Archive for January, 2009

« Newer Entries
Older Entries »
h1

Airport kabuki: Bruce Schneier on “security theater”

January 21, 2009

Lynne Kiesling

Bruce Schneier is one of the most thoughtful, knowledgeable security experts in the world, and he’s been constructively critical of the TSA’s airport policies and procedures for quite some time (so have I, but I have nothing like his expertise or his street cred). You may have seen Jeffrey Goldberg’s November 2008 Atlantic article, in which Schneier and Goldberg burst Swiss-cheese holes in the TSA’s policies and practices. In this article and other writings, Schneier describes the TSA’s policies and practices as “security theater”, intended to assuage an anxious traveling public without actually doing anything meaningful or substantive to ensure sufficient reduction in the probability of a terrorist attack using airports or airplanes.

Now Katharine Mangu-Ward has an interview with Schneier in Reason, and it’s well worth reading. The good news is that the TSA will phase out the small liquids policy (although until the UK does the same my travel will still involve stupid, pointless plastic bags of tiny bottles); can we expect some reasonable removal of the ludicrous shoe policy to follow? I certainly hope so.

Here’s one of my favorite parts of the article:

Reason: What would success look like for the TSA? If you were made King of Airport Security tomorrow and given the entire current budget of the TSA to do whatever you wanted, what kind of system would you design?

Schneier: If I were in charge of the TSA’s budget, I’d give most of it back. Politically, I wouldn’t be able to, of course, but it would be the best thing to do. Spending money on airport/airplane security only makes sense if the bad guys target airplanes. In general, money spent defending particular targets or tactics only makes sense if we can guess them correctly. If tactics and targets are scarce, defending against specific ones makes us safer. If tactics and targets are plentiful—as they are—it only forces the bad guys to pick new ones. Spending money on intelligence, investigation, and emergency response is effective regardless of the tactic or the target. Airport security is a last line of defense, and not a very good one at that. We need to remember that at budget time.

Schneier, unlike the TSA management, is capable of making reasoned, and reasonable, assessments of relative risk. This relative risk assessment is crucial for getting the most bang from the taxpayer’s money that is spent on security. Schneier argues that much of the TSA budget is better spent on “intelligence, investigation, and emergency response”. Schneier is also very effective at communicating the importance of making those relative risk assessments, and at communicating the necessity of evaluating and making tradeoffs instead of seeing security as a binary absolute. The TSA management could learn a thing (or a few!) from Schneier, both on substance and on communicating ideas.

That said, I’m confused by what I think is a false dichotomy he creates here:

Reason: What’s your reaction when you hear people say that we live in a “security state”?

Schneier: We live in an information state, which is subtly different. All computer processes produce data as a byproduct. As more parts of our lives are mediated by computers, more personal information about us is produced. This information is collected, and then bought and sold, by other institutions, both government and commercial, without our knowledge and consent. Some of this is driven by security concerns, but a lot of it is driven by economics. The problem is that personal data is looked at as property, which can be bought and sold, instead of as a right. Long term, we need to fix that.

I don’t understand the “property instead of a right” distinction. I can reconcile this “instead of” by saying that personal data are property, but they are the property of the individual to whom the data pertain. Therefore, individuals have rights to retain their data, access their data, and prevent others from accessing their data. Isn’t that approach consistent with the way we treat rights to personal data, and other personal property, in other situations?

Posted in Economics, Regulation, Travel | Tagged , | 4 Comments »

h1

Monopoly, competition, and the fear of failure

January 20, 2009

Lynne Kiesling

Yesterday David Zetland had a post on how bad a job his water utility does of pricing water to optimize use in the face of drought. I recommend it to you, because water is even more abominably, inefficiently priced than electricity … and that’s saying something!

… I don’t care about $5/month surcharges. EBMUD’s “penalty” pricing is not incentivizing me, and I will continue to use as much water as I want. …

Why are accounting details driving water use quotas?!? It seems that EBMUD is more interested in a billing cycle than a sensible communication on water use.

Further, EBMUD has NO IDEA of how many people are in this house (a per capita allocation) and NO IDEA of our water habits. EBMUD just looked at historic use at this meter and knocked 20 percent off that use.

I am NOT a meter! I am a human, and humans need to have water budgets and charges posed to them in HUMAN terms.

Amen, brother! His bottom line resonates with something I’ve been thinking about for a long time:

Water utilities can fail at execution because they are monopolies, and the penalty for failure is just rationing.

YES. The way David put this echoes something I saw earlier today in my reading, but can’t pinpoint. It’s a really, really important point: fear of failure motivates private firms to adapt, to change their strategy. Regulated monopolies cannot fail, and the processes preventing them from failure are all political.  The absence of that fear of failure leads to the dynamism double death-knell of complacency and caution. One of the objectives of performance-based ratemaking, at least in electricity, is to engender in the regulated some semblance of this penalty for failure. But it’s a constructed, and constructivist, concept of success and failure, befitting a regulatory system created by engineers and lawyers. The fear of failure that motivates private actors in markets is more organic, arising from the potential of being innovated around and made obsolete in an open-ended, dynamic, competitive system. Using regulatory institutions to try to inject some of that organicness is nigh-on impossible, which is yet another reason why regulation cannot ever “substitute for the market”.

Posted in Economics, Regulation | 1 Comment »

h1

How to deal with toxic assets

January 19, 2009

Michael Giberson

The ever quotable Yzma, from Disney’s The Emperor’s New Groove:

Ah, how shall I do it? Oh, I know. I’ll turn him into a flea, a harmless, little flea, and then I’ll put that flea in a box, and then I’ll put that box inside of another box, and then I’ll mail that box to myself, and when it arrives… [insert demonic laughter here] …I’ll smash it with a hammer!

It’s brilliant, brilliant, brilliant, I tell you! Genius, I say!

Yzma, of course, is working on a plan to dispose of Kuzco, but it kind of sounds like the general strategy for getting “toxic assets” off of the balance sheets of financial institutions.

Posted in Economics, Film, Humor | Tagged | 2 Comments »

h1

Carbon tax vs. cap-and-trade, again

January 19, 2009

Michael Giberson

The U.S. Climate Action Partnership report, mentioned by Lynne last Friday,  has stimulated a spate of new newspaper stories comparing cap-and-trade and carbon taxes as ways to regulated greenhouse gases.  A story by Tom Fowler in the Houston Chronicle looks pretty good as an overview of “carbon tax vs. cap-and-trade.”

One thing to notice about some of the points raised on one side of the argument or the other is that they apply pretty strongly to both.  Rice University’s Amy Meyers Jaffe is right to be worried about “aberrations that can be created when you design a market through the political process” – see the initial California ISO power market design for an example – but the carbon tax would similarly be designed and imposed through the political process.  I don’t see much reason to believe that the tax code is less susceptible to lobbying than other parts of the political process.

According to the Chronicle, “many are skeptical that the government would make good use of tax proceeds,” but the same people should also be skeptical that the government would make good use of permit auction proceeds. Similarly, emissions will have to be monitored under both programs, either to ensure sufficient taxes are paid or that sufficient permits are acquired.

S. David Freeman is worried that a permit system would be unpoliceable.  The example quoted refers to offset programs, not the cap-and-trade system itself, and design of offset credits raise separate issues.  Freeman worries about manipulation of a permit market, but I’d say manipulation of a permit market (which would be show up in market prices and be accomplished through registered market participants) is likely to be more transparent than manipulation of the tax code by lobbyists and their Congressional  pals in Washington (which could be snuck into obscure tax code amendments inserted during late-night conference committee mash-ups).

Craig Pirrong is quoted as saying “just like any large commodity market, CO2 prices could be highly volatile.” In a Washington Post story, Rob Shapiro also suggests that cap and trade would introduce “enormous volatility” and would allow “a lot of mechanisms for gaming the system.”   Yes, if badly designed, then a cap-and-trade market could be volatile and susceptible to gaming.  A well-designed CO2 market would not likely pose significant problems on volatility or gaming.

The RGGI market appears reasonably well designed and carefully monitored; if Shapiro knows of ways to game the RGGI design, then why didn’t he raise them during design of that system?  It will be a few years before the RGGI cap begins to bite and the market is really tested, but it looks like a reasonably sound design.

Pirrong is also quoted in the Chronicle saying, “Banks like the volatility and complexity, because the more volatile and complex, the more money they could make.  But volatility may make companies put off investing in cleaner technology because they can’t get an accurate estimate on the costs.”  On the other hand, volatility raises the value of options, which may increase the value of investing in cleaner technology.

Perhaps it bears mentioning that while a carbon tax would vary more or less directly in proportion to macroeconomic activity, a cap-and-trade approach would likely have a modest counter-cyclical effect.  The cap would become less binding during recessions – permit prices would fall – and the cap would become more binding during economic booms.

I may sound like a cap-and-trade advocate, but not really. I don’t have a hard conclusion on whether cap-and-trade or carbon taxes would work best.  But like Rob Stavins, I am opposed “to the confused and misleading straw-man arguments that have sometimes been used against cap-and-trade by carbon-tax proponents.”

Stavins also writes:

Proponents of carbon taxes worry about the propensity of political processes under a cap-and-trade system to compensate sectors through free allowance allocations, but a carbon tax is sensitive to the same political pressures, and may be expected to succumb in ways that are ultimately more harmful:  reducing environmental achievement and driving up costs.

The Hamilton Project staff concluded in an overview paper (which I highly recommend) that a well-designed carbon tax and a well-designed cap-and-trade system would have similar economic effects.  Hence, they said, the two primary questions to use in deciding between them should be:  (1) which is more politically feasible; and (2) which is more likely to be well-designed?

Stavins answers the two questions in favor of cap-and-trade, citing “real world political forces” as the reason to think cap-and-trade would be better designed.  For more by Stavins on the topic, see “A U.S. Cap-and-Trade System to Address Global Climate Change.”

On the carbon tax side of the issue, Greg Mankiw is probably most prominent among economist-advocates.

At Environmental Economics, John Whitehead advises: the “economic case for cap-and-trade (or a carbon tax) is clear.”

Posted in Economics, Energy markets | Tagged , , | 6 Comments »

h1

USCAP’s blueprint for climate policy

January 16, 2009

Lynne Kiesling

The U.S. Climate Action Partnership group issued its blueprint for climate policy earlier this week, to lots of comments. This excellent Environmental Capital post summarizes the discussion that’s taken place this week. I wonder if that fact that it has upset almost all commentators means that it’s a pretty reasonable compromise; I will read it on the plane home this evening to see if I think that’s the case.

Posted in Economics, Environmental policy | Tagged , , | 2 Comments »

h1

Even in Texas competition between electric wires companies is prohibited, except in Lubbock

January 15, 2009

Michael Giberson

Power to The Woodlands, Texas, a little north of Houston, is delivered by two different companies. Depending on which neighborhood you live in, either your power comes via CenterPoint Energy or it comes via Entergy Texas.  After power outages caused by Hurricane Ike, it took up to a week longer for power to be restored to the CenterPoint Energy neighborhoods than the Entergy Texas neighborhoods, and that prompted some interest in having service to the community integrated under Entergy Texas.

NewsWatch: Energy highlights a Houston Chronicle story that reports the response from the Public Utility Commission of Texas.  In brief, the move is not impossible, but the barriers are substantial. The Chronicle quotes Barry Smitherman, chairman of the PUCT, from a letter to the town: “Essentially, there is a high statutory standard that must be met before a service territory can be transferred ….”

NewsWatch: Energy provides this summary of the regulatory barriers:

  • CenterPoint holds the certificate of convenience and necessity for Sterling Ridge and Creekside Park, which gives exclusive rights to provide electricity in those areas.
  • A certificate of convenience and necessity can only be revoked if the company no longer provide power service in that area.
  • Multiple [certificates of convenience and necessity] are not permitted in any given area.

While there would be some expense involved in actually disconnecting from one system and connecting to the other, the expense is not the problem.  The key barriers are all matters of public policy.

Interestingly, in my new hometown of Lubbock, Texas, competition between distribution companies has long been the norm.  I don’t know if overlapping certificates of convenience and necessity have been issued.  More likely, the arrangement was grandfathered in when the state regulatory commission was established. But the Lubbock example suggests another approach for The Woodlands: don’t switch from one to the other, allow both.

Lubbock Power & Light explains the history of competition as one in which early city commissioners were unhappy with the local privately-provided electric power service, and so authorized the build of a municipal generator.  I suspect typically in such cases the municipal government would acquire the local distribution equipment from the displaced private owner, but the Lubbock government refused offers from Texas Utilities to transfer the existing Lubbock distribution system.  And so, according to LP&L:

Today, the vast majority of Lubbock remains dual-certified and customers still have a choice of electric utility providers. Customers whose account balances are current are allowed to switch from one company to the other at their discretion. The competition for the electric dollar in Lubbock has resulted in some of the lowest electricity costs in the state of Texas and in the nation. Another major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.

In the past six months we have switched from one utility to the other exactly once.  So far my current provider hasn’t given me a good reason to go back, but it is nice to know that I could if I wanted too.

A 1981 story in Reason magazine tells the story of power competition in Lubbock, noting for example:

In Lubbock, … the city fathers wrote into the city charter that any change in the competition between Lubbock Power & Light and Southwestern Public Service Company must be approved by three-fourths of the registered voters. Nowhere in the country do three-fourths of the registered voters even vote, much less agree!

The Reason article then digs into the research of economists like Greg Jarrell and Walter Primeaux, among others. Jarrell’s research into the emergence of public utility regulation of electric power turned up some surprises:

In fact, Jarrell discovered, the first states to come around to regulation were those whose utility rates had been much lower (by an amazing 46 percent) than those of late-regulating states. Profits, too, were lower (by 38 percent) and output was higher (by 23 percent). In short, it appeared that regulation was sought most avidly precisely in those states with the least monopolistic utilities, those least able to manipulate output and prices. This finding bore out the suspicion that it was the utilities themselves that wanted regulation, to protect themselves from competition.

Further confirmation came from Jarrell’s second finding. After five years of state regulation, he discovered, the utilities’ prices and profits had both increased, while electricity output fell. Regulation was creating the very monopolistic results the public was told it would counteract!

After a student tipped Primeaux in 1968 to electric utility competition in Lubbock, Primeaux started researching the topic:

Among Primeaux’s discoveries was the fact that electric utility competition seemed to be dying out. By 1972 the number of cities with competition had dropped from 49 to 35. And today Primeaux’s tally reveals only 23 competitive cities.

Turning his research to the cause of this demise, he found that the opponents of competition were not consumers in the area but regulatory officials committed to its elimination on theoretical grounds. Like their predecessors, public utility regulators remain convinced that electric utilities constitute a natural monopoly and should therefore be subject to rate-of-return regulation.

(Yes, Virginia, economic theories are performative, and not just Black, Scholes and Merton.)

The prospects for The Woodlands are complicated by the fact that CenterPoint Energy is part of the ERCOT system, while Entergy Texas is part of the Eastern Interconnection.  Entergy Texas has been seeking to join ERCOT for a few years, but that isn’t likely to happen soon, and may not happen at all.

But even with that additional layer of technical complexity, the main barrier to wires-level competition for The Woodlands is Texas state regulatory policy.  Some folks in The Woodlands want to switch distribution utilities.  The state of Texas, which otherwise has some of the most pro-competitive retail power policies in the United States, prohibits such switches.  Texas could, and should, allow consumers in The Woodlands the power to choose their own electric distribution company.

Posted in Electricity, Energy markets, Regulation | Tagged , , , , | Comments Off

h1

A roundup of some smart grid links

January 15, 2009

Lynne Kiesling

The Department of Energy has published a new, very user-friendly introduction to smart grid technologies, benefits, and policies (pdf). I have some quibbles with some of the details, but if you are a newcomer to smart grid (say, for example, if you have heard that this is a primary objective of the incoming Obama administration, but you are not familiar with it), this primer is a good place to start. It includes descriptions of some smart grid projects that demonstrate the possibilities and potential benefits. It’s also got links to a lot of the parties that are working on smart grid technology, interoperability, and policy (including the GridWise Architecture Council, of which I am a member).

Another organization that has been working very deeply in smart grid development is IBM. This Greentech Media article discusses their work, and their indication that 2009 is likely to involve a lot of business and government focus on smart grid and data storage strategies, technologies, policies, and business models.

Smart grid is attractive on a number of levels. For one thing, a substantial amount of the power in the U.S. is wasted. UC Berkeley’s Arun Manjumar recently said that the U.S. consumes 100 quads (or 100 quadrillion BTUs) of energy a year and 50 to 60 quads get lost as waste heat or by other means before it can be used. Smart grid technologies that can help shuttle around power loads over a network conceivably could put a dent in that.

Second, the technology better fits into the VC mold for building companies. Unlike solar or biofuel companies, most smart grid outfits don’t need to build huge factories. They develop software or networking devices for controlling various aspects of power transmission or consumption. …

Third, the grid right now is … uh … pretty dumb. It was made to send electrons in one direction and was not designed for two-way communication.

“Smart grid may be the largest cloud,” said [IBM's Drew] Clark. “It will be expensive, but that also means it will be lucrative” for companies selling networking gear.

Fourth, because smart grid doesn’t really exist yet, the time exists for startups to set standards and practices.

As alluded to in the DOE document linked above, there are a lot of organizations that are working together to develop a clear, consistent set of industry interoperability standards, to facilitate innovation and commercialization and investment in smart grid.

Note here a topic for further development: Clark’s reference to smart grid as “the largest cloud”. I am at a GridWise Architecture Council meeting right now, and just last night at dinner another Council member and I were talking about the implications of cloud computing for the electricity industry. More on that later.

Posted in Economics, Electricity, Technology | Tagged , , , | 2 Comments »

h1

Eric Morris: Why you’ll love paying for roads that you don’t pay for now

January 14, 2009

Lynne Kiesling

Eric Morris, guest-blogging at Freakonomics, has two guest posts (one) and (two) on road congestion pricing. Congestion pricing is a much-discussed topic here at KP, and the two Morris posts are excellent discussions of the benefits of congestion pricing. In his first post he explains how variable tolling can generate the optimal level of congestion:

To make tolling truly effective, the price must be right. Too high a price drives away too many cars and the road does not function at its capacity. Too low a price and congestion isn’t licked.

The best solution is to vary the tolls in real time based on an analysis of current traffic conditions. Pilot toll projects on roads (like the I-394 in Minnesota and the I-15 in Southern California) use sensors embedded in the pavement to monitor the number and speeds of vehicles on the facility.

A simple computer program then determines the number of cars that should be allowed in. The computer then calculates the level of toll that will attract that number of cars — and no more. Prices are then updated every few minutes on electronic message signs. Hi-tech transponders and antenna arrays make waiting at toll booths a thing of the past.

How cool is this? In his second post he’s a little Pollyanna-ish when he says

But is this a bad thing? Our transportation system is in trouble and tolls are a fair way of raising the revenue to maintain it. Shouldn’t users of the transportation system bear the burden of its upkeep?

Even better, paying government to use the roads would get us something for nothing. When you pay a toll, the money is transferred from one party (you) to another (the government). Granted, it is annoying to be the one doing the paying, but at least the money goes to a (presumably) good cause, such as an improved transportation system.

But when you sit stuck in traffic, your time is wasted and no one is benefiting. Better to transfer money from one pocket to another than to let all that time go up in smoke.

But his point is correct that a good congestion pricing system that generates revenue and leads to efficient outcomes is better than the current system.

Posted in Economics, How cool is this? | Tagged , | Comments Off

h1

The history of air: Nick Gillespie on Joseph Priestley

January 13, 2009

Lynne Kiesling

Nick Gillespie’s review in Reason makes me even more eager to read Steven Johnson’s new book, The Invention of Air: A Story of Science, Faith, Revolution, and the Birth of America. The main protagonist of this work is Joseph Priestley, one of the foundational chemists of the late 18th and early 19th centuries:

Along with his contemporaries Antoine Lavoisier and Carl Wilhem Scheele, Priestly isolated oxygen gas and was the first to draw connections between “pure air” and blood. However, as Johnson notes, Priestley was trapped within a rapidly failing scientific paradigm, phlogiston theory, which limited his ability to fully understand and accept what he was witnessing in his own experiments. One of the great dead ends in scientific discourse, phlogiston theory was a fanciful and massively influential attempt created in the 16th and 17th centuries to explain combustion, rust, and other forms of oxidation by replacing the ancient Greek elements (fire, water, air, and earth) with a series of previously undiscovered substances. Ironically, Lavoisier would ultimately use Priestley’s own experiments as the basis for refuting phlogiston theory and creating what we now know as chemistry. Like a laboratory Moses, Priestly pointed the way for others to a destination at which he could not quite arrive.

If you are interested in this book, chances are that you will also like Uglow’s The Lunar Men, a book that I enjoyed thoroughly and wrote about here and here back in 2003. Priestley figures prominently in that group in England, along with James Watt, Matthew Boulton, Josiah Wedgwood and Erasmus Darwin, before moving to the US.

Nick’s review of Johnson’s book is quite compelling, and highlights Johnson’s characterization of Priestley as a man “who survived riots, threats of prosecution, and other hardships and yet never doubted that ‘the world was headed naturally toward an increase in liberty and understanding.’” His intellectual curiosity and his quest for knowledge, and the connection between liberty and understanding, are important relationships to bear in mind today as much as they were two centuries ago.

Posted in Books | Comments Off

h1

Nudging down food waste in cafeterias

January 13, 2009

Michael Giberson

Lynne’s rambling post on Cass Sunstein – so much to think about, so little time! – came to mind when I read this Freakonomics blog post on trayless college cafeterias.

Posted in Economics, Food and wine, Miscellany | 2 Comments »

« Newer Entries
Older Entries »
Follow

Get every new post delivered to your Inbox.

Join 47 other followers