Reason Magazine - Staff

Neutral Networks Are the Devil's Allies

info@reason.com (Adrian Moore) — Mon, 01 Aug 2005 00:00:00 EDT

"Today the Court struck a blow against freedom online," claims Jeff Chester, executive director of the Center for Digital Democracy. "The Internet they have bestowed promotes the interest of a few big media companies against the best interests of the public..."

Sound bad? Then consider this dire prediction From Jonathan Rintels, executive director of the Center for Creative Voices in Media: "The Supreme Court's decision...to permit cable companies to discriminate in providing Internet access is a potentially devastating blow to the wide diversity of viewpoints and voices upon with our democracy and culture depend."

What's got these good citizens in a pickle? The Supreme Court's recent decision in the the case National Cable & Telecommunications Assn., et al. v. Brand X Internet Services, which ruled that cable companies do not have to lease their networks to rivals who have no other means of competing. In the wake of the Brand X ruling, consumer advocates fear that we'll all be stuck with broadband monopolies. Many expect the Court's decision will spur the Federal Communications Commission to deregulate phone companies, who are required to share their lines for Internet connections.

Nobody is more dismayed than Brand X owner Jim Pickrell, who says, "It's an end to competition in broadband and telephone."

But before you throw your cable modem through your TV screen, consider what's happening in the actual consumer broadband market: Consumers now enjoy an expanding array of choices, and all indications are that those choices will grow rapidly.

I should know: I live on a farm in the Sierra Nevada mountains, well outside of the nearest small town of 7,800 people and over 120 miles outside of Los Angeles. My property is not served by a cable company or by DSL broadband over the phone lines. Yet I have three companies competing to provide me with broadband Internet access—two satellite companies and a wireless company. My father lives even further from town and yet has five options for broadband access.

In a world where rural mountain valleys two hours outside of L.A. have five options for high-speed Internet access, the idea that we have to create artificial competition though regulatory policies like open access is absurd. Time and technological changes have passed by the situation that once made open access seem like an attractive option.

In fact, to the extent that we don't have as much broadband access in the U.S. as we want, open access policies are partly to blame. Open access regulations created a huge disincentive for companies to invest in more broadband infrastructure and slowed down the expansion of the technology.

That hasn't made regulation zealots trust the market any better. Hence, even as the idea of open access is dying, the battle is shifting to a new front and a new buzz term: network neutrality. This refers to rules and regulations preventing broadband firms from influencing the way content flows to you. Without such rules, some consumer groups fear we'll see fewer broadband providers, higher fees, and cable companies rigging the system so that Internet sites that they own load fast and ones they don't own are slowed down, or even blocked.

Advocates of enforced neutrality ignore one important fact: Consumers wouldn't stand for that. When you have a choice of several service providers, why would you choose—or stay with—one that is deliberately hindering your Internet use? "Network neutrality" is the just the latest attempt to fix technology from 20 years ago with regulatory theories from 40 years ago.

Los Angeles may be the test ground for network neutrality as the city negotiates its franchise-renewal deal with the cable companies. In the last few years, the city has chosen to extend a contract that brings in $20 million in franchise fees each year from the cable companies. The City Controller wants the 18-year-old pacts renegotiated. Consumer groups and others are pressuring city leaders to make network neutrality rules a requirement of any new agreement. But consumers don't need protection from this phantom threat. Consumers can cast the ultimate vote with their pocketbooks by switching companies.

Broadband Internet access is a very competitive market, and no consumer is held captive. We don't need enforced "network neutrality" policies that are much more likely to hinder innovation and slow down the expansion of high-speed Internet access than provide any added benefit to consumers.

Hydrogen Hot Air

info@reason.com (Adrian Moore) — Fri, 01 Oct 2004 00:00:00 EDT

President Bush's State of the Union address included a proposal to spend $1.2 billion developing hydrogen-powered cars. California Gov. Arnold Schwarzenegger is so taken with the idea that he wants to open a statewide network of hydrogen fueling stations.

Hydrogen cars are a popular environmental cure-all because they are supposed to dramatically reduce greenhouse gas emissions. A simulation for the Reason Foundation, conducted by chemical engineer William Korchinski of Advanced Industrial Modeling, attempted to estimate the decline in carbon dioxide emissions that would have resulted from switching every car in California to hydrogen fuel in 1981. He found that the decline would likely not even be measurable. A comprehensive comparison of the emissions released by hydrogen and gasoline vehicles, as well as those caused by the manufacture, transport, and distribution of both fuels, shows that in most cases fueling cars with hydrogen would make little net difference in emissions of greenhouse gases, and in some cases would even increase them.

For example, hydrogen is made via electrolysis or by reforming hydrocarbons, and both methods take a lot of electricity -- most of which comes from burning fossil fuels. And hydrogen can't be sent through pipelines, meaning more truck trips to haul hydrogen to fueling stations.

New cars have very low emissions, and hybrid gas-electric vehicles already on the market emit even less. Yet the kind of incremental improvements that drive so much real progress aren't as exciting to many environmentalists -- and presidents -- as flashy silver-bullet solutions.

Importing Affluence

info@reason.com (Adrian Moore) — Tue, 01 Jun 2004 00:00:00 EDT

Democrats and Republicans are now engaged in a partisan Three Stooges slap fight over who is more outraged by offshore outsourcing. Wasn't it just a few months ago that both parties were trying to outdo each other in their support for free trade?

"Offshore outsourcing" (or offshoring) is the fashionable term for the recent uptick in service jobs contracted to firms in India, China, and other developing nations. Consultants who help companies arrange offshore outsourcing agreements predict it could affect up to 3.3 million jobs by 2015. Take away the marketing hype, and it could still easily be 2 million.

Lost in the concern about offshoring is the fact that the money companies save by sending rote work overseas is invested in more creative jobs here in the U.S., a point made by a recent Institute for International Economics study (downloadable at www.iie.com/publications/papers/kirkegaard0204.pdf). Analyzing Bureau of Labor Statistics data and outsourcing studies, the report finds that while more than 70,000 computer programmers have lost their jobs since 1999, more than 115,000 higher-paid computer software engineers have been hired. In fact, most of the jobs that will go offshore pay less than the U.S. average wage and are likely to be eliminated through technology whether sent overseas or not.

Meanwhile, in a paper for Deloitte Research called "The Macro Economic Case for Outsourcing," economist Carl Steidtman shows that the U.S. exports many more services than it imports and that "the benefit of importing services is the same benefit that comes from importing goods." Improved productivity lowers prices and pushes up wages and profitability, which in turn creates new jobs.

Power Tripped

info@reason.com (Adrian Moore) mwlynch@reason.com (Michael W. Lynch) — Fri, 01 Jun 2001 00:00:00 EDT

Dominic Ciolino has had many headaches in the 13 years that he’s owned Dominic’s, an intimate restaurant specializing in Sicilian cuisine. But his electricity bill -- which hovered around $700 a month -- wasn’t one of them. That changed last summer, when Ciolino first heard about San Diego’s electricity problem on the evening news. "I thought, ‘That’s cool, whatever,’" says 52-year-old Ciolino, whose restaurant sits in Escondido, California, a blue-collar community about 30 miles north of San Diego. "Then I looked at my bill and said, ‘Holy shit.’"

At the peak of the crisis last summer, Ciolino’s monthly bill from San Diego Gas & Electric nearly tripled to $2,000, as electricity rates in San Diego jumped from under 4 cents per kilowatt-hour in May to roughly 13 cents in July. Although his electricity bill has shrunken back to about $1,200 a month, last summer’s increase devoured his savings and the current cost is gobbling up what used to be his profits. "I had to go to my kitty," recalls Ciolino. "The thing is outrageous. How the hell do you run a small business like mine? You try to put a little money away and you can’t."

At least he’s still in business. Seeing no relief from his own $2,000-a-month electricity bill, fellow San Diego County restaurateur Steve Gramzay shuttered his 4-year-old Le Peep Grill, a popular breakfast spot in the beach town of Encinitas. "There’s no sense in banging your head against the wall," Gramzay told the North County Times.

But bang their heads against the wall -- and shake their fists at power companies, politicians, and regulators -- is exactly what thousands of San Diegans did last summer, when their electricity bills spiked like the Nasdaq used to. Businesses dimmed their lights, turned up the thermostat, and shut down appliances in order to save power. Individuals turned off air conditioners and sweated it out. And they protested. "The more people talk about it, the more you will get politicians listening," 40-year-old Pam Ashby told The San Diego Union-Tribune last August while protesting outside the Sempra Energy building, headquarters of San Diego Gas & Electric’s parent company.

San Diegans were the first, and in some ways only, Californians to experience the full effect of the state’s now-notorious electricity crisis. Electricity was in short supply throughout California last summer -- reflected in wholesale price spikes of 700 percent -- and it remains so at press time. Indeed, rolling blackouts have even dimmed the lights in places as unused to scarcity as Beverly Hills. But SDG&E was in the unique position of being allowed to charge its customers the full cost of power.

Elsewhere, government-mandated retail price caps were still in effect, which kept consumers’ bills steady. It was the utilities -- PG&E in the North, Southern California Edison in the South -- that were looking at their bills and exclaiming, "Holy shit." Buying power for as much as 75 cents a kilowatt-hour and selling it for a measly average of 12.5 cents a kilowatt-hour, the utilities ran up billions of dollars in bills to power suppliers that they couldn’t pay.

Of course, it wasn’t only utilities and San Diegans that were affected. Energy-hungry businesses found themselves without power, either because they had signed "interruptible" contracts (in exchange for a lower rate, they agreed to go without electricity in times of extreme scarcity) or because they simply couldn’t get power. Miller Brewing Co., which lost power 24 times between June 2000 and January 2001, shifted production from its Irwindale plant to Dallas, idling 750 workers. Steel plants shut down, leaving thousands of workers at home, and the production of such essentials as potato chips, pork rinds, and cottage cheese fell victim to the power shortage. As of press time, the lights have gone out five times in California, including twice in March, when demand was roughly half of what it’s expected to be in the summer period. Expect to read more tales of people stranded in elevators and staring at darkened movie screens.

The Blackout Bandwagon

Why is cutting-edge California experiencing a power crisis worthy of Cuba or North Korea? "Capitalism is falling apart," vented Los Angeles Times columnist Robert Scheer in late December. "The result [of deregulation] is now bordering on catastrophic with utility companies demanding enormous rate increases or they will declare bankruptcy." Likewise, MIT economist and New York Times columnist Paul Krugman blames "placing blind faith in markets." "California’s deregulation is a colossal and dangerous failure," declared Gov. Gray Davis in his January State of the State speech.

Only Scheer totally misses the mark, as capitalism isn’t falling apart and has little to do with California’s energy crisis. But it’s true that a sort of blind faith in markets -- academic blind faith in the spot market, to be more precise -- helped turn the lights out in California. And the state’s deregulation is a disaster, � la Davis. The governor’s only problem -- and not an insignificant one when it comes to diagnosis and solutions -- is his choice of words. It isn’t deregulation that is a disaster in California, but re-regulation. Contrary to all the hand-wringing and accusations, the state never deregulated its electricity industry in the first place.

Roughly half a decade ago, energy deregulation became big buzz in Sacramento, when it dawned on politicians and business leaders that the state’s relatively high energy prices were hurting its economy. Other countries had lowered energy costs by opening services traditionally delivered by public utilities to something like market competition, so why shouldn’t California? In June 1994, on the day after Nicole Brown Simpson was found dead, the California Public Utility Commission opened hearings on deregulating the state’s electricity market. By late 1995, it had completed a plan, and in 1996, state Sen. Steve Peace (D-El Cajon) decided to step to the front of the parade. He gathered the relevant players -- big industrial customers, utilities, environmental groups, consumer groups, and the state’s utility regulators -- and put together an electricity-restructuring bill that passed the legislature unanimously and was eagerly signed by Republican Gov. Pete Wilson.

Such legislative unanimity was the first sign of trouble; whenever that much consensus is reached, especially on a topic that traditionally causes a lot of friction, you can safely bet something screwy is going on. But the restructuring plan was so popular -- and so hurried -- that there was little time for anyone outside of Peace’s working group to really peruse the 67-page law, much less debate its wisdom. Instead, everyone was left to trust that the involved parties had gotten it right.

Some observers did sound alarms at the time. "Two things should be obvious," said former chairman of the Wisconsin Public Service Commission, Charles Ciccehetti. "First, none of this should be called deregulation. Second, it is difficult to see how any of these myriad regulatory schemes, unless altered significantly "will lower prices." The New York Mercantile Exchange, experts in the creation and function of commodity markets, sent the California Public Utilities Commission a memo predicting that the new rules would result in less competition, less product and service information, higher prices, lower consumer value, and higher costs.

But none of that mattered. Everyone involved -- the pols, the environmental groups, the power providers -- wanted it to work, since, like any successful political coalition, it contained something to placate all the different players.

Politicians, claiming the plan would provide consumers with more choice and lower prices, funded an $87 million propaganda campaign to spread the good news throughout the state. Big businesses figured their purchasing power would mean lower prices. Consumer groups didn’t kick up a fuss because they had secured plenty of restrictions on how the utilities could operate; they also got an immediate 10 percent rate cut and price caps. Environmental groups were able to maintain the status quo on environmental rules, including where power plants could be placed; they were additionally titillated by the prospect of environmentally friendly power competing against dirty juice. Utilities got billions in subsidies to retire old debt. And the regulators got to keep their jobs.

How It Doesn’t Work

Here’s the basic outline of how the restructuring was designed to operate: Seeking a closely managed system, the state’s politicians passed over a more freewheeling "direct access" model, in which businesses and residential customers would enter into agreements with utilities, generators, or whomever they wanted for power. Instead, the wise legislators created an actual centralized marketplace called the Power Exchange (PX) in a building in Pasadena. They prohibited utilities from contracting for power in advance, mandating instead that all electricity must be bought and sold there in day-ahead and hour-ahead spot markets. So all the companies that generated electricity for the California market and all the utilities that delivered that electricity to consumers had to hash out prices daily in that one place. The law allowed the PX to mandate that all the utilities pay the same -- and highest -- price offered on any given day.

Utilities, both established and new, would seek to deliver the power they purchased at the PX as cheaply as possible. Prior to restructuring, California’s public and investor-owned utilities generated most of the power that they sold. But under the new rules, investor-owned utilities were given a strong financial incentive to sell off at least half of their fossil fuel- fired power plants, since vertical integration, like passing out free Web browsers, is supposedly dangerous to consumers. If utilities didn’t divest, they were ineligible to dip into a slush fund to pay off bad investments in other power generating facilities. Before restructuring, the utilities self-generated 72 percent of the power they sold. By August 2000, they generated just 20 percent of the power that passed over their lines, purchasing the rest on the market.

Additionally, utilities were allowed to charge their customers a "competitive transition charge," which almost offset the 10 percent rate cut and allowed them to recoup their "stranded costs," a euphemism for stupid investments in inefficient plants often made at the behest of regulators. They sold their plants for 1.75 times book value, pocketing a total of $3.2 billion. A package of SDG&E peaking plants -- those that fire up in times of shortage -- sold for 3.8 times book value. That anyone was willing to pay such a premium price for the plants was a sign that the market was predicting scarcity in the future.

The utilities also got a cartel scheme worthy of trial lawyers and big tobacco. First, the state agreed to "securitize" the recovery of stranded costs, meaning the state sold bonds to pay off the utilities’ bad debts up front (utility customers have been paying off the bonds through the transition charge). Better yet, any new power providers entering the restructured California market had to charge customers the same "competitive transition charge" and hand the money over to the state.

The net effect was predictable: Between the price controls and the rate cut, any new competitor entering the California market would have to price their juice so cheaply that it wouldn’t be worth the effort. So few companies made one. At first, such sophisticated and aggressive players as Enron, Duke Energy, and Green Mountain Energy entered the market. But despite dispatching hundreds of sales reps and spending $5 million, Enron fell well short of its goal of signing up 700,000 new customers in a few weeks. It acquired a mere 30,000 customers and ultimately pulled out of the market. In all, only 1.7 percent of residential customers and 13 percent of total load changed companies. No competitor to SDG&E ever tried to lure Ciolino, the San Diego restaurateur, away from his traditional power supplier.

Early on, the new setup produced a windfall for established utilities. PG&E, SDG&E, and Southern California Edison, all of whom are crying foul now, pocketed $10 billion in profits -- a combination of the mark-up on the power they sold to customers, revenue from selling off power plants, and revenue from bonds to pay off their stranded costs.

Here’s the final part of the restructuring plan: The utilities still owned the electricity grid over which power was transmitted, but they no longer operated it. Instead, politicians created a nonprofit, quasi-governmental organization called the Independent System Operator, or Cal-ISO for short. If the utilities were unable to secure enough power on the PX, the Cal-ISO purchased whatever extra was needed to keep the state’s lights on and sent the bills to the utilities. Even the ISO was prevented from entering into contracts for power.

Spot Market Pagans

"California wanted to rely on short-term power," says California State University at Fullerton economist Robert Michaels. "They thought they could foist an academic vision of what the market is on people, instead of dealing with the power market that was. Outside of California, there is a diversity of power sources, including some short-term power traded at hour-ahead and day-ahead markets, and some power traded at months and years ahead. There’s power where I have an ownership claim on someone else’s generator. Some is interruptible, some reliable. There are just all these different dimensions. California restricted itself to one kind that was only a small fraction of the real variety out there."

Robert Levin of the New York Mercantile Exchange agrees, though he’s less charitable in his comments. "The essence of the California vision is complete stupidity," says Levin. He notes that it was designed by well-intentioned academics, who, although expert in electricity regulation and economic theory, had no experience in the real world of bilateral contracts and markets. "They deliberately and artificially made the spot market -- the most volatile market -- the primary market," explains Levin, who later adds, "I call them spot market pagans. They pray to it."

The PX price was only the "market" price paid for electricity in California, and that was under totally rigged circumstances. But what consumers paid for energy had nothing at all to do with any market, even the constrained PX one. Consumer rates were effectively set by the government, which capped them at roughly the 1995 level until 2002, or until a utility paid off its stranded costs. (This last point explains why customers of SDG&E got socked with massive increases: The San Diego-based utility, partly as a result of the huge price it got for selling off its power plants, was the first -- and only, so far -- California utility to pay off its stranded costs. Hence, SDG&E was free to raise its retail prices to reflect the increase in wholesale prices.)

Now this scheme may be many things, but a deregulated market it certainly isn’t. The Airline Deregulation Act of 1978 actually eliminated the Civil Aeronautics Board, along with many of its regulations. The 1980 Motor Carrier Act dramatically cut back the Interstate Commerce Commission and its role in controlling interstate trucking. In contrast, California’s electricity restructuring law did not shrink the state Public Utilities Commission, and in fact added two new state bodies -- the PX, to control all transactions between utilities and electricity generators, and the Cal-ISO, to take over control of the state transmission grid. The restructuring law lifted some rules on electricity generation, but imposed many more on the decisions and operations of the utilities.

There are plenty of clues to suggest that a true market for power never existed in California and that everyone knows it. In fact, Robert Scheer’s outrage at utilities demanding "enormous rate increases" is one: Companies operating in the market don’t ask permission to adjust prices. Another came when Public Utilities Commission head Loretta Lynch was asked why the PUC was taking months to act on requests by utilities to approve long-term contracts: "You just can’t allow any contract," she replied (emphasis added).

But the lack of a market that could handle fluctuations in supply and demand didn’t matter much, as long as electricity was plentiful and wholesale prices remained sufficiently under the politicians’ price caps. That was the situation, until last year. "We started out with 30 percent excess capacity," former PUC commissioner P. Gregory Conlon told the Los Angeles Times. "We thought we had enough time to get this up and running." Says Gary Ackerman, executive director of the Western Power Trading Forum, which represents power generators, "The assumption that wholesale power would remain cheap and that there would be no new generation needed until after the transition period turned out to be false."

Did it ever. Times have been great in California over the past few years: The economy has been working at capacity; more people have moved into the state; folks have been buying and air conditioning larger homes; they’ve been surfing the Internet and powering up all sorts of new appliances; golf carts have been filling up the state’s fairways. Everything, in short, has been expanding in California since the restructuring, a situation that creates more and more demand for electricity.

The Ostrich Approach

There may be only one area in which California has not been growing: the number of power plants. It’s difficult to get a permit and a site for a power plant in California, be it in an economically depressed area clamoring for jobs or a high-tech Mecca that demands power. Although no definitive study has been done, it’s generally agreed that a power plant that takes two years to build in a business-friendly state takes at least four years in California. Sunlaw Energy Co. wants to build a $256 million natural-gas-fired plant in South Gate, a blue-collar city in Los Angeles County. The plant is projected to bring in $6 million in annual tax revenue and $1 million in neighborhood improvements -- neither of which has been enough to assuage community activists who are fighting the plant.

In the Bay Area, new economy behemoth Cisco Systems is leading the charge against a proposed Silicon Valley power plant that makes so much economic and environmental sense that even the Sierra Club supports it. "If there’s ever a place that needs a power plant next summer it’s the Silicon Valley," says Beth Emery, who served as the general counsel for the Cal-ISO from November 1997 to November 1999 and is now specializing in energy law in the D.C. office of the law firm Ballard, Spahr, Andrews & Ingersoll. "These people have lost their minds." During last summer’s crisis, activist groups killed a proposal to float an electricity-producing barge in San Francisco Bay -- even as the city faced blackouts. The result of all the obstruction: From 1996 to 1999, electricity demand grew by 12 percent while supply grew by less than 2 percent, according to the California Energy Commission.

That alone would have placed the system under stress. Indeed, the Cal-ISO road-tripped to San Diego in the spring of 1999 to host meetings and to warn anyone who would listen that if nothing was done to get more power on line soon, the lights were going to go out. When the summer turned out to be mild, it looked like a case of Chicken Little. But by last year, a number of shocks, ranging from unusual weather to a shortage of natural gas, combined with the rigid regulatory system, turned the Cal-ISO’s prediction into reality.

"Anything that could go wrong did," says Emery. "High temperatures, lack of adequate resources, inability to get the right regulatory policy through, and then, to top it off, it’s like every decision the governor and the commissioner had made compounded rather than helped solve the problem."

Jerry Taylor and Peter Van Doren of the Cato Institute chronicle the shocks in a forthcoming study. The price of natural gas, which fuels 49 percent of California’s electricity and nearly all of its peak power, shot up in 2000. In 1998-99, natural gas was selling for $2.70 per million British thermal units (Btu). By December 2000, it was selling for $25 per million Btu, and spiking as high as $70. In addition, one of the four pipelines that supply natural gas to Southern California was shut down for much of August due to a break.

Three years of dry winters in the West left California, and other Western states, short of hydropower, with California’s average hourly hydropower output dropping 40 percent from 1999 to 2000.

California’s clean air regulations also boosted the cost of producing power. Since 1994, California has had a trading system for nitrogen oxide (NOx) emissions that forces utilities to purchase pollution credits in order to generate power. In the winter of 1999, the credits were selling for $2 a pound. One year later, they were selling for as high as $40 a pound. (Plants emit between one and two pounds of NOx per megawatt-hour of electricity. In January, regulators waived the permit requirements for generators.)

On the demand side, a hot summer and cold winter boosted demand. Like Spike Lee at the Academy Awards, the Golden State just couldn’t catch a break. The result: On June 29, 2000, electricity was wholesaling on the PX for 43 cents per kilowatt-hour (roughly enough power to run a big-screen TV for a seven-hour Clint Eastwood movie marathon). That was seven times higher than the price had been on equally hot days in June 1999.

In a real market, utilities would have passed on most or all of that increase to customers, as SDG&E did to Dominic Ciolino and others in San Diego County. And customers would have either sucked it up or started using less energy. But with retail prices fixed at roughly 12.5 cents per kilowatt-hour, the state’s utilities had to reach into their pockets to purchase the power at a huge loss. They figured they could do it for the short term. But the short term never ended. The utilities’ losses mounted, approaching $15 billion when PG&E filed for Chapter 11 protection on April 6.

Shades of Gray

Faced with these problems, Davis has worked tirelessly to shift both the cost and the blame for California’s mess. Wedded to retail price controls that were bankrupting the utilities -- his primary goal seems to be that no voter’s electric bill will increase on his watch -- he asked the federal government to put price controls on out-of-state generators and force them to sell power to California. "Never again can we allow out-of-state profiteers to hold California hostage," Davis ranted in his State of the State address. "Never again will we allow out-of-state generators to threaten to turn off our lights with the flip of a switch."

Davis accuses power generators of manipulating the market, shutting down some plants, and withholding power to raise prices, and their profits. His suspicions were bolstered by the research of MIT economist Paul Joskow, who found that power generators were making more money than would be expected if wholesale markets were charging competitive prices. Davis set aside $4 million to fund an investigation by the state attorney general into price manipulation -- never mind that federal and other state agencies were already making their own investigations. In mid-March, the Cal-ISO released a report claiming that, based on the costs of inputs, power generators had overcharged California utilities $5.5 billion for power purchased since May 2000. In the same month, the Federal Energy Regulatory Commission, which oversees wholesale energy markets, ordered wholesale power suppliers to refund $124 million in what it considered overcharges.

Yet it’s far from clear that anyone was manipulating the market, let alone breaking any law. Economists Nguyen T. Quan and Robert Michaels point out that power sellers can make between 450 and 1,000 bidding decisions each day in California’s market. The models used by Joskow and others to measure market manipulation take into account only a handful of bidding choices, and therefore are unable to distinguish between market manipulation and simply good business decisions. The usual accusation is that electricity generators withhold power from the day-ahead market so they can sell it in the hour-ahead market, when utilities are over a barrel to meet customer demand. But research by the University of California at Berkeley’s California Energy Institute found that prices are just as often higher in the day-ahead market, and that companies cannot make higher profits just by withholding power to sell in the hour-ahead market. A Federal Energy Regulatory Commission investigation, which wrapped up in February, concluded that power plant outages were based on legitimate business grounds and not designed to raise prices.

"I don’t know what market power means in this context," says Michaels. He insists that the relevant benchmark for price isn’t the cost of generating power, but the price at which it can be sold in other markets. "There’s not much evidence of anyone withholding power. Sure, the power is over cost, because demand is highly inelastic. But I don’t call that market power. I call that equilibrium." Adds the Mercantile Exchange’s Levin, "They invented a doomsday machine, and they want to blame the people who used it."

California’s policy response has been even worse than Davis’ jawboning. The first response came in July 2000, when the state reimposed price caps on SDG&E. "People conserved when the prices went up," says the Cal-ISO’s Emery. "Then they capped prices and usage went back up. So this summer there’s no incentive for people to conserve."

A January Public Utilities Commission order "temporarily" raised rates about 9 percent, but left the utilities still selling most of their power at a loss. By then, the utilities owed roughly $12 billion to suppliers and were unable to finance the purchase of any more power. In response to the situation, Davis called a special session of the legislature, which authorized the state to purchase electricity for delivery to customers. By mid-February, California was spending $45 million a day on power, and by early March the state’s expenditures had already reached $3 billion.

In February, the legislature passed a $250 million conservation bill designed to cajole consumers into switching to energy-efficient appliances and battery-powered MP3 players. It authorized the creation of a state power authority: the California Consumer Power and Conservation Financing Authority, which can issue bonds to build power plants. (The bonds will be paid off with revenue from selling the power.) The legislature is working on bills to authorize the state to buy the transmission lines from the utilities, the tab for which is expected to be between $7 billion and $9 billion. If they don’t want to sell, Davis has threatened to use the power of eminent domain. In late March, the PUC defied the express wishes of Davis and voted to raise electricity rates by nearly 30 percent. It also authorized the state to sell up to $12 billion in revenue- backed bonds to pay for power it has already purchased and to keep the lights on through the summer. In April the legislature passed a $1.1 billion energy conservation package to do such good works as teach children about the importance of turning off lights.

"None of the proposals on the table solves the problem, which is structural," says Levin. "The state is really taking over the electricity industry. It’s a march to Marxism and a march to bankruptcy, we just don’t know which march ends first."

More to Come

Davis was unwilling to allow the retail price of electricity to increase, to let the utilities go bankrupt, or to permit private buyers to purchase utility assets. (He hastily rejected an offer by the D.C.-based Trans-Elect to purchase the utilities’ grid for $5.25 billion.) "Believe me, if I wanted to raise rates," the governor proclaimed on February 16, "I could have solved this problem in twenty minutes." His answer is a state bailout of the utilities. The only question on the table, it seems, is what form the bailout will take.

Davis first wanted the utilities’ hydropower dams in return for the bailout, a plan he abandoned when an idea he liked better came along: options on the utilities’ stock. But the California constitution doesn’t allow the state to hold stock options, so Davis now proposes to buy the utilities’ transmission lines. The common themes here are the state getting a piece of the action in exchange for billions of taxpayer dollars. "I give you a dollar; you give me a hot dog," is how state Sen. John Burton (D-San Francisco) describes the transaction.

Yet at least one of his colleagues, Tom McClintock (R-Thousand Oaks), isn’t buying it. He estimates such a plan will stick each ratepayer with a $1,300 bill but do nothing to increase the state’s power supply. "The ratepayers end up with the tab while the state ends up with the power lines," he explains, taking issue with Burton’s frankfurter metaphor. "A more accurate description of the deal would be, ‘You give me $1,300, and I’ll give my friend a hot dog.’ This kind of transaction usually requires a gun."

Yet Davis is getting considerable support for the takeover. Michael Shames, executive director of the Utility Consumer Action Network, points to four advantages of the state owning the grid. The first is financial, since the state would be able to issue bonds based on its full faith and credit. Savings will also accumulate, at least theoretically, since a state power authority will pay neither taxes nor dividends to investors. As a political entity, the state will be freed from much federal oversight. It will also be much more willing to cooperate with the state’s municipal-owned utilities on grid maintenance and allocation. "Having the state purchase the transmission grid differs very little from the current status quo," says Shames, who maintains that the provision of electricity is inherently political. "The ISO will continue to run the grid; the utilities will continue to maintain the grid. The only change is literally on paper."

Others disagree, arguing that inefficiencies of political control will quickly overwhelm any possible financial advantage. They predict disaster. "They are on a full-bore Cuban-style recovery plan," says the Cato Institute’s Jerry Taylor. "The state hasn’t shown itself to be a particularly adroit player in electricity markets so far, and I doubt turning over the entire industry to these guys is going to make things better."

On April 5, Davis finally admitted the state faces a crisis and announced a plan to increase rates on less than half the utilities’ ratepayers. His plan, which hinged on the utilities agreeing to sell their power grid, would provide the utilities with less money than the existing PUC plan. Unimpressed, PG&E filed for bankruptcy protection the next morning. Meanwhile, the state has locked in contracts for less than half the summer’s expected load and experts are predicting blackouts.

"Armageddon is on the way," prophesies Levin of the New York Mercantile Exchange. He fully expects the lights to go out in California many times this summer unless its government wises up and forces businesses to contract directly with power companies for electricity. "The state is not an able-bodied commercial agent," he says. "It’s a patsy, and everybody knows it. They are not buying that much power, and they are having trouble keeping the lights on now. And that’s at 60 percent of load."

Such dire pronouncements are echoed by the Cal-ISO’s Emery. "The summer is going to be worse than anything we’ve seen so far," she offers. "There’s no easy way out now."

Phony Deregulation

info@reason.com (Adrian Moore) — Wed, 01 Nov 2000 00:00:00 EST

Ralph Nader recently characterized San Diego as the "canary in the coal mine" of electricity deregulation, arguing that the state essentially sold out the public’s right to a reliable supply of electricity when it tried to open the door to competition. He misplaced the blame. San Diego’s skyrocketing electricity rates are the result of political horse-trading and compromise, not free markets.

The 1996 law at the center of the debate is not some radical rewriting of the rule books. California didn’t deregulate its electricity market; it "restructured " it. While the generation of electricity was partly deregulated, additional regulations and controls were placed on the rest of the system. The result violates most basic principles of deregulation: It discourages entry into the market, it restricts expansion of capacity, and it sustains the old systems and rules that prevent competition.

Witnessing the legislative battles and compromises, most potential competitors outside California adopted a wait-and-see approach. The most recent attempts to freeze electricity rates at pre-restructuring levels have only confirmed their worst fears–it isn’t a deregulated market at all, just some hybrid that no one knows how to navigate.

Under real deregulation, higher prices would spur more competition. But under California’s system, political hurdles ensure that no out-of-state relief can be expected anytime soon.

So what about new power supplies in-state? Many pundits complain that no new capacity has come online since restructuring, but they don’t bother to ask why. First, the restructuring law forced California’s utilities to get out of power generation and sell their power plants–so they aren’t investing in new ones. Several groups have applied to build new generation plants, some of them immediately after the law was passed. But even after four years, those new plants aren’t likely to come online until next year because of the glacier-slow approval process.

As important, restructuring left California’s existing power supply dangerously exposed by lengthening the regulatory process for repairs and upkeep. The last thing you want during a power shortage is to have existing plants break down. But because of a deal brokered in restructuring, power companies must now get regulatory approval before doing major repairs or refits. The result: While San Diego County suffers blackouts, the power supply problem gets worse.

Worst of all, because electricity rates were not uniformly deregulated–only San Diego is experiencing "unregulated rates"–folks upstate have no incentive to conserve power. Supply is further diminished, and prices are pushed higher.

Given that the normal benefits of deregulation–competition and price-sensitive demand–were compromised out of the restructuring legislation, what do lawmakers want to do now? They want to reimpose price controls. While this may offer San Diegans short-term relief, it will have no effect on the long-term health of the power supply. In fact, combining artificially low prices with severe bureaucratic barriers to new supply is a recipe for major power shortages.

Contrast this with true deregulation in other industries, such as trucking and long-distance phone service. In those cases, prices were deregulated uniformly across the market; barriers to entry were removed, not added; and firms were encouraged to add capacity and were allowed to grow, shrink, or revamp themselves to respond to changes in demand. The result has been huge decreases in prices and increases in service quality and choice–the very things those who labeled California’s electric restructuring "deregulation" promised.

Plan Obsolescence

info@reason.com (Adrian Moore) info@reason.com (Rick Henderson) — Mon, 01 Jun 1998 00:00:00 EDT

Life in America's suburbs is under attack. In journals ranging from The Nation, The Atlantic Monthly, and Utne Reader to The American Enterprise and The Weekly Standard, critics of suburbia argue that policies implemented since World War II--from the home-mortgage income tax deduction to subsidies for automobile operation to inflexible zoning laws--have lured Americans away from traditional downtowns and urban neighborhoods into soulless suburbs, where a landscape littered with strip malls and tract housing makes it nearly impossible for people to form genuine communal bonds with their neighbors. Contemporary suburbanites are condemned, in the words of the left-leaning L.A. Weekly, to "a future of endless sprawl and equally endless commutes."

To save suburban dwellers from this hellish existence, urban planners have devised massive subway construction projects, controls on the development of neighborhoods with single-family homes, "mixed-use" zoning districts that allow commercial operations to coexist with residences, and "urban growth boundaries" that have made it illegal to build homes or locate businesses on the outskirts of such cities as Portland, Oregon.

Enter Peter Gordon, a professor of planning and economics at the University of Southern California's School of Urban Planning and Development. For nearly three decades, Gordon, along with his USC colleague Harry Richardson, has challenged conventional views about gridlock and sprawl, finding that the data don't match the received wisdom: "Suburbanization" is not an artifact of late 20th-century America but a process that has unfolded as long as people have possessed the means to travel and relocate. Commute times are no longer than they were 15 years ago. Individuals are finding the types of living arrangements they prefer. And while Los Angeles-style sprawl is vilified in the traditional planning literature, as well as in most popular accounts of urban life, Los Angeles has the highest population density of any major metropolitan area in the country.

Gordon, who received his Ph.D. from the University of Pennsylvania, has published dozens of articles in popular publications and peer-reviewed journals. He is co-editor of Planning and Markets, a new online publication that focuses on land-use and transportation issues (www~pam.usc.edu). While he may be considered a lightning rod in the planning community, in person he's gentle and patient, hardly the sort of firebrand his heretical views suggest.

REASON Managing Editor Rick Henderson and Adrian T. Moore, director of economic studies at the Reason Public Policy Institute, interviewed Gordon at his Brentwood home in March.

Reason: There is a pervasive argument among traditional planners that compact cities built around a traditional downtown are intrinsically good. While cities once developed around transit centers, raw materials sites, or natural harbors, contemporary cities seem to be more the artificial creations of planners. What has happened?

Gordon: Compact cities are archaic forms, and they are not coming back. When you study the economics of location, all the textbook models say a firm wants to locate near the urban core or other advantageous sites, and workers must make their living arrangements so that they are close to their jobs. That may be the way it was once upon a time.

But all these firms have become much more footloose. And they go where the workers want to live. The orientation has flip-flopped. Even manufacturing businesses are no longer locked into specific sites, so they have more locational choices. They want to go where the labor force wants to go. The workers and their families want to live where the land is cheap and the air is clean and the schools are good and there are high amenities and so forth. There's a lot more spatial flexibility than ever before, and the consequences are pretty benign.

People don't have to live near work. They can be near good schools if they want to be without paying the price in longer- duration commutes. If you make travel less expensive, there will be more travel.

Reason: You've shown that the average-duration commute has stayed the same over the past 15 years or so. Why does everyone believe that traffic congestion is getting worse?

Gordon: What's interesting is how little congestion there is. If you take a resident of any large foreign city like Tokyo and transplant him or her to Los Angeles, they think they've died and gone to heaven, because the commutes are less than half, on average, here than they are there. Something like 10 percent of the people nationwide commute more than 40 minutes one way. There is a lot of self-correction going on. For 1995, the average automobile commute in L.A. was 23.5 minutes one way.

People are part of a spontaneous order. I think it's not only pessimistic but even ignorant to believe that people are going to sit tight while their lives go to hell. That's never happened. Even where the commuting distances have increased, the trip durations have not, which means commuting speeds are up. It is the opposite of impending gridlock, and it means people can have their cake and eat it, too.

Reason: So why don't people in Tokyo correct in the same way Angelenos do?

Gordon: Many Japanese choose long train commutes because they have a much smaller scope of trade-offs available. Automobile travel is much more expensive [in Japan]. Land doesn't change hands as frequently. There are all kinds of things standing in the way of the fluidity that we're used to.

Reason: You're a critic of the New Urbanism, which is the hot thing in the planning profession. Here's how Alan Ehrenhalt describes the principles of New Urbanism in Governing magazine: "The automobile, and four decades of building homes, streets and suburbs for the automobile's convenience, were draining American places of the community and intimacy that human beings naturally desire." The New Urbanists claim that people want neighborhoods with tree-lined streets, and parks and shops all within walking distance of homes. What's wrong with that?

Gordon: I think the development of neighborhoods by private developers is driven by markets, not by public policy. People are getting the neighborhoods they want. And I trust that competing developers are reading the trade-offs that you and I are willing to make and that those trade-offs include our demand for community. Our demands for community are met in many ways. We can use the automobile [to meet those demands], or we can even use the Internet.

People are getting a sense of community in the neighborhoods we have. We know that 20 percent of all trips by automobile are for work, 20 percent are for shopping, and 60 percent are for things I would call social. The U.S. Department of Transportation uses categories like family/personal business, school, church, visits to relatives, and other social or recreational uses, but you could easily call all these social or "community" trips.

New Urbanism is heavy on intervention, and it's tied into the "civil society," or communitarian, discussion. It dances around defining whether there's a problem with the way we live and says, "There's a problem--automobile use--and we have a solution." I'm not sure we all agree there's a problem. And it's a long shot to say that there's a design fix and we know what that design fix is.

Reason: Conservatives such as Karl Zinsmeister at the American Enterprise Institute have become big boosters of New Urbanism. They argue that the fatal conceit of traditional planning and zoning has led to these soulless suburbs. But aren't the conservatives substituting their own fatal conceit, that everyone wants to live in Small Town, USA?

Gordon: That's the weak link in the New Urbanism. If there were a grain of truth in their view, we would soon see people demanding it, and developers would strive to provide it. Builders are not ideologues.

New Urbanists say there are land use configurations that will lead to lower trip frequency. And if we object to the use of the automobile, then we can develop a land use solution. They have advanced all kinds of street designs, and hypothesized how to lay out homes and neighborhoods more compactly, and say if people can walk to all the places they need to go, presto, there will be less automobile use. The smallest introspection will show that trip frequency isn't fixed.

The New Urbanists certainly haven't done their homework. They certainly don't look at the facts a lot, so I keep going back to the international comparison. We've all traveled, we've all seen suburbanization in other parts in the world. There's clearly a universal demand for and use of automobiles that's reflected in the data.

International studies, like those from the Organization of Economic Cooperation and Development, are always funny to read, because the authors prejudge everything. At the beginning you have all these conclusions articulated that the automobile is the problem, what are we going to do with the automobile, how can we keep people out of automobiles, and so on. But what's revealing is that the authors lament automobile use in all these places. You have a tough time blaming American policy for automobile use [in other countries], and when you get rid of that explanation, you have to end up saying the reason people drive is consumer preference. Preference is a pretty powerful explanation compared to the one suggested by the New Urbanism.

Not just that, but the New Urbanists claim suburban development, which they call "sprawl," is something that people are using against their better judgment. One of the favorite themes of planners is that people haven't got enough choices, and builders are restricted by zoning codes to give people stuff that they don't really want. That's of course inconsistent with the other story the New Urbanists tell: that planners are beholden to builders. Well, if that's true, and just one of these greedy builders would figure out that people wanted to live in neotraditional settlements, then that greedy builder would overcome political barriers and we'd have the neotraditional developments.

Reason: Aren't there private attempts to create the type of places the New Urbanists want?

Gordon: I don't know of a lot of success stories. A lot of these developments are too new to judge. A lot of attention has been paid to the Disney-built community in Florida [Celebration], but the reviews of it have been mixed. Even that refers more to opinions of reviewers and less to the judgment of the market.

Reason: The New York Times Magazine has suggested it's more like living in a Disney-built theme park than in a real community.

Gordon: But social arrangements that are provided in the marketplace are constantly evolving. We would expect that savvy builders are evolving and experimenting in providing new things. It's a wonderful process.

If the New Urbanists have something to contribute to that evolution, that's wonderful. But instead they want to make a clean break and say that society is marching one way and we know the way it ought to go instead.

Reason: What's good about suburban living?

Gordon: Those of us who believe in markets place a lot of value on living arrangements that are an expression of consumer preferences. People are voting for spacious living, so by all means let them have what they are voting for. They're voting for access to their schools, they are voting for clean air and those kinds of things. By any measure, suburban living has to be a success story.

Americans run to [visit] Europe because, hell, those are cities. Now, that doesn't mean we choose to live there; it's just a nice place to visit. Traditional cities are fun for tourists. [That has] nothing to do with whether you want to live there.

There is the presumption that suburbanites are living these lives of quiet desperation and isolation, and they really hate being there. You see trotted out ideas about community being missing. And to have community, you've got to be in Manhattan. There are a lot of ex-Manhattanites that would challenge that theory very seriously.

Reason: A lot of people seem to think that auto travel is heavily subsidized but mass transit isn't.

Gordon: Federal transit subsidies go back to the 1960s, and for the first 10 years they were capital subsidies only. You had all this overbuilding of rail transit and a lot of people wrote articles that said overbuilding occurred because the feds subsidize only one part of the activity, and that's building. In 1974 the feds began subsidizing operation as well as building of transit systems. The whole idea of a federal transit policy may be silly, but as long as all this money is funneled though Washington, locals want to get in line to get theirs.

Whether you [do] it per mile or per trip, transit subsidies are hugely greater than any subsidies to the automobile. Per passenger mile, transit subsidies are 50 times what auto subsidies are. And the L.A. experience suggests that we spend a lot of money and get less transit use. We're spending more to get rid of riders. Back-of-the-envelope calculations show that about $7 billion has been spent on rail so far, and we know that they've lost an aggregate of about 1 billion riders over a 10-year span. So they've spent $7.00 for every transit rider eliminated.

Reason: How does that loss of ridership compare to the national average?

Gordon: There have been market-share losses in all of the new rail cities. The other thing you want to control for is background growth. So this is over a period where L.A. County added 12 percent to the population, and a lot of those were lower-skilled immigrants, who are sort of a natural constituency for mass transit. So to spend that much money and lose that many riders, that's not simple. You've really got to work at it.

Reason: Is any public transportation economically viable?

Gordon: At best, a maybe if you legalized vans. There's a big fight in New York City over them right now. Los Angeles legalized airport vans, and now Super Shuttle wants to get in the way of new entrants. But whatever [form of public transit] you come up with would be running neck and neck with large numbers of used cars. The transportation mode of choice of low-income people is used cars.

Reason: The communities that are held out as almost utopian by the New Urbanists--Portland, Oregon, or the Kentlands in suburban D.C.--have intensely politicized almost every private land use decision. Is putting every decision about painting your roof before a plebiscite the way people really want to live?

Gordon: That scares off a lot of people because they fear that their own property rights are up for grabs. If their own property rights are subject to being put in a common pool, a lot of people will say, "No, thank you."

On the other side, we have the growth of community associations, or what some people are calling entrepreneurial communities. When everything is contractual, then you're not going to have these surprises. So people are making ever more such choices, and it puts them in the category of getting out of harm's way and providing insurance for my property rights, because my property rights are ever more up for grabs, [depending upon what] judges are doing or not doing, or what the zoning board is doing in response to organized groups, and all that. The entrepreneurial communities--or whatever you what to call them, community associations--are a mechanism that fits very well.

Reason: But can't community associations become political organizations that have as much power as zoning boards?

Gordon: If everything is covered by contract, there are no misunderstandings and no surprises. We either bargain for the contract that we want or we go look for another one somewhere else.

Reason: But contracts can't anticipate everything. An entrepreneurial community established 20 years ago could have never anticipated the development of 18-inch satellite dishes, which might well be banned in such a place.

Gordon: More adaptive forms will have to come on the market. My friend Spencer MacCallum, an anthropologist who writes on these issues, says that we may see the development of leasehold arrangements rather than traditional contract arrangements. The model he uses is that of hotels and shopping malls, where entrepreneurs provide services that people want. Leaseholds may provide much more flexible property arrangements than we typically imagine.

Reason: You mean the neighborhood association may renegotiate parts of its contract every year? We won't let you build a deck on the back of your house this year, but next year we'll think about it? Or people could decide to live in rigidly defined communities with extremely inflexible contracts if there's a demand for them?

Gordon: Right. All in the direction of increasing competition. People are more mobile than ever, and they have an easier time moving from one place to another as their requirements change.

The downside of these entrepreneurial communities, of course, is that as more affluent people withdraw from cities the interest groups that are left behind become ever more powerful. The people who are victims are the people who are least likely to move. We condemn the poorest to the worst public schools and the worst public services.

Reason: So are decaying urban cores part of an evolutionary process that no planning can overcome?

Gordon: The best thing that's happening to old urban cores is the immigrants, and immigrants have almost nothing to do with the planners except for the fact that planners often give them a hard time when they want to get occupational licenses. The infusion of capital and entrepreneurial skills in the core areas is coming entirely from the immigrants. If we make it our business to chase them out, then we may be hastening the decay of those urban cores.

Reason: You don't fit the profile of the typical urban planner, advocating top-down remedies. How did you arrive where you are? Are you indeed atypical?

Gordon: Planning is so eclectic it draws people from everywhere: architecture, the social sciences, the natural sciences. You really get an odd stew. I have a very Hayekian view of the world, and given the way that I view the evolution of the built environment, the Hayekian view has a lot to say. I teach about markets, so I'm less suspicious of market mechanisms than most of my planning colleagues.

And even when I speak with like-minded colleagues, I have to ask if market-friendly planning is realistic or plausible. Is there any mileage in doing market-friendly planning, or are spontaneous orders or spontaneous adjustments going to outdistance what planners try to do all the time? And that's why it's interesting to look at the migrations that are going on into the exurbs and into private communities, because those are going on in spite of any planning or any policy.

If we have local policy interests, and we have an understanding of the role of markets, then I think you reach the conclusion that a lot of the conventional, command-and-control stuff is disastrous. Spending $7.00 per rider to lose a billion transit riders is disastrous. So I think we have a huge case study which does not offer us any cause for optimism for traditional planning.

What can we, as researchers, really do? We can quit, or we can keep believing--let's unearth some of these facts and ideas, present them as best we can, and maybe somebody will learn something.

Reason: How are you perceived in the planning community? Are you on the fringe?

Gordon: I'm at the edge of the fringe.

Reason: So when you go to the American Planning Association's convention, do you drink alone?

Gordon: Well, I don't go very often. When I'm invited to speak at certain places, I think it's as a curiosity. There's the usual handful of people who thank you. God knows if they thank you because they've been informed or entertained or whatever.

But the intent is to uncover some facts, support them as best you can, put them in context, because there are all sorts of unfounded assertions out there.

Reason: Even so, the traditional planning community doesn't seem to shun you completely. In the Winter 1997 issue of the American Planning Association Journal, you and your USC colleague Harry Richardson engaged in a fascinating debate with Florida International University planning professor Reid Ewing. Your article, "Are Compact Cities a Desirable Goal?," was a straightforward exposition of the case against traditional planning and for consumer preferences. Ewing's "Is Los Angeles-Style Sprawl Desirable?" directly challenged your arguments. How did that come about?

Gordon: We sent them our article, and they wrote back and said, "We can run this if we run it with a counterpoint." There wasn't even the suggestion that they would run ours alone. I'm happy they did run both, because I want that discussion to be out there. Nevertheless, the editors of the journal of the APA felt they needed the safety of a counterpoint before even letting us present our side. But Harry and I were pleased to find out that the editors awarded us honorable mention for feature article of the year.

I was asked to address the L.A. City Planning Commission two years ago because there was a draft of their plan which favored transit-oriented development. And I said, "Here are the various reasons why it will not work." The response I got was a big yawn. There was zero interest in that, either [from] the commissioners who for some reason invited me, or [from] a lot of the staff people who were there. I just said their document was full of holes, but there was no interest as to asking why, or can you tell us what's wrong, or anything like that.

Reason: Is traditional planning becoming inconsequential? Are today's academic planners comparable to the slide-rule designers of 20 years ago, preparing to offer a product which has no market?

Gordon: We are trending away from planners in the traditional form, who primarily serve the interests of municipalities. But property arrangements are coming on line which require the developer to wear the planner's hat or the planner to wear the developer's hat. You could call this role "planning," but it's not traditional or public-sector planning.

People who are savvy enough to see the opportunities may be called planners, but they are less likely to operate in city hall and are more likely to operate in a development group, to arrange the types of developments that are successful. They will need a more sophisticated range of skills.

Maybe the world is changing so fast that what's coming out of the academy will lag behind [what the real world demands]. Maybe students will come out of the academy being trained in one way and find, once they leave, they need skills that direct them in another.

But that may be true of any number of other disciplines. It may be a problem professional schools in general face. We know universities are having a hard time keeping up. That's why we have think tanks [laughs].

Keeping Ahead of the Joneses

info@reason.com (Adrian Moore) — Sun, 01 Feb 1998 00:00:00 EST

If you wonder why the government has such a hard time cutting spending, take a look at the new car in the driveway of the bureaucrat down the street. While private sector workers have seen their average annual earnings grow slowly but steadily over the past two decades, pay for government workers has skyrocketed. Economist Wendell Cox has discovered that since 1980, for every inflation-adjusted dollar of extra compensation (wages and benefits) the average private sector employee has earned, the average state and local government employee has received an extra $3.00. Over that same period, the average federal employee has taken home five times more in additional compensation than his private sector counterpart.

The average state and local government worker now earns over 30 percent more than the average private sector worker, while the average federal nonmilitary employee earns 50 percent more. Government employees have achieved these spectacular pay increases without much public notice. But that may change as unions and other organizations that represent government workers lobby to maintain their inflated salaries by leading the fight against privatization and the regulatory reforms necessary to make budget cuts. Cox's full analysis, derived from Department of Commerce and Bureau of Economic Analysis data, is available on the Web at The Labor Market Reporter, www.publicpurpose.com.

Planning Pratfalls

info@reason.com (Adrian Moore) — Sat, 01 Nov 1997 00:00:00 EST

The people who have been heaping acclaim on comprehensive urban planning policies like those of Portland, Oregon, should consider recent reports from the former Soviet empire. Years after the collapse of communism, we are starting to learn that central planning fails at the national and the local level.

The first lesson comes from World Bank economists Alain Bertaud and Bertrand Renaud, writing in the Journal of Urban Economics. They examined the current land use patterns of cities in Russia that were largely destroyed in World War II and rebuilt from scratch under comprehensive and centralized local planning. They found a planning pathology that makes the most sprawling U.S. city look like paradise.

The quintessential "socialist city" was inefficient on an epic scale, with sparsely populated centers that became more densely inhabited as you moved away from downtown. Moreover, most residents lived far from their jobs and faced long commutes. Even worse, the extensive rail transportation systems did not connect homes and offices. Though planners had complete control over the siting of residences and businesses, they could not create efficient cities.

Since 1990, housing and other markets in Russia have been liberalized. As a consequence, residents are mov-ing closer to their jobs and the centers of cities, leading to a more even spread of population, shorter commutes, and a lower variation in housing prices.

A similar lesson comes from the former East Germany. Germany is one of the most densely populated countries in Europe and has an extensive public transit system. Prior to reunification, very few East Germans owned or used automobiles. In 1987, 46 percent of urban travel in West Germany was by auto, compared to only 25 percent in East Germany, where 40 percent of urban travel took place on foot.

In the last 10 years, however, former East Germans have caught up with their western brethren. By 1995, 49 percent of urban travel in the former West Germany was by auto, compared with 48 percent for the former communist country. Even high population densities and well-designed public transit systems couldn't keep former East Germans from getting behind the wheel of a car as soon as they were able to do so.

The totalitarian power of the Soviet state was incapable of controlling work and housing locations in a predictable manner. And the East German experience suggests that free people will pursue their own desires despite the overarching visions of urban planners.

Portland, tear down that wall!