Applying Economics to Use of Force Policy

So I think it is a fair societal goal to minimize deaths in police/civilian interactions. Within most moral traditions, each life is equally valued. Some may argue that a law enforcement officer LEO's life is worth more than someone they may be looking to arrest, but under the concept of innocent until proven guilty, I am not sure how I feel about that.

Since police departments do not need to report death by cop incidents, data is not easy to come by, but the Washington Post has been collecting a database of certified deaths where the shooter was a LEO. In 2020, there were 1,021 such deaths (and these do not count deaths like George Floyd and Ronald Greene). Certainly, if these are all self-defense and the trade off is one civilian life for one LEO life, I think we may be ok with this. But according to the Officer Down Memorial webpage, in 2020 there were 59 LEOs that died by assault, vehicular assault, or gunshot while on duty. It is really hard for me to believe that there would have been 1,021 more police deaths had cops not taken those 1,021 lives. So what trade off are we ok with? Is it acceptable for cops to be risk averse enough that 10 civilians are killed in order to prevent the death of one LEO? The 59:1,021 ratio is not definitive, but it tells me cops are way too willing to pull the trigger when they sense some risk.

I know it makes us uneasy to think about whether policies that would result in only 600 civilian deaths (421 fewer), but with a loss of 100 LEO deaths (41 more) might be an improvement (a net reduction of 380 deaths). Even at that, it says that a LEO life is worth 10 civilians. This is really the normative discussion we should be having as the end result is the type of training and use of force policies we implement.

https://www.washingtonpost.com/graphics/investigations/police-shootings-database/

https://www.odmp.org/search/year/2020

Zoom-towns, I'm Not Optimistic

Several analyses of migration since Covid started have noted an increase in demand to live in more remote locations. This is tricky as the correlation between housing units and population is typically very high (e.g. 0.98) across cities. As people move out of a place, others tend to move it. So how do you notice a change in demand? By looking at changes in price. While population changes have been small, housing prices have varied much more. Denser, more expensive cities, like New York, have seen housing prices fall while smaller cities, especially those that are more pleasant places to live (like near ski resorts or national parks, have seen prices rise.

So this is a good thing, right? People get to live in high-amenity places and still earn wages like they are in the big city!!! Not only that, companies can shed the cost of maintaining offices. What's not to like?

Well, a main reason that people are so productive in big cities is their proximity to other people. Face-to-face interaction allows ideas to move more quickly from one person to another. To the extent that Zoom is not as efficient a way to transmit ideas, something will be lost. That "water-cooler" chit-chat that seems like a waste of time is actually the type of interaction that generates big ideas, not to mention trust between employees that is critical to firm success. While built-up social capital in a company will go a long way in this regard for a while, once employment dynamics create turnover in a company, new employees will have a harder time integrating and those knowledge spillovers that are so critical to building trust, social capital and, productivity will diminish.

Time will tell, but I am not optimistic.

Reform Needs to Be Bigger Than Just Making power More Reliable

Clearly the biggest shortcomings of the Texas electricity free market experiment were laid bare a couple of weeks go. However, there have been lots of other market failures that need to be addressed too. The free market advocates have been saying that at least Texans have had really cheap electricity rates. The problem is, they like to compare Texas to the rest of the country. Instead, we need to compare rates paid by the 60% of Texans buying in the free market versus the 40% who are still being served by traditional electricity utilities. By that metric, the Wall Street Journal found that those buying power in the Texas free market have paid $28 billion more for electricity than those served by traditional regulated utility companies. Essentially, those buying power from regulated utilities paid 8% less for electricity than the national average while those in the competitive market paid 13% than the national average. Yikes!

WSJ Source

How can this be? One of the requirements of a well functioning competitive market is that there is perfect information regarding prices. The Texas electricity market falls well short on that score. Regulated utilities have to make their rates transparent and obvious to customers and there are limits to extra fees that can be charged. This is not so in the less regulated free market. As Dallas Morning News' "The Watchdog," Dave Lieber, reported today (DMN, Sec. B, page 1 on Feb. 28, 2021), the PUC (Public Utility Commission) allows electricity contracts to contain 28 different add on fees in the fine print. If the electricity company uses a third party for billing, there can be a fee for that. If you call and talk to an agent, there can be a fee for that. Use the minimum electricity allowed by the contract for a month, there can be a fee. Pay the minimum payment for a month, there can be a fee. Change the date you want to end service when you move, there can be a fee for that. None of these show up in the rates charged, but they contribute to what you pay. Companies also include the potential for rate changes in your contract. But if you autopay you might not notice that your rate has slowly crept up from $0.08/kWh to $0.20/kWh. According to my reading of Lieber's column, companies also like to use variable or indexed rates as ways of hiding what customers pay. All of this is geared to bring in extra revenue without losing customers.

The Watchdog

Unlike The Watchdog, I am all for variable rate plans that charge higher rates when usage is highest and lower rates (like at night and on weekends) to provide an incentive for people to do laundry and other more energy intensive activities when the supply is not so strained. But there has to be a way to make the market more transparent. There should be an approved list of things where fees can be added and that list must be prominent in the contract. Second, rates paid and when and how they might vary over a 12 month contract must be plain to see. 

I can say that I visited Comparepower.com and typed in my ZIP code and checked out dozens of plans available in my area and, if the data provided can be trusted, I saw very little in the way of hidden fees or complicated rate structures. But I know different companies operate in different parts of Texas. Until the legislature takes steps to make the market more competitive, your best bet may be to become a more careful consumer.

How the Electricity market in Texas Failed

We were without power for about 40 hours spread out over three and a half days from February 15-18. I know someone in Austin who lost power for 64 hours straight and parts of his house got down to 30 degrees at night. Across the state, there are people in apartment complexes where water service hasn't been restored. This ended up being more than just a few rolling blackouts lasting the 15-45 minutes the ERCOT warned us about. So what happened?

There are actually a couple of markets involved in what happened two weeks ago in Texas: the market for fuel, the market for wholesale electricity, and the retail market for electricity.

First, the fuel market. For natural gas or coal-fired power plants, they must buy fuel. Natural gas isn’t typically stored in Texas, but is bought off the transmission pipelines from whomever it is that is pumping the gas into them. Natural gas power plant operators generally acquire fuel via long term contracts through which they buy a certain amount of gas to be used on certain dates. When they want to generate more electricity, they can buy extra in a spot market that has a price set in real time (a spot market simply means you are paying for it for immediate use). Of course, gas producers must have gas coming out of the ground that can be pumped into the lines for a generator to buy it. These electricity generators are buyers in the fuel market and are sellers (along with solar and wind turbine electricity generators) in the wholesale electricity market.

Second, retail electric companies buy enough electricity from generators to handle the demand for electricity from their retail customers. The electric companies are buyers in the electricity generation market and are sellers of electricity in the retail market. These electric companies mainly like to have long term contracts with generators to buy power used by consumers so that they can lock in a price. They can then offer a fixed rate to customers. They may pay $0.08/kWh to generators and sell to customers for $0.10/kWh.

Of course, electric companies don’t build dedicated lines connecting power plants to each house they serve. Instead, there is one large grid of interconnected wires (even though sections are partitioned off). Each power generator puts electricity into the grid wherever they are located and consumers pull it out when they turn on a light switch. There is no way to know which power plant created the electricity that comes to your house. It is just an accounting device that electric company X has customers who are pulling 5MWh of electricity out of the gird, so they need to make sure they are paying electricity generator companies to put 5MWh into the grid.

If electric company customers want to take more electricity out of the grid than their electric company has paid to put in, the electric company needs to buy more. Outside of the long-term contracts, they can buy electricity off the spot market of electricity generators are producing above and beyond what they have already sold through longer term contracts. This spot market currently has a price ceiling of $9.00 per kWh, about 100-300 times above the usual spot market electricity price.

During the recent cold snap, it became clear that there would be a spike in demand. Electric companies knew they would be buying extra electricity off the spot market. And by competing with other electric companies for that electricity, the price might well be bid up pretty high. Power generation companies also knew that they had a problem. Without proper winterization, they might not be able to generate as much electricity as they had already sold. But even if they could operate, knowing that the price for spot market electricity might be high, they would need fuel, maybe more than they had contracted to buy at a fixed rate.

Usually, when the price of a good rises in a market, it is a signal to consumers to scale back on consumption and a signal to producers to make more of the good. In the electricity market, except for the customers of one company, Griddy, the price paid for electricity is set by contract and does not vary much, if at all, with demand. This means that millions of electricity customers could feel safe turning on lights and heat pumps knowing that the price they pay is fixed. The Griddy electric company only buys electricity off the spot market (usually around $0.09 per kWh) and charges customers that rate plus any applicable taxes and a flat $9.99 per month. Their customers get notifications to rate increases and projections as to what their rate will be over the next several hours. I am not sure how much warning they got that electricity would soon cost them $9.00/kWh, a 100 fold increase over the average rate Griddy charges (As an aside, there are fixed rate electric companies that offer electricity for less than $0.08/kWh, so the alure of Griddy sort of puzzles me).

The fact that most retail electricity customers pay a relatively fixed rate for electricity means that when demand rose due to the cold weather, the price of electricity paid by most customers did not rise in a way that would cause people to turn off lights or set the thermostat lower (the exception being Griddy customers). In this instance, the market mechanism only effects supply. This can be enough for the market to still operate and avoid a shortage if the higher price for electricity on the spot market provides an extra incentive to power generators to add more electricity to the grid (without that price affecting demand too, it just means there needs to be a larger supply effect). However, there are two problems here. First, the time to winterize power generators was well past, so only power plants that could operate could even consider upping their quantity of electricity supplied. Second, even for generators that could operate, getting fuel became an issue. Once they were no longer using fuel bought under a previous contract at a reasonable price, they would have to buy fuel on the fuel spot market. Because of frozen fuel compressors and pipelines, the supply of natural gas was more constrained than usual. The spot price for natural gas at the Houston Ship Channel was $180.66 on February 16. Not surprisingly, this cost would raise a power generator’s cost per kWh to be $9.03. It definitely seems the $9.00/kWh electricity spot market price ceiling seems to have limited how much generators were willing to pay for gas.

Would allowing the spot price for electricity go to $100/kWh have helped generate more power? Probably not. The issues were technological limits to how much electricity could be generated. ERCOT had set a ceiling on the spot market electricity price of $9.00/kWh mainly to encourage the construction of new power plants. In real time, as the price of electricity rose to that $9.00/kWh ceiling, it was a little too late to build excess capacity or winterize existing plants or fuel pipelines.

When demand increased and the supply of electricity ran into its capacity limit, a shortage developed. Once price adjustments were insufficient to eliminate the shortage, the only way to manage it was to turn off parts of the grid so that electricity use would match the quantity that could be supplied. It did not matter if your electricity provider had contracted with power generators who were able to keep producing or not. Remember, houses are not connected to power generators directly, but onto a section of the grid. Shutting down sections of the grid is fairly indiscriminate. This means there is no reason to shop for a more responsible electricity provider, none of that matters once the overall shortage necessitates shutting of sections of the grid.

At the end of the day, the market failed. There is no realistic way, especially now, to force all Texans to join a Griddy type plan where higher prices would signal to people to shut off the lights, TVs, heat pumps, etc. That means the quantity demanded of electricity will be unaffected by adjusting prices in the wholesale market. On the supply side, the potential of very high spot market prices was hoped to be an incentive for generators to invest in winterization and extra capacity with the thought that it would pay off during bouts of cold (or hot) weather. As it turns out, that that was not enough of an incentive. Once a weather event is upon us, technological capacity limits how much power can enter the grid, no matter how high the price gets.

So what can be done? By regulating that all power plants and natural gas pipelines in certain climate zones be winterized, it would increase the cost of generating power across the state similarly. This would mean the price of electricity would rise enough to cover the added cost of winterization and power plants should remain just as profitable as before. The ceiling on the spot market price of gas should be set where it maxes out just above the point where maximum electric generation is reached. If increasing the price cannot cause a supply response because of technological constraints, then further price increases serve no purpose. That doesn’t mean the cap will be low. Ideally, we would have power generation companies maintain backup generators that could be turned on during bouts of cold weather. Clearly, the ceiling of $9.00/kWh was not enough to have done that in preparation for this week. This is one case where it might take a general electricity tax to come up with revenue that could be used to subsidize excess capacity that could be brought online during a energy crisis.

Hopefully the legislature will finally fix this and capacity will be adjusted so that there is always enough to meet demand. But what if this happens again for whatever reason? How do we get people to fully have power to scale back usage a little bit so that the rolling blackouts really can be 30 minutes and not 8-64 hours long? Perhaps ERCOT could issue a notice that once a crisis emerges that all electricity customers in the ERCOT area would have to pay $0.20-$0.25/kWh for electricity until the capacity was able to meet demand. This would give those who are on parts of the grid that have power an incentive to reduce usage, maybe by setting thermostats to 62 degrees rather than leaving them at 75 degrees. Any excess revenue generated could then be evenly distributed as a rebate to all customers in the ERCOT area. This would have the effect of ensuring that anyone using less than the average amount of electricity, like those in apartments or small houses, would not be made financially made worse off by the price surcharge.

That no one at ERCOT saw what happened as a possibility is shocking. Thankfully, the problems are straightforward and easy to fix...if the legislature and governor find the will and wisdom to fix them.