Daily Archives: October 13, 2009

California adopts feed-in tariff for distributed wind and solar power systems, with Nobel Prize notes

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Michael Giberson

Not all of the news this week is about Nobel prize surprises. The Los Angeles Times reports that California is adopting feed-in tariffs for distributed renewable power production:

Under AB 920, the state Public Utilities Commission will set a rate for utilities to compensate customers whose solar or wind systems produce more power than they use in a year. Under California’s current law, customers are not paid for any surplus electricity they feed back into the grid.

The state requires that when a consumer installs a solar power system, it be the right size to produce only enough power necessary for on-site use. Rebates from the California Solar Initiative, overseen by the utilities commission, discourage anything larger. So customers who later reduce their energy consumption often end up underutilizing their solar panels.

“The current system instills a perverse incentive for people to waste their solar electricity just so they don’t give it away for free to the utilities,” said Bernadette Del Chiaro, a clean energy advocate with Environment California, which sponsored the bill.

The article emphasizes how the policy fixes a problem inherent with the current rules, but doesn’t note the problems that might arise from the PUC setting rates for utility buy-back of excess power from distributed energy resources. (Or the larger problems associated with arbitrary government-selected market-share goals for certain forms of renewable energy by arbitrary government-selected dates.)

And, to connect this story back to this week’s Nobel prize announcement so I can keep up with the econoblogging elites, it is probably worth noting that state utility regulation and feed-in tariffs are just two of the the many possible governance mechanisms possible to help people capture the gains from trade in electric power.

The prize press release observes:

Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

Much of the electric power restructuring debate has been conducted as if the choice is between “the virtues” and “the limitations” of markets, i.e., between either markets narrowly construed and government regulation. But, as has been discussed in various ways here before, there actual choice set is more complex.

Vincent and Elinor Ostrom and public ownership of natural resources

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Michael Giberson

Among the news stories in response to Elinor Ostrom’s sharing of the Nobel prize for economics, an article from Alaska which mentions the important role played by Vincent Ostrom in the development of that state’s treatment of natural resources.  Both Ostroms worked on related ideas and management of natural resources was central to the work that Elinor Ostrom was recognized for by the Nobel prize committee.

From the Anchorage Daily News:

A political scientist at Indiana University, [Elinor] Ostrom studies the management of common resources, like fish, grazing lands and forests. She shed light on examples around the world — including Alaska’s fisheries — in which people have worked cooperatively to sustain their resources rather than destroying them.

Her husband and academic collaborator, Vincent Ostrom, is also well-regarded in Alaska. As a hired consultant in the mid-1950s, he was a key figure in the drafting of the Alaska Constitution’s natural resource article, which enshrined the idea that the residents of Alaska — rather than the state as a political entity — own the state’s mineral wealth.

That idea has carried forward into the distribution of state oil income as Permanent Fund dividend checks, the management of its fisheries and even the settlement of Native land claims, said Mead Treadwell of Anchorage, who chairs the U.S. Arctic Research Commission.

…[Elinor Ostrom] has cranked out many academic papers refuting the conventional wisdom that people inexorably exploit public resources — like grazing lands — for their own need, and that the only way to keep those resources from obliteration is through private or government control of the land.

“She showed it doesn’t have to be that way,” Treadwell said.

Ostrum’s work isn’t about rebelling against authority. It’s about working together to solve problems, according to [Anchorage writer Charles] Wohlforth.

How different would development patterns be in many of the oil exporting nations of the world if royalties from the development of mineral wealth were paid directly to residents rather than governments.

(HT to Tom Fowler at NewsWatch: Energy, who notes a kind-of similar practice in Texas in which oil and gas royalties are paid into the state’s “Permanent School Fund.”)

Paul Romer on the Nobel

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Lynne Kiesling

Wow. Paul Romer’s blog post congratulating Elinor Ostrom for yesterday’s Nobel is dramatic. And, in my view, entirely accurate. I really appreciate his “skyhooks and cranes” invocation:

Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles. In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses. Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior.

Romer is more eloquent on the perils of our methodological hegemony than I was in my earlier post this morning:

To make the rules that people follow emerge as an equilibrium outcome instead of a skyhook, economists must extend our models of preferences and gather field and experimental evidence on the nature of these preferences.

Economists who have become addicted to skyhooks, who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today – how to improve the quality of bad rules that cause needless waste, harm, and suffering.

Bravo. And thanks to Russ Roberts for the link.

Henderson, Smith on the Nobel and its implications for economics

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Lynne Kiesling

Today David Henderson has penned the traditional Wall Street Journal commentary on yesterday’s Nobel award to Elinor Ostrom and Oliver Williamson. He provides an excellent summary of the importance of their work, and I recommend it to you highly. In fact, David’s theme reconciles what some commenters have observed as a political or ideological contradiction. For example, Cheryl Morgan notes that both Henry Farrell and I are thrilled at the prize, and that

Henry blogs for Crooked Timber which is a fairly left wing political blog, whereas Lynne has distinct Libertarian leanings. For both of them to be happy about the Nobel Prize seems quite remarkable.

[I would not capitalize libertarian, and would say classical liberal, but that's a quibble.]

David nails precisely why both Henry and I can be thrilled: both Ostrom and Williamson do detailed, careful, empirical, real-world work to inform the theories they derive, and both show the value and efficacy of governance institutions that are organic, emergent, and voluntary. As David notes,

A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that voluntary associations work.

Consider Mr. Williamson’s work. Drawing on 1991 Nobel laureate Ronald Coase’s work on why firms exist, Mr. Williamson showed that these voluntary institutions exist to solve problems that arms-length market transactions have trouble solving. …

In her work on development economics, Ms. Ostrom concludes that top-down solutions don’t help poor countries.

In his entire article David has captured much of the essence of why I think their work is so important and valuable for our understanding of human action.

In Forbes, Vernon Smith has a complementary (and complimentary) article on Ostrom’s work, which naturally dovetails with his. Vernon helpfully points out that Ostrom has “relentlessly pursued” the answers to two questions:

(1) Since “everybody’s property is nobody’s property,” how is it that there are so many cases where collectives of ordinary people with no education and with none of the economists’ knowledge of “the tragedy of the commons,” in fact discover ingenious rules (institutions) for taking the “tragedy” out of a productive resource they hold in common? …

(2) As a distinguished political-economic scientist she will be the first to tell you that there are also plenty of commons problems that represent institutional failures and fragilities; she has asked why, and what makes the difference between success and failure?

Vernon also highlights another reason I love her work and find it so useful, and a reason why I think many of my more theoretical colleagues are not as aware of her work as they should be:

… Ostrom brings a distinct style in applying her skill in different methodologies. She blends field and laboratory empirical methods, economic and game theory, the really important ingredient of scientific common sense, and she constantly challenges her own understanding by looking at new potentially contrary evidence and designing new experiments to challenge her understanding of the emergent historical rules and the theory used to explicate them.

Bluntly: Ostrom is not bound by what I see as the methodological hegemony that persists in economics, and that I believe is pernicious and leads to the undervaluation of methodologically diverse political economy. That’s why, as one of my close friends emailed me yesterday morning, the first woman to win an economics Nobel is in the political science department. Our methodological hegemony serves as blinders to other effective and important ways to analyze real-world political economy questions.

That’s why when economists like Steve Levitt admit to being embarrassed at not having heard of Elinor Ostrom’s work, my reaction is that they should be embarrassed. I give him great credit for being embarrassed, and I hope that he and others will now pay closer attention to her work, and to the work of other economists who use a variety of approaches to analyze political economy questions.

High costs drive government to take over government-owned electric utility in Mexico

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Lynne Kiesling

This story will have you shaking your head in disbelief in multiple dimensions. The electricity industry in Mexico is government-owned but decentralized, with multiple public distribution utility companies. As reported in the Wall Street Journal, over the weekend the Mexican government took over the second-largest of these government-run distribution companies, Luz y Fuerza del Centro, because of their inefficient operations and lack of funds.

Mr. Calderón’s decree said that Luz y Fuerza’s costs were almost twice its income from energy sales, and that last year the company lost 32.5% of the energy it bought from Mexico’s main power generator, the Federal Electricity Commission or CFE. For now on, the CFE will be in charge of Luz y Fuerza’s operations.

The government plans to dissolve the company and lay off the more than 44,000 workers that make up the Mexican Electricians Union, or SME, the only union at Luz y Fuerza; the government said it plans to rehire some of the workers.

Analysts say featherbedding by the union, or requiring extra workers to provide more jobs, is a major reason for Luz y Fuerza’s financial problems and endemic inefficiency. Some analysts say the company could have been run by a fraction of that number of workers.

Large central generation of electricity is more inefficient than you think — 100BTUs worth of fuel into the generator generally creates 1BTU worth of useful electricity at the consumer’s end — but Luz y Fuerza’s numbers are staggeringly bad. And the political power of the union in this case is on par with what we see in the U.S. in the automobile industry … and we’ve seen the disastrous effects of that kind of political power over the past year, and will be paying for that kind of power for some time.

But the Mexican taxpayer, and electricity consumer, pay much, much more for the political power of the electrician’s union and the inefficiency of the operations of their publicly-owned distribution utilities. Mexico’s Federal Electricity Commission, to which control of Luz y Fuerza reverts with this takeover, has been using taxpayer funding to subsidize their operations for years (and the operations of other state-controlled utilities in Mexico). This is a long-standing practice in Mexico; when I was in Mexico City in 2004 giving a presentation on competition and dynamic pricing to the Mexican legislative staff and industry, this pattern was well entrenched. From the Financial Times article on the federal takeover:

In a press conference Saturday, Fernando Gómez Mont, Mexico’s minister of government, claimed that state subsidies to the company this year were roughly equivalent to Oportunidades, the federal government’s poverty-alleviation programme that serves millions of families.

Left unchecked, the costs to the public coffers during this administration could amount to 300bn pesos, equivalent to about $23bn, he said.

This episode illustrates the failures associated with concentrated political power, and Mexican citizens are the ones who pay the costs through high taxes and some of the highest retail electricity prices in the world, despite the fact that their prices are regulated. The combination of monopoly public ownership, state control of resources, a monopoly union controlling labor relationships, and a concentrated, monopoly state regulator has created massive energy and economic inefficiency, opaque costs imposed on citizens, and Byzantine subsidies to try to mask and prop up the political house of cards.

People often say that in an industry this conservative and regulated, it takes a crisis to get any meaningful change. For the sake of Mexican individuals, I hope this crisis does lead to the demise of this toxic and costly concentration of political and economic power. The technology exists to distribute that power among more and more individuals, and with the politicians and unions back on their heels and facing enormous deficits from their craven policies, now is the time.