Monthly Archives: July 2012

CO2 emission reductions: fracking, recession, renewables?

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Lynne Kiesling

Several people have pointed out the remarkable fact that carbon dioxide emissions from fossil fuel combustion have fallen almost to 1995 levels. As the Institute for Energy Research noted,

The Energy information Administration reports that energy-related carbon dioxide emissions in the United States are 2.4 percent less in 2011 than they were in 2010, and 9.1 percent less than in 2007 when they hit their peak level. Why are carbon dioxide emissions on a downward trend?

IER identifies the main hypotheses for this reduction: economic recession reduces energy use, high oil prices reduce petroleum consumption, switching from coal to natural gas for electricity generation, and some switching to renewables for electricity generation.

At The Atlantic, Alexis Madrigal charts out the changes over time in the share of electricity generation coming from coal, natural gas, and petroleum. His main point is the dramatic pace of change in the past two years in the switch from coal to natural gas, a pace not usually seen in electricity generation. Ron Bailey at Reason points to the role that fracking has played in the drastic reduction of the absolute and the relative price of natural gas (and, as IER noted, EPA regulations increase the relative price of coal, exacerbating the price effect underlying the switch). Merrill Matthews at Investor’s Business Daily also attributed the reduction to the increase in fracking. When an energy source that’s got half the carbon emissions effect also gets cheaper in absolute terms as well as relative to coal, economic and environmental benefits are aligned (I will defer to Mike and his earlier posts on the environmental impacts of fracking itself.

Perhaps Walter Russell Mead is correct, and we’re heading toward a new American century with unanticipated energy abundance in the US, Canada, and offshore of Brazil.

Should ice-making be a regulated utility?

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Michael Giberson

Lynne’s post on early commerce in ice reminded me that ice making has made other appearances in economic history. For example, some U.S. states once required a state license to make and sell ice.

The question of the reasonableness of such licensing requirements reached the Supreme Court in 1932 in New State Ice Co. v. Liebmann. The New State Ice Co. had secured a license from the Oklahoma Corporate Commission to operate an ice-making plant in Oklahoma City. Subsequently Liebmann built his own ice-making plant in the city and began to operate without a state license. New State Ice sued to enjoin Liebmann from operating without a license.

At the time Oklahoma state law said: “the manufacture, sale and distribution of ice is a public business; that no one shall be permitted to manufacture, sell or distribute ice within the state without first having secured a license for that purpose from the commission; that whoever shall engage in such business without obtaining the license shall be guilty of a misdemeanor, punishable by fine not to exceed $25, each day’s violation constituting a separate offense, and that by general order of the commission, a fine not to exceed $500 may be imposed for each violation.”

The court said:

Stated succinctly, a private corporation here seeks to prevent a competitor from entering the business of making and selling ice. It claims to be endowed with state authority to achieve this exclusion. There is no question now before us of any regulation by the state to protect the consuming public either with respect to conditions of manufacture and distribution or to insure purity of product or to prevent extortion. The control here asserted does not protect against monopoly, but tends to foster it. The aim is not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it….

The court affirmed a lower court ruling against the state law:

The principle is imbedded in our constitutional system that there are certain essentials of liberty with which the state is not entitled to dispense … This principle has been applied by this court in many cases. [Citations omitted.] In the case last cited the theory of experimentation in censorship was not permitted to interfere with the fundamental doctrine of the freedom of the press. The opportunity to apply one’s labor and skill in an ordinary occupation with proper regard for all reasonable regulations is no less entitled to protection.

Justice Brandies dissented from the majority, saying “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country,” and “Denial of the right to experiment may be fraught with serious consequences to the Nation.”

While I’m a big supporter of the idea of social and economic experimentation, notice here that Oklahoma’s “experiment” with regulating the ice industry was itself a “denial of the right to experiment” by private businesses. Such denials, too, may be fraught with serious consequences.

Smart shopping for electric power just got easier in Houston

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Michael Giberson

CenterPoint Energy, the Houston-area electric distribution company, has launched MyTrueCost.com to help area retail electric customers shop for electric power. Help may be needed: currently 43 companies offer a total of 239 different service options in the CenterPoint service territory according to data from Powertochoose.org, the Texas PUC’s retail power website.

The basic idea is pretty simple: customers sign up, TrueCost accesses their smart-meter based electric power consumption data and estimates bills, the customers provide some information on the kind of retailer and contract they want (low price, environmental characteristics, number of PUC complaints, years in service, etc.), and then the website identifies the contracts that appears most suited to the customer.

TrueCost doesn’t search through all possible contracts, however, just contracts from the several retailers that have agreed to participate. Currently 10 of the 43 companies in the area are participating. Customers should be aware that TrueCost gets paid a flat fee by the retailer for each customer that signs up through the service. (TrueCost noted in the Q&A that the flat fee means that the service doesn’t have an incentive to upsell customers to more costly contracts.)

Simple. Smart. Cool. (And speaking of cool, the young people of Houston would like you to know that a Forbes real estate blogger has named Houston the #1 on its list of America’s Coolest Cities to Live.)

By the way, TrueCost also charts average retail power prices offered in Texas’s competitive retail power markets and provides commentary in an accompanying blog.

One-year plans keep momentum from summer price spike

One-year plans keep momentum from summer price spike (July 5, 2012)

INVITATION: If any of our Houston area readers have tried out MyTrueCost, send me an email and let me know what you think. My email address can be found here.

Canada should better integrate electric power markets among provinces

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Michael Giberson

Pierre-Olivier Pineau’s opinion piece in the Montreal Gazette makes a case for greater harmonization of electric power markets among Canadian provinces. He begins:

It is ironic that while a power grid must be in perfect balance to work, the electricity sector both within Quebec and among Canadian provinces is in complete imbalance.

In Quebec, for instance, government policy mandates that we build new wind-powered plants that produce electricity at a cost of more than 11 cents per kilowatt hour while Hydro-Québec is allowed to sign new contracts in which industrial consumers pay about 4 cents per kWh. Does this make sense?

Looking west and then east, the gap is even more staggering. Despite the current electricity surplus in Quebec, Ontario is pursuing solar energy, which sells at 80 cents per kWh. Meanwhile, New Brunswick still prefers to burn large amounts of coal and oil to produce the electricity it needs.

No other sector of the Canadian economy displays such large differentials.

He reports that improving coordination among separated provincial power markets would have significant economic and environmental benefits. There is, of course, a long history behind the current relative isolation and regulatory barriers to overcome.

The article builds on a study published earlier this year by L’idée fédérale/The Federal Idea, a Quebec think tank on federalism.

Prices, property rights, profits … and ice?

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Lynne Kiesling

The history of the commercialization of the ice market is a multi-layered case study in market processes. Who knew? This Freeman article from David Hebert, an economics graduate student at George Mason University, tells the economic history of the origins of the long-distance ice industry in the U.S. in the early 19th century:

In 1806 Frederic Tudor sailed a ship full of ice from Boston to the Bahamas. Two years earlier Tudor had begun experimenting with insulation with the goal of bringing ice to the Bahamas.  When he was ready to set sail, he found that the ship captains refused to carry his cargo for fear of damaging their vessels. So he bought his own brig, the Favorite, and set sail February 10, 1806. He arrived in Martinique with a large quantity of ice still intact and began selling. The Bahamians loved the ice, which they had never seen before. Yet that first year Tudor lost a substantial sum of money, although he proved that ice could be shipped to the Bahamas. Now the objective became doing it at a profit.  Convinced his idea would be wildly successful, he continued his attempts to drive down costs and increase demand.

How he does so is a tale of property rights over ice on a lake, how users of a common-pool resource established a system of use rights, and technological innovation to reduce costs while improving product quality. Highly recommended reading.

Bottom-up emergent order in financial markets?

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Lynne Kiesling

Matt Ridley helpfully points out something that’s grossly underappreciated in the sturm und drang over financial market competition and regulation in the past five years — the lessons of evolutionary biology apply to human-designed systems too, including financial market institutions and regulatory institutions:

What is the cure? A change of personnel will not do it. The search for chief executives who are not motivated by greed and for regulators who are sufficiently god-like to know how to design rules that cannot be gamed will never succeed. The truth is, the financial system, like the whole of human society, was not designed in the first place; it evolved. And the answer is to allow a better one to evolve.

My own personal experience reinforces my view here, as I was chairman of Northern Rock when it ran into trouble. During that crisis it quickly became clear that not only did I not fully appreciate the liquidity risks in the markets but nor did far more expert people, including rivals and regulators.

That experience, plus some appreciation of evolutionary biology, makes me suspicious of utopian solutions. Regulating Libor will not prevent a scandal somewhere else; reinventing Glass-Steagall’s separation of retail and investment banking would not have prevented the failure of Lehmans or AIG; paying executives in shares rather than cash to lengthen their horizons has been tried and it failed; a culture of compliance can become lethally complacent.

What we need is an evolved, organic, bottom-up system that hands power back to customers and gets innovation working on potential improvements. The way to get that is to open up the banking sector to plentiful competition, dismantling its cosy, crony oligopolistic structure – in which, for example, the biggest customer, the Government, hands the bigger firms handsome income streams from the taxpayer for bond issuance.

Yes. Yes, yes, yes. He then points out that there are substantial entry barriers, largely regulatory entry barriers, that have prevented the emergence of competing banks to provide clearing services more generally. And isn’t clearing really the service that’s essential, at the foundation of improving the efficiency of the interaction of the supply of and demand for funds? He also argues for competing currencies, because isn’t the central bank’s government-granted monopoly on currency issuance one of those scale-creating top-down-imposed entry barriers that reduces the resilience of systems?

He closes by suggesting that we reform in ways that enable us to put trial and error to work. Financial systems are not the only ones for which that recommendation would be beneficial.

No, the federal solar power subsidy does not pay for itself

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Michael Giberson

Last Friday the US Partnership for Renewable Finance, a coalition of financiers who invest in renewable energy, issued a report in which they claimed the federal investment tax credit for solar power is not a taxpayer burden because the tax credit “pays for itself” (to use their phrase). As I explain below, the report fails to support its claims.

In essence the US PREF report sums up federal tax collections that can be somehow linked to subsidized solar PV projects and concludes that the sum of the future tax collections is greater than the cost of the current tax break. For example, they claim a $10,500 residential solar credit will eventually lead to $22,882 in federal tax revenues, and a $300,000 commercial solar credit would yield $677,627 in federal tax revenues over the life of the project. Most of the tax revenues are federal income taxes paid by the companies, investors, and employees on income that is associated with the subsidized solar project.

The report led to a couple of rewrites of the press release in the renewable energy trade press. RenewablesBiz: “federal tax credit that has helped energize the recent boom in solar construction pays for itself and even generates excess revenue…”; RenewableEnergyWorld): “finds that the solar investment tax credit … can deliver a 10% internal rate of return … on the government’s initial investment.” Clean Technica wasn’t content with the press release’s own puffery, so it puffed up the report more: “Contrary to erroneous, misleading assertions to the contrary, the federal government’s Solar Investment Tax Credit (ITC) is proving to be an excellent investment for US taxpayers and the federal budget.”

Let’s be clear: the report does not demonstrate that the solar subsidy “pays for itself.” First, the report does not discount future revenues as is traditional in this kind of analysis, so the effects of time value of money and inflation are completely ignored. In effect they suggest it doesn’t matter if the subsidy ‘investment’ is paid back tomorrow, next year, or thirty years from now. Do you know any lenders that loan out money on these terms? If the federal government and current taxpayers had absolutely no other currently useful tasks requiring investments (technically, if current decisions had no opportunity costs), maybe one could ignore the time value of money. An investment is excellent only if the net present value of the future revenues is better with the investment than it would be with any other investment. The report doesn’t tell us if that claim is true of the solar subsidy.

Second, the report mostly neglects the effects of depreciation on the calculated taxes. They did analyze the tax collections with and without depreciation, and it turned out that assuming depreciation has a significant effect on their results. In their residential case assuming a $10,500 tax credit, the eventual federal tax revenue is $12,469 with depreciation instead of the $22,882 in taxes they highlight. In their commercial case, the eventual federal tax revenue collected is $380,127 with depreciation instead of $677,627. But they claim they can ignore depreciation and focus on the larger results.

Their justification for ignoring depreciation is that they’re assessing the effect of the subsidy on eventual federal tax collections, and depreciation would be the same whether a company invested in subsidized solar PV projects or some other unsubsidized capital projects. In their words, they are ignoring depreciation “since the depreciation of capital improvements applies without regard to how the capital improvements have been financed” and “depreciation is not specific to the solar industry.” (See pp. 2-3.)

But income tax laws, too, apply the same for income from subsidized solar projects or income from elsewhere–well, of course, there are thousands of variations in how income gets taxed under the federal tax code, but generally speaking income taxes are “not specific to the solar industry.” If we should ignore depreciation, why don’t we also just ignore income taxes?

This point leads us to the most fundamental of problems with the US PREF analysis. To analyze the benefits of the solar investment tax credit, we’d want to compare the world with the tax credit to the world without the tax credit. For example, the US PREF report simply estimates the corporate income from sales of electricity from the solar projects and then counts a fraction of this as federal tax revenue. But a reasonably safe assumption about a “world without the tax credit” is that electricity sales would have been about the same, so income and income tax revenues would have been about the same. The net effect of the subsidy on future tax revenue is near zero. (In effect, US PREF’s analysis proceeds under the amazing assumption that without the subsidized projects, consumers would have just used less electric power.)

The same criticism applies to investor and employee incomes. In the absence of the subsidized projects, it is safe to assume that investors would have found other investments to profit from and employees would have found other jobs. US PREF might claim that subsidized solar projects are more profitable to investors and lead to higher pay for employees than otherwise, so income tax collections would be a little higher than otherwise. But in this case they should only claim the increment in tax revenue, not the whole of it, as a “return on investment.”

All of this preoccupation with net federal tax collections is mostly, if not entirely, beside the point. Even if the report was any good–and it isn’t–public policy analysis is much more that gross impact on the federal budget over the lives of subsidized projects. The usual first step for sound policy analysis is a benefit-cost analysis, and a reasonable second step is careful considerations of alternative approaches to achieving desired policy goals. There is still more to good policy analysis, but these are useful starts. The US PREF analysis stands woefully short of a complete policy analysis and therefore is mostly useless as an argument for the solar investment tax credit.

Tyler Cowen on morality and the free market

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Lynne Kiesling

Big Think and the John Templeton Foundation have collaborated on a series of short videos about free markets and their consequences and implications. I found Tyler Cowen’s video contribution to the series particularly valuable and pretty much right about the morality of voluntary exchange, how exchange embodies cooperation, globalization, etc. I intend to use it for class discussion, and to refine the distinction between the types of market processes and institutions Tyler’s discussing and the forms of “crony capitalism” that we currently experience.

PBS story on smart meter protests in California

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Lynne Kiesling

Friday night’s PBS Newshour had a feature story on the protests in California over the installation of digital electricity meters in the PG&E distribution monopoly service territory. These protests focus on two separate issues: one is a claim that the wireless communications from the meters create electromagnetic fields that harm health, and the other is a claim that the digital meters are a privacy threat and make it easier for PG&E and the local, state, and federal governments to access individual electricity consumption data.

I’ve been following these stories closely since they started in 2010, and if you haven’t been following them, this analysis provides a good summary.

Bloomberg’s bureaucratic “Big Gulp” rule, more unintended costs

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Lynne Kiesling

Seth Goldman is one of the entrepreneurial founders of the beverage company Honest Tea, which makes fresh-brewed, organic, low-sugar teas and sells them in a global industry standard bottle: 500ml, or 16.9 ounces. You’d think that such an entrepreneurial activity and such a beverage would be attractive even to Nanny Mayor Michael Bloomberg. But, as Goldman recounts in today’s Wall Street Journal (Mayor Bloomberg and Our 16.9-Ounce Tea), that extra 0.9 ounces beyond Nanny Bloomberg’s dictated size will be a problem:

When the mayor announced his proposal to ban sugar-sweetened drinks in portions over 16 ounces from New York City restaurants, many of my friends assumed Honest Tea would welcome the news as a public initiative to complement Honest Tea’s long-standing commitment to marketing lower-calorie drinks. Yet the mayor’s proposal would actually prevent Honest Tea from selling most of our drinks in New York City restaurants.

Under the proposed changes to Article 81 of the NYC Health Code, food-service establishments would not be able to sell packages larger than 16 ounces for drinks that have more than 25 calories per eight-ounce serving. Honest Tea’s top-selling item is our organic Honey Green Tea, which has 35 calories per eight-ounce serving and is in a 16.9 oz. bottle. We label 70 calories on the front of the package so consumers know what’s in the full bottle.

We initially went with 16.9 oz. (which is 500 milliliters) because it is a standard size that our bottle supplier had in stock at the time. We subsequently invested several hundred thousand dollars for 16.9 oz. bottle molds. Is 16.9 ounces the perfect size? Who knows? As a beverage marketer, we willingly submit to the unforgiving judgment of the market. What we did not anticipate was an arbitrary decision to constrain consumer choice.

The rest of Goldman’s piece clearly points out the costs that arbitrary bureaucratic diktats impose on producers like Honest Tea. Goldman is explicit about the arbitrariness risk they face — he wonders what will happen to their costs if they were to change to 16-ounce bottles and then have Cambridge, MA impose a 15.5-ounce limit next year.

Do bureaucrats take those costs into account when making their arbitrary regulations? No. And they should, because costs like this will either mean sandwich shops not carrying Honest Tea, which will reduce Honest Tea’s profits and consumer surplus, or it will mean costly capital retrofits for Honest Tea that would increase their costs and increase the retail price of their drinks.