TABLE 6-1 Net Stock of Energy-Related Fixed Assets in 2007 ($Billions)

Private Fixed Assets



Equipment and Software



Engines and turbines



Electrical transmission, distribution, and industrial apparatus



Mining and oilfield machinery



Electrical equipment, not elsewhere classified









Mining exploration, shafts, and wells



Government Fixed Assets










and in the amount desired (Abel 2006). Typically, reliability is good—the nation’s electric-power grid delivers power when needed and within an acceptable quality range.

Occasionally, however, electric outages occur when the demand for electricity exceeds the supply. There are various causes of outages, including equipment failure, extreme weather events, such as ice storms and hurricanes; trees or animals physically damaging parts of the electric system; accidents that damage parts of the system; equipment failure; and operator error. Outages solely from overloads are rare. However, other things being equal, a greater load increases the likelihood of transmission congestion and of decreased reliability. Consequently, there are externalities associated with the consumption of electricity in the sense that when an electricity consumer draws from the grid, this increases the probability that demand will exceed supply and that an outage will occur.

In addition to outages or interruptions in electricity service, voltage sags, harmonic distortions, and other power-quality events occur. Although each event generally causes little damage, except for customers whose commercial activities depend on very-high-quality power, these events occur much more frequently and result in significant annual damage.

The possible externality that an individual consumer imposes when using additional electricity is the expected damage to all other users of the grid from an outage or power-quality event (the damages of an event weighted by the increased risk of an outage from the marginal consumer’s use). The optimal price to internalize this externality would include this marginal damage (unless the costs of implementing such a pricing scheme exceed the benefits). This externality has long been recognized, and as we discuss later, various means of internalizing this externality are in place to varying degrees.

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