The Knowledge Problem
Commentary on Economics, Information and Human Action

Friday, July 19, 2002  

I'm leaving Saturday morning for Pennsylvania, to teach at a seminar given by the Institute for Humane Studies. Promises to be very good fun, and lots of great brain candy.

posted by lkkinetic | 7/19/2002 10:04:00 PM
 

Run, don't walk, to Megan McArdle's house for a superb analysis of why Canadian prescription drug prices are lower than in the U.S., and the likely consequences for pharmaceutical R&D. I can vouch for the business reality of her argument; when I worked as a tax consultant I had clients that confronted this painful reality.

posted by lkkinetic | 7/19/2002 10:03:00 PM
 

While I'm at it, the same website has a good explanation of cheap at half the price, a phrase I use relatively frequently.

posted by lkkinetic | 7/19/2002 10:00:00 PM
 

Tonight, on the Wall Street Journal Editorial Board show on CNBC, Tunku Varadarajan used the phrase "curate's egg." We could tell in context what he meant, but my husband and I were sufficiently curious to check it out afterward. Here's a translation from British English to ROW English. The essence is "parts of it are excellent", but I leave it to you to discover the rest.

posted by lkkinetic | 7/19/2002 09:58:00 PM
 

WITH THE BAD COMES GOOD: It's always refreshing to get a little perspective on these accounting and corporate governance issues. Amity Shlaes' column from Monday does so, with reference to both the history of the Industrial Revolution and Trollope, one of my favorite authors. Given my background in economic history and technological change and diffusion, this really resonated with me. I hope it does with you, too.

posted by lkkinetic | 7/19/2002 11:26:00 AM

Thursday, July 18, 2002  

IS DEMAND RESPONSIVENESS COMING TO CALIFORNIA? Yes, according to a press release and an order instituting rulemaking from the California Energy Commission yesterday. The Energy Commission’s plan is to work in conjunction with the California PUC, which has itself initiated an order instituting rulemaking to craft “policies to develop demand flexibility as a resource to enhance electric system reliability, reduce power purchase and individual consumer costs, and protect the environment.”

The Energy Commission’s press release states that

The program’s goal is to provide all Californians within the next decade with access to advanced electricity metering systems, rate structures that reflect time-of-use rates, and technologies that allow them to respond to changing prices. An example of responsive technology is a thermostat that receives price information from the utility and can automatically raise air conditioning temperatures during times of high prices.

These objectives, and the Energy Commission report on which this rulemaking process is based, are a good, if slow, start. It’s taken almost two years to get to this point, where the two main electricity regulatory bodies acknowledge, and are willing to make policy based on, the idea that consumer responsiveness can discipline the ability of sellers to raise prices. This idea is crucial to creating functioning electricity markets, and contributes to the reasons why a phased wholesale-then-retail approach to competitive markets is less likely to succeed than an integrated wholesale-and-retail liberalization.

While the CEC and the CPUC are saying the right things, finally, about demand responsiveness, it remains to be seen how, and how quickly, they will act on these statements. Will metering become another object for state subsidies, a version of the "pay to conserve" policy that dominates California? Will metering and demand responsiveness go the way of consumer direct access, which the PUC abolished to make sure that the CA Power Authority has a monopoly so it can pay for those pricey long-term contracts? Will the CPUC be flexible enough to allow utilities to offer portfolios of contracts to their consumers from which they can choose?

More generally, how will they encourage utilities to think more openly and broadly about the value propositions to their customers? Utilities will not buy into customer or third-party control of metering until that mental/cultural umbilical cord between load and revenue is broken, or, as Vernon Smith put it when I saw him last week in Washington, utilities have to wrap their minds around the idea that they could make more money by selling less power. This is a huge (yes, I'm going to use the word) paradigm shift for people who have traditionally seen the only way to raise their profits as serving more load (of course, it's by regulatory design that the umbilical cord exists), and controlling the meter is a big part of that culture. And I haven't seen any evidence that the regulatory agencies in California will be effective in facilitating that culture shift, and in themselves thinking more broadly about the value propositions that they as regulators present to the variety of customers they purport to serve.

See also my earlier post on real-time pricing, in which I cite the invaluable work of Severin Borenstein on this topic. His work has played an important role in bringing this policy change to the embryonic beginnings that the CEC and CPUC have initiated. I strongly hope that they can follow through and create a set of flexible, market-based institutions that will unleash the value potential of California's electricity market.

posted by lkkinetic | 7/18/2002 02:06:00 PM
 

This good TechCentralStation article by Duane Freese lays out the economics and the policy dynamics of nuclear fuel reprocessing as an alternative to schlepping it to Yucca Mountain. Very interesting and thought provoking.

posted by lkkinetic | 7/18/2002 10:52:00 AM
 

Last night Brink Lindsey picked up on the 100th anniversary of air conditioning, on which there was an article in Wednesday's Washington Post. Certainly, as he says, a triumph of "the Baconian project of power over nature." I hate heat and humidity, and the confluence thereof, so I fully agree, and celebrated yesterday. My only regret from this manifestation of human ingeneuity and creativity is the well-documented consequent growth of federal government because folks don't have to skedaddle from Washington for as long as they used to in the summer.

posted by lkkinetic | 7/18/2002 10:41:00 AM
 

THE WELL-BEATEN DEAD HORSE IN CALIFORNIA: Yesterday the General Accounting Office released a report on the causes of the wholesale electricity price increases in California August-October 2000. U.S. Representatives Inslee and DeFazio requested the study, which had two objectives: determining whether or not wholesale sellers actually exercised market power to raise price above marginal cost, and determining if the design of California's market enabled those suppliers to exercise market power. In other words, did the state's rules create the opportunities to raise prices, and did the sellers seize on the opportunities presented to them through the bad set of rules? The GAO study answers "yes" to both questions. One of the most valuable aspects of this report is that it reiterates something that most analysts have been saying all along, but has not been reflected in California's response to the situation -- if the sellers did exercise market power, one reason they could was that the set of dysfunctional rules in California created the opportunity for them to amass it and to exercise it.

The GAO compared the hourly pattern of prices in the August-October 2000 period with the same period in 1998, a period that exhibited price patterns consistent with competitive behavior. Through econometric analysis they find that the hourly pattern of price movements in 2000 differed from the 1998 pattern, a result consistent with supplier exercise of market power. The report acknowledges, though, that they did not completely control for the other acknowledged causes of the price pattern in 2000: higher-than-expected natural gas prices, increases in emissions credit prices, the increasingly narrow gap between supply capacity and inelastic demand, the retail price cap that gave no incentives to consumers to shift load away from peak hours, the drought in the Pacific Northwest, and temperature. Without performing an analysis that more fully controls for these variables, this current GAO analysis is not really additionally persuasive beyond the claims of market power put forth in other studies. That said, though, this study is well-done, and the econometric analyses they performed is consistent with the other analyses of the California energy crisis, some of which are cited in the report. (A pedantic presentation criticism: they report coefficient estimates and standard errors, but not the actual marginal effects of the changes in variables, so it's hard to assess the magnitudes of the effects of the variables and compare them to see which had the biggest effect on price).

I found the most interesting result in their analysis to be the effects of the various price caps that the CAISO implemented that affected the period in question -- $750 from September 1999 to July 1, 2000, $500 from July 1, 2000 to August 7, 2000, and $250 from August 7, 2000 to the end of the period covered in the analysis. They found that the $500 price cap in July and early August, as well as the $250 price cap from August 2000, actually raised prices. While some may find this result surprising, it's actually quite consistent with economic theory, and with experimental results. They also found that the $750 price cap raised prices, but with less statistical significance (at 10%). Again, though, we have to take these results with a grain of salt, because once you control for the factors mentioned above, this result might not really exist.

In fact, a Northwestern student whose senior honors thesis I supervised (Terri Kandalepas, now a law student at UCLA) performed a very similar analysis in June 2001. In her analysis, the combination of lagged electricity price in that hour, natural gas prices, emissions credit prices, Stage 1 and Stage 2 alerts, reservoir levels, temperature, and hour of the day accounted for 85 percent of the changes in price. That result means that at most the exercise of market power accounted for 15 percent of the price changes. Given the types of trades we're analyzing here that is still a serious amount of money. Her analysis did not incorporate the net imports and the price caps as the GAO report did, so they are not directly comparable, but it does demonstrate that controlling for these other effects is crucial to performing a thorough analysis that allows us to infer the actual extent of market power.

One crucial omission from their otherwise very thorough analysis of the evolution of the California energy crisis was the importance of the strategic behavior of the utilities. Among those of us who eat, sleep and breathe electricity the phenomenon of buyer bid underscheduling into power pools is well known -- in a bifurcated structure like California's Power Exchange for day-ahead and CAISO for real-time balancing, the utilities buying wholesale power have incentives to understate their day-ahead demand, with a goal of lowering wholesale prices. Then they end up buying more in the real-time balancing market, but unless supply is tight they have overall paid less for their power. Interact that with the well-worn arguments for why suppliers have incentives to withold from day-ahead, and you see how so much of the spot market activity in California got shifted into the ISO's real-time balancing market, and at astronomical prices. Plus, the ISO's real-time market priced at what the market would bear, so it was a convenient way to circumvent the price cap. I would like to have seen a discussion of this strategic dynamic in the GAO report.

A good, and very technical, analysis of the exercise of market power in California is by Steve Puller in the Economics Department at Texas A&M University. And I would be remiss if I don't engage in some shameless self promotion by mentioning the qualitative analysis of California's failed electricity policy that Adrian Moore and I wrote in January 2001. The GAO report contains a bibilography containing other analyses of market power.

posted by lkkinetic | 7/18/2002 10:33:00 AM

Wednesday, July 17, 2002  

READ TECHCENTRALSTATION TODAY: There's a lot of good stuff today, including this article by Arnold Kling on the predictive power of Moore's Law and the future of telephone companies, and this article by Ed Driscoll on the opportunities and roadblocks in the dissemination of wireless networks. A lot of folks, including Virginia Postrel, have thought carefully about the development of "third places", and the technology described here is the kind of creative change that will make it happen.

posted by lkkinetic | 7/17/2002 10:10:00 AM
 

SPEAKING OF TRADEOFFS: Today's LA Times has an article on a controversy over Medicine Lake, which is in a geothermally active area in northern California. Calpine is looking into constructing some geothermal generation plants, but local Native Americans worry that this use of the lake will sap it of its cleansing properties and traditional spiritual energy. It will be very interesting to see how this unfolds, and how they resolve the conflicting uses of these resources. The article makes a point that resonates with my prior post:

Calpine's armada of new plants fired by natural gas remain susceptible to the price swings of a fickle market for fossil fuels. In contrast, power from a geothermal plant comes with no cost for fuel--and produces 26 times less greenhouse gas. Mother Earth does all the work: Deep pockets of subterranean water are superheated by magma, producing steam to turn turbines.

Geothermal is likely to be more costly than fossil fuel generation per megawatt hour for a while yet, because while there is no fuel cost it does not generate power as intensely or as consistently, but it would be useful in enabling the diversification strategy.

posted by lkkinetic | 7/17/2002 09:51:00 AM
 

DIVERSIFY THAT FUEL PORTFOLIO: RAND has released a report on the consequences of increasingly relying on natural gas as the primary fuel for generating electricity. This very good article in the San Jose Mercury News does a nice job of summarizing the risks inherent in such non-diversification, which the report highlights. Hedge, hedge, hedge; it may mean tolerating spending more for other fuels, or using more dirty fuels than we might otherwise, but when we think about fuel choice we are trading off on lots of dimensions of costs and benefits -- stability of fuel prices and supplies, pollution, and many others that will vary from person to person.

posted by lkkinetic | 7/17/2002 09:42:00 AM
 

UNEARTHED PYTHON: What a fantastic start to my day! The BBC reports that three previously unperformed Monty Python sketches will be performed at the Edinburgh Fringe Festival this fall by Sketch Club. Now if I can just find a good reason to go ... although I agree with the article's author, who calls the troupe's task in performing them "unenviable". I mean, how many of us will watch them and superimpose the original Pythons in our heads?

posted by lkkinetic | 7/17/2002 09:34:00 AM

Tuesday, July 16, 2002  

Slashdot's online poll today is hilarious: "I name my pets/children after characters from

*Star Wars
*Star Trek
*Battlestar Galactica
*Anime
*SF Books
*Other SF Movies
*What the hell is wrong with you people?
*All my children and pets are named CowboyNeal"

I had to vote, just to see ... thankfully, "What the hell is wrong with you people?" is far, far away in the lead. Although, as a person who named her cat after a dead French fashion designer, I don't have much room for stone-throwing.

posted by lkkinetic | 7/16/2002 01:35:00 PM
 

DUKE ENERGY'S HAVING A BAD WEEK: 23 online wash trades of $1 billion to influence volumes, a 17 percent decrease in first-quarter net income, an SEC investigation of their trading practices, analyst downgrades of Duke stock. One of these in any week would be bad enough, but this is a pretty overwhelming concatenation of bad news.

Investigating these wash trades should be a complicated and nuanced process. As I've stated before, the system balancing requirements of an integrated electricity network sometimes necessitates wash trades, and it's important to distinguish between the wash trades intended to maintain system balance and the wash trades intended to make the trader look like a more important player in the industry. For those reasons, policies geared toward abolishing all wash trades would be counterproductive and contribute to making electricity networks less stable.

posted by lkkinetic | 7/16/2002 08:59:00 AM

Monday, July 15, 2002  

This three-article series on TechCentralStation (first article second article third article) connects the science behind renewables and technological change in energy to policy issues, much along the lines of my earlier post. And Sallie Baliunas is one of the most insightful and articulate physicists I've ever met (and my husband is a physicist, so that's pretty high praise!).

posted by lkkinetic | 7/15/2002 12:45:00 PM
 

WHY DOESN'T THE RECORDING INDUSTRY GET THIS? When Napster was active and we were all downloading songs like fiends, recording industry revenues and record sales went up. This Wired story from June reports on a recently released study indicating these results:

The Ipsos-Reid study found that 81 percent of music downloaders reported that their CD purchasing either remained the same or increased. That backs up research from Jupiter Media Metrix that concluded that people using file-sharing networks were more likely to spend money on music.

posted by lkkinetic | 7/15/2002 12:07:00 PM
 

OPTIMISM AND THE FUTURE OF ENERGY: Arnold Kling suggested that I explore the fuel cell future in more detail. I intend to delve further into the economics of such technological change, but for now, here's a compilation of several articles on fuel cell research and how close they are to economic viability. Most current analysts predict about 20 years. This October 1997 Wired story sets the stage by highlighting how hydrogen fuel cells work, what some of their limitations currently are (including cost per horsepower or kilowatt hour, and the infrastructure issue of hydrogen filling stations for fuel cell vehicles), and what kind of research is under way. The author also talks about one of my favorite public relations ploys in hydrogen fuel cells -- drinking the exhaust from the pipe. It's water, good old H2O. I heard a story last fall about BMW's prototype fuel cell sports car, and how they were doing a marketing gig in Los Angeles, at which Jay Leno took the car for a spin and then rehydrated from the tailpipe!

This July 2001 Wired story specifically addresses the prospect of fuel cells in transforming not just how we generate power, but how we organize the infrastructure of the entire energy network. The story focuses on the distributed resource research done at EPRI an electricity research consortium.

In recent years, a series of technological breakthroughs - and, more important, a critical mass of scientific ideas - has begun to coalesce around a new model for an energy system that would better serve the needs of the near future, while enabling power producers as well as consumers to lessen their impact on the environment in the long term. Both privately and publicly, many at the institute express concern that the policy thrust of the current administration will lock out the most promising set of innovations to emerge in the energy community since the creation of the existing grid in the first half of the 20th century. The end result, they fear, may be to freeze us into high-emissions power pathways for decades to come. ...

The smarter energy network of the future, EPRI believes, will incorporate a diversified pool of resources located closer to the consumer, pumping out low- or zero-emissions power in backyards, driveways, downscaled local power stations, and even in automobiles, while giving electricity users the option to become energy vendors. The front end of this new system will be managed by third-party "virtual utilities," which will bundle electricity, gas, Internet access, broadband entertainment, and other customized energy services. (This vision is reminiscent of Edison's original ambition for the industry, which was not to sell lightbulbs, but to create a network of technologies and services that provided illumination.)


This vision, which I share, promises to deliver a more robust and flexible energy network. It is also consistent with something I've been thinking more about and talking about with several industry folks -- a biological/ecosystem metaphor is a better model for a forward-looking, robust, flexible, efficient energy network than the traditionally mechanistic, engineering-focused model of an energy system. Engineering and mechanics are clearly important parts of creating and understanding a dynamic energy network, but we are likely to make some serious policy mistakes if we think only about them.

This abstract of a January/February 2002 Technology review article (access to full article available to subscribers) addresses the role of fuel cells in the electricity grid. It also makes a point that I have emphasized in my own work, although it doesn't make it explicitly: fuel cells and distributed generation will make electricity transmission contestable. That means that transmission will face potential competition, which will serve as a discipline on the transmission owner's ability to raise transmission prices, because if they raise prices consumers will be more likely to say, "thanks but no thanks, I'm going to buy and install a combined heat and power system for my production facility, so please take me off the grid." That's a much better way to discipline the pricing decisions of transmission owners than the traditional rate-of-return regulation that we've had for most of the past century, and in the past decade with stock market returns outpacing the regulated rate of return on transmission investment, has contributed to the dearth of grid network that we are confronting right now.

Now, the cool futuristic stuff: this March 2002 Wired story talks about thermoelelectrics -- using heat to generate electricity. This abstract of a November 2001 Technology Review article talks about methanol-powered fuel cells for cellphones -- 20 hours of portable talk time from methanol!!! How cool is that? This abstract of a January/February 2002 Technology Review article discusses how new plastics may contribute to making solar power more economically competitive with fossil fuel generation.

The big-picture punch line: our expectations of the future, including technological changes and how soon they are likely to become economically viable alternatives, are very important determinants of our current investment and consumption decisions. And current policy decisions can have large impacts, either positive, negative or mixed, on the future paths of these technological changes. But the problem is that these policy decisions are not made in a vacuum, nor are they made in an environment of certainty about the future. For all of these reasons, a lighter-handed, more flexible approach to energy regulation and energy policy is more likely to result in a robust, reliable, flexible, efficient energy network that behaves as well as a highly evolved natural system.

posted by lkkinetic | 7/15/2002 11:57:00 AM
 

WHY DOESN'T THE FCC JUST ESTABLISH SPECTRUM PROPERTY RIGHTS? This story is not a tale of a successful privatization program, but is instead a cautionary tale of how regulation has created a worse outcome than privatization could. Technological innovation is enabling us to use the radio spectrum more intensively than before. This innovation is placing pressure on regulation and property rights issues in the management and use of the radio spectrum. The current Federal Communications Commission (FCC) licensing system for spectrum, in which the government retains ownership rights to spectrum, is creating some conflicts and problems that would not arise in a privatized spectrum system. As a political process, it is also more prone to manipulation.

For most of the past century the federal government, usually through the FCC, has retained ownership of rights to transmit in various parts of the radio spectrum. For most of the twentieth century the FCC allocated spectrum use through either an application procedure or through a lottery; both of these allocation methods allowed the FCC to choose the potential licensees, in keeping with the FCC remit to govern broadcasts based on a public interest objective (this public interest remit for the FCC is increasingly coming into question, too).

As early as 1958, economists Ronald Coase and Arthur DeVany recommended privatizing the radio spectrum, selling it through an auction process. Privatization would create well-defined property rights in specific locations on the spectrum, and would enable spectrum owners to transfer rights, and importantly, to determine how much value they place on having adjacent owners far enough away to remove some, most, or all likely interference. Privatization could also involve a judicial system of legal recourse in the event that some owners believed that interference from someone else’s spectrum property harmed their use of their spectrum.

Since 1994 the FCC has auctioned spectrum transmission rights. The FCC retains ownership of the spectrum itself, but has been auctioning ten-year licenses conveying the rights to use spectrum for specific purposes. These licenses are not transferable between uses or between license holders. Retaining spectrum ownership enables the FCC to continue regulating broadcast, cable, telephone, wireless cable, and two-way analog and digital (such as analog and digital telephones and pagers) communication uses. However, a turgid system of enabling but regulating radio spectrum use, such as the FCC has been following since its inception, could slow or deter technological change itself, particularly in the burgeoning wireless technology industry.

New wireless devices such as Wi-Fi, Bluetooth, and HomeRF have become popular over the past year as people expand their network capability with wireless access through laptops, phones, PDAs, and other new wireless devices. These devices transmit in the 2.4 GHz (gigahertz) frequency, 2.4-2.483 GHz across short ranges. This portion of the spectrum is popular for several reasons, including the fact that the 2.4 GHz frequency is unlicensed. Thus regulatory hurdles in using this frequency are minimal relative to the other parts of the spectrum. Devices in this frequency also do not generate a lot of interference for each other because of the short ranges over which they transmit and because they generally operate as spread spectrum devices, which decreases the potential for interference. Customers have received a lot of value out of the increased use of this frequency, and these wireless devices have brought information access to many rural and underserved communities.

The 2.4 GHz frequency is right next to a licensed slice of spectrum; the FCC has licensed it to satellite radio operators. One of these satellite radio operators, Sirius, is concerned that consumers who use a mobile device in their cars will create interference over short distances with their satellite radio transmissions to those consumers, particularly in urban areas where buildings can create problems for satellite radio transmissions to automobiles. In a privatized spectrum system, Sirius and the device makers in the 2.4 GHz neighborhood could negotiate a mutually beneficial compromise; in the FCC regulated hybrid system we have now, though, Sirius has petitioned the FCC to force mobile devices in the 2.4 GHz frequency to operate at the lowest possible wattage, which is below the electric energy of the engine running the car. If the FCC grants this petition, the market value of wireless devices to consumers would probably fall.

Sirius appears to be using the regulatory process to increase the value of satellite radio to consumers. The Sirius and 2.4 GHz interference situation is an illustration of the wasteful incentives inherent in using regulation and the political process to mediate spectrum border disputes. Regulation creates incentives for companies to engage in expensive rent seeking. Privatization would favor uses of the radio spectrum that make the most sense for consumers, while regulation favors uses whose developers are better at manipulating the political process. The FCC’s continuing ownership and regulation of spectrum gives spectrum users an opportunity to use FCC petitions to mediate disputes instead of a judicial process based on law.

Because of the politics of spectrum rights and the lack of private spectrum ownership, resources might not get to move to higher-valued uses. The FCC is not going to be as impartial a rights arbiter as the combination of well-defined spectrum ownership and a court system using the rule of law. The absence of spectrum privatization may slow or deter potentially beneficial technological change, and leaves in place a political process more prone to financial and other manipulation than one based on markets and law.

posted by lkkinetic | 7/15/2002 10:53:00 AM

Thursday, July 11, 2002  

YES, I'M A BIT OF A FUTURIST OPTIMIST: Economically viable hydrogen fuel cells are coming. Not quickly, but they are coming. And that expectation of future applications of technological change should be causing the electricity industry to rethink the value propositions it is presenting to its customers, because it's going to become cheaper and easier for customers to say "we're outta here". This story, about the installation of a residential hydrogen fuel cell system in Georgia, illustrates the possibilities the future holds.

posted by lkkinetic | 7/11/2002 03:22:00 PM
 

More evidence that the OPEC cartel production ceiling is unsustainable collusion. From May to June, OPEC production increased by almost 100,000 barrels per day. Check out the table at the bottom of the article to see who was able to cheat, and by how much, according to these estimates from Platts. Furthermore, this Reuters story suggests that

... extra demand will be accompanied by a continued rise in supplies from nations independent of OPEC, leaving the cartel little room to manoeuvre in easing output restraints if it wants to keep oil prices near its $25 a barrel target.

"Economic recovery should be in full swing next year so we're projecting global demand growth of 1.3 million barrels a day," said Adam Sieminski of Deutsche Bank.

"But we expect non-OPEC growth of about 800,000 barrels a day and that will put a lot of pressure on Saudi Arabia to hold OPEC discipline together."


This article from yesterday's New York Newsday also discusses the changing mindset of Russia's energy entrepreneurs, seen through the lens of their evolving relationship with Iraq.

posted by lkkinetic | 7/11/2002 03:14:00 PM
 

FASHION LEADS THE WAY: Bravely diving into the breach, what what, Burberry goes ahead with its IPO. Investor confidence wavers today, but consumer confidence in a dynamic business with a well-defined and forward-looking brand and brand evolution persists! They offered at the low end of the estimated capital value of the company, which makes sense in this environment, but the road to capital markets is littered with many less-than-successful IPOs (like Donna Karan, which earned me a good capital loss tax deduction a couple of years ago; that's why I've moved to mutual funds entirely!). I'll be interested to see how long-lived their brand capital and their profitability are, and the corresponding share values.

posted by lkkinetic | 7/11/2002 12:31:00 PM
 

LINDOWS AND WAL-MART BRING CHOICE TO COMPUTER CUSTOMERS: An interesting story on National Public Radio this morning:

Lindows is a new computer operating system that's being sold with PC's for under $300. Its main selling point is its "click and run" application that allows users to easily download software. Although Microsoft and computer industry experts don't think Lindows and Windows are competing for the same market, Microsoft has taken Lindows to court complaining the names are far too similar. A judge has allowed it for now, pending a trial next year.

Lindows has been developed using the open-source Linux operating system by Michael Robertson, the entrepreneur who was behind mp3.com. He has paired with Wal-Mart to offer $300 personal computers with Lindows installed. The consumer goes home, fires up the computer, and can go to a site to download three free applications (i.e., spreadsheet, word processor, presentation program) that are Microsoft-compatible and are in a user-friendly graphical interface (GUI). The business model is that access to the software and upgrades comes with an annual subscription of $99. Robertson said that the interface is so simple that his 4-year old son, who can't read, can successfully download games and fire them up. The story does point out that the binding constraint on the success of this business model is the download speed for such software, given the 20% penetration of broadband. Another commentator in the story said that he doubts that Wal-Mart shoppers are the people who actively want operating system alternatives to Windows. Not only do I find this statement somewhat arrogant and condescending to Wal-Mart shoppers, who don't need to follow USDOJ v. Microsoft to know that Microsoft is everywhere, but it totally misses the point of where the value proposition is here for consumers, and how essential that proposition is to Schumpeter's perennial gale of creative destruction that keeps competitive pressure on companies like Microsoft. By partnering with Wal-Mart, whose business model has been the retailing sector's "killer app" for the past decade, and offering customers a low-price, user friendly product, customers don't have to think about or care about whose operating system it is, as long as the applications are interoperable and the entire integrated product works.

This is the beauty of entrepreneurship and the dynamic ways that market processes help unleash human ingeneuity. $300 computers at Wal-Mart. Life is so good.

posted by lkkinetic | 7/11/2002 11:22:00 AM
 

HAVIN' A HEAT WAVE: From the California newspapers, yesterday and today ... the LA Times describes the conditions leading to the first Stage 2 alert (when reserves go below 5%); the San Francisco Chronicle attributes the stress, at least in part, to a breakdown in conservation.

Today's LA Times story also points out the lower conservation than last June, and the importance of the 3,000 megawatts of additional (peaking) generation capacity in the state since May 2001. Not only does additional capacity stave off alerts and blackouts, it helps change the relationship between supply and demand in ways that keep prices lower and less volatile. The story in today's San Francisco Chronicle actually does a nice job of pointing out that in these heat waves, the price cap in the California market can become binding, and has encouraged power providers outside of the state not to offer power in the state, because they can't cover their costs at the capped price. Another simple, yet good, economic lesson: the people who benefit from price caps are the ones who can actually find a supply and purchase; the ones who are harmed by price caps are both the suppliers who have higher costs but would have supplied profitably at a market-clearing price, and the buyers who get foreclosed from buying because they can't find suppliers who can afford to produce at the price cap. Do California politicians who favor price caps realize that this policy harms buyers, which translates into harms for some of their voters?

Today's San Jose Mercury News story hits the same notes, including the unexpected outage of a plant in Southern California; the outage was due to a fan breaking, which is easier to distinguish from strategic witholding than the types of overuse outages that lots of peaking plants experienced in 2000 and 2001 (the distinction between engineering tolerance outages from overuse and "economic witholding" continues to be a major issue in the California electricity crisis post-mortem). Interestingly, the headline refers to the state's request to reduce electricity use, but nowhere in the article is there a single reference to the fact that big users used to have good price signal incentives to cut peak use, when they had direct access contracts with generators and had more ability to use metering and something approximating real-time pricing. But last fall the California PUC abolished direct access, unabashedly stating that the state needed large users to buy their power from the state's new power authority, because they had to earn revenue to pay for those high-price contracts signed in spring 2001. A few large users are on interruptible contracts, but that's a drop in the bucket. So now the only ways to get large users to cut back during peaks is to issue public pleas for conservation. Gee, you know, I think price signals to the large users would do the job a heck of a lot better, with less hand-wringing.

posted by lkkinetic | 7/11/2002 11:01:00 AM
 

I was going to spend some time today writing about the heat wave in the West, and how the California electricity network and "market" are responding to this first big stress in a very long time. Then I read Charles Oliver's outstanding editorial from yesterday on EnterpriseEconomy.com (link courtesy of Instapundit, thanks Glenn), and now I have some free time to think about other things! Charles' editorial reminds us that much of the ongoing sturm-und-drang in California's energy environment is the consequence of bad, highly politicized rules and policy decisions.

But it's important to remember that this activity [alleged generator manipulation of markets] didn't take place in a free market but in a highly regulated artificial market. State regulators designed that "market," set the rules and ran the exchange. They forced utilities to divest their own generating plants, and they kept the utilities from making long-term contracts. And they prevented new construction of power plants. The government set in place all of the conditions that led to a crisis.

California's energy crisis has given energy deregulation a black eye. But two dozen other states have also deregulated their power markets, and they haven't had the problems California has...

Other states didn't force utilities into state-run power exchanges. Instead, they left them free to buy power from whomever they wanted. That created competition and increased supplies and helped keep prices down. Pennsylvania started its deregulation program shortly after California "deregulated" its market. Pennsylvania has some 200 wholesale sellers of electricity. California had just 20.

Finally, other states generally did a better job than California at adding new generating capacity. They didn't wait for a crisis to start building new plants. They anticipated growing demand for new power. Texas alone has built 22 power plants since 1996 and has 15 more in the pipeline.

In short, these states gave more than lip service to deregulation. They actually cut red tape.

California officials want to blame the state's power woes on deregulation instead of their own misguided rules and regulations. It would be a shame if they were allowed to discredit a policy that has worked successfully elsewhere, a policy that they never really tried.


For those who still want to revisit the causes of last year's massive energy policy failure in California, here's the study that my colleague Adrian Moore and I did in January 2001 (one of the first thorough analyses of the situation, by the way), and here's the version of my study of other states and countries that the Texas Public Utility Commission republished in their consumer education efforts accompanying their deregulation.

The punch line: no U.S. state has really, truly deregulated the electricity industry. Even Texas and Pennsylvania, the jewels in the electricity restructuring crown, have retained retail price caps and other regulatory hangovers as part of the political bargain to get restructuring legislation passed (from the "half a loaf is better than none" school of political compromise). That said, though, they have done a far sight better at delivering efficiency gains and choice than could ever have been possible in the California regulatory environment. And they are continuing to push the envelope and apply an entrepreneurial, dynamic, open-minded perspective on the ability of competitive electricity markets to provide value and choices to consumers safely and reliably.

posted by lkkinetic | 7/11/2002 10:16:00 AM

Sunday, July 07, 2002  

In my relaxed perusals of the news this holiday weekend, I found two extremely good analyses by the typically good Amity Shlaes of the Financial Times. In her 27 June column she made a very important point about tipping in restaurants and a recent Supreme Court decision:

In the Fior d'Italia case, summed up on restaurant.org, the National Restaurant Association webpage, the IRS reviewed the restaurant's credit card receipts, finding a tipping rate that averaged a little over 14 per cent. Then it presumed the same rate on cash revenue, and concluded that workers had failed to report $304,000 in income for a two-year period. It charged the restaurant for back taxes of $23,262 (FICA of 7.65 per cent).

In its 6-3 ruling, the high court gave the IRS the authority to go after such unreported cash by estimating the amount of cash tips that go to employees.


She points out something very important -- the effect that this ruling will have at the margin on the quality of restaurant service. In her 1 July column, Shlaes pointed out another potentially detrimental unintended consequence of a legal/regulatory change, this time addressing the timely question of the accounting industry's ability to monitor its actions and enforce them without new legislation. Read both columns; they are good.

posted by lkkinetic | 7/07/2002 03:39:00 PM
 

The IAEE conference was very good -- lots of interesting papers, and I was fascinated by the similarities and the differences of the issues and approaches across this very international group of economists. In the next couple of days I'll be posting a summary of remarks from Lord Nigel Lawson, who was Chancellor of the Exchequer in Margaret Thatcher's administration. He gave a speech about electricity and natural gas privatization in Britain in the 1990s. I'll also highlight a couple of interesting papers and avenues of research about which I learned last week. But right now I'm off to Washington DC to teach some seminars.

posted by lkkinetic | 7/07/2002 03:32:00 PM

Wednesday, June 26, 2002  

I'm off to Aberdeen, the home of the UK oil industry. Can't wait!! I hope to find some good uisge beatha there as well; that's water of life, or whisky in English.

posted by lkkinetic | 6/26/2002 05:32:00 AM
 

OPEC's MEETING TODAY: Another variable in OPEC's ability to sustain cooperation in the cartel is something they will discuss today at their meeting: the fall of the US dollar. As this story reports, the currency in which oil trades are denominated us the US dollar, so its decline is not good news for oil producers who are trying to raise revenues from the sale of oil by restricting output to raise prices. As this story says,

Continued dollar weakness another incentive for OPEC members to bust quotas, OPEC source says. In the short-term, producers can maintain their purchasing power by selling more crude. The dollar recently traded at 27 month lows against the euro and at seven month lows against the yen.

This Bloomberg News story also summarizes the OPEC meeting, and mentions how much cheating on the production quotas is occurring, as well as the motivations for it:

Rather than raise the targets, members have pumped more than promised to fight Russia, Norway and other rivals for market share.

Isn't competition a grand, disciplining force?

posted by lkkinetic | 6/26/2002 05:31:00 AM
 

BRITISH EUPHEMISMS: One of the charming and fascinating things about British culture is the contradictory use of euphemisms for some things, and brutally frank phrasings for other things. The word "toilet" is one such contradiction -- whereas we Americans say "restroom" or "ladies room", even properly-brought-up Brits will say "excuse me, where is the toilet?" I must admit, this one grates on my ear much, much more than any other British/American English difference. So I was deeply amused yesterday when I encountered a reversal of this yesterday at Fortnum & Mason. I finally have done something I've wanted to do since I first studied in London in 1986 -- I had a cream tea service yesterday at Fortnum's (it was yummy, and the strawberries were fantastic, perfectly in season). I had some confusion following the waitress's directions to the ladies room, because when I did so all I saw was a door that said "ladies and gents cloakroom". Now, when I think cloakroom, I think coat check; but indeed at Fortnum's, the cloakroom is the restroom is the toilet!

posted by lkkinetic | 6/26/2002 05:24:00 AM
 

LONDON'S AIR QUALITY: I noticed something yesterday (Tuesday) that is quite different from the last several visits I made here, and from when I lived here four years ago. There are many, many more cyclists on the roads, and the cyclists no longer wear face masks to filter out the particulate in the air. London's air is still by no means pristine, as my skin indicates after just four days here, but it's quite a bit better than it used to be. Some of that improvement is due to fleet turnover, primarily in taxicabs but also a little in buses. Some of the improvement is also due to London's efforts to control congestion and use a fee-based system to reduce congestion in central London. I have not kept up with the developments in the congestion fee program, but I have noticed an appreciable change in air quality here.

posted by lkkinetic | 6/26/2002 05:18:00 AM

Monday, June 24, 2002  

THE HISTORY OF ECONOMIC GROWTH THROUGH CERAMICS, A STORY: I spent three-plus hours yesterday at the Victoria and Albert Museum, a monument to Victorian intellectual omnivorousness (and the grandeur of the Empire, of course). Most of this time I spent only in the ceramics and pottery galleries.

The evolution of ceramics uses, decoration, themes and techniques illustrates and parallels economic growth more broadly. The 12th-14th centuries were dominated by Islamic ceramics, which were largely mosque and palace decorations in very ornate, detailed geometric patterns. The dramatic colors of blue, orange/red and yellow were intense, and were the result of using costly vegetable dyes in great concentration. As with medieval cathedrals and castles in Europe, these decorations also functioned as a show of wealth. Increasingly over these two centuries these techniques showed up in home goods. Also increasingly into the 17th century, Islamic pottery showed strong use of Chinese motifs (especially as Ming dynasty pottery became so popular). The use of Chinese motifs also indicated the cross-cultural trade with China that increased up to the 17th century (but then fell off dramatically due to Chinese imperial isolationism), because the Islamic diaspora served as a crucial trade conduit between the Far East and Europe.

Spanish ceramics of the 15th-16th centuries reveal the Islamic influence of the Spanish conquest. Italian ceramics of the same period (15th-16th centuries) show many similarities -- the use of strong colors from expensive dyes, decoration of cathedrals and palaces -- but use largely religious themes (I believe the Koran prohibits human and landscape representations, so this difference is not that striking). The general appearance of Italian ceramics and the integration of geometric designs with human representations reflects an Islamic influence, certainly a result of cross-cultural trade and the growing trade networks of the Italian city-states. One thing I noticed yesterday is that around 1530 you start to see the Mannerist techniques of the Renaissance showing up in pottery, and the human representations become much more realistic and compelling, with more complex facial expressions.

Then the Dutch pottery becomes popular in the 15th-17th centuries, mirroring their growth and role as the commercial and financial juggernaut of the period. Again, Delft china shows a lot of Chinese themes, consistent with their trade and with the popularity of Ming china. Relative to the earlier Islamic, Spanish and Italian pottery, Dutch pottery is thinner and of a more consistent quality, which is the result of the increased ability to fuel hotter fires for kilns in reverberatory furnaces and clay-lined kilns to refract heat back into the kiln.

British pottery was, shall we say, rustic before the 17th century. Very utilitarian, with little emphasis on decoration and much on functionality. The heyday of British pottery comes with the entrepreneurship of Josiah Wedgewood in the mid-18th century, who harnessed the ever-increasing ability to fuel hotter and hotter fires more efficiently with coal and coke to build larger and larger kilns (that's economies of scale for you). He also spearheaded the canal construction of the mid- to late-18th century in the British midlands, which increased transportation networks for heavy and fragile items such as pottery (and, by the way, for coal and coke coming into Staffordshire).

Wedgewood and subsequent Staffordshire potteries, such as Minton, used these transportation networks and economies of scale in production to create consistent, higher quality, diversely decorated and styled, ceramic objects and vessels in a variety of price ranges. Now families in a wider range of incomes than just the wealthy with palaces and estates could have beautifully decorated, higher quality ceramic items to increase the beauty in their everyday lives. Mass production brought higher, and higher variety, quality at affordable prices for more people.

Mass production created a backlash, of course, in the Aesthetic and pre-Raphaelite movements of the late 19th century, with its focus on artisanal pottery. Mass production potters such as Minton cleverly incorporated these motifs as they became more popular, co-opting the arts and crafts motifs for mass consumption, but also thereby increasing their popularity (to this day, even; they are by far my favorite types of ceramics, especially in their American manifestations).

How does this story mirror economic growth? Look at the time periods of the ascendancy of each society's ceramics, the effects of cross-cultural trade on the aesthetics of a society, the effects of technological change on technique, the change in quality that provides increasing value for money for more people, and the role of entrepreneurship in creating growth and profit opportunities by serving wider and wider markets.

posted by lkkinetic | 6/24/2002 03:40:00 AM
 

OPEC AND VENEZUELA: An interesting story on the political dynamics of OPEC from today's (sorry, no specific link, I am reading the print version). At the upcoming meeting in Vienna, OPEC is expected to choose Alvaro Silva, Venezuela's current energy minister, as secretary general. The current secretary general, Ali Rodriguez, is Venezuelan, and Silva will serve out the remainder of Rodriguez's term. Hugo Chavez recalled Rodriguez after the failed coup against his regime to head PDVSA, the nationalized Venezuelan oil company.

This move is seen as a gambit to keep Venezuela from increasing its production; as I mentioned in a post last week, Venezuela shares Saudi Arabia's need for revenue from oil sales, and in the face of lagging demand worldwide, cheating on the production qoutas and increasing production may be the best way to achieve that. OPEC seems to believe that appointing Silva will undermine Venezuela's incentives to break with the cartel and cheat on its production quota. Silva is infamously anti-market, and opposed opening Venezuela's oil industry to foreign capital in the 1990s.

posted by lkkinetic | 6/24/2002 03:07:00 AM
 

MUNIS INVOLVED IN MARKET MANIPULATION? According to this Associated Press story and this Reuters story, a California Senate investigation has found email evidence that the Los Angeles Department of Water and Power, the largest municipal utility in the country, may have engaged in some of the same trading practices that have been called "market manipulation" when performed by independent generators. The role of the munis in the California "market" is potentially quite interesting, and the California Senate committe has been looking into it for the past year. The thing that I find the most striking is the completely inconsistent treatment and rhetoric between independent generators and the munis. Public power generators, such as LADWP and BC Hydro (from British Columbia), charged some of the highest hourly prices in the California "market" in late 2000 and early 2001, selling into the ISO in peak hours when the ISO was willing to pay almost anything to keep the juice flowing. My primary interest in this is that the actions of the independent generators and the actions of the munis should be treated consistently. If we're not going to castigate the munis for selling when the need was greatest and profiting from it, or for using arbitrage strategies that were legal (although potentially questionably ethical), then we shouldn't castigate the independent generators. And vice versa.

posted by lkkinetic | 6/24/2002 02:57:00 AM
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