Michael Giberson

Take billions of dollars of network assets owned by a number of local for-profit monopolists regulated by both state and federal agencies, turn control (but not ownership) of the assets over to a bigger regional monopoly organized as a non-profit run by an independent board, require that all major decisions must be vetted in a stakeholder review process and then submitted for regulatory approval. Several of such non-profit, regulated regional monopolies have been established, mostly developed independently of one another, and using somewhat different business models, custom-built software, individual accounting methods, and idiosyncratic rate designs.

Question: Is this a recipe for efficiency? FERC wants to know.

On September 15, FERC issued a “Notice of Inquiry” concerning the financial reporting, oversight and cost recovery practices of Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). RTOs and ISOs are two kinds of FERC-regulated regional organizations managing transmission assets and in several cases operating energy markets. Some energy consumers and other market participants have raised questions about the costs of these organizations, but it has turned out to be difficult for FERC – and others – to address these questions. Hence, the Notice of Inquiry.

Perhaps the surprising thing here is not that these organizations may be inefficient, but that they work at all. Maybe non-profit governance or regulatory oversight works better than your typical “market oriented” economist might think, or maybe something else is going on. If you have a good handle on these sorts of issues, you may want to submit a response to FERC. Comments are due November 4.

More information is available in a FERC Press Release and the full Notice of Inquiry (pdf file), both available from FERC’s website at www.ferc.gov.

Lynne Kiesling

Many thanks to Andrew Morriss over at The Commons for the link to this Chay and Greenstone working paper on the effects of air quality on housing prices.

The typical econometric method for performing such an analysis is called hedonic estimation, where your dependent variable is the house price and your independent variables are all of the things that you can measure that you hypothesize can affect that price. As the authors note, cross-section hedonic analyses have not yielded robust results on the value benefits that clean air provides. So they are enhancing the hedonic technique by using instrumental variables to control for some of the omitted variables (which are likely to abound in such a case). In instrumental variables, you use a variable that is highly correlated with one of your explanatory variables (TSP, or total suspended particulate, concentration in this case), but is not correlated with the error term in your single-equation regression.

Chay and Greenstone find that air quality does affect housing prices, and their econometric technique allows them to be more confident in saying that because they have been able to control for many confounding effects that are difficult or impossible to measure.

Very interesting …