Tag Archives: M.Cubed

UCLA professor’s comments not helping California’s drought problem

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An environmental horticulturalist for UC Cooperative Extension in Los Angeles, Don Hodel, has been getting a lot of press recently criticizing the State Water Board’s urban water restrictions. He advises that the Water Board should have advised targeting changes in watering practices rather than limiting supplies, and claims that urban restrictions were unneeded, implying that agriculture should bear the entire brunt. Unfortunately, he’s made at least two grievous errors in his assessment.

First, Hodel fails to understand that the actual implementation of the reductions is to be done by the local water utilities, not the Water Board. The Board only provided the targets, and the stick if the targets aren’t met. Hodel needs to complain to the utilities if he thinks they aren’t doing their job.

But of course, he’s equally naive about the huge problem of communicating about changing irrigation practices to millions of urban customers across hundreds (yes) of distinct water utilities. Of course, these utilities have been trying to get their customers to improve outdoor watering, but just getting their attention is a big enough problem.

Second, his real agenda is to imply that urban horticulture is more valuable the state’s agricultural industry. Urban agencies have only so much contractual and physical access to water supplies. To not cutback deliveries would require transferring water from farmers. But there’s at least two problems with that, the first being that agricultural water is much more valuable than Hodel imagines and second is that it’s not easy getting the water from northern to southern California.

It turns out that those farmers have been doing an exceptional job at improving their irrigation practices; the problem is that they’ve used that efficiency to increase output rather than to save water. The original proponents of agricultural water efficiency didn’t anticipate this response and the surplus didn’t materialize for urban users or the environment.

And even so, moving water from farm areas and treating it for domestic uses adds substantially to the cost of water. It’s the primary reason why urban water costs well in excess of $2,000 per acre-foot while agricultural water is much less than $500 per acre-foot. Water isn’t a particularly fungible good, and proponents of water transfers as the “solution” ignore this issue (along with the problems of market design and function.)

These types of moments are when I wished that journalists were better informed and able to filter out the uninformed “experts.”

Cap & trade and market design

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Bob Sussman at Brookings writes favorably about the resurrection of cap and trade for GHG regulation as a viable policy option with the Chinese planning to implement a program and the US EPA Clean Power Plan encouraging market trading mechanisms in two forms of compliance. Yet as I read this (and also think about proposals to increase water trading to solve California’s ongoing drought), I can see an important missing element in these discussions–how can these markets be designed to gain success?

In 1996, I wrote “Environmental Commodities Markets: ‘Messy’ Versus ‘Ideal’ Worlds” that explored the issues of market design and political realities. As I’ve written recently, we are not always good at fully compensating the losers in environmental policy making, and these groups tend to oppose policies that are beneficial for society as a result. And market incentive proponents seem to always propose some variation on one of two market designs: 1) everyone for themselves in searching for and settling transactions or 2) a giant periodic auction.

In reality, carefully designing market institutions that work for participants is key to the success of those markets. Daniel Bromley wrote about how just “declaring markets” in Russia and Eastern Europe did not instantly transform those economies, much to our chagrin. The RECLAIM emissions market has woefully underperformed because SCAQMD didn’t think through how transactions could be facilitated (and that failure prompted my article.) Frank Wolak and Jonathan Kolstad confirmed my own FERC testimony that the disfunction of the RECLAIM market led to higher electricity prices in the California crisis of 2000-01.

For a presentation a few years ago, I prepared this typology of market structure that looks at the search and match mechanisms and the price revelation and settlement mechanisms. This presentation focused on water transfer markets in California, but it’s also applicable to emission markets. Markets range from brokered/negotiated real estate to dealer/posted-price groceries. Even the New York Stock Exchange, which is a dealer/auction probably works differently than how most people think. There are differences in efficiency and ease of use, often trading off. As we move forward, we need more discussion about these nuts and bolts issues if we want truly successful outcomes.

Market Typologies

Looking to the Aussies to solve California’s water problems

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The San Francisco Chronicle ran an article how Australia changed its water infrastructure and usage in the face of the 12-year “Big Dry.” Earlier the Chronicle ran “5 fixes for California’s age-old water rights system” that drew on Australia’s experience. M.Cubed’s analysis of the state’s urban drought regulations included a synopsis of Australia’s experience. An interesting question is whether anyone has assessed the political-economic process that facilitated Australia’s transformation. What were the trade-offs made? How were key interest groups satisfied?

MWDSC looking to add recycled water to their portfolio

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Metropolitan Water District is looking at spending up to $1 billion on recycled water supplies. MWD is considering a $15 million pilot in Carson to start. When I talked to the California Association of Sanitation Districts last month on the impacts of the drought, I highlighted that recycled water now may be a cost-effective supply source as the water market changes. In 2008, M.Cubed prepared with AECOM/EDAW and RMC East Bay Municipal Utility District’s Water Supply Management Program 2040. At that time, other resources such as water transfers were more attractive, but the economics are changing for a variety of reasons.  I’ll blog in the near future about how agriculture may no longer be an attractive source for urban supplies.

Far Reaching Impacts of the California Drought

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I talked to the California Association of  Sanitation Agencies in San Diego on the drought situation, its economic impacts and available resources including recycled or “recovered” water. My presentation is here.

Equity issues in TOU rate design

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I attended the Center for Research into Regulated Industries (CRRI) Western Conference last week, which includes many of the economists working on various energy regulatory issues in California. A persistent theme was the interrelationship of time-varying rates (TVR) and development of distributed generation like rooftop solar. One session was even entitled “optimal rates.” We presented a paper on developing the proper perspectives and criteria in valuing distributed solar resources in another session. (More on that in another post.)

With the pending CPUC decision in the residential ratemaking rulemaking, due July 3, time of use rates (TOU) rates were at the top of everyone’s mind. (With PG&E violations of the ex parte rules, the utilities were cautious about who they were presenting with at least one Commission advisor attending. At least one presentation was scotched for that reason.) Various results were presented, and the need for different design elements urged on efficiency grounds. In the end though I was struck most by two equity issues that seem to have been overlooked.

First, various studies have shown that TOU rates deliver larger savings for customers who have various types of automated response equipment such as smart thermostats (e.g., NEST) or smart appliances. Those customers will see bigger bill savings and may find that doing so is more convenient and comfortable. An underlying premise in these studies is that the customer is the decision maker. But for 45% of California’s residents–renters–that is not the case. As a result tenants, who tend to have lower incomes, are likely to be subsidizing home owners who are better equipped to benefit from TOU rates.

Tenants must rely on landlords to make those necessary investments. Landlords don’t pay the bills or realize the direct savings in what is called the “split incentive” problem. And landlords may be concerned that future tenants might not like the commitments that come with the new smart devices. For example, signing up for PG&E’s SmartAC program can face this barrier.

So in considering residential customer impacts, the CPUC should address the likely differential in opportunities and benefits between owner-customers and tenant-customers. Solutions might include rate design differences, or moving toward a model where energy service providers (ESP or ESCo) take over appliance ownership in multifamily buildings. This split incentive is endemic across many programs such as the solar initiative and energy efficiency.

Second, a fixed charge have been proposed to address the anticipated impact of solar net energy metering. The majority of costs to be covered are for the “customer services” that run from the flnal line transformer to the meter. (I’ve been focused on this segment while representing the Western Manufactured Housing Communities Association (WMA) on master-metering issues.) However, the investments in customer services are not uniform across residences. For older homes, the services or “line extensions” may have already been paid off (e.g., most homes built before 1975), and with inflation, the costs for newer homes can be substantially higher.

The fixed charge would be based on one of two methods. In current rate cases, the new or “marginal” cost for a line extension is the starting point of the calculation, and usually the cost is scaled up from that. However, given the depreciation and inflation, the utilities will receive much more revenue than what they are entitled to under regulated returns. In the second method, the average cost for all services will be applied to all customers. This solves the problem of excess revenues for the utility, but it does not address the subsidies that flow from customers in older homes to those in newer ones. Because the residents of older homes tend to be tenants and have lower incomes, this again is a regressive distribution of costs. Solutions might include no fixed charge at all, differences in rates by house vintage, or discounts in the fixed charge as SMUD has instituted.

Regardless, these types of subsidies flow the wrong direction.

Assessing the economic impacts of drought regulations

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M.Cubed was asked by the State Water Resources Control Board to prepare an economic assessment of the emergency regulations ordered by the Governor to reduce municipal water use by 25%. We gathered a team that included Roger Mann of RMann Economics, Tom Wegge of TCW Economics, Richard Howitt and Duncan MacEwan of ERA Economics, and prepared the report in about two weeks. The SWRCB included a summary of those findings in its regulatory digest.

The innovative aspect of our study is to steer away from a single point probabilistic estimate of the benefits of the regulations and instead to focus on the potential vulnerability and consequences of the risk of continued drought in the future.

The EO is intended to address potentially significant economic vulnerabilities – risks – rather than statistical or probabilistic expectations. If the drought and high temperatures continue in California, water saved as a result of the order will become increasingly valuable. Under these circumstances, costs estimated to be associated with the EO this year could be more than exceeded by greater adverse impacts next year if the EO had not been issued.

Australia had an extended drought that lasted 10 years before ending in 2012 that cut 1.6% off its GDP. For California that would be $35 billion in a single year which is multiples of the range of costs we estimated for the regulations. In other words, the probability of continued drought would have to be less than 4% to make this option uneconomic.

We also pointed out that while the water utilities will lose revenues this year, as mostly public agencies, they will have to make up those losses in the future. For this reason, those revenue losses should be treated as eventual economic costs.

Reblog: CallMe Power – What is a community solar garden

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Here’s a good description of different types of community solar garden configurations:

You can read about community solar garden policies in one of my past blogs.

Davis to look at Community Choice Energy

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After calling a halt to the deeper exploration of an electric publicly-owned utility, the city has turned to an easier mountain to climb in community choice energy aggregation (now remonikered to CCE). The original POU study briefly looked at the CCE option and moved past (and in my opinion used too generic of an approach to assess the POU path with some incorrect assumptions and didn’t consider the rapidly changing electricity market). Several direct access providers have approached the city and interested parties about helping implement a CCE. The citizen’s committee will look at whether a CCE opens up new value for the city and its citizens, and whether to go it alone or to join another CCE. Marin Clear Energy and Sonoma Clean Power both have participation rates over 90%. I will be sitting on that committee as an appointee via the Coalition for Local Power. (I also sit on the Utilities Rates Advisory Committee which has an appointee.)

Perhaps one of the most attractive features is that Davis can gain control of the energy efficiency funds available from the public good charge by preparing a plan specific to the city. Fortunately, the framework for that plan is already underway with a prompt from the Georgetown University Energy Prize.

Focus on uncertainty and risk in climate change

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Unfortunately Alex Epstein, a blogger at Forbes, takes the wrong perspective–an underlying premise that we need absolute certainty that climate change is occurring before we should act. (And equally unfortunately, environmentalist argue that catastrophic climate change is occurring with absolute certainty to defend policy initiatives.)

The correct perspective is to ask “what are the relative risks and consequences posed by potential climate change?” Can we say with absolute certainty that GCC is not and will not occur? No, we have strong evidence that warming has occurred (although the rate can be disputed) and that various local climates have measurably changed (e.g., glaciers receding). As an analogy, would anyone argue that we shouldn’t take measures to reduce forest fire risks to communities even if fires aren’t burning nearby? We know that such fires are a strong risk, and we ask what actions are sufficient to reduce the risks while still achieving other objectives. We should be asking the same questions regarding responses to potential climate change.

Steve Moss and I wrote about this perspective in 1999 in Chapter 2 of this report. (Note that we did not coauthor the other chapters. Chapter 3 about the economic consequences of using carbon taxes to replace other tax revenues in particular is simply wrong.) Economists have evolved methodologies beyond the simple approach we presented there, such as robust decision making (RDM), real options analysis and “fat-tailed” uncertainty benefit-cost analysis. We face a great deal of uncertainty in many dimensions. We need to conduct more complete analyses that assess the potential costs and benefits under uncertainty–i.e., measure the risk of relative actions and non actions.

Simply having a battle over which scientists are correct is fruitless and distracts us from the real question at hand. Let’s agree that a large plurality of scientists have posed a plausible case for human-induced climate change, even if there are doubts about the potential magnitude and consequences. Then we can move on to what are the range of potential consequences and the justification for various responses.