Director's Take

Mark A. Jamison

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Welcome to the PURC website, where you'll find information about our research and training programs. I invite you to search for PURC working papers and publications in our Research Papers Search engine, and visit our specialized courses page for examples of our recent training programs, as well as details about the next delivery of the PURC/World Bank International Training Program on Utility Regulation and Strategy. Finally, I welcome any suggestions or comments you may have about this column or about our website.

Is Florida Spending Too Little on Energy Efficiency?

By Mark A. Jamison, Ph.D.

The essence of getting the most bang for your buck is to put fewer dollars into areas where benefits at the margin are lower and more dollars into areas that are just the opposite. That does not mean that you put more dollars into areas where total returns are highest because total and margin are different concepts. That basic idea is important when considering how Florida is doing with its energy efficiency programs.

The 2012 Florida legislature directed the Florida Public Service Commission (FPSC) to work with the Florida Department of Agriculture and Consumer Services to sponsor a study on whether Florida’s energy efficiency laws (known as FEECA) remain in the public interest. The FPSC, following its established procurement practices, chose a research team consisting of the Public Utility Research Center and the Program for Research Efficient Communities of the University of Florida, and the National Regulatory Research Institute.

The study team concluded that Florida’s laws and policies appear to serve the state’s citizens and energy customers well, although some data limitations kept the team from doing as thorough an investigation as it would have liked. The team found that the cost effectiveness of FEECA programs compare well with the cost effectiveness of comparable programs in other states. Favorable benefit-cost ratios indicate that Floridians are getting a good return on their energy efficiency dollars.

But it is easy to misinterpret the beneficial ratios and conclude that Florida should be spending more. By way of analogy, think about someone who has adopted a healthy diet, eating nutritious foods in just the right amounts. This person’s benefit-per-calorie ratio for eating would be quite high. Should this person consume even more calories? Absolutely not! Each additional calorie consumed would make the person worse off and decrease the benefit-per-calorie ratio. The additional calories would actually make the person less healthy!

Similarly, a favorable benefit-cost ratio for FEECA programs that compares well with other states suggests that Floridians are getting good returns on their investments in energy efficiency. We don’t know if improvements could be made at the margin without additional studies.

To illustrate, if a utility is now spending $10 million on energy efficiency (recovered in bills), with customers obtaining $15 million in benefits, customers are receiving a net benefit of $5 million. If the utility spent and recovered $11 million instead, and total benefits increased to $15.5, the additional $1million outlay would have additional benefits that were half the additional costs. That is not a bargain for customers, even if the benefit cost “ratio” is still greater than one!

How much should Florida spend on energy efficiency? Even though that cannot be known without sophisticated studies, it is important to keep in mind that the goal is the highest benefit cost ratio we can obtain, given customers’ opportunity costs. A high ratio is not a signal to do more. A more appropriate interpretation is that we may be close to spending the right amount.

Ex Ante Regulation of Google?

By Mark A. Jamison, Ph.D.

Recent calls for ex ante regulation of Google are reminiscent of other calls for regulation of IT companies. Remember the calls to treat Windows like a public utility, or iTunes as an essential facility? These were all misguided because they misconstrued the basics of the proposed regulations. The calls for regulation then and now also contain an unstated premise that rules designed for truly monopoly industries with public franchises and stable, long-lived technologies could be successfully applied to companies whose technologies change daily and whose customers readily move on when something better comes along.

Advocates of ex ante regulation of Google generally frame Google as a public utility, a common carrier, or a holder of an essential facility. Google fits none of these.

A public utility is a firm that is given a public franchise to hold a 100% market share for a service that is essential to a modern economy. Local electricity, water, and natural gas providers are typical utilities. Google isn’t like them. There is no public franchise for providing general search. Most estimates find that Google has about a 65% market share in general search in the U.S., and a much smaller market share in overall search. And while Google is important, it is not an essential gateway of commerce, as evidenced by how quickly customers switched to Yahoo! when Google had a software glitch a few years ago.

A common carrier is a firm, such as a telecommunications provider or railroad that transports items on someone’s behalf. Regulations for common carriers come from the English common law public calling concept that emerged centuries ago when certain trades that were essential to the functioning of local economies were in short supply so that tradesmen could exploit customers with unique circumstances. Google does not fit the basic premises that make a firm a common carrier. Google does not transport information on a customer’s behalf. Google finds information and provides advertising, but telecom companies provide the transport. Also, general search and advertising are not in short supply, and Google’s pricing approach does not permit exploitation of unique circumstances.

A firm falls under the essential facilities doctrine if the firm is a monopolist or near monopolist in the final goods market, controls an input that rivals need to be able to compete in that market, and denies rivals access to the critical input. Google fits none of these criteria. Google is far from being a monopoly in the relevant retail markets, such as operating systems (Android vs. Apple OS), calendars (Google Calendar vs. Windows Live), and video displays (YouTube vs. Vimeo). And Google does not exclude rivals from advertising or from being included in general search. Even though Google clearly does not fit these categories of regulation, proponents of regulation remain, claiming vaguely that oversight would benefit competition. This is incorrect. Regulation of Google would likely diminish, if not kill the innovations, investment, and expansion of output that competition is supposed to encourage.

Read my full paper.

Make Better Mistakes

By Mark A. Jamison

It was clear from the nervous voices that the discussion had found a tension point. The small group of consultants, academics, energy companies, and a single utility regulator – all attending a large conference on the new energy economy – had been assigned by the conference organizer to discuss barriers to increased use of intermittent renewable energy, energy storage utilities, electric cars, and the like. I was in this group.

Our host country had been a pioneer in electricity reforms, having broken up and privatized its state-owned electricity monopoly in the 1980s. However, it appeared to our small group that the country’s vertically disaggregated electricity system wasn’t up to the challenge of a creating new energy economy. We had no answers: We didn’t know what the right structure should be, which companies could or should reform their cultures and business models, which laws should be repealed, which new laws should be adopted, etc. All we knew for sure is that no one in the group was safe: Each of our roles in the current energy system was at risk. As one might expect, we quickly discovered that talking about whether customers would recharge their cars at home or at work was less unsettling, so we moved on to that topic.

Ignoring a problem doesn’t solve it. The electricity sector, its customers, its suppliers, and its regulators are at a complex crossroad. We generally accept that increased use of renewable energy sources, more efficient use of power, improved grid management, and new uses for and new ways of pricing electricity are imminent. We could be wrong. Even if we aren’t wrong, we don’t know the best way to effect these changes, nor can we describe what the changes should look like.

How do we resolve this complexity and uncertainty? We don’t. As economics writer Tim Harford explains in his TED talk on the dangers of thinking we have the answer (which he refers to as the God complex), we have to start making better mistakes.

Most of us are not good at this because it means admitting our own incompetence. Economists and engineers like developing deterministic solutions and then moving on. Lawyers like writing laws and finding legal conclusions. Voters cast their ballots for politicians who make promises about the future and who vow to fight the bad guys, namely the other political party. Our desires to protect our professional reputations drive us to believe we have answers even when none exist.

Some traditional regulatory practices work against us when the future is uncertain and complex. Several jurisdictions have laws that require utilities to provide energy at least cost. What is least cost in a complex environment? Some costs, such as risk and foreclosed options, cannot be readily quantified. Sometimes a company incurs costs on behalf of others, perhaps decreasing system costs, but making the company’s service more costly. The ultimate effects of utility investment decisions are unknowable for years, making fact-based judgment difficult at best.

Finding the future is a trial and error process, so costs of errors are necessary for finding the future. How can regulators assess whether the learning has been efficient? And how should the regulator value the spillover benefits of errors when other utilities, regulators, customers, and others learn? Our normal view of prudency, and the way regulatory and utility work is scrutinized in the media and in the political arena encourages people to prefer errors of omission rather than errors of commission, because the former are harder for others to see.

Sometimes regulatory laws restrict business models, for example, by precluding companies from vertically integrating. This was the situation in the country hosting the conference, where some companies were refusing to introduce new energy services because they were uncertain whether the new services should be classified as providing energy, distributing energy, marketing energy, or something else. That classification would determine who could provide the services.

What can we do? We should view our next step as a next step and nothing more. We should encourage energy companies, customers, and regulators to experiment without risk of reprisal for errors as long as experiments are openly discussed, openly analyzed, and openly discarded when they fail to be part of the next step.

Most of all, we should embrace the notion that no one has the answer. As Mr. Harford said, “I see the God complex around me all the time in my fellow economists. I see it in our business leaders. I see it in the politicians we vote for — people who, in the face of an incredibly complicated world, are nevertheless absolutely convinced that they understand the way that the world works.”

Being Unsuccessful in Energy and Telecommunications

By Mark A. Jamison

What makes some people spectacularly unsuccessful? In “Why Smart Executives Fail,” Finkelstein and Roth analyze why former high-flying companies like Enron, WorldCom, and Tyco failed and found seven habits that the senior executives had in common: (If you don’t have time for the book, Eric Jackson provides an excellent summary in Forbes.)

  1. They see themselves and their companies as dominating their environment
  2. They blur personal and company interests
  3. They think they have all the answers
  4. They eliminate anyone who doesn’t completely follow them
  5. They are more obsessed with image than with results
  6. They underestimate difficulties
  7. They fail to let go of the things that worked in the past, but that now hold them back

It is easy for us with 20-20 hindsight to see the folly of these habits, especially when we are looking at others. What could happen if we looked for these behaviors in utilities and regulation today?

We might become more aware of our limitations. Sometimes regulators and policymakers see themselves as the ones who set direction for energy or telecommunications. However, a quick review of history finds fatal mistakes were made when governments followed their own visions, ignoring the forces of technology, economics, and customer demand. Utilities sometimes see themselves as the providers of service rather than as a part of a broader system with evolving boundaries and players.

We might also listen to outside voices more often. When Shell Oil experienced political and environmental disasters several years ago, its management engaged in an extended campaign of listening to the company’s harshest critics. This helped Shell recognize that its world had changed and that the company needed to adapt if it wanted to be successful in the future. Certainly there are many critics of utilities and regulation, and they speak often, but how well do we hear the song beneath the words that our critics share? It is tempting for each of us – academics, consultants, utilities, regulators, etc. – to trust our own understanding, and in doing so, miss some important themes that are cutting across all of our work.

We might spend more time thinking carefully about real impacts and less time on impressions. Sometimes enrollment rates in programs like Lifeline are used to define success while consumer impacts go unnoticed. Dollars invested in broadband or green energy are also used to measure success while economic and environmental value created or destroyed is ignored.

I have touched only on a few of the habits, and I am sure that I have missed many blind spots, especially my own.

What are we to do? I was impressed by a consumer representative at the recent Critical Consumer Issues Forum in St. Louis who asked whether the regulatory and infrastructure initiatives that are coming to a head in energy at this time make sense when taken together. This big picture view of the preponderance of initiatives and how they interact is too rare. His point was supported by my own informal survey of utility executives, that found that most of their attention is devoted to complying with regulations at the expense of business improvement and strategic planning.

I have also been impressed with regulators and utilities’ employees who have made a point to listen to their critics and process what they hear. The Australian Competition and Consumer Commission convenes an annual conference that features outsiders who are invited to assess what they see happening in the country. A regulator in the U.S. organized an annual dialogue with executives, policymakers, and researchers to initiate discussions about which her state should be thinking for the future. A utility executive in the U.S. invited leading thinkers from many walks of life to challenge how his company thought about itself and its future.

Above all, each of us should think carefully about these 7 habits and watch for warning signs in ourselves and in our organizations.

Hurricanes and Electric Utilities: Lessons from Florida

By Mark A. Jamison

What's the best way to divert hurricanes and avoid damage to electric infrastructure? Maybe it's being ready to learn from the experience.

That is one way of interpreting Florida's experience. In the aftermath of the 2004-2005 hurricane season, when eight named storms caused a total of $15.5 million in customer losses from power outages, Florida embarked on a comprehensive reform preparing electric utilities for hurricanes. This effort included coordinated research through PURC on electric infrastructure and storm damage.

This research – funded by Florida's utilities and done in collaboration with them – included an in-depth look at the economics of hardening the state's electric system. A computer model developed for that purpose helps analyze the costs and benefits of undergrounding and other forms of hardening at a micro level. The research also included the deployment of an extensive network of weather monitoring devices to gather storm data and a companion software system for mapping the weather data to infrastructure damage.

But now that we in Florida are ready to test our model against real storm damage, no hurricanes have hit the state. Maybe our preparedness hasn't caused hurricanes to go elsewhere these past six years, but we are better prepared now for extreme storm events than we were in 2004.

Florida's experiences may provide other states with an approach to better prepare for extreme weather events. The work done in Florida was the foundation for a study in Texas of the economics of hardening electric infrastructure following hurricanes there a few years ago. States in the northeast are beginning to review the impacts of Hurricane Irene. As they move forward with their investigations and plans, we at PURC look forward to collaborating with them and sharing Florida's strategies to minimize losses from extreme weather.

What exactly can other states gain from the Florida experience? One key lesson is to have a coordinated plan for dealing with storms and their aftermaths, and to have practice runs of the plan. This isn't something that PURC has been involved in, and I am sure that at least some other states in the hurricane belt have similar systems in place. However, states without such plans would benefit from talking with Florida's Division of Emergency Management.

Another key lesson is to develop a system of shared knowledge and shared research. This has been PURC's role in Florida. At the request of the Florida Public Service Commission, the electric utilities and PURC conducted workshops on the effects of the hurricanes, identified areas where research could improve utilities' abilities to serve their customers when hurricanes hit, and worked together to address the research needs. A more comprehensive description of this work is available in The Electricity Journal article "Florida's Storm Hardening Effort: A New Paradigm for State Utility Regulators" by PURC researchers Lynne Holt and Ted Kury.

While it is a standing joke in Florida that the 50+ weather monitoring stations that WeatherFlow and our collaborative research team installed after 2005 have kept hurricanes away, the real service to the state's utilities and customers is that both are better positioned to manage hurricane damage in the future and to continue to improve as we learn from experiences.

A Leadership Deficit

By Mark A. Jamison and Araceli Castañeda

This moment in history is a good opportunity to learn about leadership. We see the U.S. debt ceiling deadline looming large and our federal government losing its AAA credit rating, even if a debt deal is reached. We also see the people who are in a position to do something faltering: Three perspectives seem to prevail. First, there are the political actors who see today's predicament as a phase in a long-running competition for public approval and political power. They play to the media and the voting public, demonize rivals, and exalt themselves, seeking advantage for the next election.

Second, there are those who view this moment as resulting from recent elections that authorized them to reign in government spending; they feel a need to meet their supporters' expectations and stand firm against the bad guys.

Finally, there are those who perceive the situation as a train wreck; they attempt to distance themselves from the fray, from the adolescents, and frame the state of affairs as someone else's fault.

These three views shape much of the activity in Washington, D.C., at least as it is portrayed in the media. This media view is to be expected. After all, powerful drama with good guys, bad guys, and looming disasters stimulates newspapers sales, newscast viewership, and Internet page views.

However, these perspectives seem to miss the uncomfortable feeling that is settling in for this country: Most of us in the U.S. have never lived in a country that was not the world's leading economy, not the world's leading financial center, and not a world leader in good government. Now we do.

Public debt as a percent of our income (GNP) now stands at 73%. That is double what it was at the start of the current recession. Thumbing its nose at historical patterns, our sputtering economy is now into its fourth year of the doldrums, despite multiple attempts at fiscal and monetary stimulus. Wall Street is now a four-letter word in much of the public discourse, not the respected center of international finance that it became after the Great Depression. U.S. government officials are being lectured about financial responsibility by officials from countries that we considered developing economies just a few years ago. Now the media mentions the U.S. in the same breath as it does Europe's most anemic economies.

Our natural response to this predicament is to view it as someone else's fault: We blame Democrats, Republicans, greedy businesses, bureaucrats, Bush, etc. We don't see ourselves in the problem. We are there.

We are there in part because we are looking for solutions in the wrong places: We are looking for a traditional type of leader, one who would provide direction, solve problems, and fix the bad guys. This approach, however, does not work because this is new territory, and there are no easy answers. Making matters worse, we are divided in what we want. Some voters want to live in the world's strongest economy, financial center, etc. again. Others are more comfortable with a United States that does not stand out on the world stage. Some voters don't bother themselves with such concerns, preferring to focus on culture wars, nanny state, wealth envy, or social and environmental justice. As a result, many of us become upset if someone tries to lead us on a particular course, as President Obama has discovered. Maybe the leadership deficit is in us.

We are also in the midst of this dilemma because we do not like what someone practicing leadership has to offer. Leadership in moments like this should stir, steer, inspire, and disappoint. Stirring keeps our problems, conflicts, and contradictions before us so that we see them clearly and debate them with our friends and colleagues. Steering moves us away from past loyalties and supposed truths that in fact hold us back, and moves us onto new paths of our own making. Inspiration is needed to keep us in the game: It gives us hope that we can overcome the current situation. It also carries us through the disappointment of coming to the realization that some of our "truths" may be false, and some of our aspirations may be fantasies.

Outdated or Wise? Innovative or Naive?

By Mark A. Jamison and Araceli Castañeda

A knowing chuckle spread across the room of utility executives and senior managers. A show of hands revealed that one fourth will retire within five years and about half in 10 years. That magnitude of loss was true from the company managers all the way down to the craft workers.

Everyone agreed that this was a problem. Was it a technical problem that could be solved through changing hiring practices and implementing training programs? Or was it an adaptive challenge where employees and the company would have to make hard decisions about what they valued most?

Aging workforce is a well-known problem for utilities, as it is for other industries. When utilities expanded in the 1960s and 1970s, they hired a large number of people that were just entering the workforce and these employees, many of whom have now worked for the same company for 30 years, are nearing retirement. Some people worry that when these employees go, a lot of knowledge, wisdom, and loyalty goes with them. Others are happy to see the older generation go.

Who is right, those who worry or those who can't wait? Probably both. Aging workforce presents both a threat and an opportunity for companies facing a changing economic and regulatory climate. The key questions companies have to answer include:

  • What from the past does the company need to retain to be successful in the future?
  • What from the past holds the company back from future successes?
  • What losses are the older generation experiencing that may cause them to sabotage knowledge transfer?
  • What beliefs and attitudes do the new generation possess that may cause them to reject the most important lessons from the past?

Some of the knowledge to be kept is obvious: Where are problems likely to occur in the transmission lines? What is the best way to communicate with emergency management officials when a major storm hits? However, some traditions that pass for knowledge may hold a company back. Rivalry between organizational silos can keep a company from adapting as circumstances change. Memories of failed expansions into new lines of business can make a company overly conservative. And predominance of close relationships with like companies can reinforce conventional wisdom.

How can a company develop a culture that can determine what from the past to remember and what is best left behind? One company – not an electric utility – developed interdisciplinary experiment teams, whose mission was to identify and carry out trials that would test conventional wisdom and new ideas. Another company organized its troublemakers to openly debate the questions others wanted to avoid and expose the company to threats that others pretended didn't exist. In a third company, the CEO allowed disgruntled employees to vent at him publically, thus establishing a culture that celebrates the discussion of elephants in the room.

How can a company address the losses, beliefs, and attitudes that separate generations? Some companies establish programs that honor the roles of aging employees and help them establish new roles outside the company, maybe within the community or in an organization that celebrates the company's past. Other companies hire pools of talented, young employees that rotate through the company during their first few years of employment. Yet others develop leadership academies that expose younger employees to all aspects of the company and to senior employees, and have the academy participants work in interdisciplinary teams on experiments of their choosing that test new ways for the company.

The wrong approach to addressing the aging workforce issue is to assign it to HR, treating it as a personnel issue. The adaptive challenges of aging workforce cut across all dimensions of an organization and involve everyone.

What happens if a company ignores the adaptive challenges of the aging workforce? The 50 percent or so of employees who are going to retire will do so, and the company that is left behind will be a consequence of attempts to put new wine in old wineskins: It won't be the company created by the retired generation because they will be gone. It won't be a company formulated by the new generation because it is simply being fit into the old generation's structure. Nor will it be a company jointly developed by the best that the old generation and the new generation have to offer because they never worked through what to keep from the past and what to create anew. At best, the company will be an accident of history. At worst, it will belong to somebody else.

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