Archive for February, 2009

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Who needs charitable giving when you can have big government?

February 28, 2009

Michael Giberson

At the Arizona Economics blog, Scott Gustafson runs some numbers on the limits on tax deductions for charitable giving contained in the Obama budget outline for 2010. Drawing on numbers from the budget outline (as summarized in this Washington Post article), Gustafson concludes that the administration thinks the change will result in $45 billion drop in the amount of charitable giving that qualifies for tax deductions.

While, as Gustafson notes, many of the affected individuals will give to charities anyway, it is reasonable to expect some drop off in charitable contributions.

Asked about that, Office of Management and Budget Director Peter Orszag said Mr. Obama took care of that by giving charities government money to make up part of the difference.

“Contained in the recovery act, there’s $100 million to support nonprofits and charities as we get through this period of economic difficulty,” he said.

Gustafson observes that, “$100 million is 0.2% (two tenths of 1 percent) of $45 billion. Somehow I think that losing a tax deduction on $45 billion in charitable giving will reduce it by a bit more than two tenths of one percent.”

So, the administration’s proposed reaction to a projected drop off in charitable giving is to increase government spending. But 0.2% likely won’t make up the shortfall.

As Brody said to Quint: “Your gonna need a bigger boat.”

Posted in Miscellany, Politics | 2 Comments »

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Should advocates of electric industry restructuring have not promised lower rates?

February 27, 2009

Michael Giberson

In an article to appear in the March 2009 Electricity Journal, C.K. Woo and Jay Zarnikau point out that “to win public support, proponents for electricity market reform to introduce competition often promise that post-reform retail rates will be lower than the average embedded cost rates that would have prevailed under the status quo of a regulated monopoly.”

They follow-up with, “Unfortunately, the promise of lower rates has failed to materialize….”

Of course there is a small slip in the concepts here. In the first phrasing they identify the relevant counterfactual – post-reform retail rates are compared to rates that would have prevailed under the status quo – but in the second phrasing post-reform rates are implicitly compared to pre-reform rates instead of the relevant status quo counterfactual.

They know the difference between the two comparisons, but it doesn’t matter much because many advocates for electric power restructuring overlooked that subtlety and promised plain simple lower rates if you restructure. But bumper sticker slogans make more appealing political rhetoric, and it gets to sell counterfactuals. In retrospect, it would have been better to promise that, post-reform we will get a more efficient allocation of ponies, rather than promising that everyone gets a pony. But the promise was made, and now not everyone is happy to have received a more efficient allocation.

After touching on that debate, Woo and Zarnikau jump to the substantive question of whether electricity market reform will likely reduce retail rates. In what they admit to be “a simple analysis,” this question gets reduced to whether the post-reform system marginal costs are likely to be higher or lower than system average costs. They consider a “high demand” case and a “low demand” case, and in the former marginal costs are higher than average costs, but in the latter marginal costs are lower than average costs. Finally, they note that the high demand case seems a better description of at least the ERCOT market experience, so electricity market reform in ERCOT has led to increased retail rates.

They admit a few qualifications to the simple analysis and then jump into an examination of rates in the ERCOT and non-ERCOT parts of the state of Texas (the ERCOT region features wholesale and retail market restructuring, while the non-ERCOT areas are mostly still served by vertically-integrated regulated monopolies). Their analysis demonstrates that, in fact, prices in the ERCOT-served portion of the state has increased more than prices in the non-ERCOT portions of the state.

They sum up the analysis with “electricity market restructuring heightens the sensitivity of retail electricity prices to marginal costs,” and conclude the article saying, “unless one is very confident that the post-reform marginal costs are less than average costs, electricity market reform will be unlikely to deliver the promised benefit of lower retail prices.”

Excellent advice to political orators opining on the benefits of restructuring the industry, I’m sure, but incomplete as analysis of public policy. Where is the concern for economic efficiency?

Of course during a time of rising marginal cost, a backward-looking average embedded cost rate will be lower than the efficient market price. And therefore, at the margin, consumers will consume more than they would have had they faced efficient prices, and therefore the regulated rate is wasteful. I’ll admit, too, that mine is “a simple analysis.”

If it is true, as they say, that “electricity market restructuring heightens the sensitivity of retail electricity prices to marginal costs,” then we should expect restructured regions to become more efficient users of energy.  The result should count as a plus for electric industry reform.  Woo and Zarnikau don’t emphasize this point.  Rather, they focus on the issue of whether or not consumers will get the ponies that politicians and policy advocates have promised.

But as economists examining public policy, shouldn’t we aspire to go beyond offering advice to overly-enthusiastic political orators, and actually try to say something about the net benefit or costs of policy reforms?

Posted in Economics, Electricity, Energy markets, Regulation | Tagged , , , | 3 Comments »

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LNG and the future of natural gas prices in the U.S.

February 27, 2009

Michael Giberson

Domestic U.S. production of natural gas is up. Macroeconomic factors are reducing demand for natural gas. And yet, as Fereidoon Sioshansi points out:

The real surprise is that despite the declining need for imported LNG, the US may end up on the receiving end of much of the global excess production and transportation capacity because of its massive storage.

See the linked article by Sioshansi, from the March 2009 EEnergy Informer, for more explanation. Possibly collaborating evidence comes from the EIA; the most recent Weekly Natural Gas Storage Report shows working gas in storage to be 199 Bcf above the 5-year average of 1,696 Bcf.

So natural gas in the United States may be in for another long stretch of low prices. Bad news for producers, of course, but good for natural gas consumers.

Also good news for electric power consumers since natural-gas fired generation frequently sets the market price for electric power in those parts of the country featuring competitive wholesale markets. Fuel adjustment clauses or more cumbersome regulatory procedures will also, eventually, bring lower power prices to regions that remain dedicated to the old vertically-integrated-regulated-monopoly approach to providing electricity.

HT to Cheryl Morgan at MorganEnergy.

Posted in Energy markets | Tagged , , | Comments Off

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Animal conservation through prices

February 26, 2009

Lynne Kiesling

The fundamental cause of most environmental problems — whether air pollution, climate change, or species extinction, for example — is ill-defined property rights. Ill-define property rights lead to inefficient resource use decisions, resource overuse, and accelerated resource use. The effect of human action on the rate and pattern of species extinction is an example of this issue. Places where people have found ways to define property rights in endangered species have seen them return to healthy, robust populations (such as elephants in Kenya). Some previous KP posts have addressed species extinction.

This proposal from a team of biologists is another idea in the direction of establishing property rights in endangered species: require property developers to buy financial contracts tied to the health of a species:

Under their plan, the government would determine the cost of protecting a species if it becomes endangered. That money would be set aside to fund contracts with payouts pegged to species health. The contracts would be sold to landowners and developers whose actions directly affect the animals, though the contracts could be freely re-sold.

Should animal numbers fall beneath a predetermined threshold, contracts would be voided, and money devoted to anticipated recovery programs. If the species thrives, investors would be rewarded, with profits growing in direct proportion to species health.

Despite the snarky comments in the Wired blog post, this is an idea worth elaborating on and testing (using economic laboratory experiments, of course). The experimental testing would be crucial for ensuring that such a policy would achieve its intended objectives, and not result in, for example, strategic species arbitrage transactions.

Very interesting.

Posted in Economics, Environmental policy | Tagged , , | Comments Off

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Who invented the automobile?

February 25, 2009

Lynne Kiesling

Lynne’s snark of the morning: If President Obama doesn’t know who invented the automobile, perhaps he should take my Western Economic History class this spring (hint: the inventor of the automobile was German). My spring class is already full and has a waiting list (which I find gratifying), but I’d make room for the President.

I’d make more substantive commentary on his proposals, but I’m too busy today actually working on smart grid things.

UPDATE: I would like to add here Nick Gillespie’s more substantive snark of the morning (he’s way better at it than I am):

Last night, President Barack Obama underscored that, despite being in the Senate for the past few years and his party being in charge of Congress since 2006, he’s just mopping up for the bungler in chief who preceded him. I yield to no ink-stained wretch in my vast and bottomless dislike of George W. Bush but let’s hold Obama’s feet to the fire here: He has consistently pledged to, you know, stop spending right after well, you know, he and Congress stop spending.

Posted in Economic history, Economics | 5 Comments »

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Does anyone care about oil and gas reserves reports included in year-end financial statements?

February 24, 2009

Michael Giberson

On December 23, 2008, I posted on “The forthcoming dramatic fall of reported oil reserves.” Now, as predicted, reports are showing up like this one from Warren Resources, Inc.:

Independent reserve engineers’ estimates of Warren’s proved oil and gas reserves as of December 31, 2008, were 129.3 Bcfe, compared to 356.4 Bcfe as of December 31, 2007, which represented a 64% decline. … This decrease in estimated proved reserves is largely due to the steep decline in year-end oil and gas prices.

(I don’t know anything in particular about Warren Resources, it just happened that they recently issued a news release with year-end results and it was readily found in a Google News search)

As the December 23 post noted, because SEC requirements required reserve estimates to be based upon single-day end-of-year prices, reserve estimates can be dramatically affected by price volatility. The Warren Resources post illustrates the point nicely.

SEC’s reserve reporting requirements were controversial, in part because they departed from industry standard approaches to reserve estimation. And, as mentioned in a December 30 follow up post, the SEC is changing its rules for reporting reserves. The SEC justifies revising their requirements “to help investors evaluate the value of their investments in these companies.”

But will the change help investors?

Richard Miller, a former president of the Society of Petroleum Evaluation Engineers (SPEE), addressed this question in a presentation at last year’s SPEE annual meeting. His article based on that presentation is contained in the new Journal of the Society of Petroleum Evaluation Engineers (pp. 32-39). He said:

Before expending time and effort to revise the SEC reserves reporting rules, perhaps it might be useful for the SEC, reporting companies, and energy company investors to consider this question:

Does the effort to report oil and gas reserves under the current or revised definitions provide information that is useful to investors? Put another way; is the oil and gas reserves information reported in SEC Form 10-K and 10-Q of real value to investors and, if so, what is the value of that information?

In short, Miller finds no support for the idea that the SEC-required reports are valuable to investors.

Miller takes two separate approaches to examine the issue. First he looks at whether stock prices and trading volumes appear to be affected by information announcements (both disclosures of SEC-required reserve reports, and other, more informal information releases). Second, he surveyed oil and gas industry analysis at major financial advisory firms. Neither approach suggested there was much value in the information.

His result is not too surprising. A number of energy industry companies devote significant effort to tracking petroleum reserves, constantly acquiring and digesting information more subtle and more substantial than that required by the SEC. By the time the official version of reserves estimates is issued it is old news. While it may be good for the SEC to revise its rules for other reasons, it won’t provide much in the way of “help to investors.”

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

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Smart grid rhetoric at yesterday’s clean energy summit

February 24, 2009

Lynne Kiesling

[UPDATED to add live link to NPR story}

NPR just ran a story on yesterday's clean energy summit in Washington DC. The event was organized by Senator Harry Reid and included such luminaries as Boone Pickens, Bill Clinton, and Al Gore, in addition to political representatives such as Rep. Nancy Pelosi and Secretary of Energy Steven Chu. The Pickens Plan blog has a good post summarizing the event, including a link to a video of the event. I'd like to highlight two ideas that came up yesterday, and that the NPR story also discussed -- the connection of smart grid technologies, invesments, and rhetoric to the construction of long-distance transmission, and the way that the state's rights/eminent domain issues were discussed. This discussion focused on a narrow and unrepresentative set of issues in electricity policy, and even within smart grid policy.

Pelosi picked up on a point that Boone Pickens has been reiterating for months -- they both contend that the US can be the "Saudi Arabia of wind", but that transmission construction is crucial to get wind-generated power from where the wind blows to where people live, work, and consume electricity in the course of their daily activities. She stated explicitly that this transmission must be built, and that it must be a "smart grid". According to the Pickens blog, Secretary Chu picked up that theme and "talked about the technical issues which attend to building a 21st Century Grid". [Ugh, would authors please, please stop capitalizing "21st century grid" and "smart grid"? They are not proper names, and do not have the monolithic homogeneity associated with such nomenclature. Stop it. Please. -ed.]

Not having attended the event or watched the video, I infer that Secretary Chu talked about the technical challenges associated with the interconnection of distributed renewable generation — their production is intermittent, co-location with storage helps, but having clear technical rules by which these sources can and cannot place electricity on the network is crucial for system balance. That is a serious and important issue, one that we’ve been working on for nearly a decade, and will continue to tackle as the electric power network becomes increasingly populated with distributed active agents, be they generators or consumers.

However … I think Rep. Pelosi overstates the case when she makes the blanket statement that long-distance transmission must be a smart grid. I would amend her rhetoric to say that if we are going to build new long-distance transmission it should have the two-way communication overlay that is the hallmark of a smart grid, but that the most important area to focus digital intelligence in the long-distance transmission network is in the interconnection function that Secretary Chu discussed. I can envision, indeed I have argued for, a future in which long-distance transmission includes remote devices for the dynamic injection of reactive power to balance power flows autonomously (and ideally in response to price signals in a market for reactive power) when needed, and not in the static “dumb” way that existing capacitors do.

But she misses the point that the most important, most relevant, and potentially most value-creating place where the digital intelligence-creating capabilities of a smart grid are the greatest is in the consumer-facing portion of the network — in the distribution network, and in the end uses to which consumers put the electricity they consume. That’s where smart grid technologies, and the complementary policies that enable retail choice and dynamic pricing, are the most valuable. But that’s outside of her jurisdiction …

Which brings us to the second issue. Constructing long-distance transmission to transport wind-generated electricity from South Dakota to Deleware will mean crossing many states. States have siting jurisdiction for all infrastructure, as discussed in this Houston Chronicle article on the summit. The NPR story quotes Fred Butler of the New Jersey Public Utilities Commission, who is also the current president of the National Association of Regulatory Utility Commissioners, articulating this point, and stating that state regulators would work with federal regulators in siting new wires, but would not relinquish that authority.

Appallingly, Sen. Reid said that Commissioner Butler “represents 253 regulators” and not the interests of the American people (implying, naturally, that Sen. Reid does represent the interests of the American people). In fact, as noted in the Chronicle story,

Senate Majority Leader Harry Reid, D-Nev., said he would propose giving the Federal Energy Regulatory Commission the authority to trump states in deciding where to place new power lines as part of a bid to boost electrical transmission capacity nationwide.

Current rules require approval from local, state and federal agencies before new transmission systems are installed. States generally have the final say about where new transmission lines go, an authority that state utility regulators have been reluctant to relinquish.

Under Reid’s proposal, states in regions with huge renewable energy potential would have time to come up with their own plans for building new transmission capacity, but if they moved too slowly, FERC could get involved.

That way of putting it sounds more like Butler’s partnership than Reid’s heavy-handed use of eminent domain that is indifferent to both the Constitution and to the idea that Congressional representatives do not actually have the knowledge, capability, or incentives to represent the interests of the American people. Still, Reid’s language and tone, and willingness to invoke such a strong stance, bears watching if you are concerned about the concentration of government authority in ways that contravene the Constitution.

Instead of focusing so much attention on building wind farms in South Dakota and threatening federal legislation and the exercise of eminent domain, I encourage these policymakers who are invoking smart grid rhetoric and ideas to work together to focus on ways to use this intelligence capability to send information and price signals to consumers. If state and federal policymakers work together to change state regulations to allow dynamic pricing and retail choice in energy products and services, we may see conservation and changing demand patterns that reduce the need for new wind farms and new long-distance transmission lines. Take advantage of the transactive capabilities of a smart grid!

Put another way: how can these luminaries know what the true value is of new wind farm and transmission investment when they don’t even know what the true value of electricity is to end-use consumers?

Posted in Economics, Electricity, Regulation | Tagged , , | 3 Comments »

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An economic history lesson on fiscal responsibility

February 24, 2009

Lynne Kiesling

At the Atlantic’s newish business web site, Greg Clark has a very good post on the history of government spending in Britain. He starts in the early post-Magna Carta period:

In England, for example, from the Magna Carta of 1215 until the Glorious Revolution of 1689, public debt was always tiny — a few percent of national income.  This was because while the King controlled expenditures, the English Parliament controlled taxation. And Parliament refused to tax. …

Without a ready tax source, the early Kings were the ultimate sub-prime borrowers. Royal borrowing was at extremely high interest rates. The only lenders were financial adventurers willing to risk periodic defaults.

Then after the Glorious Revolution constrained the ability of the sovereign to borrow, putting both the taxation and expenditure function in Parliament. Quelle surprise, spending increased dramatically! But since taxation was extremely unpopular, Parliament funded this spending with, you guessed it, borrowing. Thus the 18th century saw unprecedented levels of government debt leading up to the Napoleonic wars, debt that only lessened with the reduction in government military spending after Napoleon’s defeat.

He then draws some conclusions for our current debt situation, highlighting the costs of government debt-funded spending. Part of Greg’s conclusion really struck me:

But because this damage is creeping and insidious — not as obvious as hacking off a limb — it will never motivate real political action.

Yet again, as in my post yesterday about the erosion of civil liberties in Britain, I am moved to invoked the “frog in a pot of water” metaphor. The costs of crowding out private spending and private entrepreneurial activity are not only creeping and insidious, they are part of Bastitat’s unseen. When we don’t pay attention to those costs, we underestimate the costs of this debt-funded spending, and therefore derive an incorrect estimate of the net value of the spending.

Posted in Economic history, Economics | Tagged , , | Comments Off

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KP RSS feed

February 23, 2009

If you are reading Knowledge Problem through a reader and are experiencing delays in feed distribution, please use this feed:

http://knowledgeproblem.com/feed/

Thanks!

Posted in Uncategorized | Comments Off

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GridEcon 2009

February 23, 2009

Lynne Kiesling

I am co-organizing an event called GridEcon in Chicago, 16-17 March 2009. GridEcon is in the suite of events that the GridWise Architecture Council co-sponsors, including GridWeek, Connectivity Week, and Grid-Interop. GridEcon has come about because we think that the policy and business discussions have moved beyond the technical interoperability issues that have been the primary focus of GWAC for the past few years (although we, of course, continue working on those as technical standards develop). Also, as NIST provides the focal point for the development of interoperable smart grid standards as per the EISA 2007 guidelines, one of the areas that they are considering is how to define pricing standards.

GridEcon will focus on dynamic pricing, new business opportunities and new products/services made possible because of smart grid technologies (including the implications of PHEVs), and the policies and business models that can make those opportunities a reality. We will also have a set of panels talking about the intersection of carbon policy, carbon markets, and smart grid. You can see from the list of speakers so far that we are going to have a really great set of discussions. If your work touches on smart grid issues, I hope to see you there!

Posted in Economics, Electricity, Energy markets | Tagged , | 2 Comments »

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