Lynne Kiesling
Congratulations to Dennis Sullivan, my former undergrad professor (to whom I owe my undying gratitude for, among other things, having me read Sen’s Paretian liberal paradox argument), who has been named the 2005-2006 Miami University Alumni Association Effective Educator. I concur; he’s been an inspiration to me for (gaack!) decades, both in and out of the classroom. And he’s a wonderful person on top of all that.
Lynne Kiesling
For you KP readers who don’t eat, sleep and breathe electricity policy, this new blog called Adam Smith Lives! might be more to your taste. Written by Sandra Peart, a historian of economic thought, it is a good read that puts a lot of great shape and nuance on the history of economic ideas. She’s got some thoughtful and engaging post-Katrina posts about sympathy and its expression in human action and in economic writing and theory. A must read site.
Lynne Kiesling
Resource adequacy is the current hot topic in electricity policy. Fueled by the glacially incremental restructuring process in the states and concerns about service reliability in this persistent policy limbo, states and regional system operators have explored a variety of means of providing forward-looking reliability incentives in the absence of the regulatory mandate to vertically-integrated utilities. One incremental approach is capacity markets. In a capacity market, system operators solicit offers from generators to provide a guarantee of future capacity to provide power, based on the system operator’s need to meet a specified, engineering-determined reserve margin over and above forecast demand. In capacity markets that have been implemented or proposed in the U.S., the forward timeframe can range from one day to four years.
The typical argument offered for the implementation of capacity markets invokes the lack of retail demand response, which makes active, double-sided forward markets impossible, and the lack of developed, liquid, integrated spot and forward energy markets. Notwithstanding the chicken-and-egg nature of this conundrum, implementing a capacity market in isolation, based on an artificial demand curve (regardless of its slope), does not do anything to reduce the barriers to active retail demand. Furthermore, technological advances and increasing numbers of retail demand projects show that empowering demand response is not as expensive or as distant a task as capacity market advocates claim.
Another cautionary note for capacity markets comes from their focus on providing the “missing incentives” for investment in generation capacity for the future. But there are four resources in the portfolio of resources that we can use to ensure future system reliability: generation, transmission, demand reduction, and technological innovation that can affect any or all three of the other resources. Creating incentives for generation leads to inefficient distortions in cases where one of the other resources might be better suited to a particular case, or might be less expensive, or might be more flexible and adaptable on the network.
California is currently considering implementing a capacity market, and has requested comments. In a recent paper, which the Alliance for Retail Energy Marketers submitted to the CPUC, I analyze these issues and present an alternative model for enabling system reliability through resource adequacy. Capacity markets do have benefits in terms of increasing price transparency and market liquidity, as well as providing a platform for load serving entities to buy and sell capacity. Rather than adopt a capacity market that is based on an artificial demand curve to complement the state�s existing resource adequacy requirements, however, the best resource adequacy policy that California could follow would be to eliminate the current regulatory barriers that impede demand-side participation in the wholesale and retail markets (i.e., participation by end-use customers and LSEs). A second priority should be to develop integrated spot and forward energy market platforms that transmit accurate price signals to investors and entrepreneurs. While achieving these two priorities will take time, a transitional approach that employs known, tested financial instruments, such as call options, could bridge that gap. By flexibly accommodating generation, transmission, and new demand-side resources and technologies, this recommended approach is more likely to generate long-run benefits for California customers than an artificial capacity market that would be both costly to implement and difficult to dismantle once it became obsolete.
Lynne Kiesling
As you’ve by now inferred, we’ve made the exec-you-tee-vo decision to change to Title Case on titles at KP. Many thanks for the input I got from several of you, public and otherwise. I think what swung the decision was the ability to reserve all caps for times when we want the emphasis, like “Governors See Price Gouging; THEY CAN’T BE SERIOUS!”
Just a hypothetical …
Michael Giberson
Rainbough Phillips amusingly tags price gouging as “the Phantom Menace” in a post on Catallarchy. She also provides a neat insider’s look at the supply and demand for emergency supplies, viewed from the returns counter at an Austin-area big box hardware store.
Meanwhile, back in Houston, authorities are urging the city’s gasoline station employees and owners to return as soon as possible.
It is purely a coincidence, of no relevant economic logic or moral importance I’m sure, that the higher the gas station’s price-cost margin, the greater the incentive the station owner would have to do what authorities are saying would be the right thing to do. (Or, perhaps, even remain behind during the storm, the better to serve their customers.)
Lynne Kiesling
In his last column in Technology Review in December 2004, Michael Schrage talked about the importance of the diffusion of innovation. He made a lot of very trenchant observations, including
The challenge for policymakers and populations alike is how to cope with the pervasive-and perverse-consequences of ever more people gaining access to ever more innovations that offer ever greater impact for ever lower costs. Why? Because diffusion is inherently messy and unpredictable, and because the ingeneuity of a technology’s adopters more than rivals the creativity of its original innovators. We ignore this at our peril.
I am going to use this quote as a stepping-off point for several posts this week, and I start with a “how cool is this?” example that illustrates the multi-dimensional dynamic of innovation. You know the story: you get a new technology, you say “gee, that’s cool, but I wish it could also do X”. Then you get on with your life. But chances are, there are other people out there who also want it to do X. One of those folks, imbued with entrepreneurial spirit and seeing an opportunity, innovates a new product or service that does X. Not only do those of you who wanted X to begin with benefit, but those of us who didn’t realize we wanted X before also benefit, because in the process of creating the innovation and bringing it to market we discover our preferences over X relative to other product and service offerings out there, given our budget constraint. Our preferences feed into innovation, and what’s more important and more overlooked, innovation feeds into our preferences. All the more reason why Hayek was bang-on right when he said that competition is a discovery procedure: the action is in the dynamics of innovation, not in the static discovery of my liking Fresca better than Diet Pepsi.
I offer as Exhibit A a somewhat frivolous example, but when I saw it, it made me metaphorically smack my head and say “of course!” 411song will, for 99 cents, identify a song and send you a text message with the song and artist information, and a link to get the mp3 of the song.
- Hear a song you love.
- Call (866) 411-SONG.
- Wait for the beep and hold your cell near the music for just 15 seconds.
- We identify the song and send you a text with all the song info (artist and song name) and a link to GET it.
Sure, it’s frivolous, but I’d be willing to wager that it’ll profit.
Hat tip to Daily Candy, one of my favorite daily fun reads.
Lynne Kiesling
While I’m digressing, let me ask y’all a style question: are the all caps titles OK, or jarring? Should we switch to Title Case? all lower case (I’m not serious about that one)?
I’ve noticed that when I see the all caps titles in RSS feeds they stand out, and I’m not sure I like it. They are a relic of the old Blogger environment in which there wasn’t a title field.
I’m inclined to change, and would like to hear opinions. Bring ‘em on!
Lynne Kiesling
That is how much I like him, that I am willing to break from KP title protocol …
I’m putting the whimsically allegorical poem that Kurt Elling read on Wednesday after the cut, if you are interested. Here’s the first stanza as a teaser:
here is little Effie’s head
whose brains are made of gingerbread
when the judgment day comes
God will find six crumbs
Lynne Kiesling
It’s been a long, long time since I’ve been this tired on a Friday afternoon. First week of classes, working on a project with a short timeframe, not enough exercise, and two fun back-to-back music events.
The later one, Wednesday, was our standing visit to the Green Mill to hear The Kurt Elling Quartet whenever they are in town and we can go. This week they were a blast; everyone was in a bit of a silly mood, Kurt read not one but two, two e.e. cummings poems (I adore him), and the guest musician was Howard Levy, who can make the harmonica make sounds that should not be physically possible. Literally. He invented a technique that enables him to play the notes that have been taken out of the harmonica, or at least that’s my philistine understanding of it. It was a total hoot.
Tuesday night was an event I had been anticipating for months: Franz Ferdinand kicked off their North American tour in support of their new album You Could Have It So Much Better, right up the street at the Aragon Ballroom. What a total blast; I even had a better time than at the Snow Patrol concert last fall.
More Friday-afternoon-I’m-too-tired-to-work concert blather after the cut …
Lynne Kiesling
I am teaching environmental economics this fall, and Tuesday was our first day of class. As I have structured the class, it focuses on common-pool resource allocation decisions. So I typically start the class with the example of a river, which I draw on the board. I ask students to name the different ways that we use the river (transportation, recreation, fishing, swimming, electricity, natural beauty, drinking water, dump waste from paper mill, irrigation, runoff from farms, etc.). As I start to populate the drawing with all of these uses, it quickly becomes apparent that some of these uses conflict — power generation and transportation, for example, or swimming and waste dumping.
So the problem is one of conflicting uses of a scarce resource. For most goods, market processes help us solve those problems, but with common pool resources we either have real limitations to the extent to which we can define property rights, or we have made political choices to manage the common pool resource as a public good.
Then today we did an in-class experiment called Paper River, in which the common pool resource is small sheets of paper. Half of the room made profits by producing math problems, solving them by writing in pencil on sheets of paper. The other half made profits by making paper airplanes, but here’s the catch: the paper has to be clean before the plane can be “sold”. So the downstream plane firms bore a cost due to the production processes of the upstream math firms.
After doing one round of this, we discussed some policy options that could help to incorporate this uncompensated external effect (I am eschewing the increasingly meaningless word “externality”). Here’s the list that they came up with:
Because of the way I set up the experiment, the paper of one math firm went to one plane firm, so what they did after generating this list was bilaterally meet and negotiate how they were going to deal with this situation. Although we haven’t explicitly talked about the Coase Theorem in class yet, this is clearly an exercise in defining property rights and negotiating.
Most of the groups, interestingly, had the plane firms paying the math firms to use less paper. One group reached this interesting agreement: the math firm gets one free piece of paper, but then has to compensate the paper firm 1/2 point per additional piece of paper used (the profits in this experiment are class participation points). Two sets of firms merged, illustrating the other Coase point that some transactions are less costly to consummate through firms than through markets!
Then they did a second round. The combined math firm + plane firm profits in Round 2 exceeded those from Round 1; their negotiations produced a Pareto improvement.
I really like starting the class this way, because we build a big, diverse menu of policy alternatives, and then we can start comparing, contrasting, analyzing, looking at pros and cons.
[cross-posted at Environmental Economics]
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