FERC, NERC conclude “weather-related causes” explain most electric power and gas supply problems during February’s extreme cold in Southwest U.S.

Michael Giberson

The Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC) have issued their report on the events surrounding electric power and natural gas supply interruptions around the Southwest United States in early February, 2001. The culprit? According to the press release: “the task force found a majority of the electric outages and gas shortages were due to weather-related causes.”

My initial snarky response was, “It took you six months to figure this out? I think ERCOT power system operators had reached the same conclusion by about 6 AM on February 2.” But, of course, at the time there was some uncertainty about contributing factors and it is useful to go back over the event carefully in order to see what can be learned from the experience.

In the case of this report, “go back over the event carefully” seems to dramatically underestimate the effort. The resulting document totals 357 pages from cover to cover, including eleven appendices on topics ranging from “Electricity: How it is generated and distributed” to “Impact of cold weather on gas production.”

Much of the report, appendices included, is more or less a primer on current electric power and natural gas systems, focusing on the Texas, New Mexico and Arizona systems, and with an emphasis on reliability and weatherization issues. The report adds to that primer an account of what went wrong during the cold snap lasting February 1-5 and then reaches some conclusions and offers recommendations. The report appears to be a “one stop shop” for policymakers, power systems operators, and others interested in what went wrong.

The FERC press release highlighted a recommendation to Southwest states to consider whether to require winterization plans. In addition, the press release noted the following (from among the total of 26 electric power and 6 natural gas system recommendations):

  • Generation owners and operators should ensure adequate construction, maintenance and inspection of freeze protection elements such as insulation, heat tracing and wind breaks.
  • Reliability coordinators and balancing authorities should require generators to provide accurate data about the temperature limits of units so they know whether they can rely on those units during extreme weather.
  • Balancing authorities should review the distribution of reserves to ensure that they are useable and deliverable during contingencies.
  • State lawmakers and regulators in Texas and New Mexico, working with industry, should determine if weather-related production shortages can be mitigated through the adoption of minimum winterization standards for natural gas production and processing facilities.

Also of interest in the report, FERC/NERC reviewed the ERCOT Independent Market Monitor’s report on the rolling blackouts (which concluded no market manipulation was involved) and similarly found that there was no evidence of market manipulation.

While there is a great deal of additional detail in this report, the overall conclusions are more or less the same as reached in earlier reviews. This information, along with the economic incentives to put it to work, will likely keep the energy industry in the Southwest from experiencing rolling blackouts next winter.

RELATED: Tom Fowler offers a summary at FuelFix.com. The rolling blackouts in ERCOT were the topic of many posts earlier this year at Knowledge Problem, the interested reader can start with this KP search: ERCOT+blackout.

Penn Jillette and Hayek: “I don’t know”

Lynne Kiesling

Penn Jillette, the taller and more vocal half of the magic performance duo Penn & Teller, has written a lovely and thoughtful essay as a companion to his appearance last night on Piers Morgan’s CNN show. It defies excerpting, so I encourage you to click through and read it in its entirety.

His theme: “I don’t know”, particularly with respect to religion and to helping the poor, leading him to conclude that he is an atheist libertarian. For example, about helping the poor he writes

Then he asked me what we could do to help poor people. I said I donated money, food, medical care, and services and he said, “No,” he meant, what could society do to solve the problem of poor people. Again, I was stumped.

He said the government had to do it, which I interpreted as another way of saying he didn’t know, but he thought that made me look mean … even though I do care and do try to help. …

And I don’t think anyone really knows how to help everyone. I don’t even know what’s best for me. Take my uncertainty about what’s best for me and multiply that by every combination of the over 300 million people in the United States and I have no idea what the government should do.

In this essay Jillette is channeling some of the most important ideas about the knowledge problem developed by Hayek and others, ideas that are the foundation of what we do here at KP — the limits of individual knowledge, the necessary limits of collective knowledge, and the humility that should arise as a consequence, both individually and in collective action/policy situations. Jillette is also channeling a lot of David Hume’s skepticism, not just in terms of religion but also in terms of empiricism and the limits of human reason.

Jillette’s essay is also charming in tone, reflecting respect for those who disagree with him and those with different life experiences and abilities. A very thought-provoking read.

Raising MPG standards, part 2: Morris well explains the relative advantages of raising the gasoline tax

Michael Giberson

At the Freakonomics blog, transportation scholar Eric Morris favors President Obama’s recent deal to dramatically raise CAFE standards (Corporate Automobile Fuel Economy standards) by 2025. A gasoline tax would be far superior public policy, he said, but it won’t work politically. Because he thinks CAFE standards do work, technically and politically, he said we should go with this “second-best solution.”

To keep the discussion here in manageable chunks, I’m responding in two posts. In part 1 of “Raising MPG standards,” I explained why I wasn’t persuaded by Morris’s evidence that CAFE standards actually work. In this post I highlight what Morris explained well: why a gasoline tax can be the superior regulatory approach.

Here’s Morris:

[E]conomists generally prefer to do things with price signals as opposed to regulatory standards. Why?

Price signals inflict pain on consumers, but let them figure out what form they want to take it in. They in turn force producers to respond to their (altered) demand, but allow producers leeway in how that demand is met. This allows consumers and producers to change behavior in the most efficient possible manner.

Instead of CAFE, why not just raise the gas tax and let drivers figure out whether they want smaller cars, lighter cars, less powerful cars, more expensive cars, shorter-range cars, or, crucially, cars that are just as heavy, powerful, and cheap—but which get driven less?

This raises the true problem with CAFE. It misses out on a potentially key part of the solution to reducing fuel use: driving less. In fact, ironically, increased CAFE standards will have a perverse and unwelcome effect; better fuel economy will increase the fixed cost of driving (i.e. vehicle prices) but will actually reduce the marginal cost (i.e. fuel expenditures). To a degree, less thirsty cars will actually cause people to increase the number of miles they drive (as I’ve written about here).

With increased gas taxes, on the other hand, less driving will be part of the consumer’s toolkit. Some who absolutely need vehicles with poor fuel economy will have the option of avoiding the tax by driving less instead. As long as their fuel use goes down, why not give them that choice? Greater economic efficiency would result. In fact, the Congressional Budget Office ran the numbers in 2004 and found that cutting fuel use through taxes was considerably cheaper in the long run than raising CAFE.

Reducing driving through a higher gas tax would have other important benefits that improving fuel economy does not, like congestion relief and accident reduction…

Another advantage of a gas tax increase is that it would start working today. Since the car fleet takes so long to turn over (according to the US Department of Transportation, automobiles these days stay on the road an average of about 12 or 13 years), it will be a very long time before the new CAFE standards actually translate into meaningful changes in emissions. But increasing the gas tax would have immediate effects.

Sure, we can counter a call for higher gasoline taxes with a long list of negative consequences. The point is that an energy tax is relatively speaking transparent and efficient. However harmful a higher gasoline tax is, a CAFE regulation aiming at the same effects would be ten times (rough guess) more costly.

The social costs of raising CAFE are surely greater than the social benefits, so “second best” policy or not, we ought not to do it.

RELATED: In part I, I criticized the evidence that Morris put forward in favor of the view CAFE actually works.

Raising MPG standards, part 1: Morris is not persuasive in his claim that CAFE works

Michael Giberson

At the Freakonomics blog, transportation scholar Eric Morris favors President Obama’s recent deal to dramatically raise CAFE standards (Corporate Automobile Fuel Economy standards) by 2025. A gasoline tax would be far superior public policy, he said, but it won’t work politically. Because he thinks CAFE standards do work, technically and politically, he said we should go with this “second-best solution.”

To keep the discussion here in manageable chunks, this first post argues that Morris is not persuasive in his claim that CAFE works. A second post will highlight Morris’s more insightful discussion concerning gasoline taxes.

The evidence Morris offers that CAFE standards work is, to put it politely, weak. Here is his chart and accompanying explanation:

 This is not because CAFE doesn’t work; it does. In 1975, a few years before CAFE was implemented, average MPG for new cars and light-duty trucks was 13.1. In 2010 it was 22.5. Can this be attributed to CAFE? To a large degree, yes, as this graph makes clear:

Source: Eric Morris, Freakonomics blog.

CAFE standards were aggressively increased from 1978 to 1984, and, as the chart above shows, fuel economy responded. However, from 1985 until 2007 CAFE standards were no longer raised meaningfully—and MPG flatlined. The table makes it pretty clear that the CAFE standards created a floor under MPG for a 25-year period, when low gas prices (remember those?) rendered consumers otherwise indifferent to fuel economy.

Yes, gas prices, remember them? Beginning around 1976, gasoline prices jumped from about $1.73 (EIA data, annual average price per gallon of unleaded regular gasoline in constant 2005 $) to about $2.65 by 1981, then they drifted back to around $2.00 in 1985. In 1986, gasoline prices dropped under $1.50 and stayed around that level until about 2003. From 2003 to 2008 gasoline prices moved up with crude oil prices, in 2009 they started coming down again.

The big moves in measured CAFE came when gasoline prices were high. The long low-price period saw both measured automobile and light truck CAFE levels drifting downward.

Now look at the chart again: the average of measured “car” and “truck” CAFE levels (labelled “both” in the chart) fell faster than either the car or truck level.

How is it possible that the average of two data series fell faster than either of the component data series? Because “both” is a weighted average, and as gasoline prices stayed low consumers limited by their options in the more-tightly-regulated automobile category simply switched into light trucks (i.e., minivans and SUVs). Automakers, too, feeling constrained by CAFE standards, pushed consumers to make that shift. What exactly are the policy benefits from driving consumers out of station wagons and into SUVs and minivans of similar fuel economy performance?

CAFE “worked” when it has a supporting high gasoline price environment, but I suspect that the gasoline prices were doing most of the heavy lifting.

RELATED: In part II, I highlight what Morris explained well about gasoline taxes.