Monthly Archives: October 2011

WIRED UK profiles inventor James Dyson

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Michael Giberson

Inventor James Dyson is a fan of Thomas Edison and making lots of mistakes. From the November 2011 WIRED UK:

Thomas Edison, the American inventor, is synonymous with trial-and-error innovating. He would build a prototype, test it, watch it go wrong, tweak the design and build another. Over and over again. … Dyson has volumes about Edison on his bookshelves at Dodington Park, his country house in Gloucestershire, and, over a century later, swears by his approach. (In the 1980s, Dyson’s Ahab-like quest to find out how to make a bagless vacuum cleaner involved 5,126 failures.) “At school, you’re not allowed to fail; the wrong answer is a bad thing,” Dyson says. “But all failures are valuable because they all teach you something. I have lots of them every day.” His company would later use this monomaniacal process to give heater manufacturing a shot in the arm.

One way Dyson tries to promote innovation is to avoid the well-educated industrial designer. As Dyson put it, “A non-hardened engineer is probably more likely to do ridiculous experiments,” and sometimes that is a very useful thing. More:

To calibrate the business to tackle design problems, Dyson has imposed a clearly defined corporate philosophy. Its core function is to encourage “outrageous suggestions”. Take recruiting. “I like naïvety,” he says. “We try to choose people without experience. And we don’t employ any [pure] industrial designers at all.” It means that his staff aren’t polluted by received wisdom, he says, helping them to think afresh. There are also a few artists, even furniture designers — people with no formal engineering training at all. Like Dyson himself.

“If you don’t understand why the sums don’t add up, and you make a suggestion, most of the time you’ll be wrong,” he says. “But just occasionally you’ll be suggesting something quite unusual. And a non-hardened engineer is probably more likely to do ridiculous experiments.”

Ridiculous can prove lucrative. In 2004 Dyson was working on a product that never saw the light of day. He won’t say exactly what it was, in case his company develops it in the future, but it involved water and powerful slivers of air. One day an engineer attempted to dry his wet hands with the airflow. “We all noticed, and suddenly said together, ‘Hand drier’.” In 2006 the company launched it as the Airblade, which uses cold air and dries hands in ten seconds, consuming, Dyson claims, 80 per cent less energy than a warm-air equivalent.

The beautiful transmission tower, the glamorous wind turbine

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Michael Giberson

We talk a bit about the economics of electric power transmission and wind power here, but there is more to understanding the world than economics. Previously we have noted Virginia Postrel writing on the techno-glamour of, among other things, wind turbines. Now we take note of the Pylon Design Competition and its recently announced winning design, a transmission tower design intended to “be both grounded in reality and be beautiful” as per the competition guidelines, the Bystrup T-Pylon (I liked short-listed entry 3 as well).

And if you like integrating artistic insights into your thinking about power transmission and wind turbines, you just might want to support a planned performance art piece intending to promote exactly that kind of integration. The piece will be based on recordings in the wind energy oral history project housed in Texas Tech University’s Southwest Collection.

Why did water utilities in the U.S. become mostly publicly owned?

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Michael Giberson

Among U.S. water utilities, some are publicly owned and some are privately owned. Same thing for gas utilities and electric utilities. But unlike in the gas and electric power industries, the water business has become predominantly organized by publicly-owned utilities. Scott Masten explores why it was that public utility ownership became dominant among water utilities in an article, “Public Utility Ownership in 19th-Century America: The ‘Aberrant’ Case of Water,”  appearing in the October 2011 issue of the Journal of Law, Economics, and Organization.

I would have guessed that the large up-front costs with low salvage value (termed “relationship-specific assets”) created a large potential for post-investment opportunism (i.e., like the “competition over infra-marginal rents” story that John Neufeld says help explain the rise of state electric power regulation). After all, seems like there are few better examples of sunk costs than the networks of underground pipes that make up a municipal water supply system.

Masten discusses the idea that relationship-specific asset related problems favored municipalization, but finds no evidence in his data to suggest that water utilities will larger investments were more likely to be publicly owned. And yet his favored explanation is related: he finds strong support for the idea that frictions between city governments and private water utilities was a key contributor to municipalization. Friction was often over city-demanded expansions that were resisted by private water utilities, mostly because contracts negotiated between cities and private utilities didn’t provide efficient incentives for expansions and occasionally cities reneged on promised subsidy arrangements to induce expansion. This is, as Masten explains at pp. 621-625, is a fight over infra-marginal rents, so I’m not sure why Masten favors a “relational friction” story over a “relationship-specific assets” story. In any case public ownership, by integrating city and water utility, eliminates the costly conflict that would otherwise undermine the efficiency of private operations.

While his data and analysis mostly revolve around the late 19th century, he notes the issue is of more than historical interest. From the conclusion (notes omitted):

The World Bank has recently been actively studying privatization of waterworks as a way of addressing severe water problems in developing countries.The dominance of public ownership of water and sanitation services in the United States should, at a minimum, give policymakers pause: If, despite an institutional environment conducive to private ownership, American water and sanitation systems are overwhelmingly publicly owned and operated, is it reasonable to expect privatization to yield long-term gains in developing countries where the environment for private enterprise may be much less hospitable? Understanding the determinants of variations in waterworks ownership both over time and between communities may help inform whether privatization of water systems in developing countries makes sense .

Public ownership does eliminate costly fighting between city and private utility over infra-marginal rents, but it doesn’t eliminate the rents and so likely won’t eliminate the competition to capture them. Masten’s suggestion for further research are useful, but also needed are complementary studies of the efficiency of publicly owned water utilities in countries “where the environment for private enterprise may be much less hospitable.” The question in terms of generalized economic growth seems to be under which system are more of the rents yielded to consumers.

Masten’s abstract:

Unlike other public utilities, most water in the United States is supplied by publicly owned and operated waterworks. The predominance of the public sector in the supply of water was not always the case, however; private firms dominated US water supply throughout most of the 19th century. This article analyzes the puzzle of why water and sanitation systems were the only major utilities to become predominantly public by, first, reexamining historical accounts of the problems of contracting for water services in light of modern theories of economic organization and, then, evaluating hypotheses derived from those accounts using data on 373 waterworks serving US municipalities with populations over 10,000 in 1890. Among other results, municipal ownership is found to be related to the distribution of population and commerce within a city in ways that suggest that frictions between cities and private companies over system extensions and improvements played a significant role in the shift to municipal ownership.

The smart grid and the regulatory barriers thereto

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Michael Giberson

Bob Jenks of Oregon’s Citizens’ Utility Board, writing at EnergyPulse, explains “Why Smart Grid Advocates Should Learn About Utility Regulation.”

Reading between the lines a bit, the reason smart grid advocates should learn about utility regulation seems to be so that they will understand that their talent, inventiveness, and desire to make the world a better place will be wasted unless they trim their vision to fit the established way of doing things. Therefore:

Although Smart Grid advocates have brought something new to the industry, progress for the sake of progress must be discouraged. Let us preserve what must be preserved, perfect what can be perfected, and prune practices that ought to be prohibited.

No, I’m sorry that is not right, somehow Jenks’s text got mixed in with Dolores Umbridge’s introductory speech to the assembled students of Hogwarts.

Actually, Jenks argues a long history of regulatory practice has resulted in a body of established ways of doing things – for example, managing utility incentives through manipulating the rate base, doctrines such as “use and useful” intended to protect ratepayers. If smart grid advocates want to engage with customers of a regulated electric utility, Jenks says they’ll need to work within the established system.

In essence, smart grid advocates, the advice is to realize that any regulated industry is part of the broader political industry:

Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.

No, once again I’ve mixed it up a bit. That is Google’s John Schmidt talking about his experience dealing with politicians in Washington, DC.

All snarkyness aside, I actually agree with a great deal of what Jenks says. If smart grid advocates want to make headway in a regulated business like exists for electric power for most of the United States, then they better learn the rules of the regulated game. You want to sell into a regulated utility market? Then you better trim your vision to fit the regulators’ ways of doing things. It just turns out that neither regulators nor the regulated industry do innovation very well, at least not the revolutionary kind of innovation like some smart grid advocates have in mind.

And in recognition of that well-established fact, I’d like to invite all smart grid advocates with revolutionary innovations in mind to come on down to Texas and check out the dynamic potential of the state’s competitive retail market.

Special energy section in today’s NYT

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Lynne Kiesling

This special energy section in today’s New York Times has a lot of interesting articles, especially if you are curious about the business aspects of renewable energy. I particularly learned a lot from the article about control room operators, how they do their jobs, and how they and reliability standards have had to evolve to adapt to the changing wholesale power market environment. I think the article underplays (or does not acknowledge) the coordination and reliability benefits that can come from distributed, decentralized digital intelligence and using prices and transactions to coordinate and balance flows along with the control room operations. But the window into those windowless rooms is informative.

Hat tip to Ron Bailey, who writes further about the article on the disappointment of green jobs in the special energy section.

Nest’s elegant learning thermostat — but is it transactive?

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Lynne Kiesling

A team of highly skilled and design-savvy engineers have revealed Nest, an elegant, well-designed thermostat that can learn your preferred settings, analyze your data to spot energy-saving and money-saving opportunities, and look lovely on your wall. Earth2Tech has a review article on Nest, as does Greentech Enterprise. This summary description, from the Earth2Tech article, indicates why this device has strong potential:

The Nest thermostat, on the other hand, is supposed to learn your energy consumption behavior and program itself, and then automatically help you save energy in a convenient way. Once installed, the thermostat takes about a week of hardcore learning to recognize the standard way you heat or cool your home, and then recommends settings that are slightly more efficient than what you already do. It also automatically turns down the thermostat at times that are convenient to you. The device also continues to do lighter learning of your behavior via pattern recognition and your manual interaction with it, throughout the life of the device. …

The Nest thermostat has five sensors — temperature, humidity, light and two activity sensors — and the activity sensors can notify the device to turn down the heating and cooling when no one is in the house.

The Nest thermostat also has a feature called “time to temperature,” which shows the home owner how long it will take to heat or cool the home.

I love the idea of this “time to temperature”, because most people don’t realize how large an effect the thermal mass of the home has on energy use, and how pre-cooling and pre-heating before a high-price period can save both money and energy.

Nest also offers a website with more granular data, remote adjustment capabilities (and I expect that those adjustments can be automated, although the article doesn’t specify), and money-saving energy-saving suggestions.

But even more importantly, Nest comes equipped with a Zigbee chip and wi-fi, so it will be a discoverable device on your home network, and able to communicate with a digital meter and other digital devices in the home. It sounds like it has enough intelligence in it to be extensible over time to be a portal for automating the behavior of smart digital devices in the home … and it can be transactive, and consequently make the home transactive and the homeowner capable of automating the responses of a wide range of smart devices in the home to respond autonomously to price signals. If a grid is not transactive it’s not a smart grid, and Nest looks like it will be a step in that direction. The other necessary condition for a smart grid is retail choice and the customer being able to choose dynamic pricing that Nest can automate. Without retail choice and dynamic pricing, the smart grid is not smart.

A final interesting note about Nest is its path to market: rather than going the mass utility deployment route, Nest is going direct to consumer, hurrah!

However, Nest is one of the only companies that is directly targeting consumers for its thermostat. Nest plans to sell its thermostat at Best Buy, via building specialty channels, and through its website. Fadell tells me the company wants to “connect with the iPhone generation where it shops.”

I’ll be watching this development with great interest.

Monsters of Grok t-shirts

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Lynne Kiesling

Here’s some outstanding geek attire! Monsters of Grok is a line of t-shirts that use rock band t-shirt logo designs, but the names are instead famous scientists and intellectuals such as Ada Lovelace (done as a Ladytron logo), Isaac Newton (as Iron Maiden), and Benjamin Franklin (as Black Flag). I fell over laughing when I first saw these, literally hyperventilating and weeping. Guess that makes me a geek rocker …

Today, to make myself feel better for having such a nasty ear infection (with gratitude to those of you who have sent get well wishes!), I finally broke down and purchased two of them. The first one’s easy to guess if you’re a regular KP reader, the second one is a little more tricky as there were several contenders. If you guess them both you get a gold star!

Exelon’s John Rowe and Google’s Eric Schmidt: Truth to power?

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Lynne Kiesling

Here’s an interesting juxtaposition of two prominent executives performing sound public choice analyses, and I think they complement each other, at least in my work! This weekend’s Wall Street Journal featured an interview with Exelon’s John Rowe, A Life in Energy and (Therefore) Politics. Exelon is the third largest investor-owned utility/generation owner in the country, with one of the largest nuclear generation fleets outside of France. Between the growth of Exelon through mergers and the provenance of Commonwealth Edison (a substantial chunk of Exelon) as Samuel Insull’s pioneering origins of the electricity industry, Rowe has experienced many of the crucial business and policy aspects that have characterized this industry for the past century.

And for my part he pretty much nails the public choice analysis. In discussing the politics of electricity in general, and in particular Exelon’s support of active federal carbon policy:

In a visit to The Wall Street Journal’s offices recently, Mr. Rowe was eager to strip the altar of green jobs—and the many other political pieties that distort the energy industry, even a few that he says belong to the Journal editorial page.

“The utility business is a funny business and almost no one in any political authority in either party really believes in orderly markets in electricity,” Mr. Rowe says. …

The reason for this seeming contradiction—between simultaneously supporting free markets and interventions like an economy-wide CO2-reduction plan—is that “we’re always being asked to do things that are in our view bleeding crazy,” as he’ll go on to explain.

For starters, the anti-market demands made on Mr. Rowe are bipartisan.

He discusses the cost differential between, in this instance, wind power and other lower-carbon means of generation, such as natural gas, and the bipartisan political support for wind despite the reality that we get more carbon reduction “bang for the buck” from natural gas. Interestingly, in this interview he does not tout nuclear as the be-all-end-all carbon-free energy approach, given construction costs; he also dismisses clean coal.

Rowe is also an enthusiastic amateur historian, so is very well-versed in the origins of the politicization of the electricity industry:

This political economy is an artifact of the historical electricity market—which, through most of the 20th century, was not really a market at all. Until recently, almost all consumers bought electricity from a monopoly supplier at rates set by the government, with a guaranteed return for utilities. That model eroded amid deregulation in the 1980s and ’90s, and the rise of more efficient wholesale electricity markets and independent generators. Commercial and now even some residential consumers are no longer captive, but the political habits persist. …

Mr. Rowe continues that “Somebody else wants clean coal; it’s a non sequitur and it’s not economic either. Somebody else wants wind or solar, and meanwhile . . . the market says the only thing that makes sense for a decade, maybe two, is for new generation to be gas-fired. Natural gas is cheaper than everything else,” thanks to domestic shale finds via fracking and other factors. “It’s likely to stay that way for a long time—but it isn’t what politicians want.”

I encourage you to read the entire interview; I’ve omitted a very interesting discussion of the debate over the extent to which EPA rules would shut down sufficient coal-fired generation to cause reliability problems, which has been asserted in, for example, Texas (but I don’t see how that makes sense, given the loooooong portion of the generation supply stack that is natural gas).

Rowe’s public choice analysis of his industry is complementary to one offered by Eric Schmidt of Google in this Washington Post interview in early October, on the heels of his first-ever Senate testimony experience (Gordon Crovitz analyzes Schmidt’s interview in today’s WSJ, Google Speaks Truth to Power). It’s an absolute must-read in its entirety, but here’s one piece of sound public choice analysis:

Washington—having spent a lot of time there, I grew up there and have spent a lot of time there recently—is largely defined by detailed analytical views and policy choices that are not very good. You know, each policy choice has a winner and a loser, right? Somebody’s ox is getting gored. They’re complex arguments: They’re economic and political and social, and everyone has an opinion on those. Here, the arguments are, how do we make something that affects a million people? How do we change the economics of an industry?

And one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome. …

Come on. Give me a break. The press is so young, they don’t understand the history here. We’re still a small component of what a whole bunch of other companies have done, and certainly most other industries. So I reject all such charges [about the magnitude of Google's lobbying]. And I’m very clear on that because people can’t do math. Take the numbers of the amounts of money that go into the regulated industries of all sorts—and then compare high tech, and compare Google in specific, and it’s miniscule.

And privately the politicians will say, “Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.” We, after some debate, set up a PAC, as other companies have. And it’s basically in the interest of our customers to do this, because the government can make mistakes. And for every one of these Internet-savvy senators, there’s another senator who doesn’t get it at all. And it’s not a partisan issue. It’s true in both parties.

This excerpt highlights two timely insights. First, note the “you need to participate in our system” dynamic that defines the corporatist political system. Companies like Google feel compelled to engage in lobbying to rectify what they see as ill-informed political decisions (a reasonable stance, given the lack of technological sophistication in Congress) that would impair their ability to create value for consumers and profit from doing so. Add this incentive to the more cynical and craven one of manipulating the political process and ensuing legislation to favor your company, and you have a range of high-powered and low-powered incentives that drive toward increasing corporatism in politics.

Second, note his observation that “… one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome.” This is the clearest articulation I’ve seen of a hypothesis that I’m currently working on with respect to electricity regulation (here’s the complementarity between the two analyses). Regardless of industry, regulation does specify a path to follow, and it’s a backward-looking definition. Combine Schmidt’s observation with the summary of the history of electricity regulation from the Rowe article, and you get a potent combination leading to technological inertia … which, when you’re talking about an industry that enables and is the driving force of a lot of our productivity and lifestyle, is a costly impediment to economic growth.

Combining these two interviews shows the breadth and depth, and costliness, of today’s corporatist regulatory and political environment.

What do the Occupy Wall Streeters care about? Haidt on the moral foundations of OWS

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Michael Giberson

At Reason.com, social psychologist Jonathon Haidt writes about the foundational moral concerns that animate the Zuccotti Park protestors.  Working from a Moral Foundations Theory* perspective, which Haidt and several others have developed, he said, “In my visit to Zuccotti Park, it was clear that the main moral foundation of OWS is fairness, followed by care and liberty. Loyalty, authority, and sanctity, by contrast, are very little in evidence.”

The Occupy Wall Street protests and its progeny are famously leaderless and consensus based, meaning the exact meaning of the movement remains a bit hazy. Politicians left, right and libertarian have stepped into the resulting void to explain what it all means (usually the explanation is that the politician has been right in his views all along, and the explanation seems to serve left, right and libertarian politicians whether the politician is speaking in support of or in opposition OWS).

Haidt attempts a somewhat less self-interested attempt at understanding the basic moral feelings that are motivating participants in the protests. I remark on it here mostly as a complement to Lynne’s thoughts collected here: “A political economy model for Occupy Wall Street.”

*Haidt explains Moral Foundation Theory as, “outlin[ing] six clusters of moral concerns—care/harm, fairness/cheating, liberty/oppression, loyalty/betrayal, authority/subversion, and sanctity/degradation—upon which … all political cultures and movements base their moral appeals.” More information is at www.MoralFoundations.org.

 

Praise for a New York Times article on natural gas fracking (Or, How property rights help mitigate potential environmental harms)

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Michael Giberson

I’m writing in praise of a New York Times article on natural gas fracking. Yes, really! Even more surprising, I’m writing in praise of a New York Times on fracking written by Ian Urbina. Yes, really!

What is this marvel, you ask? I answer, ”Rush to Drill for Natural Gas Creates Conflicts With Mortgages.”

What is so marvelous about this article? I answer, the way it highlights how property and contract laws can serve to regulate potential environmental harms from gas drilling and hydraulic fracturing.

Of course, as the headline suggests, the focus of the article concerns mortgage restrictions which may be violated if a property owner leases part or all of the property for oil or gas development. Mortgage lenders usually include such limiting provisions in loan contracts to help ensure protection of the property, which typically serves as collateral for the loan. Obviously mortgage contracts differ and the article notes that only sometimes will leasing violate a mortgage. The article further notes that lenders who don’t secure such restrictions in their mortgages, or who fail to closely police compliance with such restrictions, may find it difficult to resell their mortgages in the secondary market.

But here is the deal: almost all of the well-documented environmental harms from natural gas drilling and hydraulic fracturing happen within a few hundred feet of an active well: cases of methane in groundwater, spills from holding ponds filled with produced water from fracking, and so on. If the landowner owns the surface and mineral rights free and clear, and owns a large enough piece of property that effects on neighbors are unlikely, then most of the potential hazards from drilling and fracking are faced by the property owner who can weigh the trade-offs between the costs and benefits and negotiate reasonable protections within the lease with a developer. Actions taken by the developer in response to such a contract to mitigate the likely harm to the property-owner will also almost inherently serve to mitigate any possible harm to neighboring properties. If methane doesn’t migrate from the well into the groundwater immediately around the well, it can’t subsequently migrate across a property line some tens or hundreds of feet distant.

When a landowner borrows against the land, the lender naturally gains an interest in protecting the land’s valueas a tool to help ensure the loan’s repayment. In may be the case, as the article mentions, that the a lease enhances the value of a property and the resulting income makes loan repayment more likely. On the other hand, gas drilling and fracking may reduce the value of the surface property. The point is that – working in the context of contracts and property law –  landowners, lenders, and gas development companies have a natural interest in trying to work out these issues in an way that should naturally reflect most of the potential costs and benefits from exploitation of the shale resource.

Not every potential hazard will be well contained within a mortgage contract and a mineral lease. For example, the landowner may not care too much what the developer does with produced water from fracking operations so long as it is safely removed from her property. Other issues may depend on rights to surface water crossing a property or the contribution to any local air pollution hazards. In such cases liability rules and potential litigation by neighbors might be the efficient regulator, but government-provided regulation is also sometimes the efficient response.

I praise the New York Times article for highlighting (even if only indirectly) the way that decentralized decision making in the context of the rights and responsibilities attendant to property and contract law can serve to regulate environmental harm. The next step, from the view of government policy, is to refocus the efforts of government regulators on just those harms that are not well addressed within the scope of voluntary decentralized decisions.

[NOTE: For additional commentary on Urbina's NYT reporting on natural gas fracking, none of it laudatory, see this search of the KP archives.]