Daily Archives: July 31, 2002

THE NEPTUNE PROJECT

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The Neptune project is a privately-funded, high-voltage, direct current (yes, DC, not AC!) project to connect Manhattan and Long Island with other areas that have larger supplies of generated power. This type of interconnection of markets is a driving force in reducing transaction costs and increasing efficiency in energy markets. The progress of this project is very important as an indicator of the investment value of new, private transmission, and of the fact that just because electricity transmission is network infrastructure, that does not imply that it must be either provided by government or subject to government economic regulation (I am happy to concede the importance of safety standards in electricity transmission). This story, about TXU joining the investment consortium that is funding the Neptune project, illustrates the investment appeal of competitive electricity transmission to reduce bottlenecks. TXU’s development capital will expand the construction to include DC lines connecting Manhattan and New Jersey, which gives Manhattan better access to the liquid and well-supplied PJM (Pennsylvania-Jersey-Maryland) wholesale electricity market. This is a good thing.

GAME THEORY AND HUMAN NATURE

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This Wired News article highlights remarks by Martin Shubik, an eminent economist and game theorist, who is advocating pushing the use of game theory in economics beyond its grounding in rationality and strategy, to incorporate such human traits as emotion and error.

Last Wednesday, Shubik told the audience of game theorists with mathematics backgrounds that the next theories have to be hammered out “in concert” with other disciplines. The next theories, he said, have to consider emotions and their consequences, the culture and the context.

“Our simple models are no longer sufficient to answer many of the questions we have raised. The very successes of game theory are forcing us to move on,” said Shubik, an economics professor at the Yale University School of Management and a consultant to major corporations and agencies of foreign governments.

Very interesting. Perhaps the technocratic mathematization of my profession is in retreat? I’m not holding my breath, but as more prominent scholars recognize the need for interdisciplinary study of human action, I get more sanguine.

FERC SETTING MARKET RULES TODAY

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According to this Bloomberg News article, FERC will announce rules today to govern cross-regional wholesale electricity sales, including market monitoring and pushing “regulated utilities to cede some authority over transmission lines.” This has been coming for a while, with lots of industry and public comment time. I hope Commissioner Massey’s quote in the article is not indicative of the policy stance, though:

“We now have enough information to know what works well,” Massey said in an interview.

What disturbs me most in that statement is the missing “for now” that I wish were there — we know from history of the past five years what not to do, given existing technological and regulatory environments. But what if FERC’s standard market design is not flexible and robust to changes, especially in technology? And what if it doesn’t allow for regulatory change that would be mutually beneficial for consumers and for innovative producers? Then I worry that FERC’s standard market design will freeze the institutional structure underpinning the industry, and that it will be rigid, unresponsive, and eventually obsolete, but still legally binding, to the detriment of consumers and innovative producers. It could also create vested interests who benefit from the institutional structure frozen in that way, who then have an incentive to lobby and use the political process to stymie change.

The biggest benefit is reduced transaction costs; transaction costs have been a big impediment to regional coordination that will bolster and liquify wholesale markets. See also this Reuters article on the topic.