The implementation of retail demand response in the electric power industry--" that is permitting consumers to choose when they purchase electricity-- "would provide a wide range of benefits, including fewer critical power spikes, consumer control over electricity prices and environmental benefits." We all agree with that. Five years from now will retail demand response of the kind Vernon has outlined, have begun to be implemented in a significant way or not? Vernon, what do you think? Is it coming?

Vernon Smith: I hope so.

Peter Robinson: Oh yeah but now what I want is a political…

Vernon Smith: That's a tough one because people don't--see it's invisible. What that will do for people is not as visible as building another generation and another transmission line. That's visible.

Peter Robinson: Right.

Vernon Smith: And…

Ralph Cavanagh: And unwelcome in most cases.

Vernon Smith: Yes, and I'm strongly on the side of environmentalists on that. See the thing is better pricing gives you a better environment as a free lunch. You don't even have to pay for it.

Peter Robinson: You're advising Governor Schwarzenegger--is this coming? Is what Vernon wants coming?

Ralph Cavanagh: First of all, to make Vernon happy for once today, a substantial part of this is clearly locked into California. For large customers, it's a reality. The only issue is whether the cost of the meters makes it worthwhile for small customers. We're going to duke that out but for much of the system Vernon's description is a reality. My argument is that it's not enough. That in addition to the short-term load shifting, you've got to be thinking about long-term investment and we use the refrigerator example, the air conditioner example. These are pieces of equipment whose fundamental efficiency doesn't hinge on short-term shifting decisions. It hinges on long-term purchase and investment decisions. And I argue that we have to attend to both and that…

Peter Robinson: Five years from now, am I going to have a meter in my house that encourages me to set that big beautiful Maytag we just bought to run at 2:00 in the morning? What do you think?

Vernon Smith: Yes.

Ralph Cavanagh: It depends entirely on the cost of that meter, whether--it's got to come down. If the meter cost stays where it is now, no you won't have it because the benefit won't be sufficient but the good news is that refrigerator will be about…

Peter Robinson: Washing machine but all right…

Ralph Cavanagh: …the refrigerator and the washing machine will be substantially more efficient than your current additions because we've got…

Peter Robinson: Because of market forces or you're going to mandate it?

Ralph Cavanagh: No because we've already mandated it.

Vernon Smith: But the way to get cheaper meters is to open that sector up to competition and get…

Ralph Cavanagh: That's fine.

Vernon Smith: …and have some innovation that--the point is we do not know yet what new ideas will come along to make that monitoring and metering very, very cheap.

Peter Robinson: Do you mind if I give the Nobel Prize winner the final word here?

Ralph Cavanagh: Not at all.

Peter Robinson: All right. Vernon and Ralph, thank you very much.

Ralph Cavanagh: Thank you.

Peter Robinson: I'm Peter Robinson for Uncommon Knowledge, thanks for joining us.