BUSTAMANTE'S PROPOSAL TO REGULATE GASOLINE AS A UTILITY

Where to begin ...? With this Contra Costa Times article and this Sacramento Bee article.

The political theater that is the California recall election is certain to elicit some very bad policy ideas from candidates, and the prize thus far goes to Cruz Bustamante. On Thursday Bustamante advocated regulating the gasoline industry as a utility. According to the Contra Costa Times,

"Gas prices in California are the highest in the nation," he said at a news conference in front of a Sacramento gas station. "Californians are being gouged and, under current law, we are powerless to do anything about it."

Bustamante recommends a constitutional amendment to apply utility regulation to sales of gasoline, by simply adding “gasoline” to the list of regulated industries in the state. Leaving aside for the moment concern about the ease with which politicians can exercise arbitrary power in such an environment, let’s work through what would happen in that case. First, the California PUC would have to determine whether they would use price cap regulation at the pump, or rate-of-return regulation on the refiner.

If they chose price cap regulation, the PUC is almost certain to get the price wrong, because demand fluctuates, sometimes pipelines need repair, and world crude oil prices will probably fluctuate more than the regulated prices would allow. The likely consequence of such a price cap is that customers would see periods of shortage when costs go above the price cap – so instead of being able to get gasoline to drive to work at a high price, customers would not be able to buy gas at all, because it would not be available at the regulated price. When costs are below the price cap, then there would be plenty of gas available. So maybe customers could buy extra when it’s cheap and store it in their garages, right?

But wait. Not only is gasoline highly flammable and dangerous to store in your garage in large amounts, it also has different formulas between summer and winter, and between locations within California, because of federal and state environmental regulations. So if people stored gasoline and used it in a different season, it would be harmful to air quality. So the state EPA would probably outlaw such storage of gasoline, to prevent the deleterious effects on air quality of consumers trying to insure themselves against shortages of regulated gasoline.

Thus under price cap regulation the consumer would get stuck between economic regulation of gasoline prices and environmental regulation of air quality. The inability to get gasoline when consumers want it would be a costly inconvenience, and while it may set the hearts of command-and-control environmentalists singing to think of all of these people being unable to drive when they want, it is an appalling intrusion on the personal and economic liberty of a supposedly free people in California.

What if the PUC imposed rate-of-return regulation on refiners? That’s the model by which electric utilities have been and are regulated, and Californians above all people should recall the consequences of such regulation up through the early 1990s. One reason why electricity restructuring occurred in the 1990s was the overinvestment in expensive generation capacity that occurred in the regulated electricity industry. So perhaps refiners, seeking to increase their profits by increasing the rate base on which they earn their rate of return, would build more refining capacity than is really needed, and that cost would get reflected in gasoline prices.

But wait. The last refinery built in the U.S. was in 1976, and particularly since 1990 the environmental regulatory barriers and NIMBY barriers to new refinery construction have kept it that way. So the attempts of refiners to build new capacity would probably meet with regulatory and community resistance, much as they do today.

Thus under rate-of-return regulation the consumer would get stuck between economic regulation of petroleum refining rates of return and environmental regulation of demand. Refining capacity to serve California would continue to be very close to capacity, and price spikes would still occur.

Two important facts will enable us to see through Bustamante’s demagoguery. First, the 36-cent increase in gas prices over the past two weeks that inspired his proposal was the consequence of an unusual event – a burst pipeline in Arizona. Second, to meet federal air quality regulations, Phoenix and southern California both use the same oxygenated fuel formula, so the first place that would feel price increases from gas being sent to Phoenix to increase their supply would be southern California. If federal environmental regulations did not fragment gas markets in this way, prices would be less volatile and less variable across markets, so a supply disruption in Phoenix would not just draw gas away from California.

Cruz Bustamante’s proposal to regulate gasoline as a utility indicates that he wants consumers to sit in line and wait for gas, like consumers do in Baghdad, instead of being able to buy gas when convenient, albeit at higher prices. In advocating such an ill-advised policy, Bustamante reveals one dimension in which he does not differ from Governor Gray Davis – his complete and utter lack of understanding of how markets give us the best available signals and opportunities about how to use our scarce resources. Davis’s leadership failure in the electricity crisis contributed to his current predicament. Hopefully Cruz Bustamante will see the parallels, retract his populist proposal, and avoid being hoist by the same petard.

NEW SOURCE REVIEW

Few environmental policies and response to them are as caricatured as new source review. Earlier this week the EPA finalized the changes to new source review that it proposed in December 2002. Basically, this ruling clarifies what kinds of equipment replacement will and will not trigger new source review, and it allows firms (typically power plants, refiners, etc.) certain equipment replacements without triggering new source review.

To hear some of the "environmentalist" and media folks talk about this, it's like the EPA has repealed all air quality regualtions and we'll be soon plummeted into a universe of dark, sooty skies. But how realistic an opinion is that? Not very, in my view. First, new source review and the stringent treatment of equipment upgrades has induced firms to stick with older, less efifcient, more polluting technology than they might otherwise have implemented. What the Chicken Litlle crowd often forgets is that fuel costs for these companies are a substantial portion of their budgets, so if power plants and refineries can get more bang for their fuel buck by installing new technology, they would like to. Furthermore, these newer technologies are cleaner burning, and therefore less polluting than the grandfathered ones. But if installing these new technologies will trigger a long, extensive, bureaucratic review, at the end of which you will be subject to more stringent emission regulation, are you going to want to go through all of that as long as you can avoid it? Certainly not. [NOTE: always remember and never forget that arguments like these are marginal arguments, that I am claiming at the margin that NSR induces less technology upgrading than we would see otherwise]

So the complaint about the NSR changes seems to be that the companies will be allowed to upgrade their equipment without being forced to decrease their emissions. OK, so ... how does this make us worse off than we have been in the situation in which they choose not to upgrade at all? They will still be held to the same Clean Air Act regulations.

In looking at the histrionic claims from, for example, the American Lung Association, Mother Jones, and the states like Pennsylvania, Illinois, and New Jersey that may fight the EPA on this one, I have yet to see a compelling argument for how allowing companies to upgrade without triggering NSR will increase pollution.

I'm more inclined to agree with my colleague Joel Schwartz, who argues that this change will not harm air quality.

Schwartz notes that the NSR changes won't affect air pollution emissions, because a wide range of other regulations require large pollution reductions in coming years, and/or set hard, declining caps on pollution that can't be exceeded, regardless of NSR. For example:

-- EPA's "NOx SIP Call" regulation will reduce eastern power plant and industrial boiler nitrogen oxide emissions by 60 percent next year during the May-September "ozone season." This is a hard, system-wide cap that can't be exceeded and is not affected by NSR. The acid rain program for sulfur dioxide sets a similar declining cap that is reducing year-round emissions by a total of 50 percent between 1995 and 2010.

-- EPA has also issued more than 70 air toxics rules for industry-including petroleum refineries and chemical plants-that require "Maximum Achievable Control Technology" (MACT) and that are unaffected by NSR changes.

-- EPA standards require a 90 percent reduction in new-car and new diesel-truck emissions during the next few years, which will eliminate almost all mobile-source pollution during the next two decades as the fleet turns over.

"NSR needs to be reformed, as the current regulations actually slow progress on air pollution by creating perverse incentives to keep older plants running," said Schwartz. "Those who attack NSR reform display a profound ignorance of the factors that really affect future air pollution and a disregard for the harm to consumers of unnecessarily expensive regulations like New Source Review."

Joel thinks more carefully about air quality and the well-being of real people tyring to live fulfilling lives than anyone I've ever met.

Another colleague, and sometime co-author of mine who thinks carefully about such things is Ed Reid. Ed sent me a good analysis via email, and has permitted me to post his thoughts here.

Much of the angst regarding the revisions to the NSR process flows from a lack of perspective. Perhaps an example of the EPA’s revised approach to NSR applied to a residential scenario will help "clear the air".

The owners of an older home notice that their water heater has begun to leak and must be replaced. While shopping for a new water heater, they discover that new water heaters of the same storage capacity and energy input are available with higher efficiencies than their old unit and that these higher efficiency water heaters would thus use less energy to produce the same amount of hot water and cost less money to operate. They decide to purchase one of the more efficient water heaters.

However, the salesman then hands them a copy of an EPA document entitled “Homeowners’ Guide to NSR Compliance”. The homeowners read the guide and learn that, if they replace their old water heater with a more efficient water heater of the same storage capacity and energy input, they will also be required to bring all other aspects of their home and its energy using equipment into compliance with current codes and standards. This would involve replacing their existing heating and cooling system with a new system which meets the minimum efficiency standards established by the National Appliance Energy Conservation Act (NAECA) and perhaps also their current clothes washer and dryer, range, refrigerator, etc. It would also require that they replace their current windows or add storm windows, increase the insulation levels in their walls and ceilings, renew caulking and weather stripping and take other energy conservation measures required by the codes in their state and/or city.

On further reflection, the homeowners decide that the extra operating cost of the new, but lower efficiency, water heater is not so bad compared with the cost of bringing their entire home into compliance with current codes and standards all at once. This decision does not make their home less energy efficient than it was before, but it does leave it less efficient than it might otherwise have been, at least until the next time the water heater requires replacement.

Those are the pernicious incentives embedded in New Source Review.

LONDON BLACKOUT

Okay, another one ... but at least this one lasted only an hour, and was probably due to a transformer failure in south London, according to this Financial Times article. Not being an engineer, I don't know if the recent, sustained strains from the heat wave has weakened any part of the transformers on the system ... I do recall in 1998, when during a hot Chicago summer ComEd customers suffered from blackouts due to overheating transformers, that transformer maintenance became a priority item.

London mayor Ken Livingstone is claiming that National Grid, the owner of the transmission system in England, has underinvested in the grid system. I think the important question is, will customers suck it up and deal with higher electricity prices to help fund equipment upgrades. If prices are politically constrained away from allowing the producer surplus required to fund investment because customers will complain (and retailers won't be able to pass on the full cost of the power they buy), then reliability will be a problem, even in an electric system that is as successful and vibrant as England's (actually, England-and-Wales's).

Think of this analogy: would you be willing to pay, say 50 cents more per month for your cell phone plan if your cell phone company were going to build more towers to improve the reliability of the signal? Why should electricity transmission investment be any different?

I thank Tyler Cowen for his post on the blackout, and particularly the link to this speech by Stephen LIttlechild, the outstanding economist (and extremely nice fellow) who has worked tirelessly to create institutions so that choice and competition can create value in this industry in England and Wales.

England has been one of the success stories of electricity privatization, but its comparison with the U.S. is apples-to-oranges, because we have 51 jurisdictions with regulators, and fragmented transmission ownership. England had a nationalized industry and has not had to struggle with the consequences of fragmented transmission ownership.

I will be interested to see if the more performance-based and outcome-oriented transmission regulation environment in England leads to more fluid adaptation to the needs for investment. I hope so, for the sake of English customers and entrepreneurs.

ADAPTATION AND RIGIDITY?

I've got to spend the day preparing my fall classes, so I am happy to have a guest post from my knowledgeable friend and colleague Mike Giberson. Mike wrote in response to my claims yesterday that the grid we've got is rigid and maladaptive. I was insufficiently clear: the regulatory treatment of transmission has made it maladaptive to changes in other parts of the supply chain. Here are Mike's observations:

Let's not get crazy and call the current grid "inflexible" or "brittle" - actually, like many networks, the current grid has proven itself fairly reliable under many different kinds of circumstances. One major failure every 30 or 40 years is not a bad record. Contrary to the remarks of some (was it former Energy Secretary Bill Richardson?), we don't have a "third world grid."

But just building more capacity for the existing grid is not the right approach. In my view the big problem creating the blackout was not a lack of transmission capacity so much as a failure of control systems that should have kept the problem localized. Much has been made of the growth in grid traffic over the last decade and the relative decline in grid investment, but some part of that trend is simply more efficient use of transmission resources. (More efficient use of resources due to wholesale market restructuring over the last decade? Why are we surprised?)

But still there is an interesting puzzle - how to decide which possible network improvements should be made - and I don't think that the current government/industry structure provides a very good answer to this question.

* I'm tempted to think that telecom companies may provide some clues to competitive network designs, but given the apparent overbuilding of networks and collapse of a many telecom companies, maybe they don't know either.

* It is likely that "real" independent transmission companies - like Trans-Elect and American Transmission Co., for example - are better positioned to do this kind of thinking, but still the decision making process involves a lot of state and federal reg review, and likely also depends a lot on the support of the regulated utilities operating in the region.

I'm also intrigued by suggestions to "fragment" the grid - say break the eastern interconnection into seven or eight blocks that are linked only by DC connections. My understanding is that such a framework would dramatically reduce the complexity of the control problems, but I really don't understand enough of this approach to judge what the tradeoffs are.

GAS PRICES JUMP

No surprise there: blackout took 7 refineries offline for a few days, there was a big pipeline rupture in Arizona, it's coming up on Labor Day weekend ... Here are some links to articles discussing the gas price spike, from the Los Angeles Times (registration required), CNN/Money, and the Associated Press. I agree with Stephen Karlson's assessment of gasoline prices:

When you see unleaded regular at $2.73 a gallon (I'm not sure how the Energy Information Administration treats taxes) give me a holler.

In other words, the real price of gasoline is still low.

GETTING BY WITHOUT THE GRID

The blackout has raised public interest in distributed generation (DG). DG technologies have gotten more cost effective over the past decade, and many businesses that cannot afford power outages use DG for backup. See, for example, this Time article on net metering, which is allowing your meter to run backwards and thus sell power back to your local utility at the same price you get charged for it, this AP article on a New York woman who generates her own and puts excess power back on the grid, and this Wired article on getting off of the grid. The Wired article points out the value that DG can have in taking strain off of the grid, as well as in making the grid less vulnerable to terrorists (an argument I made in November 2001 in this commentary):

The high cost of everything from photovoltaic cells to batteries is likely to keep such home-power systems from becoming widely used any time soon, notwithstanding events such as last week's massive power failure in the Northeast and Midwest, said professor Lester Lave of Carnegie-Mellon University in Pittsburgh.

But the underlying notion -- that power generation and transmission should be more widely distributed, like the design of the Internet -- is one that has huge promise in fixing some key problems with the electrical grid, said Lave, co-director of Carnegie-Mellon's Electricity Center.

"It's certainly true that the system is aged and creaking, and that's what the blackout is telling us," Lave said. "We've done a fair amount of work here on distributed generation as a means of achieving energy security -- such as deterring a terrorist attack -- and efficiency. We're optimistic about its ability to solve many of these problems and make the system much more reliable and secure."

As is typical with Wired stories, this one is well-researched and informative.

So if DG is valuable and becoming more affordable, why isn't it more widespread? In spring 2000, the Department of Energy published a study of the barriers to distributed generation ( here's the press release on it). Its primary finding:

The Energy Department examined 65 distributed electricity generation projects. Of the 65 case studies, only seven reported no major utility-related barriers. However, in most cases, substantial regulatory, technical and business-practice barriers exist, which inhibit distributed generation interconnection to the grid in the United States. For example, 17 projects, more than 25 percent of the case studies, experienced delays greater than four months.

Think about this from the point of view of the utility, which is operating in the 85-year-old regulated business model of "make more profits by selling more power." DG removes potential load from their customer base, so of course they are going to fight it as long as they remain in the "make more profits by selling more power" mindset. Breaking out of that mindset requires active retail choice, which is how the utilities can make more profits by selling less power (i.e., by charging different prices at different times depending on demand).

One thing that utilities can do is use the "obligation to serve" regulatory mandate under which they operate to argue that they must keep customers on the grid. Under this obligation to serve, utilities have also been able to charge high "grid exit" fees to customers who wish to be removed from the physical service of their local distribution utility monopoly.

Here is a 2002 study done for the DOE by the Regulatory Assistance Project, very thoughtful folks, on how DG can help utilities avoid incurring the costs of upgrading their distribution networks.

THE ORGANIC NETWORK IS ROBUST AND ADAPTIVE

Paul Phlip at Long Harvest notes an oped in the NYT on the electric grid by Steve Stogratz. Stogratz makes some really important points in his argument, including the fact that we should think about the grid in a more organic and less mechanistic way, and that we should abandon the unrealistic idea about total control and perfectibility.

We need to stop pretending that the grid is ever going to be a perfectible machine. Just as bacteria eventually develop resistance to the antibiotics used to kill them, the defense of the grid will require ever-more inventive strategies on our part. We should recognize that the power grid needs to evolve and adapt, just like any other successful living creature.

And we should ask what kinds of policies and regulatory environments help, and hinder, the innovation and dynamism that enables interconnected networks to be more adaptive and robust. The regulatory environment that is the product of the past 85 years has created a very maladaptive, rigid system.

WIND POWER IN ILLINOIS

Here's an article from today's Tribune on wind power in Illinois. Wind power is too intermittent to be totally reliable in the absence of a better storage technology than we currently possess, but it may take strain off of the grid (especially if it's a hot, late afternoon wind ...). Wind power also receives government tax subsidies, thought to be necessary because wind (and solar) power are more costly to generate than standard fossil-fuel-generated power.

Expansion of wind power in the United States could slow in 2004 if a federal wind power tax credit is allowed to expire at the end of the year. In fact, the Crescent Ridge project likely will not move into construction without the renewal, according to Noe.

"The project won't go forward without the tax credit," Noe said. He said he believes, though, that the credit will be renewed as it has every few years since it was enacted. "It is a substantial part of financing."

Here's a thought: look at the states that have allowed some retail choice for their customers, and look at the fact that some customers are willing to pay more to buy green power from companies like Green Mountain Energy. If there are customers willing to pay more for a more costly, but cleaner, technology, then that gives you a signal of the value that customers place on cheap power vs. cleaner air.

Retail choice gives customers options, including green power, and while it may not lead to the wider proliferation of green power that many advocates would wish for, it enables those who care deeply about green power to put their money where their mouth is, without the force and coercion that renewable portfolio mandates use as a bludgeon, and without the economic distortions introduced by tax subsidies for solar and wind power.

THE GREEN MARKET REVISITED

Now is a propitious time to remind folks of a Tech Central Station article of mine from August 2002 on how market-based retail electricity pricing is good for consumers and good for the environment:

One of dynamic pricing's most enticing long-run benefits is that it induces conservation. If it's expensive to produce electricity in a peak hour and consumers face that price difference across a day, they have an extremely powerful incentive to shift their energy-intensive uses to non-peak hours. Price signals are the most effective way to encourage conservation and to get people to make informed choices about how and when they will use electricity. A strong economic incentive to conserve could limit or prevent blackouts. Dynamic pricing also helps us achieve our environmental goals, in two ways. First, seeing real price signals could decrease overall electricity use. Second, the higher prices in peak hours shift use away from peak hours, which decreases the need for backup generators and using older, dirtier power plants to meet the peak.

SOME MORE TECHIE LINKS ON POWER SYSTEMS

Here are some analyses of the more technical aspects of power systems: Peter Kaminski on who pays for reliability, Sparkey's outstanding post at Sgt. Stryker, Steven DenBeste, in a second post to follow up, and Shots Across the Bow.

Very helpful detail for the supply and infrastructure sides of the issues.

Any day is a good one when I channel Tyler Cowen, who points us to an article in the Washington Post on decentralized power. This New York Times article from last week about Hen Island points out many of the same strategies for removing yourself from grid reliance. Technological change in generators and in solar panels have made such redundancy affordable and, as I argue in this article on the obsolesence of the natural monopoly model,

Technological change in generation is making transmission contestable, and therefore no longer a natural monopoly.

It's important enough to say that I isolate and highlight it. Cannot be said often enough.

UPDATE: I found one of the links I was looking for: this AP story from Monday highlights a woman who produces more power than she consumes, and under a "net metering agreement" can connect her solar system to the grid and add her power to it.

But substantial regulatory barriers exist to DG, particularly at the state level. This 2000 DOE report details some of those barriers, as does this 1997 report.

FERC has been trying to facilitate creating a consistent set of DG interconnection standards acruss systems and states, but this has been a daunting task.

In particular, utilities see DG as a reduction in their market, because they continue to operate from the historic culture and business model that "we make more profits by selling more power." So if you want to generate for yourself, your gain is their loss, because of this zero-sum perspective on their business. DG interconnection would not be perceived as such a threat if

utilities seized the idea that retail customer choice can enable them to make more profits by selling less power.

Yet again cannot be said strongly or often enough.

SMITH-KIESLING WSJ OPED AVAILABLE AT REASON

The retail electricity deregulation oped that Vernon Smith and I wrote on Wednesday is available at the Reason website.

COST ESTIMATES FOR UPGRADING POWER LINES

This table from the Energy Information Administration at the DOE indicates some estimates of the cost per mile of constructing different types of power lines:

60 kv, wood pole: $120,000-130,000
230 kv, steel pole, double: $230,000-550,000
230 kv underground: $3,700,000

Yes, that's 3.7 million for a single high voltage wire, per mile. And that was in 1995 dollars.

Now tell me that installing smart meters, especially in larger industrial and commercial customers, is more expensive than that. Spare me.

METERING COSTS AND DEMAND RESPONSE

Chris King at eMeter sends me the following information as a follo-up to Vernon's and my oped today:

Re your editorial, the equipment cost hierarchy you presented is debatable. Regarding load control, the expense is higher than implementing advanced metering, since the device cost is about the same (around $50), but installation is much more complex. A meter is a simple "unplug the old, plug in the new" (literally) installation, while a load control switch requires opening up the air conditioner control circuit to install the switch, a complex operation requiring a licensed electrician. Moreover, with metering you get what you pay for in demand response, while a major percentage (sometimes half or more) of customers on air conditioner load control deliver no load reduction (due to oversized A/C units, failed control switches, and tamper disabled control switches).

Regarding metering, advanced metering (time-based recording with communications) is actually cheaper than adding a second meter. The meter costs more ($50 vs. $25), but, again, the installation is vastly simpler. Installing a second meter requires installing a second circuit breaker box and rerouting of whatever circuit you are monitoring; this approach is cost prohibitive. Moreover, advanced metering provides significant utility operating savings - namely reduced meter reading costs and improved outage management via automatic detection and restoration verification - which further reduces the net cost. In fact, many utilities are implementing advanced metering for these operating cost savings alone (over 10 million units around the U.S.).

Thus, the lowest cost option is advanced metering, followed by air conditioner load control, followed by a load management system in a home
or business. These numbers are based on large-scale installations.

MY CONVERSATION WITH DON LUSKIN ABOUT ELECTRICITY

Yesterday I had a lovely conversation with Don Luskin while he was working on his National Review Online column and his blog post on Paul Krugman's silly column on the blackout. It was a delightful chat about deregulation, the benefits of being more interconnected, and the value creation that comes through markets. Don said it more succintly than I have been able to:

What she means is that, without price signals to tell producers what to supply and at what level of reliability, and to tell consumers what to demand and with what usage patterns, we really have no idea how to design an electricity industry. In Kiesling's framework, the challenge is to develop an environment in which an electricity industry can safely design itself.

VOLATILITY AND ELECTRICITY TRADING

This New York Times article suggests that sharp wholesale electricity price spikes last Friday dissipated quickly, and did not result in a lot of profits for the traders.

ACTIVE RETAIL DEMAND RESPONSE CAN REDUCE POWER LINE CONSTRUCTION

NIMBY concerns threaten to stymie attempts to build more power lines, which is one reason why we should enable customer retail demand response as a tool to empower consumers and to stabilize the grid.

SMITH AND KIESLING IN THE WALL STREET JOURNAL

Vernon Smith and I have a commentary in today's Wall Street Journal (subscription required).


A systematic rethinking of the power demand and supply system -- not just transmissions lines -- is required to bring the energy industry into the contemporary age. Eighty-five years of regulatory efforts have focused exclusively on supply -- leaving on dusty shelves proposals to empower consumer demand, to help stabilize electric systems while creating a more flexible economic environment.

Under these regulations, a pricing system has developed that is so badly structured at the critical retail level that if it were replicated throughout the economy, we would all be as poor as the proverbial church mouse. Retail customers pay averaged rates, making their demand unresponsive to changes in supply cost. Without dynamic retail pricing, no one can determine whether, when, where or how to invest in energy infrastructure. Impulsive proposals to incentivize transmission investment, without retail demand response, puts the cart before the horse and risks expensive and unnecessary investment decisions, costly to reverse. ...

The implementation of retail demand response in the electric power industry would provide a wide range of benefits including lower capital and energy costs, fewer critical power spikes, consumer control over electricity prices, and the environmental benefits gained by empowering consumers to use electricity more wisely. Despite Milton Friedman's admonition, by adding increased flexibility to the electricity grid and sparing critical infrastructure from shutdown, demand response creates a more efficient and resilient economic structure while providing more robust security as a free lunch.

INFORMATION IS POWER

This Chicago Tribune article provides an example of how technology and intelligent monitoring can empower customers to use less energy, just by being informed about your actual consumption, which is a capability that the standard watt meter does not possess.

MORE ON ENERGY BILL OBSTACLES

Here are a couple more articles on the obstacles facing a national energy policy: this New York Times article on how the nation's governors have difficulty speaking with a unified voice on energy matters, and this New York Times article on the difficulties Congress faces in separating out an electricity bill from the large omnibus energy bill proposals.

ONLY CONNECT

The blackout last Thursday has produced some hyperbolic hysteria about the perils and vulnerability that come with being so interconnected. But decentralized interconnection is also a source of stability and growth, both physically and economically. Albert-Laszlo Barabasi, a physicist and author of Linked FINISH, had an oped in Saturday's New York Times about the pros and cons of interconnectedness.

The effect of power blackouts, economic crises and terrorism can easily be limited or even eliminated if we are willing to cut the links. Strictly local energy production would guarantee that each blackout would also be strictly local.

But severing the ties would also cripple the network. Shutting down international trade would surely eliminate the impact of the Japanese central bank on the American economy, but it would also guarantee a global economic meltdown. Closing our borders would reduce the chance of terrorist attacks, but it would also risk the American dream of diversity and openness.

The events of the past few days — unwanted side effects of our network society — are just one of the periodic reminders that we live in a globalized world. While celebrating that everybody on earth is only six handshakes from us, we need to accept that so are their problems and vulnerabilities.

Yesterday Slashdot had a link to a 1999 Wired article on the myth of order in software. The article is about how software is essentially a bottom-up-effort whose relevance to the problems at hand changes over time, and that few people realized that until they had to confront Y2K.

But I think the most insightful, useful and inspiring commentary comes from Paul Phlip at Long Harvest:

This is how networks operate. Networks are feedback. Feedback modulates and exaggerates the effects of small, unexpected events. They are all flow and flux. A network as complex as the power grid is never the same network twice. New connections are made every moment. Information technology changes the shape of society daily. The grid must not only supply our power, it also must follow us around as we work at home, create new businesses, launch new web sites, connect more partners, and share more music. Too keep up with us, our networks become smarter. ...

... life exists at the frontier between order and chaos. Life seeks out turbulence and flux and creates it’s own opportunity for living. Life is an entrepreneur.

Chaos won yesterday. The lesson of this loss is that networks aren’t machines. We cannot control networks the way we control machines. We must decentralize our control, distribute intelligence and allow the network to learn and adapt. We will find someone to blame and throw some bums out of office. We will serve ourselves well if, at the same time, we add to our ability to trust innovation.

Allow the network to learn and adapt. That is a set of capabilities that regulation has done very poorly at enabling.

CHECK OUT FUTURE PUNDIT'S POST ON NUCLEAR POWER

Randall Parker has a nice post on nuclear power, citing a NYT oped and a study by two MIT professors. They claim that nuclear will become an economical alternative if regulation of carbon dioxide proceeds. Very interesting analysis.

TIME TO RETHINK THE NATURAL MONOPOLY THEORY OF REGULATION

I have a Reason commentary on natural monopoly theory. Excerpt:

Many technological and market innovations have reduced the natural monopoly rationale for traditional electric industry regulation. For example, consider distributed generation. Distributed generation (DG) is the use of an energy source (gas turbines, gas engines, fuel cells, for example) to generate electricity close to where it will be used. Technological change in the past decade and deregulation in the natural gas industry have made DG an economically viable alternative to buying electricity from a monopoly utility and receiving it over the utility’s transmission and distribution grid. The potential for this competition to discipline a transmission owner’s prices for transmission services is immense, but it still faces some obstacles. ...

Technological change and market dynamics have made the natural monopoly model of electricity regulation obsolete. While technological changes and market innovations that shape the electricity industry’s evolution have received some attention, their roles in making natural monopoly regulation of transmission and distribution obsolete have not received systematic treatment. For that reason, the policy debate has focused on creating regional transmission organizations to rationalize grid construction, but has not dug more deeply into the possible benefits of dramatically rethinking the foundations of natural monopoly regulation. Last week’s blackout suggests that this rethinking of natural monopoly is long overdue.

GOOD ELECTRICITY POLICY ARTICLES

I strongly recommend these two articles if you want a good, thorough analysis of what's going on with electricity:

This Wall Street Journal article by Rebecca Smith is a really thorough study.

The main defects are transmission systems badly in need of improvement and a chaotic combination of regulated and deregulated markets. The unsteady regulatory situation, among other factors, inhibits the investment that is critically needed to improve transmission equipment.

The nation is stalled in the middle of a massive but incomplete shift from old-fashioned state-regulated utilities -- which generate their own power, move it over their own transmission lines, and sell to local customers -- to a system in which ownership of plants and transmission lines is broken up among a variety of players, and government oversight is fractured. ...

The main problems date to a deregulatory movement that began in the early 1990s, but never completely took hold. In 2000, the deregulation drive sputtered in the midst of a series of electricity-related crises. First came the near meltdown of California's power market that year and the next. Supply shortages, combined with unscrupulous practices by power merchants taking advantage of poorly drafted rules, produced soaring electricity prices and rolling blackouts in the state. Then came the December 2001 bankruptcy filing of Enron Corp., a pioneer of free-market electricity trading that collapsed amid fraud allegations.

Today, some power generators report to state commissions, while others are overseen by federal agencies in Washington. Some power is sold by heavily regulated traditional utilities at slightly above cost, while some is sold by new independent power companies for whatever price the market can bear. Some transmission lines -- the critical conveyor belts of power -- are owned and run by utilities, while others are managed by a new breed of quasi-public independent grid operators whose jurisdictions encompass many utilities, often in several states.

This Sunday Washington Post article by Peter Behr and James Grimaldi, to which I referred in an earlier post, is also thorough and well-written. They have a nice discussion of the interesting political bedfellows that electricity deregulation debates have created:

The debate has produced unusual allies, with powerful utility companies such as Atlanta-based Southern Co. agreeing with such consumer organizations as the Public Interest Research Group. Southern and PIRG contend that new federal rules would bring the kind of free-market reforms, once advocated by Enron Corp., that could produce California-style energy crises.

Atypical political fault lines are another complication. While some of the debate mirrors ideological rhetoric of states rights vs. federal control and deregulation vs. consumer rights, the groups of political allies just as often reflect regional differences than partisan politics.

Southern has been the target of repeated allegations that it favored putting off repairs of the "chokepoints" on the transmission grid because it wants to limit competition from outside its region. Upgrading transmission lines would permit electricity to flow more freely and make it difficult for one dominant player to monopolize the power lines.

Officials at Southern dismiss such talk and say they have spent, and plan to spend, billions of dollars upgrading transmission lines in the South. They also advocate building smaller power plants closer to large clusters of electricity users to reduce stress on the grid.

In the past three years, Southern has spent more than $10 million on lobbying, employing a dozen lobbying firms in addition to its own in-house lobbyists. Included on Southern's six-page list of areas of lobbying are the FERC rules Shelby is seeking to delay until 2005.

MONDAY AFTERNOON BLACKOUT COMMENTARY ROUNDUP: NYT and WSJ

I was intending to comment on all of these commentaries, but some writing has come my way that has taken more time than I thought ... in any case, for your convenience and my own, a compendium of commentaries:

Robert Kuttner from the New York Times Saturday: no great surprise, he blames deregulation for the blackout. This ill-placed blame ignores several things. First, it does not stand up to logical scrutiny: we had blackouts before the purported "deregulation" he decries, and in places that have actually implemented deregulation (such as the UK), there is no demonstrable increase in blackouts.

Second, it ignores the reality that what we have experienced in the U.S. is not, repeat not, deregulation, not by any stretch of the definition of the word. We have had some liberalization of the wholesale trade of generated electricity, but both transmission and retail distribution and pricing are still heavily regulated by a rigid 1930s vestige of trying to control and manage a vertically integrated, government granted local monopoly.

Third, his desire to return to the days of that vertically integrated, government granted local monopoly speaks to me of a lack of imagination and creativity. Technological change has transformed human lives for the better in so many ways, including the wholesale generation and market exchange of electricity, and if we had proper deregulation, innovators seeking value opportunities would create and apply new ideas in this industry in ways that would be mutually beneficial to suppliers and customers alike.

His title, "An Industry Trapped By A Theory" is clever enough, but I claim that the industry's problems arise from being trapped by a different theory: the theory of natural monopoly.

Grrr.

The New York Times editorial from today does not cover any new ground, but at least does lay out the political road we can anticipate. I like where they say

A burst of political leadership, not blame-saying, would cut through the complex of government and utility factors that let the issue become stymied.

but in the context of the editorial it's clear that they mean political leadership for increased regulation. Please see my above comments on that topic.

I thought this morning's Wall Street Journal editorial (subscription required) was pretty sensible. It was an interesting editorial decision to run William Hogan's call for uniform rules and support of FERC's Standard Market Design proposal next to Jerry Taylor and Peter VanDoren's call for market self-regulation. These two approaches tend to bracket the pro-deregulation opinions I've encountered, from wanting to manage the process of creating markets (Hogan's ordered competition) to "markets are self policing" (Taylor and VanDoren's competitive order). I am skeptical of the the desirability of micro-managing the process of creating electricity markets to the degree that Hogan advocates, and to the degree seen in the FERC Standard Market Design proposal. But, as the WSJ editorial points out, in reality transitions can be messy and some pernicious outcomes can be avoided by having some clear rules.

PJM [the mid-Atlantic ISO; they had no outage on Thursday] is no miracle worker. It is merely an example of the kind of "regional transmission organization" (or RTO) that can develop everywhere if a more competitive wholesale electricity market is allowed to proceed. More than 215 buyers and sellers of electricity are part of PJM, and the efficiencies of its marketplace have produced both lower consumer costs and more investment to ensure that the transmission grid remains reliable.

As it happens, the Federal Energy Regulatory Commission (FERC) has been proposing rules that would allow more of these RTOs to develop. Legislation to do so is pending in the energy bill now in House-Senate conference -- one of the few parts of that bill that would actually be useful. (Most of it is a subsidy-fest for ethanol and other political constituencies.)

Some of our friends on the right have assailed this FERC idea as a federal takeover of state prerogatives. And, yes, in a perfect world we would prefer if the states eliminated their franchise monopolies on power generation, as the Cato Institute proposes. While we wait for that utopia to arrive, however, the rest of us have to find some way to avoid blackouts that close down much of the country.

The FERC proposal is arguably less intrusive than a system of state monopolies, and as the PJM experience shows it holds the promise of increasing both the competitive supply and reliability of electrical power. As William Hogan elaborates nearby, it also allows for consistent rules of the road. The state utilities have a point that the rules are changing underneath them and that their cheaper hydro-power will capture national prices, but perhaps some compromise can be worked out in drafting the FERC rules.

The FERC proposal has evolved from encouraging RTOs to mandating RTOs (one per region), back to encouraging RTOs a bit more firmly than initally.

But all of this discussion, including these three WSJ pieces, focuses entirely on wholesale electricity markets and on transmission. Such a focus puts the cart before the horse by not addressing the appalling lack of retail choice for customers. Without such choice, how do we know if we're investing optimally in generation and transmission?

THANKS FOR THE LINKS, MATES!

I must take this opportunity to thank those of you who directed traffic this way: Tyler Cowen, Steve Verdon, and Megan McArdle aka Jane Galt all posted links to the Knowledge Problem, as well as offering their own cogent and insightful commentaries.

Tyler also mentioned the Watts paper on cascading failures, and has endeared himself to me even further by calling me the "goddess of electricity analysis". I shall continue to strive to earn such a moniker.

UPDATE: I forgot to thank Greg Ransom at PrestoPundit. And Glenn Reynolds was posting a link here at the very time I was writing my initial thanks.

Thanks!

SOME TECHNICAL REFERENCES

For you techies out there, here's a paper by Duncan Watts on cascading failures from the Santa Fe Institute [ironically, I was reading this paper for my own general edification early last week!].

And a knowledgeable reader, Eric Krieg, sends this link to a paper on high-phase power. Eric says

Basically, you can pump more juice through a 6 phase power transmission line corridor than you can through a 3 phase one. In a world where you can't build new power corridors, it's a pretty slick solution.

To my knowledge, New York State Electric and Gas is the only power company in the country to use this technlogy, although you can see from the references that the idea is not new.

TECH CENTRAL STATION'S ELECTRICITY ARTICLES

Tech Central Station has a couple of electricity articles this morning: one by Vaclav Smil on the fragmented nature of our grid and the consequences of that fragmentation, and one by me on how deregulation is not to blame and how retail demand response can make the grid more reliable.

MONDAY MORNING BLACKOUT NEWS ROUNDUP

Some articles on the possible causes and the fallout from the blackout:

Overloaded power lines in northern Ohio may be to blame, although the utility that owns and operates the lines in question thinks that their imbalances were a symptom of a larger problem:

Baird said FirstEnergy is evaluating information that shows there were "unusual electric conditions and disturbances" throughout the eastern United States beginning at noon Thursday, three hours before the Cleveland line failures and four hours before the spreading power failures. These included big shifts in voltage levels and electrical "frequency" on grids, or conditions making electric flows swing above or below the normal 60 cycles per second.

But it's also true that FirstEnergy and other utilities knew that they operated near transmission capacity during summer peak hours:

Last year, an annual assessment of summertime power-handling capabilities of the links connecting the Midwest to the Northeast and Mid-Atlantic states, conducted by the industry, recognized that growth in long-distance energy trading was in a fine balance with the limits of the grid.

"The results of this analysis stress the continued need for close coordination and communication among the users of the interconnected systems in order to maximize the utilization of the network without jeopardizing its reliability," said the report, produced jointly by groups set up by the three regions' power companies after the blackout of 1965 to cut risks of disruptions.

A power failure like this has been a long time coming [Disclosure: this article is from one of my hometown papers, and I'm also quoted in it], but it does not necessarily mean that the right response is to build more power lines.

The political fallout, regulation, and the pending energy bill proposals:

The Federal Energy Regulatory Commission's Standard Market Design proposal, which has been in the works for the past year and a half, is likely to be delayed. In addition to discussing the SMD, this article has some good background:

But since the beginning of electricity deregulation in 1992, the transactions moving power over long-distance high-voltage lines have shot up 400 percent, creating dangerous congestion at a number of bottlenecks around the country. Meanwhile investment in the nation's 170,000-mile high-voltage grid has stalled as the electric-power industry tries to recover from huge stock market losses. Last year, less money was spent on the grid, after allowing for inflation, than in any year since the Great Depression, says the Electric Power Research Institute.

"It is very well known where there are weak links in the transmission grid," said Elizabeth A. Moler, former FERC chairwoman and now a lobbyist for Exelon, a utility based in Chicago. "There are maps of them. The fact that these weak links persist is ridiculous."

Every day, thousands of megawatts of power are bought and sold between regions, transforming the way in which the U.S. electrical system worked in the first half of the last century, when one company served a region as both generator and distributor of electricity.

This quote indicates just how inadequate our old regulatory model is to adapting to the dynamics of the evolving and increasingly interconnected wholesale electricity markets.

The blackout highlights political battles in Washington and between federal and state regulators [Disclosure: this article is from one of my hometown papers, and I'm also quoted in it]. President Bush calls the transmission grid "old and antiquated", and says we need more investment in transmission, policies for which are being considered in energy bill discussions this fall.

The House energy bill proposal, HR.6

The Senate energy bill proposal, S.14, and a mind-boggling number of amendments

The blackout now means that energy will get more political attention when Congress returns in September, when they debate these two energy bill proposals. Some politicians now, finally, see electricity policy as urgent. But that does not mean that these large, omnibus energy bills are going to pass. Energy is a divisive issue politically, particularly in the Senate, because of the regional variation in interests and capabilities. I anticipate substantial revisions, and already some members, like John Dingell, have proposed splitting out electricity into a separate bill so that it doesn't get dragged through the ANWR/oil & gas subsidy/R&D subsidy mud wrestling that has killed previous energy bills.

ELECTRICITY CONTENT COMING TOMORROW

I'll have more analysis and commentary on electricity policy tomorrow, after I've rested and digested the weekend's news. Please come back then (or set your aggregator to my RSS feed)!

A RECIPE FOR THE PERFECT CHICAGO SUMMER DAY

Morning: the cat sticks her wet little nose into your eye socket to wake you up. Husband makes tea, french toast and turkey bacon while you work on some electricity blackout writing.

Weather: high of 78F, low humidity, not even a wispy cloud in the sky.

11:30-2:30: kayak in the 3-4 foot waves on Lake Michigan with some of your favorite people on the planet.

3:30-4:30: walk from home out to Lake Michigan past Wrigley Field, where the game is in progress and you can hear Ozzy Osbourne singing "Take Me Out to the Ball Game" from two blocks away (unfortunately, Cubs lose 3-0 to LA). Watch what looks like a countably infinite number of boats on Lake Michigan enjoying the lovely water. Watch the Air Force Thunderbirds tear through the sky and perform wonderful maneuvers, often whizzing overhead so low that your chest cavity shakes and you jump up and down like a three-year-old.

5:30: husband makes you Tanqueray 10 martini to enjoy while you do some light reading and relaxing.

7:00: dinner on the deck, enjoying the sunset.

Life is good.

INAUGURATING A NEW LAPTOP

This post is the first from my brandy-new Macintosh Powerbook G4 12" laptop. It's utterly zippy -- stylish, small, screamin' fast, plays my Pride & Prejudice DVD and all of my tunes from my IPod beautifully.

And I am grateful to my husband, whose technical virtuosity makes it possible for me to live in a cross-platform world (we run Windows, Mac, Linux and OpenBSD at home).

REASON BLACKOUT RESOURCE CENTER

We have updated Reason's electricity pages to include a Reason blackout resource center. Transmission-related information will be provided here, updated regularly.

One very valuable resource available on our site is Ken Silverstein's column on the blackout. Ken is a very incisive observer of electricity policy, and he correctly points out that

The wires business must evolve to meet the needs of a high tech society. The delivery system was designed a century ago and the technologies that run it are half as ancient.

And the regulatory apparatus in which transmission decisions are made is a relic of the 1930s. This apparatus is not flexible or robust enough to adapt to the changes brought on by increasing liberalization of electricity markets over the past decade.

GRID RELIABILITY AND ROBUSTNESS

A quick break ... this commentary on electricity grid vulnerability from November 2001 is still, or even more, relevant today, even though my focus in this commentary was terrorism. A teaser:

While the Sept. 11 attacks disrupted communications and business operations on a massive scale, many businesses recovered their data quickly, and telecommunications companies restored service quickly, because they had built backups when creating their networks. Even companies like Cantor Fitzgerald that lost major operations in the World Trade Center and 700 employees recovered and resumed operations. It has become standard practice in financial services and other data-intensive industries to perform real-time backup of data and transactions to multiple off-site storage locations. Similarly, telecommunications companies that provide the backbone for such systems build redundancy into their lines, wireless relays, routers, and so on.

This same realization of the security value of redundant systems in other industries should inform and change the regulatory treatment of electric utilities, which have for decades been regulated on the premise that a single owner and a single set of infrastructure is the least-cost way to provide electric service. The basic concept underlying this idea, that of a natural monopoly, is that building multiple sets of generation facilities, transmission wires, and distribution grids would be a wasteful capital investment because one set of infrastructure is cheapest. Unfortunately, recent experience in the telecommunications industry undercuts the notion of "the fewer the better."

The telecommunications industry has been in a dynamic building flurry in the past several years while electric transmission networks have remained static. The regulatory treatment of electricity transmission as a natural monopoly is largely responsible for this contrast between two networks that otherwise have strikingly similar economics. As James Liles observed recently in Public Utilities Fortnightly, "in dry economic terms, one network is viewed as a contestable market; the other is viewed as a natural monopoly." The recognition in the telecommunications regulatory environment that potential competition creates a dynamic industry has helped transform our lives and the creative, unforeseen ways that we can use technology.

Perhaps this blackout will be the tipping point crisis that enables us to transform the regulatory treatment of electricity, and create a dynamic industry with a robust, adaptive and flexible network infrastructure.

GO TO RPPI.ORG FOR MORE ELECTRIC GRID RELIABILITY INFORMATION

I am completely snowed under with interviews and have not yet been able to compose my thoughts beyond the soundbites. In the interim, please visit Reason's website for links to our electricity work, including this commentary on network reliability in California.

POWER OUTAGE NEWS ROUNDUP

A good overall story from Reuters, and one from the New York Times.

A Bloomberg Energy article pointing to the fact that the power outage meant that five refineries in Ohio, Michigan and Ontario have gone offline, so gasoline prices may be affected. But lots of gas stations are closed because their pumps run on electricity.

This CBS Marketwatch story describes how New York City is getting back to normal, slowly.

The outage will continue to affect air travel today as airlines cancel flights.

Niagra Mohawk has asked its customers to reduce electricity use as they bring the grid back up.

In addition, CNN, MSNBC, and Fox News all are posting stories.

THIS POWER OUTAGE DID NOT COME OUT OF THE BLUE

The grid has been the subject of underinvestment for the past decade, and lots of industry folks, industry analysts, and government officials have put their heads together to think about how to make the grid more robust for the 21st century. This Washington Post article puts it nicely:

The country's halting moves toward electricity deregulation over the past decade have dramatically increased the volume of power flowing on the grids.

But the transmission towers themselves remain the stepchildren of the nation's energy infrastructure. People don't want them in their back yards or on their farms. Energy companies aren't interested in building them. And while the system is linked together with advanced computer systems, much of the equipment that opens and closes connections around the nation's three major grids is 1950s vintage, officials said. ,,,

The nation's major utility companies, which own the bulk of the transmission lines, often balk are sharing them with competing independent merchant power providers that have been building generating stations along the lines, hoping to take customers away.

As deregulation flourished, investment dwindled in transmission lines, whose profits are limited by regulation.

For example, the Department of Energy's National Transmission Grid Study 2001 highlighted a lot of the issues that we are now confronting in crisis mode. And the Center for the Advancement of Energy Markets Infrastructure Forum, in which I participated, issued this white paper on infrastructure reliability. CAEM also has a Grid Enhancement Forum Project that illustrates the approaches that we could use to get a robust 21st century grid.

POWER OUTAGE MEDIA FRENZY

I got bumped from Greta; between Governor Pataki and the fact that the New York phone lines were fading in and out. Today it's lots of radio interviews, and I'll post some about what could cause such a thing,

While I'm doing radio and trying to get a little sleep, Glenn has some further links, including MIT Energy Lab study link from Suman Palit. This study, from March 2000, is by Yong Yoon and Maria Ilic. Ilic is one of the most thoughtful and insightful and technically knowledgeable people on transmission out there.

I would frame what Glenn said about "restructuring not going too well" in this way: it has stalled in a very akward place, with a lot of things, including transmission, still under substantial federal and state-level regulation.

POWER OUTAGE

Glenn Reynolds has a post that gathers a lot of info about the northeast power outage. I've not been blogging it because I've been doing radio interviews.

If you stay up late to watch Greta van Susteren on Fox News, and then a special report, you'll probably see me.

RADLEY BALKO AND I ARE BOTH LISTENIN' ...

To the same stuff, according to this post on the contemplative music he's listening to. Specifically, we overlap on Tom Waits (early and late for me, I like his "rough and ragged" recent voice), the Verve (I have always been a fan of British music, this is what happens when you come of age in the mid-80s), and Miles Davis.

Actually, though, lately it's been lots and lots of Coldplay and Kurt Elling. I'm a voice weenie -- and all of these guys (except Miles, obviously) have arresting, rich, smooth voices. I've always been a voice weenie; I love the Smiths for, among other reasons, Morrisey's voice, Echo and the Bunnymen for Ian McCulloch's voice and the cello, and James for Tim Booth's versatile and haunting voice. James also likes to mess with sound the way Kurt Elling does, and being from Manchester will of course make them near and dear to my heart.

Sorry, just had to get that off the chest.

WELCOME NEW BABIES

I'd like to welcome two new babies: Michael Brancato, son of Kevin Brancato and his wife, and Mateo Firth, son of Colin Firth and his wife Livia Giuggioli.

Benvenuti!

In the same post, AtlanticBlog mentions Thomas Sowell on economic and demographic change in California. Sowell asks this question:

After years -- indeed, generations -- of being a magnet for people and businesses, California is now exporting both, including particularly young people. Why?

His hypothesis:

One reason is that California's politicians are following a strategy which has worked well politically in New York City -- milking the productive people in order to support the unproductive, whose votes count just as much and are easier to get.

He notes that between 1995 and 2000, California had a net population loss of 600,000 (not counting foreign in-migration). For evidence on the detrimental nature of California's business climate (beyond the anecdotal references to the failed electricity restructuring policies and the budget fiasco), this California Business Roundtable California Business Survey from January 2002 indicates that business is indeed looking elsewhere:

Compared to two years ago [2000], two-thirds of California Business Leaders agree that business conditions in the state have worsened; ... [California} companies looking to expand in, rather than relocate to, other states jumped from six percent in 2000 to twelve percent in 2001. ... About two-thirds of business leaders agree that taxes and regulations are worse in California than other states. ...

And a finding that is of great interest to me:

Despite the higher costs, a majority of Business Leaders believe California’s energy system should continue to be investor-owned. Fifty-eight percent say private utilities and corporations should provide electric and gas service, while twenty-six percent believe public agencies should once again take over the system (See Fig 12).

When asked specifically whether the state should re-regulate or stay the course on deregulation, fifty-six percent of California Business Leaders agreed with the statement that “even though the California deregulation plan was flawed, we should stay the course and not re-regulate” (See Fig 13).

In fact, a majority of Business Leaders (61%) do not blame the private utilities for mismanaging California’s energy system, but instead believe the energy crisis resulted from poorly conceived and implemented plans to deregulate energy markets so that once the crisis is past, private utilities and generators will be more effective and efficient.

The report also cites government involvement as the most frequently mentioned negative factor affecting business in California. I hope the 240-some candidates for governor of California are paying attention to such issues.

BASTIAT SHOULD BE REQUIRED READING

I think Frederic Bastiat was one of the most insightful writers on state power. He starts off his major work, The Law, with a bang in the introduction:

If every person has the right to defend even by force—his person, his liberty, and his property, then it follows that a group of men have the right to organize and support a common force to protect these rights constantly. Thus the principle of collective right—its reason for existing, its lawfulness—is based on individual right. And the common force that protects this collective right cannot logically have any other purpose or any other mission than that for which it acts as a substitute. Thus, since an individual cannot lawfully use force against the person, liberty, or property of another individual, then the common force—for the same reason—cannot lawfully be used to destroy the person, liberty, or property of individuals or groups.

Try telling that to the governments that want to use eminent domain to condemn properties! Bastiat then goes on to define plunder, how the law can be used to commit plunder, and why it should not be. I've thought for years (12 at least, since I first read Bastiat) that The Law is a must-read, for he makes an incredibly persuasive case for individual rights and limited state power.

And in a posting that kicked me off on this, AtlanticBlog quotes one of my favorite Bastiat lines:

The state is that great fiction by which everyone tries to live at the expense of everyone else.

PASCAL ON PROOF AND CUSTOM

I've forgotten to check Eric Rasmusen's blog lately, and in revisiting there this morning I noticed his interesting post on Pascal, proof and custom. The passage he chose to quote, from Pensees, is striking, and not something that I've typically associated with Pascal:

For we must not misunderstand ourselves; we are as much automatic as intellectual; and hence it comes that the instrument by which conviction is attained is not demonstrated alone. How few things are demonstrated! Proofs only convince the mind. Custom is the source of our strongest and most believed proofs. It bends the automaton, which persuades the mind without its thinking about the matter. ... The reason acts slowly, with so many examinations and on so many principles, which must be always present, that at every hour it falls asleep, or wanders, through want of having all its principles present.

Wow. It would be really fun to read Pascal, Hayek and Michael Polanyi together, to tie in Hayek's arguments on how tradition and custom shape our economic interactions and get expressed in market processes, and Polanyi's analysis of tacit/inarticulate knowledge. How much of what we do and how we go about it in a given day do we do without having to think about it? How much do we know how to do without remembering having learned how to do it?

RAUCH ON SPAM

Jonathan Rauch has a typically good column on spam and ways to deal with it. He recommends what I think is the best approach: that we have property rights in our email inbox!

The spam problem, though new in form, is an instance of a very old and familiar dilemma, which economists often call the tragedy of the commons. When any resource is both valuable and freely available, people tend to overuse it. Moreover, everyone anticipates that everyone else will overuse it, so everyone tries all the harder to get while the getting is good. The result is a run on the resource. The tragedy is that everyone's least-favored outcome -- the depletion or exhaustion of the resource -- is assured.

Centuries of theory and practice have unearthed two effective remedies. One is to appoint a conservator with the unique power to mete out the resource: say, the U.S. Fish and Wildlife Service. The other is to create property rights to the resource and allow a market to develop. What people own, they conserve.

In the case of e-mail, the valuable resource at issue is my attention, and the problem is that access to it is essentially free. People who really want to talk to me need make no more effort than do people who merely want to waste my time. In fact, spammers expend less effort than real people do, because a computer does all their mailing for them, whereas you would need to sit down and write a message.

Rauch then explains why spam bans and ISP exhortations will not work as well as our having property rights in our own inboxes.

Link to RSS feed

OK, for those of you who use aggregators, here's the address of my RSS feed:

http://knowledgeproblem.blogspot.com/rss/knowledgeproblem.xml

WORKING ON A NEW PAPER: ENVIRONMENTAL REGULATION AND ORGANIZATIONAL CHOICE

I've also been working to get a paper out for the International Society for New Institutional Economics conference in September. This paper is the first in a new project on how the petroleum refining industry responds to regulatory change, so this paper essentially lays out the conceptual argument and marks out the path that I want to follow on the project.

The title of the paper is "Environmental Regulation and the Transactional Boundary of the Firm: Regulatory Change, Vertical Integration, and Firm Profitability in Petroleum Refining, 1990-2001". Here's an excerpt from the conclusion:

The mergers and consolidation seen in the petroleum refining industry in the late 1990s are the transactional manifestation of firm attempts to regain economies of scale after the imposition of new regulations in the CAAA [Clean Air Act Amendments of 1990]. The fuel regulations in the CAAA introduced market fragmentation in motor gasoline, and this fragmentation undercut economies of scale in petroleum refining. Relative to pre-CAAA, the regulations could constrain refiners away from their previous minimum efficient scales of production. Organizational change through horizontal mergers of vertically integrated firms offered refiners a more profitable alternative than switching production within refineries. The imposition of external constraints increased the value of production and organizational flexibility that vertical integration allows.

WHERE HAVE I BEEN?

This is not an existential question, but rather an opening to discuss my recent sporadic posting. I spent the weekend at a Liberty Fund conference on constitutionalism directed by my good friend Georg Vanberg. It was a real treat to think about and discuss issues of constitutionalism with some of the most esteemed political scientists in my book, and I learned a lot and had a good time getting to know folks whom I previously only knew by name.

NEW SOURCE REVIEW: A NEW VOLLEY BEGINS

The states of New York, New Jersey, and Connecticut have won an Ohio court ruling that Ohio Edison, a First Energy company, violated the Clean Air Act. How did they do so? By making improvements that, the decision finds, nullified their being grandfathered out of new source review.

The suits against Ohio Edison, a subsidiary of the FirstEnergy Corporation, and the other power companies centered on the Clean Air Act's "new source review" provision. The provision mandates that older coal-burning plants, "grandfathered" from some pollution control requirements when the act was adopted more than three decades ago, install modern controls whenever they significantly expand their energy production.

The provision does not require the increased, and expensive, controls in the case of routine maintenance, and the suits maintained that power plants had long been doing substantive upgrades, some needing approval from company directors, under a routine-maintenance guise.

In other words, the upgrades should have been sufficient to trigger a new source review, and even though the EPA's enforcement is not perfect, that's no excuse for Ohio Edison doing these upgrades without being subject to new source review, and therefore to more stringent emission regulations.

So it's not that they spewed more stuff into the air, it's that the made improvements that should have shifted them into a new regulatory regime that required them to start emitting less.

Yes, it's as absolutely convoluted and screwy as it sounds. I'll have more to say on this later.

See also these articles from MSNBC, Forbes, and the Cleveland Plain Dealer.

VIVE LE DIRIGISME!

I love the header in this Economist (subscription) article on the proposed French government subsidy of Alstom:

The French, it seems, have no word for laissez-faire.

Beautiful!

RSS AND TITLE FEEDS

If any of y'all are playing with RSS on blogger and can help me figure out why my titles are shifted down to the next lower post, please feel free to drop me a line. I have to go do the day jobs now.

A NATURAL GAS UPDATE: BARNICH AND REID

On Monday Tech Central Station ran a good article by Terry Barnich, a fellow Chicagoan and also a former utility regulator. Barnich is in a good position to analyze the current natural gas situation and make recommendations:

State utility regulators, working cooperatively with electric power producers can accelerate the displacement of older, less efficient power plants with new gas-fired plants that employ modern technologies that nearly double the electricity output for the amount of gas used. By undertaking this task with a modest sense of urgency they could be in place to free up gas to the market to ameliorate any shortage this winter.

Ten years of government policies encouraging the use of natural gas have succeeded too well. As a former utility regulator in Illinois, the nation's largest user of gas for residential heating, I am familiar with the roller-coaster nature of our public policies on natural gas and the endless possibilities for unintended consequences of those policies.

The rest of his argument highlights the importance of technological change in delivering cheaper and higher quality functionality in many, if not all, of the aspects of our lives, including power. It can also deliver environmental quality more cheaply, because one thing that often gets lost in the shuffle is that if energy consumption gets more expensive, and we have to bear the cost of our consumption, we'll consume less, which means we'll pollute less. Barnich's argument complements that point, by showing how technological change can enable us to maintain the amount of heat and power we get, but to get it with less energy input and less emission output.

Today Tech Central Station published an article by Ed Reid, who I have known for a while as one of my energy go-to guys and who has been involved in the natural gas industry for decades. He makes a strong argument for a more balanced portfolio approach to energy, as opposed to hanging our hopes and our rigid regulatory mandates on single sources like natural gas. He also shows the numbers and does the math to show that the current degree of natural gas consumption for electricity generation is unsustainable. His conclusion is going to come back, I'm sure, as Congress debates an energy bill this fall:

Far too much of the discussion regarding the energy future of the U.S. is focused on "silver bullet" solutions to our energy problems. Our future energy supply portfolio must include more than a single source of energy, or we will be at far greater risk of energy shortages than is the case today.

Both of these arguments are complementary, and are also complementary to the argument I made at Tech Central Station in June that the existing regulatory environment is one of the primary reasons why natural gas prices are currently high and volatile.

TITLE FIELDS AND RSS

I've made a few little changes because I'm messin' around with an RSS feed. I'll keep you posted.

NUMBER PORTABILITY, FINALLY?

According to this Business Week article, we are getting national cellphone number portability in November. The article predicts price cuts and a marketing frenzy in December.

The number portability progression is an interesting case study in the formation and definition of new property, and new property rights. Back in the bad old Ma Bell black phone days, phone numbers were much less relevant. Because of technological and cultural change they have become an important part of our daily lives. And the interesting struggle has been that transition from the "phone company" ownership of the number to the individual ownership of the number. As the Business Week article points out, but not in so many words, this property rights realignment has dramatic implications for how consumers and phone companies split the surplus -- do prices fall or do profits rise? The evolution of number property rights toward the customer seems to suggest the former.

I think there will be more subtle and drawn out effects of this property rights evolution, but I want to chew on them a little longer and write about them once I've had some time to sit down and think carefully about them.

GWAPE

As mentioned earlier, the forthcoming Girl With A Pear Earring movie:

Frontpage Magazine has reprinted a WSJ opinion piece from Wednesday by Steve Haber, Doug North, and Barry Weingast entitled "If Economists Are So Smart, Why Is Africa So Poor?" (although the first clause of the title does not appear on the Frontpage site, more's the pity). This piece is a succinct statement of the problems of institutional formation and change facing African countries:

In effect, solving the development problem in Africa requires the crafting of political institutions that limit the discretion and authority of government and, more saliently, of individual actors within the government. No simple recipe for limiting government exists. Yet two principles are clear. First, the countries of Africa must create mechanisms and incentives for different branches and levels of government to impose sanctions on one another if they exceed the authority granted to them by the law. Second, these sanctions cannot be imposed in an arbitrary or ad hoc fashion: the sanction mechanisms themselves must be limited by the law.

Read the whole thing.

Another thing that went by the wayside while I was teaching last week was my interaction in a debate on hydrogen fuel cell vehicles at Arnold Kling's EconLog. This Futurepundit post on recent hydrogen studies is a very good, thorough analysis of hydrogen fuel cell vehicles. Russell cites the recent studies from Berkeley and MIT that indicate that there are better (by which I mean more energy efficient and more economically efficient ways of achieving environmental and security objectives) ways of achieving our objectives than hydrogen fuel cell vehicles.

He also pulls what I think is a very important quote from the Berkeley press release on the study:

"There are three reasons you might think hydrogen would be a good thing to use as a transportation fuel - it can reduce air pollution, slow global climate change and reduce dependence on oil imports - but for each one there is something else you could do that would probably work better, work faster and be cheaper," Farrell said.

In addition to the studies linked from the Futurepundit post, this Reuters article and this Yahoo article on the Berkeley study. These discussions also complement five-part series on hydrogen published in March.

I'm sure there are good reasons for this, like the fact that these are scientific studies and not economic studies, but I must reiterate that the command-and-control forms of regulation that the authors recommend as an alternative to hydrogen vehicles, like mandating increased fuel efficiency, ignore that fact that consumers have fuel efficient choices available to them, yet do not choose them. As consumers, we view vehicles as a bundle of attributes and opportunities, including effects on the environment that are a consequence of using vehicles, but also other characteristics like size, horsepower, design, etc.

Another factor here is that we want a clean environment, but we also want cheap and plentiful fuel and not to have to think about our transportation too hard. Thus even though there are gasoline taxes of various sorts, there are also some fuel subsidies (including the egregious subsidies to ethanol that distort our ability to assess whether or not ethanol can compete on its own, but that's another post ...) and other political devices that keep fuel cheaper than it would be otherwise.

We want our cake without paying for it, and political processes enable that spoiled child approach to public policy.

I am doing my work this morning in Mozilla's browser, Firebird. I can post successfully, which may be a reflection on Blogger and not on Mozilla, but I've never had full posting success with Netscape. Firebird loads quickly and has a clean interface. I like it even better than Opera.

So don't get sucked into the monopoly browser! Try Firebird.

Kevin Brancato has this really good post on opportunity cost, in response to a tv segment he recently saw on whether performing household chores yourself is financially "worth it".

This analysis made me cringe, not just because one cannot really separate the financial from any other aspect of value, but because the methodology used by the talking head assumed that each hour of human life has equivalent potential financial value--which is untrue for most of us.

How can any economist know enough about the specific lifestyles and work habits of people to tell them whether mowing their lawn--instead of hiring the neighborhood kid--makes financial sense? Anybody who makes any decision must take the particulars of his circumstance into account. It is the particulars that will decide each and every case. No formula or methodology can remove the need for specific data.

Amen, brother! Add to that comparative advantage and specialization, and the personal and subjective nature of assessing them, and you see why each individual is in the best position to evaluate whether or not it's worth it. In a sense, what the commentator observed is what we called revealed preference -- financial evaluations of the choices that we have made, and have thus determined are worth it by definition.

Although I must take some tongue-in-cheek umbrage with his moral, although my husband may not:

Moral: Don't let economists tell you who should mow your lawn, or when to mow it--your wife should tell you that. If your wife is an economist, I empathize.

Lots to catch up on, including Craig Newmark's new address. Please update your links accordingly. Thank you.

Now, back to thinking about energy economics!

Another thing that made my flight delay bearable was Kurt Elling's new CD, Man in the Air. One thing that's really cool about Elling and the folks who play with him is that they are fascinated with the texture of sound -- when we see him at the Green Mill he is always doing funky stuff to mess with sounds in ways that may result in something very interesting. You definitely get a sense of that in this album.

This album also has Stefon Harris, a fantastic vibraphonist, in addition to the Laurence Hobgood Trio that usually plays with Elling.

MORE READING RECOMMENDATIONS: I ended up spending a few extra hours in the Raleigh airport due to bad weather on both ends, so I was extremely glad to have Walter Isaacson's new biography of Benjamin Franklin to make the delay bearable. It's quite well written, and Isaacson casts his tale in the context of the paradoxical juxtaposition of Puritanism and the Enlightenment ideals that jointly formed Franklin's intellectual background. It's a very sympathetic portrait, but not sycophantic -- he highlights Franklin's successes and failings, particularly the negotiations and blind spots (against the Penn family) that got in the way of negotiations over the taxation and representation issues. Not that I think any more focus on Franklin's part would have overcome the beliefs and biases of Townsend & Company, but ...

I also finally read Girl With A Pearl Earring, which is an amazingly beautiful novel based on a Vermeer painting. Tracy Chevalier takes the girl in the painting and gives her life, a story, and a personal connection to Vermeer. It's beautifully written, with very visual prose, as befitting a novel about an artist like Vermeer. In this regard Chevalier's writing is somewhat like A.S. Byatt's, who is another writer I devour.