Lynne Kiesling
Greg Mankiw beat me to it yesterday by linking to and excerpting Michael Salinger’s commentary on price gouging in Saturday’s Wall Street Journal (subscription required). Salinger, who is currently at the FTC (on leave from BU), draws his commentary from a recent FTC report on “price gouging” (I haven’t read it yet, maybe it provides a definition for “price gouging”) in retail gasoline markets. Worth reading.
Lynne Kieslingj
Ghana has beaten USA and advanced in the World Cup. In addition to the satisfaction of well-played football and national pride, can there be economic incentives motivating the players? Yes. The 23 members of the Ghana squad get bonus pay for each victory, and that bonus pay doubles in the round of 16:
On top of the $50,000 received for competing in the World Cup, each squad member is earned $10,000 for defeating the Czech Republic.
The same incentive will apply should the Black Stars beat the United States on Thursday. And, if qualification for the second round is achieved, the players will also receive the $10,000 they would have been due had they beaten Italy.
This should take their earnings for the group stages to $80,000, per player, making it a total of $1,840,000. While the $80,000 may be about half of what Africa’s most expensive player, Michael Essien earns for a week’s job at Chelsea FC, it is a mighty bonanza for several of the players, especially their Ghanaian-based ones.
There is no discrimination when it comes to entitlement to the money. A player such as third choice goalie Ben Owu of Ash Gold should have enough money to shop and pay for excess luggage and perhaps top it with a C-Class Mercedes Benz before returning to Obuasi where he earns his normal pay.
The winning bonus, which is taxable in Germany, is to be increased to at least $20,000 if the team advances beyond the group stages.
For participating in the World Cup, Ghana has earned $4.5 million from FIFA.
In the Ten Principles of Economics (as articulated by Greg Mankiw), Principle Four is: people respond to incentives.
Congratulations to Ghana.
So now I’m down to England and Spain. Once we see the pairings I may venture to make some predictions. Maybe.
Lynne Kiesling
On Monday the Chicago Tribune published an editorial about electricity policy in Illinois (registration required). We’ve got a lot of electricity policy issues on the table right now. Nine years ago, the political bargain struck to allow wholesale market competition in electric power was a ten-year retail rate freeze, at a discounted rate relative to 1996 rates. At the time this was seen as compensation for inefficiency and cost overruns associated with nuclear plant construction, which meant Illinois retail rates were some of the highest in the country (and thus the impetus for introducing competition).
Nine years ago Illinois lawmakers voted to slash and freeze Commonwealth Edison’s electricity rates while the state prepared to move to a competitive market for power. Residential rates were cut by 20 percent, bringing ComEd customers closer in line to what neighboring states were paying.
In the ensuing decade, fuel prices have risen due to increased domestic demand, increased foreign demand, and environmental regulations that have constrained supply and have shifted out the demand for fuels like natural gas.
At the end of 2006, these heavily-discounted retail rate caps in Illinois expire. We have had much administrative procedure over the past two years trying to figure out “what to do” once the retail rate caps expire. One thing that is moving forward is a long-term wholesale procurement auction. I have reservations about the wholesale auction that I won’t elaborate on here (yes, auctions introduce market processes and price signals, but the structure of the wholesale auctions and having the incumbent as the purchaser may simultaneously lock customers into long-term prices/contracts that they might not otherwise have chosen, and it may also provide a substantial entry barrier to competing retailers who have to compete against this incumbent product offering). But the auction is coming, and it will reflect market values for electricity and expectations of those values for the next 1-3 years, so it will mean price increases.
One thing you can’t do is avoid the inevitable. Illinois and other states are going to move away from the old system of government-regulated electricity rates and into a competitive market. And they should. Over the long run, that’s going to be the best way to govern supply and demand–and encourage conservation–of power. …
The cost of electricity in Illinois does seem destined to rise sharply, at least in the short term. The wholesale price of electric power in much of the nation has increased in the last two years, driven by soaring prices for natural gas, which fuels nearly all the new electric generating capacity built here in the last decade. That marginal capacity largely governs the price in the wholesale markets. ComEd’s auction will reflect that rise in price.
The editorial correctly points out that supply is part of the story, but so is demand:
The price of electricity for ComEd customers right now is 8.67 cents per kilowatt hour–every hour of every day. But the market price fluctuates depending on how much power is needed at what time. Most of the time though, the market price for electricity is somewhere around 6 cents. In the middle of the night, it’s just a penny or two. On a steamy July afternoon the price can spike well above 10 cents. The need to have enough power available, whatever it costs, for the hottest minute of the hottest day is what drives up the overall price.
Consumers haven’t had price information to respond to a spike in electricity like they can respond to a spike in gasoline. (That is, use less of it.) But that might be coming.
Under a pilot program set up as part of the 1997 deregulation law, ComEd installed meters that gave real-time price signals in some homes. The result: On last summer’s hottest day, July 25, participants cut their peak-hour electricity consumption by an average of 15 percent.
You KP readers are already familiar with this program, the much (and justifiably) touted Energy Smart Pricing Plan from the Center for Neighborhood Technology.
The editorial closes by essentially saying we can’t go backward, nor should we, because the regulated past wasn’t that great a place to begin with!
Those who want to delay the move to an electricity market seem to have a mistaken nostalgia for the old days. ComEd consumers were paying the highest prices in the Midwest in the mid-1990s, in large part because of the government-protected monopoly’s notoriously poor management of its nuclear fleet. Exelon, the successor to ComEd, has been a much more nimble and efficient firm as it moves toward a market-driven power system.
As you would expect from someone who knows way too many of the details of topics such as this, I have quibbles with some of the editorial’s claims, but in general I think this is a useful commentary, and valuable for Illinois customers and politicians to consider.
Lynne Kiesling
Many of you probably already know that Wyoming was the first state in the US to extend voting to women, which they did as a Territory to ensure sufficient votes for statehood. More along those lines from Wikipedia’s entry on Wyoming:
In 1869, Wyoming extended much suffrage to women, at least partially in an attempt to garner enough votes to be admitted as a state. In addition to being the first U.S. state to extend suffrage to women, Wyoming was also the home of many other firsts for U.S. women in politics. It had the first female court bailiff and the first female justice of the peace in the country. Wyoming was also the first state in the Union to elect a female governor, Nellie Tayloe Ross, in 1925.
Jackson also had an all-woman, five-person city council in the 1920s.
Michael Giberson
Greg Mankiw explains why the increase in Fed watching could be a bad sign:
Perhaps increased Fed watching is inevitable whenever we have a new Fed chairman, but it is nonetheless troubling. Fundamentally, Fed watching is a symptom of ambiguity in monetary policymaking. Fed insiders do not have significantly more data on the economy than everyone else. When financial markets react to Fed statements, therefore, they are not incorporating news about the economy. Instead, they are incorporating news about policymakers’ intentions. So if a speech or testimony by a Fed official moves financial markets, it means that the intentions of monetary policymakers were not clear before the speech or testimony.
Mankiw concludes, “The ideal would be a completely boring Fed chairman whose speeches are regularly ignored by financial markets. Apparently, we are not there yet.”
I think by expanding his idea a bit, we could come up with a description for the ideal Congress, too.
Michael Giberson
Gunnar Birgisson, at Bracewell & Guiliani’s Energy Legal Blog, writes that customers “aren’t happy with the high and rising operating costs of organized electric markets, including Regional Transmission Organizations and Independent System Operators.” Birgisson points out two developments – one at PJM and the other at ISO-New England – illustrating the current state of the regulatory debate. Long-time FERC watchers will recall that there is an open rulemaking docket concerning RTO/ISO cost accounting and oversight (Docket No. RM04-12-000).
I object to the term “organized electric markets”? The implication – unintended perhaps, but there nonetheless – is that trading in power at NYMEX and the IntercontinentalExchange is, what, “disorganized”? A better term for the electric power markets operated by RTO/ISO would be “grid-integrated electric markets,” (or more simply “integrated electric markets”) because the distinctive feature is that the results of the market are integrated with operation of the transmission grid.
Or perhaps, reflecting the quasi-monopoly status the entities have over access to the regional transmission system, maybe the term should be “monopoly power markets.” At least then no one would be surprised by the tendency toward ever higher costs.
“Tendency” is not destiny, however, as PJM has now committed to a fixed annual fee, starting at 33 cents per MW-hour and dropping in steps to 30 cents per MW-hour in 2011.
Michael Giberson
The Independent Institute has released it’s Open Letter on Immigration. The press release explains:
As the House and Senate struggle toward compromise on an immigration bill, tensions and rhetoric are rising. The signers of the Open Letter on Immigration believe that this emotional debate taking place in Washington, D.C. and around the country could be elevated by a modest and non-partisan reminder of the value of immigration, and plea for a clear-eyed consideration of the principles at stake and the historic American goals that will be affected in any outcome.
Hmmm, the press release says that “rhetoric [is] rising” like it is a bad thing. Maybe they should check that usage with Deirdre McCloskey, an expert on rhetoric in economics and one of the 500+ signers of the Open Letter.
Lynne Kiesling
I am in Jackson, Wyoming, attending the Western Conference of the National Association of Regulatory Utility Commissioners. This afternoon and tomorrow morning my colleague Bart Wilson and I are running experimental economics workshops for the commissioners and staffers attending.
We got very fortunate yesterday flying in; from the right side of the plane we had a view of the entire Teton range, and the weather was perfect. Jackson is a fun little town; touristy, of course, but still with its own vibe as well.
The KP Spouse and I had dinner last night at the Snake River Brewing Company. Good food, great beer, outstanding people watching.
Now to work …
Michael Giberson
Progress. The Washington Post reports:
Pepco Holdings Inc. is planning to install “smart meters” in 2,250 District homes as part of a $2 million pilot project to give Pepco more information about residential electricity usage and give homeowners greater ability to manage power consumption and curb monthly bills….
About half the residences in the program will also get “smart thermostats” that will provide customers with information about real-time electricity prices and running usage so they can adjust air conditioning or the use of other appliances.
The price of electricity can vary widely depending on time of day and season. Summer rates at peak hours are 64 cents a kilowatt-hour; rates during non-peak hours are 6.81 cents.
Pepco would also have the ability to adjust the thermostats to prevent demand from overloading the transmission system. There are 15 “critical peak” days during the summer and three during the winter. Customers would be able to override Pepco’s adjustments.
Pepco said it will select the homes for the pilot project at random in all eight wards of the city and will install the new meters at no charge.
A curious detail, the pilot is formally being run by “Smart Meter Pilot Program Inc., a nonprofit company comprising Pepco, the District’s Office of the People’s Counsel and Consumer Utility Board, the International Brotherhood of Electrical Workers Local 1900 and the D.C. Public Service Commission….” Why set up a separate nonprofit, is this just political cover of some sort? Maybe just a way to get buy in from the regulators?
A spokesman for “Advanced Metering Data Systems LLC, the maker of the meter communications system, said that the devices have been installed in 50,000 homes in Birmingham, Ala., and that there are pilot projects in Gulfport, Miss.; Charlotte; New Orleans; Covington, La.; Jasper, Ga.; and two towns in Ontario.” Anyone know more about these projects?
Michael Giberson
Apparently, people elsewhere are actually watching this World Cup thing.
Problems faced by retailers emerged yesterday in figures from retail analysts Footfall, who measure shopper numbers.
These show the numbers visiting department stores last week fell by 24per cent compared to the week before. The figure was 3.2per cent down on the same period last year.
Across the high street, the week on week fall was 10.6per cent, while the numbers were down by 8.2per cent on the same time last year.
Shopper numbers collapsed on Saturday afternoon at the time that England kicked off their match against Paraguay. (Daily Mail)
The article continues by saying “stores are dreading the possibility that England will go a long way in the tournament, so keeping people out of the high street.” They needn’t worry. While England has already secured a spot in the next round, the way they have been playing that’s about all they will get.
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