A Better NYT Article on Electricity Restructuring, But Still Not A Good One

Lynne Kiesling

While I hate to disagree with my esteemed colleague’s assessment of David Cay Johnston’s electricity restructuring article from the New York Times, I do disagree. Yes, it’s better than the first one, but the first one was a confused muddle of too many angles on a very complicated set of issues. This one is more coherent, true, but in most of the article he misses the point.

For one thing, he completely and utterly falls for the political canard that the uniform-price auction market design is to blame for high prices. This claim is simply incorrect. He is faulting the uniform-price structure for other design features that do not provide sufficient discipline of supplier incentives to raise prices. The alternative, a pay-as-bid auction, generally performs worse, and it shouldn’t take too much intuition to see why. If you are a seller and you know that you are only going to get paid exactly what you offer, are you going to offer exactly your marginal cost? Of course not! So you have an incentive to shade your offers upward, and so does every other supplier selling into that market.

What is the single most effective design change that policymakers could make that would discipline this ability for sellers to raise prices? Active demand and a double-sided market. Buyers submit bids and sellers submit offers simultaneously, and the interaction of those bids and offers determines the (uniform) market-clearing price that all buyers pay and all sellers receive. That’s the right answer, but that’s not what Johnston discussees in his article. I hope he does discuss active demand, double-sided markets, and the role of enabling digital technology (and the removal of regulatory barriers to its implementation) in his next article in the series.

Furthermore, he misrepresents the experimental research performed by my ICES colleagues at George Mason. Yes, the experiments show that people learn how to manipulate the rules. Welcome to human nature. What that means is that it is incumbent upon the policymaker, upon the regulator, to create processes that lead to robust, resilient market designs. That means lots of testing, and experimental testing with real humans is the best test. But what Johnston does not report here is that in the treatments in which active buyers are bidding against those sellers, they are unable to raise prices. Again, institutions matter, market design matters, the rules matter.

Yes, the existing market institutions in electric power are generally inferior. But the uniform-price auction structure is not the culprit. It’s the lack of active, engaged demand, because of the lack of integrated wholesale and retail markets. I hope Mr. Johnston points that out in his next article.


11 thoughts on “A Better NYT Article on Electricity Restructuring, But Still Not A Good One

  1. “Esteemed colleague”? How about “co-blogger pal”?

    In any case, we don’t really disagree. Maybe it is just a question of expectation. The first article set the bar very low, and I noticed that he easily jumped it in this article.

    You had higher expectations — evidenced by your complaints about all of the important things that are still missing from Johnston’s reporting — and you noticed how far short of the mark he was.

    I think it is hard to conclude that George Mason’s research is misrepresented since he kind of just lumps GMU into a sentence also mentioning Cornell and says that both institutions found “the same thing” as Talukdar did at Carnegie Mellon. If by “the same thing” he means that people can learn to exercise market power when it is available, I’m sure that there are experiments showing that result.

    In a comment on my post D.O.U.G. points to a response to Johnston’s article by EPSA, a merchant generators’ group, which provides several detailed objections to claims in the story. I suppose, all things considered, I should have been less pleased that this article was better than the last, but I guess I was seeing that the glass was 0.05 full rather than 0.95 empty.

  2. The article was surprisingly full of opinion, in my opinion. Like most of the Times, like most mainstream media these days, it seemed to me to be more op-ed than hard news.

    The biggest laugher was that the auction system led to prices that were as much as 90% of regulated prices. So he is as much as admiting that the auction system does result in lower prices, just not as low as he thinks they should be.

  3. As I begin my fifth decade of investigative reporting, most of it about law enforcement and economic regulations, I observe that the very things that struck me in my youth about readers remain fresh — many do not read with care and many others cling to what they believe, or wish, to be true and then apply an interpretation which reinforces exsting their view of the world regardless of the facts.

    How different from what serious journalists learn, which is to check it out and go wherever the facts go, which means you are constantly discovering the world is not as you might have thought and you go wherever the facts go. Indeed, that is the whole point — to find out that which you and they did not know and then tell.

    Nothing in my latest installment supports the assertion above that I “fall[s] for the political canard that the uniform-price auction market design is to blame for high prices.” Nowhere do I write that nor do I suggest that any design is preferred.

    My article was about what a host of thoughtful, informed and serious people say are FLAWS in the design of those markets. My article cited official findings by the operators or market monitors of those markets (and behind that I have extensive collateral evidence supporting those points). Would you prefer that these issues be kept hidden from the public?

    We also provided an illustrative graphic from an RTO that was created without any cops on its pay sheet. And we reported that this bidding behavior occured as recently as late October and is currently under investigation, which is certainly newsworthy.

    This is a series. By its nature it breaks highly complex issues into pieces so that ordinary people can come to a step-by-step understanding of the issues.

    Lets see — first overview of the issues inc luding laying out the standard that the proponents and the government set as a benchmark; generation, an election on corporate vs. public power (timing events outside my control made that third) and then markets in Part 4.

    My effort to strip away the jargon so that ordinary people can grasp the issues, and to examine whether promises made have panned out and if not the reasons, is not yet over.

    That the poster is eager to reaffrm what she believes, rather than question her assumptions, is demonstrated by the assertion that a passing reference to research at George Mason (and Cornell) misrepresented that research, folloswed by a sort of backhandd admission that I really did get it right and then a misrepresentation of what I wrote, the last by asserting that the issue is one of market design and creating the impression that I ignored the issue of robust, resiliant markets. Gosh, that was right up top in my piece.

    My article was entirely about issues of market design.

    It quoted a leading proponent of markets on the importance of the details in market design, as well as the interesting observations of Prof. Talukdar about assumptions, rather than testing and verification.

    The third poster here says my piece is full of of opinion without citing a single example — because he cannot.

    It is hard to believe the poster read the article or looked at (much less studied) the graphic.

    Each reported fact is tied to an identified source (and behind what I had room for in print I have collateral examples). It is rich with specific facts and figures and nothing at all like an Op-Ed piece, where one is allowed to assert, rather than as I did establish step-by-step and empirically the issues.

    Whether showing that President Clinton gave the super rich a bigger tax break than President Bush (surprise!) or that the LAPD spent more money checking out false burglar alarms than investigating murders or making the public aware of importaant issues about that key ingredient of modern life — electricity — the work is done by establishing facts one by one and never by assertion.

    Of course if one believes that the existing markets are perfect then to write about what those I reported on say are flaws in the designs of those markets, as well as official findings, would be disconcerting.

  4. To my mind, focusing on uniform price vs. pay-as-bid is something that has been popular among those who want to politicize the debate and keep the status quo (or as close to “the good old days” as possible), and don’t want to dig in and do the hard market design work that takes real economic analysis and challenging political leadership. That’s why I call it a canard. We have decades of theoretical and experimental evidence demonstrating that when both buyers and sellers are active in a market, uniform price is superior to pay-as-bid; that’s just not a convenient set of research for some of the stakeholders in this industry.

    I do not say that these, or any, markets are “perfect” (in fact I abhor the use of the word “perfect” in connection with markets). I do say that the uniform price auction issue is a political canard and a red herring, and that the real benefits come from active demand, retail choice, and double-sided markets.

  5. The first two paragraphs from Johnson’s response are just classic! The disdain for the customer (what is the reader, after all) reminds me of the Big 3 back in their hayday, when they blamed quality lapses on their customers’ wapred expectations.

    Mr. Johnson, do you or do you not say in your article that prices under the auction system are 50 to 90% of regulated prices? Do you or do you not paint that fact in a negative light? Could someone who supports the auction system paint them in a positive light?

    I’d find the offending quotation myself, but the article is hidden behind the Times Select Star Wars Defense Shield System.

  6. Though I intend to remain civil here, I agree with my colleague Buzzcut that the first two paragraphs of Johnston’s response are classic. It’s always a mistake to think that way. Some of us have spent our productive lives trying to get down to the facts in this very industry, and many of us have learned by being in the thick of it.

    My statement was not that Johnston’s statements were not factual, but that the nature of his statements and his selective filter created a generally bad impression that may not really be justified. Many of his statements are of the “he-said” variety. Quoting Bob McCullough saying something damaging and inflammatory is easy. Discerning the facts that McCullough often obscures or does not know is much more difficult for someone not into the details. The same is true of the Carnegie Mellon crowd. To report that these people have said something is perhaps to report an indisputable fact. But that does not make their statements factual, and it certainly does not paint a balanced picture when only one side of a argument is reported. The article “stitched an ugly quilt out of weakly related anecdotes,” I said.

    Mr. Johnston, there is so much more to know that what you have reported, and the way you have reported it indicates clearly to many of us that you don’t really have depth of knowledge about the subject. But really, main-stream news reporting about this industry usually has the same weakness. This is not new, but it is why we hate to see it come out in such unbalanced yet high-profile ways. There is another side of the quilt and the debate; why don’t you quote some people on the other side? Better yet, why don’t you spend enough time to discern the facts yourself and just report them? I can tell you why. It’s because the holistic truth is too hard to figure from all of the seemingly dissociated reductionist facts. For some of us who have devoted our lives honestly seeking truth in this very industry, we know that the larger facts are elusive, perhaps beyond determination. Painting an ugly one-sided picture for the public really doesn’t do anybody much of a service. And I don’t expect you to realize or admit that that’s what you’ve done.

  7. Interesting to read the comments here this rainy and perhaps soon to be snowy evening.

    Buzzcut asks:
    “Mr. Johnson, do you or do you not say in your article that prices under the auction system are 50 to 90% of regulated prices? Do you or do you not paint that fact in a negative light? Could someone who supports the auction system paint them in a positive light?”

    First, the name is Johnston, not Johnston.

    And no, I did not write that “prices under the auction system are 50% to 90% of regulated prices.” Not even close.

    I wrote:

    “In that experiment, the buyers and sellers learned to manipulate the price within 100 rounds of bidding, capturing from 50 percent to 90 percent OF THE PRICES AN UNREGULATED MONOPOLY WOULD HAVE CHARGED. Instead of falling, prices soared.”

    Note that what I wrote was about simulations, not actual markets. For actual markets I cited official data.

    So, there is a vast chasm between what I wrote and buzzcut’s post. Had I written what buzzcut thinks I wrote his criticism would be spot on.

    There is a rich body of published research on how market design influences pricing and efficiency going all the way back to Adam Smith. Because of that I am surprised that people who say they have spent long times in the industry are hostile to what I reported.

    I also carefully pointed out, throughout the latest article, that the issue is not markets per se, but the DESIGN of these particular markets, hence the emphasis on “flaws” in the article.

    To D.O.U.G., I spent a year researching for this series, read 40 books (including carefully rereading all of Smith), read thousands of pages of documents, prepared spreadsheets and traveled many many thousands of miles to interview a vast array of people in the industry, attend conferences, etc.

    I also wrote extensively about utilities from 1973 until about 1979, when some of the issues now in the news were first emerging.

    When I quote advocates, whom I identify as such, I also check their source material.

    Just because you dislike someone is no reason not to quote them; an advocate would selectively choose sources, a reporter checks with people acros the board, as I did and I also quoted advocates of electricity markets and cited their work (official RTO findings, Prof. Wolak). And, BTW, McCullough is an advocate of markets, as his testimony under oath and comments to me both clearly show.

    Even Wolak agrees that there are problems with market design, the very issue I wrote about.

    No one I spoke to told me the markets are perfect as is (nor did anyone whose work I read assert that), but if they had I would have taken note of their reasoning.

    Do you think the elctricity markets are flawless? If they do have flaws do want to hide that or make sure people know about it? Of course not. So why the hostility to explaining in plain English what informed people say about these market design flaws?

    Now it may be that I am a lousy student. The thing about journalists is we sign our work. And soon I will be signing more pieces in my series about how restructuring. I hope the posters here critique what I actually write.

    Bye.

  8. Interesting to read the comments here this rainy and perhaps soon to be snowy evening.

    Buzzcut asks:
    “Mr. Johnson, do you or do you not say in your article that prices under the auction system are 50 to 90% of regulated prices? Do you or do you not paint that fact in a negative light? Could someone who supports the auction system paint them in a positive light?”

    First, the name is Johnston, not Johnston.

    And no, I did not write that “prices under the auction system are 50% to 90% of regulated prices.” Not even close.

    I wrote:

    “In that experiment, the buyers and sellers learned to manipulate the price within 100 rounds of bidding, capturing from 50 percent to 90 percent OF THE PRICES AN UNREGULATED MONOPOLY WOULD HAVE CHARGED. Instead of falling, prices soared.”

    Note that what I wrote was about simulations, not actual markets. For actual markets I cited official data.

    So, there is a vast chasm between what I wrote and buzzcut’s post. Had I written what buzzcut thinks I wrote his criticism would be spot on.

    There is a rich body of published research on how market design influences pricing and efficiency going all the way back to Adam Smith. Because of that I am surprised that people who say they have spent long times in the industry are hostile to what I reported.

    I also carefully pointed out, throughout the latest article, that the issue is not markets per se, but the DESIGN of these particular markets, hence the emphasis on “flaws” in the article.

    To D.O.U.G., I spent a year researching for this series, read 40 books (including carefully rereading all of Smith), read thousands of pages of documents, prepared spreadsheets and traveled many many thousands of miles to interview a vast array of people in the industry, attend conferences, etc.

    I also wrote extensively about utilities from 1973 until about 1979, when some of the issues now in the news were first emerging.

    When I quote advocates, whom I identify as such, I also check their source material.

    Just because you dislike someone is no reason not to quote them; an advocate would selectively choose sources, a reporter checks with people acros the board, as I did and I also quoted advocates of electricity markets and cited their work (official RTO findings, Prof. Wolak). And, BTW, McCullough is an advocate of markets, as his testimony under oath and comments to me both clearly show.

    Even Wolak agrees that there are problems with market design, the very issue I wrote about.

    No one I spoke to told me the markets are perfect as is (nor did anyone whose work I read assert that), but if they had I would have taken note of their reasoning.

    Do you think the elctricity markets are flawless? If they do have flaws do want to hide that or make sure people know about it? Of course not. So why the hostility to explaining in plain English what informed people say about these market design flaws?

    Now it may be that I am a lousy student. The thing about journalists is we sign our work. And soon I will be signing more pieces in my series about how restructuring. I hope the posters here critique what I actually write.

    Bye.

  9. >>First, the name is Johnston, not Johnston.

    Yes, I see.

    >>”In that experiment, the buyers and sellers learned to manipulate the price within 100 rounds of bidding, capturing from 50 percent to 90 percent OF THE PRICES AN UNREGULATED MONOPOLY WOULD HAVE CHARGED. Instead of falling, prices soared.”

    Thanks for the clarification, I did misread the bit about “unregulated”. How would we know what an unregulated monopoly would charge? Basic economic theory?

    I think that you could scrutinize any “market” and come up with “flaws”. The history of markets is that there are very few true market failures. Even flawed markets are generally better than highly regulated ones, when all unintended consequences are accounted for.

    I’m a lot happier today than I was the day I read your article. The Illinois legislature failed to re-regulate our electricity market, and an auction system much like those that you criticize will be coming on line in January. This will result in a 22% increase in rates here in Chicago, still putting us at only about 10.5 cents per kWhr. If that is 50 to 90% of unregulated monopoly prices, that is not so bad (granted, this wasn’t the 100th auction, it was the first).

    My only criticism of these auctions is the same as Lynne’s, that to really work they need real time feedback from users. As wireless networking improves, as cellular rates decrease, as powerline networking improves, the cost of implementing smart meters falls dramatically. Widespread use of smart meters would make these auctions almost perfect.

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