February PoV

Larry Landis

Larry Landis

Sponsored and written by Larry Landis, Former Commissioner of the Indiana Utility Regulatory Commission

As an undergraduate double major in political science and economics, one of the best courses I took was a political science course entitled “administrative behavior.”  Over the years, I have kept a smattering of the textbooks I read in favorite courses (notably, the works of Schumpeter), but I neglected to retain a book by two professors by the name of Blau and Merton.  They introduced a concept which was set forth in more than one work, but notably in“Continuities in Structural Inquiry.”

At one point in the course of the book, they discourse on why it is important for administrators and policymakers alike to be extraordinarily careful in the implementation of “reforms” or significant changes in direction.  When you undertake a major change, they suggested, that change will either produce the results that were intended (manifest results), or they will produce unintended results (latent results). They also suggested a second dualism: the results will be either good (functional) or bad (dysfunctional).

As you read that text you can almost sense the authors taking a deep breath before they proceed onward.  To understand the implications of these two dualities, they suggest, imagine a 2X2 matrix:

UPDATE - tableOn the basis of random distribution, Blau and Merton continue, the chances are three in four that any initiative you undertake will produce unexpected results, bad results, or both.

At about the same time as Blau and Merton were writing, another, relatively young, professor by the name of Daniel Patrick Moynihan wrote a book entitled “Maximum Feasible Misunderstanding,” in which he chronicled the failure of the war on poverty in general and welfare in particular. In the name of providing support for the working poor and the economically marginalized, policies were adopted which provided for assistance to family units with a female household head but no male present in the household. These policies perversely created a situation in which often the best thing an unemployed male household head could do to improve the family’s economic condition, even marginally, was to leave.

The effect, which was radically different from the effect expected by the policymakers, was to virtually eviscerate the family unit among the disadvantaged, with the ultimate results including a dramatically higher dropout rate, a decline in educational achievement, the destruction of the family unit and intact, two-parent families, a dramatic rise in the number of children born outside of marriage, and ultimately, exacerbated poverty. Moynihan, of course, went on to advise Presidents and to serve with great distinction in the United States Senate.

A colleague of mine, Tim Echols of the Georgia Public Service Commission, writes a periodic newsletter for his constituents. In the current issue of that newsletter, he writes about a recent visit to Germany and his introduction to “energiewende,” or energy transition in Germany.  Here are his observations:

“Like us, Germany depends on nuclear power to supply a steady flow of power for the grid-at least for now.  Their 18 reactors ran 24 hours a day and operated without any major incident for many years.  But nuclear power has been under scrutiny in Germany since the Russian accident at Chernobyl on April, 26th, 1986.  After Fukushima, they shut eight plants down, with the others set to go off-line in 2022.  Initially, they were concerned about fall-out, but like us they are addressing the need to develop a long-term storage solution for spent nuclear fuel.

“Because their clock was ticking on nuclear power, Germany enacted the Electricity Feed Act in 1991 which jumpstarted the renewables industry, mostly wind power in the north.  The feed-in tariff they paid to generators initially was hefty, about .47 euro cents per kWh (61 cents/kwh using the current conversion rate), but so was the technology back then.  The program yielded some results, but not as much as they hoped.

“But in 2000, they shifted the program into another gear by passing the Renewable Energy Act (EEG) and they found the right formula that motivated the German people to go into a renewable energy frenzy.  The government authorized 20 year contracts with any and all who wanted to deploy renewables and guaranteed any energy they produced would be purchased at a premium price-regardless of whether it was actually needed at that moment or not. Banks then financed these projects giving homeowners essentially a second mortgage on an energy system that brought in a check every month over and above the mortgage payment.  It was a “gold rush” as one German official explained it to me.  Other European countries tried the tariff, or a quota, but no one has had the success the Germans have enjoyed.

“This monthly payment one earned from the power company for electricity is recovered through “remuneration,” as they say, on your power bill.  Every customer pays it, except very large industrial companies.  This program has been so well received that now about 25 percent of power is generated with wind and solar-with half on private property-what we call distributed generation.  Only power companies weren’t getting the money to generate it, the people were.

“Here is the bad news. This program has become so popular that Germany often has excess energy-but at unpredictable times.  The surcharge on consumers’ bills continues to grow as more people sign up. In fact, the surcharge is more than the actual cost of the power.

“To make matters worse, all of these renewables, which the Germans admit are intermittent and dependent on the weather, are wreaking havoc on their grid, and their neighbors.  When these surpluses occur, Germany often pays its neighbors of Poland to take the excess power.  That almost free power impacts the energy market in adjoining countries.  And when the wind doesn’t blow, they have to buy it back or fire up coal and gas peaking units.”

Chances are good that you are aware of a similar situation in which a major initiative in your state, a nearby state or at the Federal level has produced such unintended and/or dysfunctional consequences.  In part that is due to the fact that few companies institutionalize a “Department of Unintended/Bad Consequences,”  the function of which is to challenge potential initiatives on the part of the company to maximize the likelihood of producing a good result.

Models can prove useful in winnowing alternatives, , but far too frequently wind up being flawed, ill-conceived and even destructive.  A model adopted by the FCC a few years ago to analyze high-cost, rural and insular telephone companies came out with the absurd conclusion that it cost less to build out telecommunications networks in Alaska than in the lower 48.

Until better management tools and models are developed and capital-intensive networked utilities can more effectively and rigorously pretest new policies and structures, one of the  most effective and protective tools for minimizing bad outcomes is the adversary-focused regulatory proceeding, be it a rate case or a major capital expenditure.  Whether from the perspective of a Petitioner, a consumer advocate, an intervenor or a regulator, the perspective of Blau and Merton is useful in reaching decisions which are not only in the public interest but true win-win solutions.  Moreover, all stakeholders in such proceedings will better represent their views if they subject their cases to rigorous internal testing, much as politicians at the state and federal level often engage in extensive simulations of debates before the events themselves.