Couldn’t have said it better myself

Lynne Kiesling

Steve Horwitz, this morning, on the cronyism between the oil industry and regulatory agencies:

Despite the hopes of those who think this can be solved, as the AP report suggests, by better ethics laws or hiring “better” regulators, the revolving door that leads to capture is not a “bug” but a feature – the private sector benefits from being regulated and will always push to be at the table and influence the process.

The problem is not regulatory or ethical, but institutional.  If you want to change the pattern of outcomes, change the rules.  The only possible way to end the corporate control over the state is to reduce the state’s sphere of influence down to as little as possible and ideally nothing.  As long as there’s the dead animal of the state (really: the citizenry) to feed on, the vultures of the private sector will keep showing up to get their share.

Do go read it, and check out the links too.

Catching my eye this morning …

Lynne Kiesling

Ron Bailey writes at Reason about a new evolutionary psychology paper in the Proceedings of the National Academy of Science. I haven’t read the paper yet, and may well have more to say about it when I do, but Ron’s observations make it worth mention. Ron’s summary:

A new study [PDF] in the latest issue of the Proceedings of the National Academy of Science by University of California, Santa Barbara evolutionary psychologists Andrew Delton, Max Krasnow, Leda Cosmides, and John Tooby suggests that human generosity evolved as a response to having to make cooperative decisions in the face of social uncertainty. Specifically, the uncertainty about whether or not any interaction is a one-shot deal or could be repeated in the future.

As the U.C. Santa Barbara researchers note, the results of experiments like the dictator game not only “violate standard theories drawn from economics, but they also violated the predictions of widely accepted models of fitness maximization in evolutionary biology—models that (in the absence of kinship) similarly predict selfishness. Natural selection is relentlessly utilitarian, and is expected to replace designs that unnecessarily give up resources without return with those that retain those resources for enhanced reproduction or kin-directed investment.” On the face of it, natural selection should weed out nice guys.

In recent years, various anthropologists and economists have suggested that group selection could explain the apparent paradox of human prosociality. This new study argues that group selection theory is not necessary.

This research comes from the lab of the pioneering evolutionary psychologists Leda Cosmides and John Tooby, whose work has transformed our understanding of human motivation (and who are among the co-authors on this). I recommend reading their work, which I think is accessible even without an in-depth technical background in the field.

This result is a big deal, in part because of the data it provides to falsify the hypothesis that group selection is necessary for us to be sociable. Note also that the finding that “human generosity evolved as a response to having to make cooperative decisions in the face of social uncertainty” also fits with the pro-sociality arguments Adam Smith presented, particularly in The Theory of Moral Sentiments.

A heat wave without blackouts

Lynne Kiesling

Last week’s heat wave in the US was record-setting. Historically, the combination of a persistent heat wave with static, regulated retail markets and fixed prices has resulted in brownouts or blackouts in peak hours (and, at least from my personal experience with ComEd, exploding transformers in substations). However, as reported by Martin LaMonica in CNet today, such was not the case last week (apart from some isolated small events around New York). Why not? Two things: peaking plants that operate only a few hours a year provided additional generation, and large-scale demand response provided peak demand reductions:

Grid operators met soaring demand by ordering power from addition generators, called “peaker plants,” which only operate a few days a year. But ratcheting down power demand across many locations, sometimes called a virtual power plant, is increasingly being used to maintain grid stability–and keep a cap on energy prices. Demand response provider EnerNoc today said it curtailed 1,230 megawatts of power through utilities across the U.S. last week, the most it has done yet. …

Rather than contact large energy users individually as they used, grid operators now work through third-party demand response companies, such as EnerNoc and Comverge. By participating in the voluntary programs, customers, who can be businesses or consumers, receive a payment or have reduced rates. Demand reductions can be automatic, such as adjusting lighting in a warehouse or changing the settings for an air conditioner.

Demand-response companies contract with customers to manage their electricity use, bid demand reductions into organized wholesale power markets, and essentially split the surplus with their customers. Note the win-win-win-win nature of this: customer saves money even after paying the DR company, DR company profits, peak demand is reduced and reliability maintained, and wholesale electricity prices don’t increase by as much as they would otherwise.

The administratively-determined demand response “products” in wholesale markets are not perfect, the demand curve in most organized wholesale markets is an artificial construction based on too many static and fixed retail prices, and there are lots of payment disagreements and nuances in wholesale markets that arise from both the administrative definition of the product and the economic interests of the generators and the DR companies who are both jockeying for “economic dispatch” in the wholesale supply curve. That said, though, it’s clear that even in this incomplete and imperfect set of markets, large-scale demand response is providing value during peak hours in heat waves.

But the persistence of such a regulated and administrative approach is hampering efficacy and value creation in other “programs”. As LaMonica notes,

Not all demand response programs worked out as well as hoped last week. Baltimore Gas and Electric has a PeakRewards program, where it can reduce load by dialing down consumers’ air conditioner thermostats in exchange for annual credits worth $200 in the first year and then $100 per year. Making use of the voluntary program reduced 600 megawatts from the grid, which prevented black outs or brownouts, BGE said.

But the utility admitted yesterday that it needs to review its procedures after people were left without air conditioners for several hours on Friday when temperatures hit 108 degrees, according to reports. BGE said it intends to improve communication, including potentially calling affected consumers. It’s also investigating why the air conditioning cycling didn’t restore cooling in about 30 minutes after the end of the emergency demand response event.

I remain as skeptical about air conditioner cycling programs as I have always been — programs, programs, programs, not markets, not prices, not any truly interesting or valuable ways of actually exploiting the features of digital technology to benefit consumers and profit firms. Whether it’s air conditioner cycling or energy efficiency, regulated distribution utilities and regulators seem incapable of thinking in terms of anything other than a “program”!

Not good enough. The technology exists to do better, to allow consumers to use the technology to set more granular temperature changes in response to changes in prices, to enable a truly transactive network. Increasingly consumers will expect better, especially when the deficiencies of these administered “programs” continue.

First thoughts on Spotify

Lynne Kiesling

I’ve been playing with Spotify this week during its U.S. release, and so far I really like it. My British friends have been raving about it, so I was keen to check it out.

For music playing it combines some of the best features of iTunes and Pandora and Rhapsody — I can make playlists comprising my own music, music my friends have/have identified, or any music out there in the Spotify cloud catalog (which is large, broad, and deep). There are lots of resources on the web for finding new music, or creating automated playlists based on seeding with an artist’s name. For example, I love medieval-Renaissance-Tudor-pre-Enlightenment music, and it can be hard to sample such a large and diverse genre to find new music (although I recommend anything recorded by Stile Antico). I went to Spotiseek and entered “Thomas Tallis” as the artist, and generated a really lovely playlist that helps me identify some other music I really enjoy, and — here’s the economics hook — at least one CD that I will purchase, based on what I heard in the playlist. One thing I have yet to figure out that I want to do, though, is to seed multiple artists to generate a playlist — Interpol + Franz Ferdinand + Follow the People, for example, or Tallis + Byrd + Dowland. That’s one feature I really like about Pandora that I’d like to capture in Spotify.

The social/sharing aspects are also nice. I usually don’t sync much across social networks, being a bit of a privacy weenie, but I linked Spotify to my Facebook account, and I can see their shared playlists and share my playlists with them. Good conversation starters as well as ways to share experiences with friends and identify new music.

I’ve also played around a bit with the Android app on my phone, and have synced up a few of my local playlists, although I don’t listen to music on my phone that often. It’s a clean interface and works well, with no latency in my experience thus far.

The Spotify desktop application doesn’t do a great job of maintaining the video and podcast file organizational structure, so if I want to organize my podcasts in Spotify it looks like I have to go in and build the file structure. That means I will continue using iTunes for podcasts and videos, and will likely duplicate music management — so, for example, if I buy an MP3 album on Amazon I’ll import it into my iTunes library, which syncs with the Spotify desktop, and I’ll keep my iPod synced with iTunes and not Spotify. That may change if I make more Spotify playlists that don’t rely on music in my local library.

The business background of Spotify is interesting, in the context of copyright, file sharing, RIAA, and the reactionary positions of the recording industry as technology changes the world around them. This Bloomberg article, constructed as a profile of Spotify founder Daniel Ek, gives a good discussion of those issues and how Spotify’s business model is a way to embrace and profit from such innovation. Interestingly, the major record labels are part owners of Spotify, similar in certain respects to what Hulu is doing for TV.

Great sports journalism: Jason Gay on Jens Voigt

Lynne Kiesling

I’ll spare you my observations on this year’s Tour de France, which I am enjoying mightily. Today, with three huge Alpine climbs, features both grueling riding and gorgeous scenery; I’m watching a descent through a series of steep hairpin turns as we speak. But I will share one thing, because Jason Gay’s recent article, Nobody Suffers Like Jens Voigt, in the Wall Street Journal is an excellent example of sports journalism. Gay writes about everybody’s favorite member of the peloton with the same energy, joy, and wit that Voigt brings to cycling:

But Voigt is cycling’s beloved superfreak, a cult object on two wheels. Cycling fans can be combative—they will argue about riders, teams, doping charges, seat angles, handlebar tape, frame materials, the coffee, and then the handlebar tape some more—but Jens is a rare point of agreement. Everybody loves Jens.

Voigt is adored because he rides a bike like it’s his last day on it. He is full gas, always. A race like the Tour de France can be maddeningly conservative—riders at the top of the standings watch each other, cover attacks, avoid risks, do just enough to cling to their position.

But Jens? Jens pummels the race. He rides like he’s fleeing a bank heist. He rides like he’s got a paper route with 100,000 papers. Voigt on a bike is a boxing match—relentless, confrontational, jabbing, punching, attacking.

Over his long career, Voigt has won big races, including Tour stages. But that’s not why he recently got 40,000 followers in a couple days after opening his Twitter account, or why there’s a jensvoigtfacts.com website with Chuck Norris-type tributes. (“Sharks have a Jens Voigt Week.”)

Jens Voigt’s energy, enthusiasm, joy, and endurance reflect his passion and sense of life and good-natured wit, and Gay has captured that well with excellent, lively writing.

The energy industry insiders that didn’t bark

Michael Giberson

Dozens of energy industry insiders have gone missing in recent weeks, in what must be the largest unreported crime wave ever. Or possibly the energy insiders have been silenced by a vast powerful and secret industry cabal, which has compromising photos of the insiders or something like that, which would also be a large unreported crime wave. Somehow many energy insiders have been kept from voicing their opinions by some nefarious means. I don’t know what exactly is going on, but how else do you account for the absolute lack of supporting comments by any of the thousands of experienced geologists, geoscientists, petroleum engineers, and oil and gas analysts who responded to the New York Times article on shale gas skepticism by saying, “I’ve seen some of this data and what the Times reports is true.”

There must be a vast conspiracy. Muckrakers start your engines! I mean, either that or the Times was just wrong.

Maybe I’m taxing your interest by following the story of the New York Times shale gas skepticism into the weeds. I’m fascinated, though, by the way ideas rocket around the public, rebound into politics, and come out in the form of changes in law and regulation. The skeptic articles were pretty weak tea, but because it was the Times they made a big splash.

So where are we now? After the Times public editor posted his analysis critical of the reporting standards exhibited in Urbina’s one-sided stories, the national editors responsible for green lighting the articles issued a harsh reply (which the public editor posted on his blog: “Times Editors Respond to my Shale Gas Column“). A senate committee held a hearing yesterday directed at the EIA’s shale gas estimates; EIA is sticking to it projections.

Meanwhile, shale gas skeptic Art Berman, one of two critics quoted by name in the stories, feels unjustly accused by a few pieces in the backlash to the Times pieces. (See his blog here, specific links below.) One article posted at the Real Clear Science blog speculated without evidence that Berman was scheming to denigrate shale gas to promote coal gasification, and said Berman might have been involved in market manipulation or insider trading surrounding publication of the skeptics article. The RCS post makes a big deal out of some of Berman’s speeches and other public appearances. The allegations directed at Berman are mostly nutty innuendo. Berman complained and the post was revised. (Revised post here; related Berman complaints here and here. HT to Berman, since I wouldn’t have noticed the RCS post but for his vociferous complaint.)

The second critic quoted by name is Deborah Rogers, plumped in the Times story as “a member of the advisory committee of the Federal Reserve Bank of Dallas” and “former stockbroker with Merrill Lynch” and derided in some of the backlash writers as a mere “goat farmer.” The RCS post reports Rogers has “been fighting the natural gas industry – and Chesapeake Energy in particular – tooth and nail for years.” Environmental group Earthworks summarized Roger’s background with natural gas, suggesting she became interested after Chesapeake began drilling near her property in April 2010. If correct, then hardly “fighting … tooth and nail for years,” but probably a material fact that should have been mentioned in the Times piece which cites her as an expert. (Here is a link to a presentation Rogers gave at the Earthworks 2010 People’s Oil and Gas Industry Summit held in Pittsburgh. I’ll only observe that she hides her financial expertise well.)

The other ‘backlash’ effort worthy of Berman’s complaint was a fascinating analysis presented by Ken Boehm of the National Legal and Policy Center in the form of a letter to the New York Times, subsequently posted on the NLPC website. (Another HT to Berman! See his responses to the NLPC here and here and here.) Boehm, or someone working with him, carefully picked through the email contents and spent a great deal of time staring at the little black boxes used to redact the identities in the email trove posted by the Times. He concludes that many of the emails were either sent or received by Berman. Since Berman is quoted by name in the article and prominently associated with the skeptic point of view, Boehm concludes he cannot really be a confidential source and that the reason reason the Times hid Berman’s name was to mislead readers. Berman could easily clear up this particular issue by indicating which of the emails that the Times has posted were to or from him.

Boehm also complains that the Times article doesn’t explain that Berman has been the most prominent supporter of the shale gas bubble idea and makes some money from speaking and consulting on the idea. But the article does call Berman “one of the most vocal skeptics of shale gas economics,” and, frankly, speaking and consulting on his views about shale gas economics is exactly what an experienced industry consultant like Berman should be doing. Berman may be absolutely wrong about shale gas economics, but he is out there very prominently staking his business and reputation on his beliefs. That he gets paid for his geology and energy industry expertise? – that’s pretty normal for an energy industry consultant.

How should we sort all of this out? The initial Times article was shoddy work. No matter how many background interviews were done, no matter how much well data was examined, the piece was written to convey the false impression that there is a widespread, growing view that the shale gas boom is some sort of Enron-Ponzi scheme-shell game hoax being played by a handful of natural gas developers on the rest of the industry. As a result of this story, I predict that for a year or two we’ll be hearing anti-gas industry activists claiming “it’s just an Enron bubble anyway” as an excuse to stop development. Urbina and his editors ought to go back to journalism school; as a public service the Times should publish a story that allows readers to better understand shale gas skepticism.

Berman can contribute his own bit of public service by claiming the emails sent to or from him among the emails the New York Times relied upon in the piece. I don’t say he as an ethical obligation to do it – it was the Times shoddy journalism practices that presented them publicly in their redacted form – but he could help advance public understanding of shale gas supply by doing so, and that is something he reportedly would like to advance.

Meanwhile, I still don’t see any outpouring of support for the story from like-minded skeptics. After Berman’s years of hard work on the issue, is he still essentially the only person with a credible industry background willing to publicly declare his skepticism? Some anti-gas development activists have lauded the Times, but only because it provided them another bit of ammunition in their local political battles. Has anyone knowledgeable about oil and gas resource development came out in public agreement with the stories published in the Times? Not to my knowledge.

Where are all of these skeptical insiders the Times writes of?

Quote of the day: Hayek on expediency and freedom

Lynne Kiesling

Pace Don Boudreaux for my shamelessly copying his “quote of the day” meme … my quote of the day is this striking one from Hayek’s essay “Principles or Expediency” (1971):

From the insight that the benefits of civilization rest on the use of more knowledge than can be used in any deliberately concerted effort, it follows that it is not in our power to build a desirable society by simply putting together the particular elements that by themselves appear desirable. Though probably all beneficial improvements must be piecemeal, if the separate steps are not guided by a body of coherent principles, the outcome is likely to be a suppression of individual freedom.

The reason for this is very simple though not generally understood. Since the value of freedom rests on the opportunities it provides for unforeseen and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom. Any such restriction, any coercion other than the enforcement of general rules, will aim at the achievement of some foreseeable particular result, but what is prevented by it will usually not be known. The indirect effects of any interference with the market order will be near and clearly visible in most cases, while the more indirect and remote effects will mostly be unknown and will therefore be disregarded. We shall never be aware of all the costs of achieving particular results by such interference.

And so, when we decide each issue solely on what appears to be its individual merits, we always overestimate the advantages of central direction. Our choice will regularly appear to be one between a certain known and tangible gain and the mere probability of the prevention of some unknown beneficial action by unknown persons.

Certainly captures some themes we’ve been exploring around here lately.

Boettke on Cowen, Smith, Schumpeter, and Stupidity

Lynne Kiesling

One of the most beautiful (or frustrating) things about the Internet is that if you wait long enough, someone will say what you wanted to … and probably say it more eloquently. Pete Boettke and the commenters on this recent thread did that for me. In this discussion Pete analyzes Tyler Cowen’s argument in The Great Stagnation, which you’ve seen summarized and discussed in several places.

Tyler created a stir by arguing that the stagnation in real per-capita median income since 1980 is due to a deceleration in technological change, and that we have exploited all of the technological “low-hanging fruit” from an economic growth perspective. While his analysis has sparked considerable debate, I have found my thoughts on it to be rather inchoate — purchasing power is a tricky piece of data, differences in the quality of goods and what goods are available matter, how those available goods change our quality of life is hard to measure, and so on, so my initial reaction has been skeptical.

Pete has put his finger on what I think is an important interpretation of Tyler’s argument that is extremely relevant to our current economic analyses and policy debates:

Government policies since WWII have created an illusion that irresponsible fiscal policy, the manipulation of money and credit, and expansion of the regulation of the economy is consistent with rising standards of living.  This was made possible because of the “low hanging” technological fruit that Cowen identifies as being plucked in the 19th and early 20th centuries in the US, and in spite of the government policies pursued.  An accumulated economic surplus was created by the age of innovation, which the age of economic illusion spent down.  We are now coming to the end of that accumulated surplus and thus the full weight of government inefficiencies are starting to be felt throughout the economy.

Think of it in terms of two complementary categories of growth drivers as defined in Joel Mokyr’s Lever of Riches: Smithian (growth through trade and commerce) and Schumpeterian (growth through innovation, technological change, and the creation and application of useful knowledge). Pete takes this framework to analyze Tyler’s argument thus: despite government policies that distort incentives and redistributes resources in ways that reduce productivity, over the past 150 years we’ve had sufficient Smithian and Schumpeterian growth to more than offset the government drag on economic activity … but now the growth of government is shifting that relationship and leading to what Tyler calls the great stagnation, in this period between what Tyler characterizes as innovative waves. Pete says it thus:

We realized the gains from trade (Smithian growth) and we realized the gains from innovation (Schumpeterian growth), and we fought off (in the West as least) totalitarian government (Stupidity).  As long as Smithian growth and Schumpeterian growth outpace Stupidity, tomorrow’s trough will still be higher than today’s peak.  It will appear that we can afford more Stupidity than we can actually can because the power of self-interest expressed through the market off-sets that negative consequences. But IF and WHEN Stupidity is allowed to outpace the Smithian gains from trade and the Schumpeterian gains from innovation, then we will first stagnate and then enter a period of economic backwardness unless we curtail Stupidity, explore new trading opportunities, or discover new and better technologies.

Yes, this, this is an eloquent articulation of my inchoate thoughts on the subject! And this interpretation of Tyler’s argument bears directly on the current policy debates that are roiling the US, from entitlements and health care to debt ceiling and government borrowing to monetary policy to authoritarian immigration and security policies … all of which have grown to become net economic drags, anchors that we all have to pull along. In particular Tyler analyzes data indicating that government services, health care, and education are substantial contributors to what he sees as stagnation; these are the sectors of the economy where those government anchors are most prevalent, although he doesn’t pursue that connection as deeply as I would have liked in the analysis.

I’m wary about calling this phenomenon “stagnation”, because I’m not persuaded that Schumpeterian growth has decelerated (in the comments on Pete’s post Steve Miller makes the same point, as do others in the thread). This is a really complicated question to tackle, both because innovation/technological change/application of useful knowledge is punctuated and not uniform and because its endogeneity with Smithian growth and Stupidity (and, for that matter, with culture) means that its effects on productivity and economic growth show up with lags and in unpredictable patterns.

In part what I like about Tyler’s approach and Pete’s interpretation are the parts that point out what Pete calls the “economics of illusion”, and how that aligns with my take on regulation. In his EconTalk podcast on the work, Tyler points out that the expectation of consistent, uniform annual GDP growth rates of 3% lead us to fiscal and taxation policies to perpetuate that rate that are ultimately costly, and he argues that with the growth in the size and scope of government that illusion is more disastrous today than it was in 1985. In other words, striving for security, for constancy, for consistent economic growth facilitated by government policy to tweak the growth rate is pointless, because those goals are unachievable illusions. I make the same argument for regulation in electricity.

So I encourage you to read Tyler’s (short!) book, Pete’s post and the comment thread, and I recommend EconLog’s David Henderson’s review of it in Regulation in the Summer 2011 issue. David finds Tyler’s argument less than persuasive for some of the reasons I described above, and his analysis complements the other readings.

Risks and regulation, part 2

Lynne Kiesling

A couple of days ago I outlined some remarks I gave at a regulation conference organized by the Istituto Bruno Leoni, and I asked what some of the risks are associated with electricity regulation. In the comments on that post, Ed Reid and David Zetland touched on what I think are two important risks arising from regulation — and not just in electricity:

Ed:

You have written here on several occasions regarding smart meters, smart grid, variable rates, etc. Many of the programs which have attempted to evaluate the potential of these approaches have failed because regulators refused to expose the consumer participants in the test program to real time rates or established such short test program durations that many of the investment-intensive consumer response options offered no potential to be recovered from savings.

The smart grid is viewed by many as essential to a renewable energy future. However, the reluctance of regulators to permit construction and testing of an attractive consumer value proposition over a test period long enough to encourage permanent change, might “kill the goose” before it has the opportunity to lay any eggs.

David:

The biggest risk is regulating uncertainty as if it’s risk, i.e., pretending one knows the probability and damages of an event and then attaching regulations to those guesses.

Their comments illustrate two points I made in my talk: regulation is prone to the problems of Bastiat’s unseen (we see the costs and benefits we experience, but not the ones that we fail to realize by choosing to foreclose retail dynamic pricing, bundling, and product differentiation), and in regulation we have a serious epistemological hubris problem because regulators make decisions based on regulating uncertainty as if it’s risk that have large impacts and are difficult to reverse. Add these to the risks I discussed before — reliability, bankruptcy/investment, environmental, fuel price volatility, and foregone value opportunities due to lack of innovation (which overlaps with Ed’s point) — and the risks we face from perpetuating our current regulatory system are large and diverse. Here are some of the issues I raised about them at the conference:

Set of risks: These risks interact, and regulatory attempts to reduce or eliminate one usually increase another or introduce a new one. For example, the focus on reliability and financial stability focus has led to static market definition associated with legal entry barriers, the commodification of the electricity product, and little innovation (just put iron in the ground, customers don’t want that digital stuff). Such a traditional regulatory focus reduces the incentive and ability of firms in the electricity industry to discover and commercialize new technologies, products, and services with lower emission footprints, so the focus on reliability and bankruptcy risk reduction contributes to increasing environmental risk. There are other examples, but you get the idea.

Innovation changes everything: A centralized or top-down regulatory approach to these risks ignores consumer preferences, the heterogeneity of consumer preferences, and the fact that consumer preferences can change over time as technology changes. Take, for example, consumer end-use digital technologies for energy management (programmable communicating thermostats, web portal, etc.). Such devices empower consumers to program their energy consumption/willingness to pay preferences into their homes and devices, to automate responses to price signals, to choose the level of reliability that they want/are willing to pay for (even by room!), and even to choose how their electricity is generated (green/grey mix). Of course the canonical example of research into this value proposition from innovation is the GridWise Olympic Peninsula project that I’ve discussed here many times before.

With such technology, the static, standalone commodified retail electricity market is an anachronism. With such technology and other distribution-related smart grid technologies, product differentiation (dynamic pricing, green power, differentiated reliability) is possible, bundling with home entertainment or home security or home health monitoring is possible, and both consumers and competitive retail energy service providers can benefit … and in the process they can create ways to manage this set of risks, ways that are almost certain to differ from what would be imposed top-down using the traditional regulatory techniques of the electro-mechanical era.

We can’t eliminate risk, but we can price it through markets: Risk is not a bad thing, not an aspect of life than should, or can, be eliminated. But it can be priced – and should be priced through the methods I just described, which are decentralized market processes for entrepreneurs to discover and create products and services that benefit consumers. Some of those entrepreneurs will fail, and that’s as it should be, because well-being and thriving human societies only arise from systems where individuals can profit OR lose from their endeavors.

Resiliency: Another benefit of such decentralized systems (this applies to financial regulation too, even more so than energy) is resilience – their distributed nature means that a failure of any one entity does not materially affect the system as a whole. Two examples here are (a) unexpected physical failure of a generator and its effects, which can be mitigated through distributed end-use response to the price increase that would naturally accompany such an unexpected outage; and (b) exit of a retail firm from the market, where establishing a set of market rules for customer service in the event of exit minimizes customer disruption while still offering them alternatives from competitors. Pluralism and decentralization in complex systems makes them more resilient, which itself contributes to changing the risk portfolio of the system. When unavoidable failures happen, pluralism and decentralized market processes allow for systems to fail gracefully.

Imperfection: Even if we made all of those (beneficial IMO) changes to make retail electricity markets more competitive, more innovative, and more able to price risk, the imperfection of human systems is inescapable. In the world I sketched out, consumers may not choose options that change their energy consumption in ways that align with “optimal carbon objectives”, if we could know and define such a thing. Incomplete property rights that are costly to define are going to continue to be the core economic cause of environmental issues, including greenhouse gases.

One overarching issue in regulation of all the forms we’re discussing is control vs. choice – both history and human nature put us on a path of desiring control over our circumstances. But history also shows us that such control is an illusion, particularly in complex systems, and paradoxically, is it through choice in decentralized systems that we can achieve the kind of stability, reliability, and thriving that are the stated objectives of regulation.

Thus I conclude that if we try to use regulation to reduce risks or eliminate them entirely, we do so at a substantial cost. Our best approach to risks involving energy and the environment is to have an institutional framework that allows experimentation and trial & error, because only experimentation will enable us to discover the institutional and technological innovations that we can use to create more resilient human systems for pricing and managing the complex set of risks we face in this area.

NYT editor on shale gas skeptic article: we should have done better

Michael Giberson

As mentioned here a few weeks ago, links below, the pair of New York Times articles giving voice to shale gas skeptics were badly done. (I called them no more than “an impressive collection of shale skeptic sound bites.”) I was far from the only critic, and the paper itself received a lot of complaints. The Times‘s reader ombudsman investigated and has published an assessment: “Clashing Views on the Future of Natural Gas.”

The report included a somewhat amusing interchange between the ombudsman, the reporter and the editor for the story (links are in the original, bolding added for emphasis):

I also asked why The Times didn’t include input from the energy giants, like Exxon Mobil,that have invested billions in natural gas recently. If shale gas is a Ponzi scheme, I wondered, why would the nation’s energy leader jump in?

Mr. Urbina and Adam Bryant, a deputy national editor, said the focus was not on the major companies but on the “independents” that focus on shale gas, because these firms have been the most vocal boosters of shale gas, have benefited most from federal rules changes regarding reserves and are most vulnerable to sharp financial swings. The independents, in industry parlance, are a diverse group that are smaller than major companies like Exxon Mobil and don’t operate major-brand gas stations.

This was lost on many readers, including meMichael Levi, a senior fellow for energy and the environment at the Council on Foreign Relations, wrote that the article “repeatedly confuses the fortunes of various risk-hungry independents with the fortunes of the industry as a whole.”

He told me he hadn’t realized that the report was focused on independents and read it more broadly, adding, “If I didn’t know they were talking about certain independents, then Times readers — who don’t know what an independent is — they aren’t going to know what they are talking about either.”

This confusion stems from the language in the article, which near the top referred to “natural gas companies” and “energy companies.” The term “independent” appeared only once, inside a quoted e-mail.

LINKS

The stories: “Insiders Sound an Alarm Amid a Natural Gas Rush,” the focus of the discussion above, and from the next day, “Behind Veneer, Doubt on Future of Natural Gas.”

Notable among objectors to the NYT’s articles was the panel that put together the MIT study on The Future of Natural Gas, released about two weeks before the newspaper stories.

The Council on Foreign Relation’s Michael Levi, quoted in the excerpt above, has an article in The New Republic on the natural gas fracking industry’s public perception problems.

My posts in response to the articles, which include links to some of the other reactions: