Archive for March, 2011

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Meanwhile, more “power market and the state” battles in New Jersey and Maryland

March 23, 2011

Michael Giberson

And if Andrew Kleit thinks that the Pennsylvania state government is toying with a bad idea (see previous post), look what is going on next door in New Jersey and Maryland.

In New Jersey: “Utilities challenge New Jersey law while preparing to reap its benefits.”

In January the Governor signed a law which is intended to facilitate long-term capacity agreements between the state’s electric distribution companies and generators. As the linked story explains, PSEG is considering building power plants that would benefit from the law – the long term guarantees will help the utility secure lower-cost finance – and “allowing [developers] to build facilities or undertake projects that would not have been feasible otherwise.” At the same time, PSEG is among the members of a coalition of companies that have protested the state’s law at FERC and a member of another group which has filed a challenge to the law in federal court.

Dow Jones Newswire explains: “PSEG and other power producers say this program undermines the U.S.’s largest competitive-electricity market by skewing market prices. They are in the process of suing the state over the legislation in a U.S. District Court and filed a complaint with the Federal Energy Regulatory Commission. Just in case those efforts fail, PSEG is preparing to work under the program.”

Do they contradict themselves? Very well, they contradict themselves. PSEG is large, like one-time New Jersey resident Walt Whitman, they contains multitudes.

In Maryland: “PSC, generation firms debate auction rule.”

The Maryland Public Service Commission on Friday [March 4, 2011] filed a protest with the Federal Energy Regulatory Commission over efforts to do away with breaks at wholesale power auctions that given to new plants that are built with state subsidies. Two groups, P3 Power Providers Group and PJM Interconnection LLC, don’t want those subsidized plants to be allowed to bid less than an administratively set benchmark price.

In both the New Jersey and Maryland cases, among other things the generators are concerned that state involvement in subsidies or guarantees for new investment would undermine operation of the PJM capacity market.

Also see: Court Rules PJM Capacity Market Prices Adequately Protected from Seller Market Power, but Others Contend Not Protected from Buyer Market Power. (Energy Legal Blog).

Posted in Electricity, Energy markets, Politics, Regulation | Tagged , , | 1 Comment »

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Would a ‘Pennsylvania Power Authority’ be good for Pennsylvanians?

March 22, 2011

Michael Giberson

Also in the Spring 2011 issue of Regulation magazine is Andrew Kleit’s article on a proposed Pennsylvania Power Authority. In the course of explaining why such a state power agency would be a bad idea, Kleit explains a lot about how the wholesale power market works in Pennsylvania (and elsewhere).

Noteworthy is Kleit’s response to a utility commissioner’s complaint about the difficulties faced by companies seeking to borrow money to finance construction of power plants:

As Pennsylvania Public Utilities Commission vice-chair Tyrone Christy explained during the 2009 legislative hearings, “because of the uncertainty in where the rates are headed — I mean, they go up and down like the roller coaster — it makes it extremely difficult to finance a capital-intensive power plant.”

Note that power authority advocates do not make an argument specific to electricity markets. Investment in all industries in a market economy is risky. To acquire funds to make such investment, an investor must either use his own money or acquire equity or debt funding from other parties. Those parties will seek assurances that they will have an opportunity to gain a reasonable return on their investment. Indeed, such challenges can be seen as a benefit of market economies, in contrast to investment made by government entities that have no such assurances. Put another way, and borrowing a term from commentary on computer software, this restriction on investing is “a feature, not a bug” of the competitive market system. This is in contrast to regulated markets with government-guaranteed investment, which have been shown in electricity markets to lead to huge cost overruns that were eventually paid by electricity consumers.

Posted in Electricity, Energy markets, Regulation | 1 Comment »

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“The Problem with Price Gouging Laws”

March 21, 2011

Michael Giberson

Regulation magazine, Vol. 34, No. 1, Spring 2011

Regulation magazine, Vol. 34, No. 1, Spring 2011

The Spring 2011 issue of Regulation magazine carries my article, “The Problem with Price Gouging Laws.”

One bit:

Economists and policy analysts opposed to price gouging laws have relied on the simple logic of price controls: if you cap price increases during an emergency, you discourage conservation of needed goods at exactly the time they are in high demand. Simultaneously, price caps discourage extraordinary supply efforts that would help bring goods in high demand into the affected area. In a classic case of unintended consequences, the law harms the very people whom lawmakers intend to help. The logic of supply and demand, so clear to economists, has had little effect on price gouging policies.

One of the reasons I’m fascinated by price gouging is that it involves a tight tangle of economics, moralizing, ethics, psychology, law and public policy. Most economists are persuaded by the supply and demand argument. Many non-economists rebel at the idea that merchants should be free to raise prices on goods that are in high demand due to emergencies. Working out good policy in this area presents some interesting challenges.

Posted in Economics, Law, Liberty, Politics | Tagged | 6 Comments »

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Price gouging for potassium iodide pills

March 20, 2011

Michael Giberson

A fool and his money are soon parted. -Thomas Tusser.

Potassium iodide supplies in the United States have run low and the price shoots up. What sold for $10 or $20 dollars a week ago is now priced from $30 to $75 and more. Some cry “price gouging!”

Regulation magazine has just published an article of mine on price gouging policies. Since the Regulation article was finished in January, I didn’t anticipate potassium iodide price gouging in March. My reactions:

Is “price gouging” on potassium iodide in the United States a good thing?

High prices will have the beneficial effect of dissuading some Americans from acquiring and hoarding supplies of a resource that will be better used elsewhere. High prices will have the beneficial effect of prompting some additional production. High prices will have the unfortunate effect of attracting more supplies to the United States when those resources would be better sent elsewhere (i.e. to some of the 3- to 4-billion people living closer than most Americans to the damaged reactors in Japan). Note that Japanese officials are promoting a 12-mile evacuation range around the damaged reactors and the United States is thousands of miles outside the evacuation range.

Of course the appropriate question is “a good thing compared to what”? What is the alternative to allowing suppliers and consumers work out prices in the market? Two alternatives to price gouging are (1) anti-price gouging moralizing and (2) anti-price gouging laws.

Anti-price gouging moralizing discourages useful economic activity because businesses will take steps to avoid being branded a price gouger even when those steps actually make consumers worse off. (I.e. failing to resupply at higher prices and simply running out of stock instead.) Anti-price gouging moralizing also encourages political responses that we’d be better off without, which leads me to the next point:

Would an “anti price gouging law” enforced by federal or state authorities be a good thing?

No. All such a law would have done was minimize the amount of money parted from the fast-acting fools, slower-moving fools would lament their ineptness, less dim-witted fools would not be prompted have second thoughts about hoarding something they didn’t need and no price signal would encourage suppliers to respond.

Note that state laws on price gouging do not apply in this situation, since they typically require an official declaration of emergency, or if not an official declaration, at least some kind of threat of harm to consumers associated with the higher-priced good. There is no related emergency anywhere in the United States.

NOTES: Check out prices on eBay; see related news: Wall Street Journal, Reuters, Bridgeport, CT News-Times, NBC Bay Area, and many more.

I’ll post more about the Regulation article here in a day or two. Regular readers will have seen much of the raw material for the article discussed earlier onKnowledge Problem (link searches the KP archives for “price gouging”), but there is new material, too.

Posted in Economics, Miscellany | Tagged | 2 Comments »

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Is economics a science? (liquidity trap edition)

March 19, 2011

At http://feedproxy.google.com/~r/marginalrevolution/feed/~3/ycq8YZirYR0/is-economics-a-science-liquidity-trap-edition.html Marginal Revolution today, Tyler Cowen asks this question, does some research on empirical analyses of the existence (or not) of liquidity traps, and comes up with a conclusion in which I concur: economics is not a science of the researcher cares about the outcomes of the analyses.

By the way, apologies for any funky formatting; this is the first time I’m posting from my phone!

Posted in Economics | Tagged | 2 Comments »

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Deirdre McCloskey on Bourgeois Dignity

March 18, 2011

Lynne Kiesling

For your weekend intellectual stimulation and viewing pleasure … I cannot recommend this highly enough: Deirdre McCloskey’s recent talk at George Mason University about her new self-recommending book Bourgeois Dignity, the second in what’s likely to be a 4-volume re-examination of Western economic history.  I guarantee you will learn more, and think more, in the 1.5 hours of this talk than any other way you are likely to spend that time. Enjoy!

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

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The economics of bike lanes

March 18, 2011

Lynne Kiesling

As a celebration of impending spring, I give you economics journalist Olaf Storbeck’s sound analysis of the economics of bike lanes. His prompt for writing was a rant from John Cassidy in the New Yorker about the tradeoff between bike lanes and “free” street parking spaces. Storbeck’s analysis is thorough, and goes beyond the oft-forgotten “street parking isn’t free” (citing the oft-forgotten work of Donald Shoup on that subject) to mention the network effects of having a more interconnected set of bike lanes (with a shout out to my very interesting colleague Mathias Doepke in the process!)

Storbeck accurately, I think, pinpoints the fundamental question: “Should the government promote cycling?” Here we probably disagree somewhat; he argues that it should, based on the health and environmental effects of substituting into cycling and out of driving. I am more concerned about the top-down imposition of a particular value judgment and the paternalism inherent in such a position than he is.

I don’t take the same normative position as he does, but I do favor making bike lanes explicit on high-traffic streets from a more Coasean perspective — bike lanes define property rights more clearly, and contribute to more coordinated and more peaceful shared use of a common-pool resource. For me that’s the primary economic reason to take the normative position in favor of bike lanes. More clearly defining property rights will reduce the costs associated with the decision to bicycle, so at the margin it will lead to the desirable outcomes he wants.

I am really looking forward to getting outside on my bike. For Christmas this year the KP Spouse got me a SRAM Force groupset of components for my bike (don’t worry about what that is if you aren’t a cyclist, it’s spiffy gears and shifters etc.), and I’ll be taking them on their maiden voyage next week in North Carolina, where we’ll be attending a “spring training” bike camp to work on mountains and hill climbing.

Happy cycling!

Posted in Economics, Sport and fitness | Tagged , | 3 Comments »

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Will Wilkinson on the economics of disasters

March 17, 2011

Lynne Kiesling

Will Wilkinson is sick of talking about the broken windows fallacy (as are we all …), and has instead written a very nice overview of the academic literature on the economics of disasters. He gives some good pointers to articles to read, and points out that we simply don’t know the likely economic consequences of a nuclear power plant meltdown (thankfully, I think we don’t know that because of their relative infrequency).

A recommended read.

Posted in Economics | Tagged | Comments Off

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Update on “Will faking a consumer cartel help make power markets more efficient?”

March 16, 2011

Michael Giberson

Last September I asked, “Will faking a consumer cartel help make power markets more efficient?“, ”Does FERC really want to go down this path?” and “Do they really think that faking a consumer cartel will help make wholesale power markets work more efficiently?”

The answer to the first question is “no, it won’t make markets more efficient.” Yesterday FERC issued the final rule requiring what it calls a “market-based demand response compensation rule,” so now we have answers to the second and third questions. The answers are:  ”yes, FERC wants to go down…” and “yes, apparently they really do think faking it is as good as the real thing.”

From the press release:

“Today’s final rule is about bringing benefits to consumers,” FERC Chairman Jon Wellinghoff said. “The approach to compensating demand response resources as we require here will help to provide more resource options for efficient and reliable system operation, encourage new entry and innovation in energy markets, and spur the deployment of new technologies. All of this contributes to just and reasonable rates.”

Today’s final rule recognizes that in the Energy Policy Act of 2005, Congress established a national policy to eliminate unnecessary barriers to demand response participation in organized wholesale energy markets. In approving the new rule today, FERC continues to recognize that markets function most effectively when both supply and demand resources have appropriate opportunities to participate.

The full Order 745 (PDF) includes the dissenting statement of Commissioner Moeller. He begins:

While the merits of various methods for compensating demand response were discussed at length in the course of this rulemaking, nowhere did I review any comment or hear any testimony that questioned the benefit of having demand response resources participate in the organized wholesale energy markets. On this point, there is no debate. The fact is that demand response plays a very important role in these markets by providing significant economic, reliability, and other market-related benefits.

However, in a misguided attempt to encourage greater demand response participation in the organized energy markets, today’s Rule imposes a standardized and preferential compensation scheme that conflicts both with the Commission’s efforts to promote competitive markets and with its statutory mandate to ensure supplies of electric energy at just, reasonable, and not unduly discriminatory or preferential rates. For these reasons, I cannot support this Rule.

He proceeds to take apart the logic of the majority’s Order for 10 pages.

NOTE: The docket number is RM10-17-000.

(HT to a regular reader. Thanks for bringing bad news to our immediate attention.)

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

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Netflix recommendations: Deep or random?

March 16, 2011

Michael Giberson

I know that Netflix’s recommendation engine has some serious computation behind it, and it often offers up interesting and useful suggestions. But occasionally it puzzles me, and I wonder if it is incredibly deep in its analysis or simply somewhat random.

Case in point:

Suggested: American Experience: Into the Deep

American Experience: Into the Deep: America, Whaling & the World
Because you enjoyed:

It Might Get Loud

Yojimbo

The Last Picture Show

 

So let’s get this straight, because I enjoyed a documentary about rock guitarists from different generations, and a classic Kurwasowa movie about a masterless samurai, and a black-and-white period piece about growing up in a small town in Texas, the artificial genius of Netflix thinks I’d enjoy a riveting documentary on the history of whaling in the United States?

Well, actually, it does sound kind of interesting …

Also, if they have any films about a rock-and-roll samurai sushi chef coming to a small town in Texas, I’d want to see that too.

Posted in Film, Networks, Technology | 7 Comments »

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