Archive for September, 2010

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The Mongoliad

September 10, 2010

Lynne Kiesling

Speaking of Neal Stephenson, he’s involved in a new, online, serialized novel called The Mongoliad. Set in 1241, it’s an adventure journey story with the Mongol invasions of Europe as a backdrop. There are some stories you can read on the site for free, but to receive the weekly chapters you have to subscribe. So it’s an interesting venture both in a literary sense and as a new online business model (which hearkens back to the early 19th century in a way that I find charming).

Happy reading! What are you planning to read this weekend? I am finishing up Deirdre McCloskey’s The Bourgeois Virtues and Paul Seabright’s The Company of Strangers, and will probably have some things to say about both of them.

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Facebook etiquette question

September 10, 2010

Lynne Kiesling

I have a Facebook etiquette question to pose. Different people use Facebook differently. My rule is to use Facebook to keep in touch with people I know personally, and only very rarely do I make any exception to that rule. This leaves me with a dilemma when I get friend requests from people who are “friends of friends”, but who I have never met in “meatspace” (good to have a Neal Stephenson quote on a Friday morning!). I love meeting new people and making connections with others who share my interests, but I hesitate when it comes to approving friend requests for people I do not know personally. Consequently I have a pile of requests sitting in my inbox, and I feel like I’m in a quandry.

What do you do in this type of situation?

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Nodal pricing coming to Texas wholesale power market

September 9, 2010

Michael Giberson

A story by Purva Patel in the Houston Chronicle does a reasonably good job explaining the upcoming shift from a zonal to a nodal market design for the ERCOT market in Texas. It is a complicated matter and hard to convey to non-specialist readers.

(In fact, even some specialists appear confused about parts of the bigger picture as evidenced by the comments reported of an attorney “who represents cities in utility issues and who sits on ERCOT’s Technical Advisory Committee.”  The attorney claims that while a “nodal system may make it easier to spot congestion and where new power plants are needed, it ignores the reality of how plants are built.”

How does it “ignore the reality of how plants are built”? The gist of the point seems to be that prices will rise at points in places like Houston but it is unlikely a new power plant could be built in Houston because of space limitations, public opposition, and air quality problems.

The misunderstanding may arise because of loose talk about how a more transparent and efficient pricing system will signal where new power plants are needed. This is not quite right. The more transparent and efficient pricing system will just do a better job of revealing the value of power at various locations on the grid.  What consumers and producers do with that information – build new power plants, add transmission, reduce consumption, or just pay the higher prices – is up to them.)

UPDATE: The Austin American-Statesman ran a story on Texas nodal the same day. It reveals something about the differences between Houston and Austin that the Houston story focused more on the practical aspects of the change while the Austin story highlights the behind-the-scenes politics.

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BP’s “Deepwater Horizon: Accident Investigation Report”

September 8, 2010

Michael Giberson

BP released the report of its internal investigation into the drilling accident in the Gulf of Mexico. Also available is a half-hour video explanation.

The Financial Times energysource blog has identified some of the key points from the report and a response from Greenpeace as well:

BP oil spill report: “No single factor” to blame

BP oil spill report: The main findings

BP oil spill report: The nitty gritty

BP oil spill report: Greenpeace responds

From “the main findings” post:

The four-month investigation has found that the accident was caused by “a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces”.

Selected from the “Greenpeace responds” post:

“This report is a sorry catalogue of the gaffes and failures behind the Deepwater Horizon disaster. And it’s highly likely that a truly independent report would be even more damning for BP.

“Worryingly, they’re just weeks away from drilling at similar depths in UK waters. The Government must step in right now and stop this by introducing a moratorium on deep water drilling.

“But the real problem is our addiction to oil…”

Questions for my U.S. Energy Policy and Regulation students: “In light of the Gulf oil spill, does the analysis of Robert Hahn and Peter Passel, ‘The economics of allowing more U.S. drilling,’ (Energy Economics, May 2010) need to be updated? Why or why not?”

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New York assembly candidate proposes to *really* ban zone pricing this time

September 7, 2010

Michael Giberson

From Politics on the Hudson:

Kaplowitz takes on Big Oil, says stronger ban on zone gasoline pricing could create a $1.3 billion “tax break” for New Yorkers.

At a news conference today at 12:30 at the Shell Station in Bedford on the corner of Rt. 22 and Rt. 172, State Senate candidate Mike Kaplowitz called for new laws to strengthen the state’s newly enacted but ineffective ban on zone pricing.

Statement by Mike Kaplowitz:

“Beginning in 2003, I strongly pushed for a state ban on “Zone Pricing” – the practice by big oil companies of charging different wholesale prices to retail stations for the same gasoline based on location.  Under zone pricing, price is not based on the cost of the commodity itself nor based on laws of supply and demand.  Instead, the marketplace is grossly manipulated by big oil.

In fall of 2008, we succeeded in getting the legislature to enact a law intended to end zone pricing of gasoline to wholesalers.  Unfortunately, the new law has had only limited effect, and zone pricing remains widespread in New York State.

(See related reports MidHudsonNews.com and NCNLocal.com).

It seems to be true that “the new law has had only limited effect.” At least it is the case that New York retail gasoline prices didn’t seem to change much relative to prices in New Jersey, when looking before and after the November 2008 implementation of the partial zone pricing ban. A colleague and I have examined retail price and margin data for 8,000+ stations in the two states for approximately six months before and after the law. A short summary is: no obvious change in pricing patterns due to the law.

As Kaplowitz notes in his statement, not all stations were directly affected by the ban as it applied only to wholesalers selling and distributing directly to retailers – not to vertically integrated firms owning refineries and retail stores, and not to retailers who purchased directly from refineries. It would be interesting to see whether the law has had any affect on the relative market shares of retailers buying at wholesale compared to retailers buying directly from refiners or retailers vertically integrated with refiners.

It also is true that most economists believe that zone pricing does not on average raise prices to consumers, and may allow lower prices in some areas. Zone pricing is just a form of price discrimination that relies on a geographic basis for segmenting customers. It is true that zone prices will strike some consumers as unfair, but also true – contrary to Mr. Kaplowitz’s claim – that price discrimination simply reflects the forces of supply and demand in the marketplace.

A complete ban on zone pricing may simply raise some consumers’ prices and lower other consumers’ prices.  Since zone prices likely raise prices in wealthier locales and reduce them in lower-income areas, a ban on zone pricing would tend to benefit wealthier consumers at the expense of poorer consumers.

(Which is why it is no surprise that Kaplowitz is campaigning against zone pricing in Westchester County, New York – one of the state’s wealthiest areas. The state senator who sponsored the 2008 law was from the suburbs of Rochester, another area with higher than average incomes.  Note that zone pricing is also often a political issue in Fairfield County, Connecticut, another wealthy area worried about having relatively higher gasoline prices.)

NOTE: this search will find the many previous Knowledge Problem posts on “zone pricing.”

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Bedbugs, public policy, and relative risk assessment

September 7, 2010

Lynne Kiesling

Over the past few weeks I’ve been paying some attention to the increasing, and spreading, bedbug infestations in the U.S. I’m not particularly squeamish, but bedbugs are rapacious colony-dwelling critters that can survive for a year without food, feast on the blood of sleeping animals (humans YUM YUM), and colonize easily in mattresses and box springs. They spread due to population density and mobility, and their small size and imperviousness to eradication means that even good hygiene is not enough to prevent infestation.

As infestations move out of hotels and apartment buildings in densely-populated areas like Manhattan and into schools and nursing homes across the country, more and more people are looking for effective ways to eradicate them, short of burning all of an infested person’s bedding and clothing (a decidedly medieval approach!). Pesticides that are currently legal are no longer effective, and techniques like steaming and freezing are not feasible for large items like mattresses and box springs.

In part, this wave of bedbug infestations is an unintended consequence of environmental regulations banning certain pesticides, particularly DDT, that used to be used on bedbugs and were quite effective. Over time, bedbugs have evolved resistance to the pesticides used since the DDT ban.

The bedbug resurgence illustrates the challenges of doing relative risk assessment in regulatory policy. I’ve painted a pretty disgusting, but accurate, picture of a bedbug infestation, but it’s also the case that pesticides have toxicity and duration effects, particularly on vulnerable populations like children and the elderly; however, I would make the normative claim that we want to protect children and the elderly from bedbug infestations too. Which harm is bigger: the harm from a bedbug infestation, or the harm from exposure to chemicals to eradicate the bedbugs?

The uniformity of our environmental regulations do not allow for such relative risk assessments, and the EPA makes the decision on our behalf that the harm from chemical exposure is bigger. What if they are wrong? From my perspective and with my preferences, they are wrong — I think the contagion and propagation effects in addition to the disgustingness of an infestation cranks up the cost of an infestation relative to the cost of a concentrated, careful application of chemicals to eradicate them. Others certainly assess those relative risks differently, because risk preferences are subjective and vary a lot from person to person and place to place. But a uniform, federal-level regulation does not admit for differential costs and benefits across people and places.

Jonathan Adler tackles some of these relative risk assessment issues in a post yesterday, but he focuses more on a specific issue of federalism:

Health officials in Ohio and several other states believe that the risks posed propoxur are outweighed by the severity of the bedbug problem.  The EPA disagrees.  The EPA has the legal authority to preempt state preferences, and is often obliged to under existing statutes, but should it?  Why should the EPA’s assessment of the relevant risk-risk trade-offs override those of the states? …

If local communities wish to strike a different risk balance than the feds, the EPA should not stand in their way.  It is one thing for the EPA to inform local choices, and help clarify the relevant health trade-offs, quite another to impose one set of health preferences on the nation as a whole.  If EPA’s resistance to propoxur was motivated by spillover concerns, such as potential groundwater pollution that could cross state lines, the federal rule would make sense.   But it is not and does not.  This is precisely the sort of environmental problem which state and local preferences should control.

Jonathan also mentions another unintended consequence of such uniform, stringent regulation on indoor pesticides: to deal with bedbug infestations, some people are resorting to pesticides meant for outdoor use, with deleterious health effects.

Sadly, I think Glenn Reynolds has a point when he observes that “The real lesson of the bedbug epidemic is this: Once, the government’s primary role was protecting us from things like that. Now its primary role is stopping us from fixing them.”

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When to worry about the Jevons Paradox

September 6, 2010

Michael Giberson

Tom Konrad explains, “When it Makes Sense to Worry About Jevons Paradox, and When it Doesn’t.”

Konrad highlights the critical point – whether demand for the good in question is elastic or inelastic – and suggests that the demand for electric power is relatively inelastic and therefore the demand for lighting is inelastic, hence reductions in the cost of lighting will not lead to more that proportionate increases in the quantity of lighting consumed. Konrad:

When candles were the primary light source, acquiring light required a lot more effort than just flipping on a light switch, and it was possible to see the light you purchased being used up as a candle burned down. Today, we would have to go outside our house (at night) and watch the meter spin to see visual evidence of the cost of light, and even then it would be difficult if not impossible to isolate the effect of the cost of light from the cost of watching TV or running our refrigerator.

Because it’s much harder today for a consumer to determine the true cost of the light he is using, I expect that consumers will be much less sensitive to changes in the price of light than they were in the past.

Two background factors may work against Konrad’s view. If, for example, the real price of electric power increases over the next twenty years, the higher price would increase the salience of the price and reward consumer’s efforts to economize in its use. Further, whether or not the real price of power increases, it is becoming easier for consumers to identify and track power consumption on a socket-by-socket or circuit-by-circuit basis.

Of course don’t jump to the conclusion that just because more efficient lamps may lead to an increase in the consumption of energy, that more efficient lamps are a bad thing. Improvements in technical efficiency increase the ranges of choices to consumers such that consumers are not worse off. It just may be the case that promoting improved efficiency in lighting is not an effective energy conservation strategy.

In the case of automobile efficiency, Konrad notes that the elasticity of demand for driving has increased in recent years, which leads the Jevons Paradox to be a concern if one expects fuel economy regulations to do much to reduce oil consumption.

NOTES: Konrad’s post is in part a reaction to my post last week on the potential for efficient lighting to lead to increased energy consumption; my post relied on an article in The Economist, which in turn drew upon this research article in The Journal of Physics D: Applied Physics.

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The 128th anniversary of the beginning of the electric power industry

September 4, 2010

Michael Giberson

From the IEEE Global History Network:

With the opening of the Pearl Street station in lower Manhattan at 3 o’clock in the afternoon on 4 September 1882, Thomas Edison publicly presented a complete system of commercial electric lighting and power. The success of the Edison bulb created a demand for a source of power. It was this demand that led to the construction of the Pearl Street station and launched the modern electric utility industry. The Pearl Street station featured reliable central power generation, safe and efficient distribution, and a successful end use (that is, his long-lasting incandescent light bulb) at a price that competed with gas lighting.

When I introduce my students to the origins of the electric power industry, I try to disabuse them of the idea that Edison did everything. I note, for example, that Joseph Swan patented an electric light before Edison and that Edison took Swan as a partner rather than risk a patent battle over Edison’s very similar bulb. Westinghouse, Tesla, and Insull share the stage with Edison. But I think it pretty clear we can date the emergence of the electric power industry to September 4, 1882, when Edison flipped a switch at the Pearl Street Station and powered up many electric lights all at once.

Sometime today when you flip a light switch, marvel at the instant-on, safe, reliable lighting that is made possible by the efforts of Thomas Edison and the many, many other people working in the electric power industry.

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The number of correct responses from PhD’s in economics, consequently, was somewhat less than the expected number if the respondents had been chickens pecking randomly

September 3, 2010

Michael Giberson

The title above is a quote from Harold Margolis’s paper, “Are Economists Human?”

HT Marginal Revolution. (I wonder if Tyler Cowen laughed when he read it?)

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The city council puts Lubbock’s new municipal electric monopoly to use

September 3, 2010

Michael Giberson

Are monopoly municipal electric utilities supposed to be treated like piggy banks by city councils?  For over 90 years Lubbock Texas has had two electric utilities serving the town – one regional state-regulated investor-owned utility (Xcel) and a municipal utility (LP&L). Both ran wires throughout the city and most customers could switch between the competing utilities on a few days notice. For the most part LP&L stayed competitive by charging a slightly lower rate as Xcel. The LP&L website once trumpeted the benefits to consumers from the competition. Not any more.

Last November the city and the announced that city-owned LP&L would buy out Xcel’s distribution service and customer accounts in the city, making LP&L the monopoly electric power provider in town. The deal is expected to be completed in October.

Already the city council is beginning to treat the utility budget like a basketful of unattended Halloween candy. The deal is not even done, but the current city budget proposal for next year has LP&L customers picking up the $3 million tab for street light power and maintenance costs.  The budget also tags LP&L with a $1.46 million payment in lieu of property taxes. (Not clear from the news story but I think LP&L already pays a percentage of gross revenue into the city budget.) One of two council members objecting to the plan said LP&L customers ought not to be tapped to support city-provided services.

Council members supporting the transfer assure us that “it was not council’s intent to tap the utility for more than the street light program it once supported.” Slippery slope arguments are overblown, they say. Sure the city council drained funds from LP&L in the past, almost pushing the utility into bankruptcy when it got caught by rising fuel costs a decade ago. “None of us on this dais would do that again — would start putting them into any kind of financial trouble again,” a city councilman said. “That is not what we’re after. That is not what we want to do in any way.”

Feel better?

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