Posts Tagged ‘risk’

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Bedbugs, public policy, and relative risk assessment

September 7, 2010

Lynne Kiesling

Over the past few weeks I’ve been paying some attention to the increasing, and spreading, bedbug infestations in the U.S. I’m not particularly squeamish, but bedbugs are rapacious colony-dwelling critters that can survive for a year without food, feast on the blood of sleeping animals (humans YUM YUM), and colonize easily in mattresses and box springs. They spread due to population density and mobility, and their small size and imperviousness to eradication means that even good hygiene is not enough to prevent infestation.

As infestations move out of hotels and apartment buildings in densely-populated areas like Manhattan and into schools and nursing homes across the country, more and more people are looking for effective ways to eradicate them, short of burning all of an infested person’s bedding and clothing (a decidedly medieval approach!). Pesticides that are currently legal are no longer effective, and techniques like steaming and freezing are not feasible for large items like mattresses and box springs.

In part, this wave of bedbug infestations is an unintended consequence of environmental regulations banning certain pesticides, particularly DDT, that used to be used on bedbugs and were quite effective. Over time, bedbugs have evolved resistance to the pesticides used since the DDT ban.

The bedbug resurgence illustrates the challenges of doing relative risk assessment in regulatory policy. I’ve painted a pretty disgusting, but accurate, picture of a bedbug infestation, but it’s also the case that pesticides have toxicity and duration effects, particularly on vulnerable populations like children and the elderly; however, I would make the normative claim that we want to protect children and the elderly from bedbug infestations too. Which harm is bigger: the harm from a bedbug infestation, or the harm from exposure to chemicals to eradicate the bedbugs?

The uniformity of our environmental regulations do not allow for such relative risk assessments, and the EPA makes the decision on our behalf that the harm from chemical exposure is bigger. What if they are wrong? From my perspective and with my preferences, they are wrong — I think the contagion and propagation effects in addition to the disgustingness of an infestation cranks up the cost of an infestation relative to the cost of a concentrated, careful application of chemicals to eradicate them. Others certainly assess those relative risks differently, because risk preferences are subjective and vary a lot from person to person and place to place. But a uniform, federal-level regulation does not admit for differential costs and benefits across people and places.

Jonathan Adler tackles some of these relative risk assessment issues in a post yesterday, but he focuses more on a specific issue of federalism:

Health officials in Ohio and several other states believe that the risks posed propoxur are outweighed by the severity of the bedbug problem.  The EPA disagrees.  The EPA has the legal authority to preempt state preferences, and is often obliged to under existing statutes, but should it?  Why should the EPA’s assessment of the relevant risk-risk trade-offs override those of the states? …

If local communities wish to strike a different risk balance than the feds, the EPA should not stand in their way.  It is one thing for the EPA to inform local choices, and help clarify the relevant health trade-offs, quite another to impose one set of health preferences on the nation as a whole.  If EPA’s resistance to propoxur was motivated by spillover concerns, such as potential groundwater pollution that could cross state lines, the federal rule would make sense.   But it is not and does not.  This is precisely the sort of environmental problem which state and local preferences should control.

Jonathan also mentions another unintended consequence of such uniform, stringent regulation on indoor pesticides: to deal with bedbug infestations, some people are resorting to pesticides meant for outdoor use, with deleterious health effects.

Sadly, I think Glenn Reynolds has a point when he observes that “The real lesson of the bedbug epidemic is this: Once, the government’s primary role was protecting us from things like that. Now its primary role is stopping us from fixing them.”

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What fixed vs. flexible retail power rates in Texas tell us about wind power in the ERCOT market

January 13, 2009

Michael Giberson

Electric power consumers in (the ERCOT portion of) Texas have many choices when it comes to the electric power retailer they wish to enroll with, and typically each retailer offers a handful of different plans.  Historically speaking, this is a crazy cornucopia of consumer choice not seen anywhere else in the world. Or, seen from another point of view, a lot of data for economists interested in retail electric power not available anywhere else. This post dissects a few bits of that data and offers a preliminary conclusion.

One choice available to many Texas power consumers, but rare elsewhere, is between rates that are variable from month-to-month and rates that are fixed for a longer term.  Typical terms for fixed rate offers are six months and one year, but terms as long as five years are offered.

The primary difference between a variable rate and a fixed rate is whether the customer or the retailer is exposed to the risk of adverse price movements.  A little simple economics leads one to expect that if the retailer is to take on the risk of adverse price movements, the customer will have to pay the retailer to take on the risk. So we’d expect that fixed rate contracts would tend to be higher than variable rate contracts.

And that is just what we see in the offers listed at www.powertochoose.com, the State’s online list (just comparing average offered fixed rate deals to average offered variable rate deals). For example, in the Houston area the average rate for fixed price offers was 14.04 cents/kwh and the average rate for variable price offers was 13.60.  In Dallas, fixed price offers averaged 13.35 cents/kwh and variable price offers averaged 13.03.

But elsewhere in north Texas, specifically the AEP North Texas distribution service territory, the average rate for fixed price offers was 12.7 cents/kwh and the average rate for variable prices offers was 12.8 cents/kwh. So, apparently in parts of north Texas, electric retailers in effect are willing to pay consumers a little bit in exchange for taking on price risk.

Crazy, right?

Well, not exactly.  A fixed rate offer transfers the exposure to both adverse and beneficial price movements.  If a retailer expects prices to fall (relative to the current market expectations), then it would want to encourage customers to lock in at current rates; if the risk of a price movement down is larger than the risk of a price movement up, and retailers are less risk-averse than individual consumers, then retailers would be willing to pay consumers to take on the risk.

And why might retailers in certain parts of north Texas expect prices to fall? Might it be access to large quantities of wind power that sometimes can’t reach Dallas or Houston due to transmission limits – sometimes such large amounts of wind that prices in the ERCOT west region go negative?

I think so.

Admittedly, simple averages of offered fixed and variable rates provide only the coarsest of indicators of what is going on. Maybe more sophisticated analysis makes the anomaly disappear. But at first glance, it looks like another market indicator of the temporary excess supply of subsidized wind power in west Texas.

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