So I’m at a conference here in Philadelphia with Tyler Cowen, and I told him after dinner that I was going up to my room to bed, no computer, just a phone call home. But then I got sucked in …
Archive for February, 2004
MORE ON REGULATORY ARBITRAGE
February 19, 2004A friend of Knowledge Problem who is extremely knowledgeable about the electricity regulation and the dynamics of the industry in the past decade offers this response to my earlier post. I think he’s right:
On your latest post re arbitrage, I think the spirit of your post is right, but the facts might not be. Vertically integrated utilities cannot move assets between rate base and unregulated subs with any ease whatsoever. Indeed, it would be the mother of all transfer proceedings for them to try to do so, and most states would stop it. Rather, their going-forward investment incentives are affected by what regime looks most attractive. Thus, from 1998-2001, they put their capital in unregulated merchant subs; since then, they have put their capital in the regulated side because the return is better.
Your basic point is right, a world half-regulated, half-free cannot stand and indeed is the worst of both worlds and reflects a deep ambivalence toward competitive power markets. That said, the utilities’ investment decisions are being influenced where they think they can get the greatest return.
GASOLINE PRICES, AGAIN
February 19, 2004Here’s an article on the complex interaction of factors that have led to a recent rise in gasoline prices in California. It’s a lot of the usual — planned and unplanned maintenance, the seasonal fuel switchover, etc.
ECONOMETRICS TEXT: STOCK AND WATSON
February 19, 2004I agree with Alex at Marginal Revolution that Stock and Watson is an extremely good econometrics textbook. I don’t teach econometrics, but I do supervise senior theses that frequently require my consulting with students about their analyses, and Stock and Watson is very good.
This is not surprising; I learned time-series econometrics from Mark Watson when he was at Northwestern, and he was a very good teacher.
COMPETITION BENEFITS VIRGINIA CONSUMERS
February 19, 2004Check out this commentary from Monday’s Richmond Times-Dispatch. Virginia is considering returning to full regulation of its electricity industry, and this commentary by Thomas Nicholson lays out the case for why that’s a bad idea.
The way the wholesale market has been designed in Virginia has some serious flaws, and Nicholson encourages Virginians not to throw the baby out with the bathwater, but instead to address those flaws and create a transparent regulatory environment into which competitive suppliers would find entry attractive. That entry is an important part of the process of competition delivering real value to Virginia consumers.
Thanks to Mike Giberson for the article link.
ARBITRAGING REGULATORY UNCERTAINTY
February 18, 2004I am pleasantly surprised to see James, Rogers, CEO of Cinergy, being frank in stating explicitly what we know: the regulatory uncertainty currently plaguing the electricity industry provides participants with arbitrage opportunities that they would not otherwise have. This uncertainty creates the opportunity for vertically integrated utilities to move assets around to where they will get the best return, shifting ownership between their unregulated and regulated subsidiaries.
The apparent freedom of diversified utilities to move underperforming merchant-power plants into their regulated utility assets, where all costs are assured recovery, is seen by many as a big advantage over pure merchant-power companies. Such companies as Calpine Corp. must suffer through low prices until markets recover.
“Some people are calling it a hybrid, or a fault line. I call it a dual universe for generation, and it’s a hugely uneven playing field,” said Standard & Poor’s utilities analyst, Peter Rigby, in an interview at the CERA Week conference in Houston.
I think Cinergy and other companies like them are doing their fiduciary duty to their shareholders by profiting from this regulatory minefield, and Rogers agrees:
Cinergy, Rogers said, is simply “playing the hand it was dealt” by state legislators and regulators.
“I’ve advocated competition my entire career, but if I’m in a state that hasn’t deregulated or changed its mind about deregulation and wants me to build new plants, I’m going to build new plants. That’s where we found ourselves. We don’t have control over the market rules,” Rogers said.
So the question to ask regulators is this: do you really think it’s in the public interest to create these perverse incentives for utilities? Wouldn’t it be more in the public interest to have regulatory transparency that would lead to dynamic efficiency through the optimization of investment incentives according to what consumers want, as opposed to what regulatory commissions tell firms they have to do based on what they think consumers want?
Grrrr.
KENNYWOOD
February 18, 2004Oh, and also to Stephen, I do remember Kennywood, fondly and vividly. My first roller coaster, my first log ride … although I don’t think that was my first post-ride motion sickness. My father will have to confirm (and he should feel free to do so in the comment box if he does recall …).
Maybe it was, after all … I remember being really nauseated after the centripetal force thing where they spin you and the floor drops out, but I can’t recall if that was Kennywood, Hershey, or some other park.
Kennywood was awesome.
MADDUX IS A CUB AGAIN
February 18, 2004Thanks to Stephen Karlson at Cold Spring Shops for pointing out that spring is around the corner as pitchers and catchers report to camp.
And to make it even better, Greg Maddux is reporting to the Cubs spring training (pending a physical)!! Yeeee hah!
DISTRIBUTED ENERGY SYSTEMS
February 18, 2004Check out this Crumb Trail post on research using glucose as fuel and a microorganism as the catalyst. This research may lead to smaller-scale fuel cells and accelerate the ability to implement distributed energy systems.
Making those distributed energy systems economically viable is another thing … but it is coming.
COTC AT TASTY MANATEES
February 17, 2004Carnival of the Capitalists is now up for this week at Tasty Manatees. In addition to my airport time slots post, COTC highlights a few posts that I read last week too and think are really good. I’m running out the door for the day, so will only highlight one for now. More later.
At Catallarchy, Jonathan Wilde asks: Does capitalism create poverty? In discussing the decision of these workers to become illegal immigrants and accept these jobs, Jonathan observes
However, under the assumption that they chose to work at these jobs, why did they choose to work under such horrible conditions? Clearly, in their own eyes, it was better than the alternative. Perhaps the alternative was the starvation back in China. Maybe they thought that working their jobs would help them save enough money to give their own children a better life. It was their own subjective appraisals of the situation which led them to choose these jobs among the available alternatives.
This dynamic has been pervasive throughout all of human history, and has been universally decried by ex post historians and observers. You see the same type of argument against enclosure in Britain in the 17th and 18th centuries, and against the movement of underemployed agricultural workers from rural areas to the newly industrializing urban areas in the late 18th and early 19th centuries to work in factories.
I have always been bothered by such ex post judgments. The way I tend to put it is twofold: how do you know, and compared to what? As Jonathan says, people make subjective evaluations of alternatives based on the available alternatives. Where do we get off judging their choices? And it’s hugely unfair to judge their choices and alternatives relative to some idealized benchmark that we only realize after the fact was either available or better, or wasn’t even available.
But there is a more subtle question one can ask: why do some alternatives exist and not others? OK, if people make choices in the face of a discrete set of alternatives, can’t we judge the alternatives among which they choose? Put more concretely, did the agricultural proletariat (I’m using Marxian-speak to hook back in to the end of Jonathan’s post) have any “meaningful” choices? Did the Chinese workers who chose these dangerous jobs have any “meaningful” choices?
Again, I think this question requires an ex post perspective. But the thing that I think is the most pernicious in the conception of “meaningful” choices is that the people making this argument believe that someone has a positive obligation to provide those meaningful choices, as opposed to everyone having a negative right to general liberty, including the freedom to change location and employment.
Others are better qualified than I to discuss the destructive incentives and social environment that the positive entitlement approach engenders. But one of the core, fundamental principles underlying the great economic prosperity that humans have created over the past three centuries is the freedom to make that ex ante subjective, individual choice about how much and what kind of risk you are willing to bear, and what actions you are willing to take to have a chance of improvement in your well being.
