Friday, September 09, 2005

Institutional Entrepreneur

Entrepreneurs make the world go round and insitutional entrepreneurs deserve special mention. Not only do they invent ways to overcome transactions costs and thereby expand property rights and the exchange economy but they also develop (and profit from) ways to overcome dumb policies.

I once blogged about the LifeSharers network, whereby precommitments by members make organ swaps possible.

Another example is in the current Forbes. "That's Hot" describes a way that one entrepreneur arbitrages electrical power between peak and off-peak in ways that skirt the official reluctance to do just that -- and thereby save and make money (all at the same time!).

"With the mercury peaking at 96 degrees, in New York's Central Park on an afternoon in late July, the city set a record for energy draw: 13 gigawatts. That is equal to the generating capacity of seven Hoover Dams.

"During spikes like this, New York's Consolidated Edison buys exensive energy from peak-usage power plants, sending the wholesale spot price of a kilowatt-hour of energy -- 3 cents on a cool day -- to $1 or higher. New Yorkers never notice the difference because the price they pay hardly varies on the hottest day of the year.

"The discombobulated pricing is a senseless waste and it might make Michael Gordon rich. His $12.5 million (sales) New York energy services shop, Consumer Powerline, is New York's largest " aggregator" of electricity savings contracts.

"Twice a year Gordon signs up huge office tenants ... to volunteer in advance to shut off nonessential lighting or turn down a building's chillers a bit on heavy usage days.

"When the New York State power grid is under stress, Con Ed calls in the favor with Gordon to ease demand -- and pays 50 cents a kilowatt hour for the energy he saves. That's half the price of juice on the spot market . In addition, Con Ed writes Gordon and his clients a check based on the avoided cost of building more peak-usage power plants. ... Such reductions stave off rate hikes for Gordon's clients. They saved $2.5 million in future electric bills that day ..."

Even when policy makers tremble from real deregulation, market participants still run circles around them -- to the benefit of all concerned, including the regulators. And I live in a world where the regulators are still looked to as the saviours. Good government is always just around the corner.