Freakonomics AEP-style: Cutting trees, shifting costs

Editorial

The Granville Village Council meeting last night was a tribute to the distorted economics of heavily regulated industries. American Electric Power and its state regulators appeared before the Council to explain why it launches a slashing attack on Granville’s trees every four years. The reason, of course, is reliability. AEP cuts back the trees so they don’t interfere with power lines.

What was most interesting about the 90 minutes of banter wasn’t AEP’s routine defense of its tree-cutting practices. Nor was it the generally nodding affirmation given by representatives of the Public Utilities Commission of Ohio, AEP’s apparent governmental protector. What was most fascinating was the perverse economics of the whole discussion. The underlying economic assumptions were so peculiar that only individuals steeped in the bold tea of regulatory reality could fail to see the oddity.

AEP defended its tree-cutting on the grounds that it had to provide reliable power. As its representative famously said last week, AEP can cut down every tree in Granville if it wants to. PUCO regulators gave a 10-point PowerPoint presentation explaining how its regulation assisted AEP on its noble mission. 

Classic regulatory reality. Now let’s talk economic reality.

Economics is the study of how humans allocate scarce resources. In a market economy, property owners make these decisions. In a regulated industry, government and favored providers make those decisions. Trees have value. Electricity has value. The cash in our bank accounts has value. And all these affect the value of other things. Trees add to property values, reduce pollution, add beauty. Electricity powers the appliance, lights display cases at Goumas candy stores throughout the tri-county area, and pollutes the atmosphere. A complex brew of competing values. AEP — courtesy of its captive regulator — has to worry about none of that. 

AEP told the Council last night that it could spend more time trimming trees more thoughtfully. But that would cost more money. AEP said it could use higher poles and more resilient wires. But that would cost money. It could put power lines underground. But that would cost more money, lots of it. Instead, AEP chooses the cheapest alternative: cutting trees, which costs $300,000 to trim along 55 miles of lines once every four year in the Granville area — or about $1,400 per mile annually.

This is a classic case of cost shifting. AEP damages other people’s property to protect its own in the least expensive way possible. This lopsided deal for AEP couldn’t happen in a competitive economy. DirecTV would never tell a customer its going to put a big, cheap, ugly satellite dish on a customer’s front lawn because it’s cheapest for the company. DirecTV has competition, so it works to develop small satellite dishes and works with customers to put them in the least obtrusive places, while still pointing skyward in the right direction. It’s a classic balancing. The company and customer working cooperatively to settle issues of price, technological necessities, reliability, aesthetics, etc. 

AEP doesn’t do any of that. It prefers cheap and ugly. No balancing test is applied. Because of its monopoly status, the government imposes a regulator to oversee the company. And that’s where the economics gets interesting. The regulator soon becomes captive of the industry. This was true in extreme last night. In theory, PUCO represents the public. In reality, it represents AEP against the public. 

You would assume that the government would take the big picture, weighing the various needs and wants of the public and AEP.  For example, large roadside trees reduce heat generated off roads and other impervious surfaces, reducing rising temperatures in microclimate. Large roadside trees are one of the most effective pollutant filters for nonpoint source pollution (storm water runoff, salt from roads, etc.) that is the No. 1 water pollution problem in urban and suburban areas. But the PUCO places no value whatsoever on environmental concerns. Nor does it place any value whatsoever on the aesthetics of tree-lined streets or the cost of replacing trees or the property value appreciation that comes with trees. The fact that unsightly tree trimming can reduce property values far more than $1,400 per mile — likely the loss could run in the many tens of thousands of dollars — means nothing to our government representatives. 

PUCO cares only about getting AEP a reliable system at the cheapest cost. By coincidence, that’s the only thing AEP cares about, too. The regulator uses its governmental power to protect its supposed supplicant, not to nudge it to the greater good. It’s an extraordinary market failure when a company can expropriate value from its customers — a taking, you might call it — so that it may pursue the cheapest of its maintenance options. But it’s governmental failure when state power protects a monopoly company from having to adjust to the demands of its customers.