Tag Archives: infrastructure financing

Repost from AER: Deposit Competition and Financial Fragility: Evidence from the US Banking Sector


by Mark Egan, Ali Hortaçsu, and Gregor Matvos

We develop a structural empirical model of the US banking sector. Insured depositors and run-prone uninsured depositors choose between differentiated banks. Banks compete for deposits and endogenously default. The estimated demand for uninsured deposits declines with banks’ financial distress, which is not the case for insured deposits. We calibrate the supply side of the model. The calibrated model possesses multiple equilibria with bank-run features, suggesting that banks can be very fragile. We use our model to analyze proposed bank regulations. For example, our results suggest that a capital requirement below 18 percent can lead to significant instability in the banking system.

Enlisting Davis’ Citizen-Analysts | Davis Vanguard

By Richard McCann

Why are we not using Davis’ wealth of human capital to our advantage? Why don’t we assign, and even hire or retain, these individuals to prepare these analyses for commission review?

Source: Enlisting Davis’ Citizen-Analysts | Davis Vanguard

Where Should All the Coal Miners Go? – Pacific Standard

An interesting discussion about the failures and lessons for broad scale retraining programs.

My own thought is that we need to buy out the homes of displaced workers at the higher of either their purchase cost or the assessed value to facilitate moving to a new job location.

Source: Where Should All the Coal Miners Go? – Pacific Standard

An answer to Brexit & Trump: Rebuild our infrastructure


At the core of the dissatisfaction driving support for Brexit, Donald Trump (and Bernie Sanders) is economic dislocation that reduced the jobs and wages of those who worked in the manufacturing and construction industries. The solution is NOT to return to retail manufacturing, where the U.S. can’t compete with China; nor is it to extract more fossil fuels in a highly volatile energy market or to build houses for another financial bubble. Instead we can address their needs while solving a different crisis–fixing our crumbling infrastructure, and even get some other ancillary benefits. We would have both construction and heavy manufacturing jobs with good wages, aimed right at the Brexit/Trump constituencies. And there would be little foreign competition while we put the U.S. economy on better footing to compete in other sectors.

The American Society of Civil Engineers estimate that America needs $3.6 trillion of investment in replacing our infrastructure such as roads, waterworks, power and gas lines and the rest that makes American go. This sounds like a big number, but it’s only a bit more than half of what all federal, state and local governments spend annually. Of course, we would never pay for all of this at once. In our current low-interest environment, at 3% bond financing over 30 years, the annual cost would be $180 billion, which is less than 3% of total spending.

The key is to use disciplined deficit spending, i.e., bonded indebtedness, to finance this program. Funds should be earmarked specifically for this program at the federal, state and local levels. One source of funds could be a wealth tax. A tax rate of 0.2% (yes, two tenths of a percent) on registered securities and real estate could cover the annual debt repayments.

We could tie this program to two other possible goals:

  • To ensure that the income from holding the bonds accrue to a wider segment of the population, we could limit purchase of the bonds to the Social Security Administration and widely-held municipal bond mutual funds.
  • We could staff the program with young people serving in a compulsory national service. The national service would give 18-20 year olds their first jobs and bring together a mix of different backgrounds and cultures. As the draft did in World War II, they could gain a better understanding of others beyond their current experiences.




Reexamining growth and risk sharing for utilities

Severin Borenstein at the Energy Institute at Haas blogged about the debate over moving to residential fixed charges, and it has started a lively discussion. I added my comment on the issue, which I repost here.

The question of recovery of “fixed” costs through a fixed monthly charge raises a more fundamental question: Should we revisit the question of whether utilities should be at risk for recovery of their investments? As is stands now if a utility overinvests in local distribution it faces almost no risk in recovering those costs. As we’ve seen recently demand has trended well below forecasts since 2006 and there’s no indication that the trend will reverse soon. I’ve testified in both the PG&E and SCE rate cases about how this has led to substantial stranded capacity. Up to now the utilities have done little to correct their investment forecasting methods and continue to ask for authority to make substantial “traditional” investment. Shareholders suffer few consequences from having too much distribution investment–this creates a one-sided incentive and it’s no surprise that they add yet more poles and wire. Imposing a fixed charge instead of including it as a variable charge only reinforces that incentive. At least a variable charge gives them some incentive to avoid a mismatch of revenues and costs in the short run, and they need to think about price effects in the long run. But that’s not perfect.

When demand was always growing, the issue of risk-sharing seemed secondary, but now it should be moving front and center. This will only become more salient as we move towards ZNE buildings. What mechanism can we give the utilities so that they more properly balance their investment decisions? Is it time to reconsider the model of transferring risk from shareholders to ratepayers? What are the business models that might best align utility incentives with where we want to go?

The lesson of the last three decades has been that moving away from direct regulation and providing other outside incentives has been more effective. Probably the biggest single innovation that has been most effective has been imposing more risk on the providers in the market.

California has devoted as many resources as any state to trying to get the regulatory structure right–and to most of its participants, it’s not working at the moment. Thus the discussion of whether fixed charges are appropriate need to be in the context of what is the appropriate risk sharing that utility shareholders should bear.

This is not a one-side discussion about how groups of ratepayers should share the relative risk among themselves for the total utility revenue requirement. That’s exactly the argument that the utilities want us to have. We need to move the argument to the larger question of how should the revenue requirement risk be shared between ratepayers and shareholders. The answer to that question then informs us about what portion of the costs might be considered unavoidable revenue responsibility for the ratepayers (or billpayers as I recently heard at the CAISO Symposium) and what portion shareholders will need to work at recovering in the future. As such the discussion has two sides to it now and revenue requirements aren’t a simple given handed down from on high.

Paying for Water in California

My partner David Mitchell has coauthored an article in the Hastings Law Review:

Paying for Water in California: The Legal Framework

Brian Gray, Dean Misczynski, Ellen Hanak, Andrew Fahlund, Jay Lund, David Mitchell, and James Nachbaur
Over the past four decades, California voters passed a series of initiatives that
amended the California Constitution to limit the power of the state legislature and
local governments to enact taxes and restrict their authority to adopt fees and other
charges to fund government programs. Three of these initiatives—Proposition 13
(enacted in 1978), Proposition 218 (passed in 1996), and Proposition 26 (approved in
2010)—have placed significant constraints on the funding of water resources projects.
Although each of these laws has enhanced the transparency and accountability of the
decision-making process, the funding constraints now jeopardize an array of vital
water supply, management, and regulatory functions. These include funding for the
development of new water supplies, integrated water management, protection of
groundwater resources, development of alternative water sources (including recycled
and conserved water programs), control of stormwater discharges, and regulation of
water extraction and water use to protect water rights, water quality, aquatic species,
and other beneficial uses of the state’s water systems.
This Article is a companion to the report Paying for Water in California and focuses
on the legal aspects of water financing. The Paying for Water study demonstrated the critical importance of local funding to support California’s water system: local
utilities and governments raise eighty-five percent of the more than thirty billion
dollars spent annually on water supply, quality, flood, and ecosystem management
through local fees and taxes. The study identified a two to three billion dollar annual
funding gap, with critical gaps already evident for provision of safe drinking water in
small, rural communities, prevention of stormwater pollution, protection of people,
property, and infrastructure from flooding, recovery efforts for aquatic ecosystems,
and integrated water management. In most cases, these gaps reflect legal obstacles to
raising more funds locally. In addition, urban water and wastewater systems—now in
relatively good fiscal health—face looming challenges related to rising costs and legal
constraints on the ability to raise fees to support modern, integrated water
This Article begins with an overview of the traditional sources of funding for water
development, management, and regulation, and proceeds to a detailed analysis of the
effects of the constitutional constraints (especially of Propositions 218 and 26) on
these essential governmental programs. Topics include: (i) analysis of the effects of
Proposition 218 on water rates and fees charged by public retail water agencies for
water service and integrated, portfolio-based water management; (ii) consideration of
the special problems of Proposition 218 for groundwater regulation and stormwater
discharge programs; (iii) predictions about the effects of Proposition 26 on wholesale
water rates, water stewardship charges, and regulatory fees; and (iv) suggestions for
harmonizing the fiscal strictures of Propositions 218 and 26 with the reasonable use
mandates of Article X, Section 2, of the California Constitution, which form the
foundation of the state’s water law and policy.
Our key conclusions are that: (1) Propositions 218 and 26 have created significant
impediments to economically rational and sustainable funding of California’s most
important water service, management, and regulatory programs; (2) judicial
interpretations of the constitutional restrictions generally have compounded these
impediments; and (3) reform of the law is needed. The Article concludes with
recommendations that water agencies, the legislature, the courts, and the voters
should consider as a means of correcting (or at least ameliorating) those aspects of
the law that are inconsistent with sound and creative water resources administration