“… the knowledge problem and governance problems are intertwined.” (Kiesling, October 20. 2023)
Those eight words from an electricity technocrat dressed in classical liberal garb represent a major concession regarding the (governmental) centrally planned wholesale electricity markets, known as ISOs (Independent System Operators) and RTOs (Regional Transmission Organizations).
Before, Keisling only acknowledged governance. “Where the RTOs should have done better IMO is in governance, which is quite flawed but flawed differently in each RTO…”, to which I responded:
One question you have refused to answer: apply the knowledge problem to ISOs/RTOs. Can you do that for us all at substack? And not only Hayek–bring in Don Lavoie’s analysis on noncomprehensive planning, and the Austrian view of competition.
And now she has answered in part. It is not easy dealing with an assumption-making academic who seems to be hiding something from her classical liberal friends and sponsors. But maybe she has fooled herself. She certainly is “increasing rivals’ cost” in my case. And she does not like competition to her “synthetic theory of regulation” for electricity–the rival of a real free market (which she refuses to even define) as a social ideal. [1] [2]
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This exchange began with a post by Matt Alvarez: “𝗪𝗵𝗮𝘁 𝗶𝘀 𝘁𝗵𝗲 𝗗𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝗰𝗲 𝗕𝗲𝘁𝘄𝗲𝗲𝗻 𝗮𝗻 𝗘𝗻𝗲𝗿𝗴𝘆-𝗢𝗻𝗹𝘆 (𝗘𝗥𝗖𝗢𝗧) 𝗣𝗼𝘄𝗲𝗿 𝗠𝗮𝗿𝗸𝗲𝘁 𝗮𝗻𝗱 𝗮 𝗖𝗮𝗽𝗮𝗰𝗶𝘁𝘆 (𝗠𝗜𝗦𝗢) 𝗠𝗮𝗿𝗸𝗲𝘁?” Alvarez examined the difference between an the two and stated:
I conducted a poll last week that asked, “Would you rather have an Energy-Only (like ERCOT) or Capacity (like MISO) power market?” 54% chose Energy-Only (like #ERCOT). Do you agree with the results?
I answered:
The choice and examples above are central planning. This is not a free market. It is also part of the ‘knowledge problem’ of what is a ‘monopolist’ (the ISO, RTO) to do.
In a real free market, each firm (integrated if history is a guide) sells to end users under contracts that specify rates and terms (firm, interruptible, hybrid) with two-part pricing and whatever else.
The integrated firm decides as it will, above and beyond the above two choices. If there is a massive reliability failure, the integrated provider must true-up with legal claims. No sovereign immunity as under central planning.
David Snapper responded:
I don’t want to invoke Kenneth Arrow’s Impossibility Theorem (but I want to mention it as relevant), but did your voters know that MISO now proposes to modify the capacity auction clearing method so that it no longer produces traditional competitive market solutions but rather increases (oddly without maximizing) social surplus using sub-regional and “system-wide” (but importantly not aggregate sub-regional) demand-based geographic price discrimination.
The auction clearing ultimately will still depend on administratively determined demand intersecting with accredited supply offers, but at larger amounts of total cleared supply. The clearing prices will reflect some sort of incremental (“marginal”) cost, which is efficient in a way.
The resulting geographic price separation could create fairness concerns. I’ll leave those determinations to regulators and ratepayers, as well as politicians and constituents.
I worry more that the approach could create the need for out-of-market make-whole payments; and that the demand curves will be based on marginal Expected Unserved Energy while accredited supply is not valued in EUE terms, much less EUE reduction terms (so the auction will clear orange supply against apple demand).
I asked David:
Is this central planning subject to the ‘knowledge problem’? (see my comment above)
He responded:
yes.
I don’t know enough to define and impose seasonal administrative price-sensitive (sloped) demand on utilities and their customers that I could be sure are actually accurate (or just or reasonable).
I’d rather let utilities voluntarily bid what they’re willing and able to pay. It’s not only fundamental for preserving consumer sovereignty principles (which need not be sacrificed with rrgulation) but it’s doable as MISO’s original monthly auctions proved.
The complaints about that approach were largely that it produced near-zero prices when there was excess supply. I thought that was confirmation that things were working as expected with rational buyers.
I responded to David:
I agree. This is not the position of Lynne Kiesling who argues that the problems of ISOs/RTOs is not the knowledge problem but a ‘governance problem’. I think it is both.
In a ‘market’ set by government intervention, a whole new set of rules apply. It can be an economists’ playground within the technocratic constraints of electricity. Energy-only market, capacity market, hybrid? Who knows?
What I am suggesting is a removal of government intervention where the (unfranchised, unregulated) provider deals with the market. If one provider over a large geographical area, then the incentive is for consumers to organize collectively (smart lawyers/consultants can lead the way) to create a ‘monopsony/monopoly’ situation.
The “knowledge problem” would be addressed in a real free market. And surely reliability would be better protected by Grade A corporations under contractual obligation than ISOs/RTOs that have sovereign immunity.
Kiesling responded:
First you passive aggressively don’t tag me, then you put words in my mouth. You have misrepresented my position. Again. You either do not understand or fail to acknowledge that the knowledge problem and governance problems are intertwined.
I responded:
No need to get personal. So does the centrally planned wholesale market via ISOs/RTOs does have a “knowledge problem’? Have you written on this anywhere that I can cite?
And can you define what a free market in electricity is and is not so I/we can understand your position?
Two things: My 2008 book: Section IV of my 2015 chapter, “Knowledge Problem“, in the Oxford Handbook of Austrian Economics
The article mentions public utility regulation of electricity but does not get into the knowledge problem of ‘synthetic’ regulation.
Your book does not define what a free market is in electricity or bring in the classical liberal tradition in terms of electricity policy: names such as Demsetz and Primeaux.
You state (p. 47): “Regulation is a form of central planning, and is therefore prone to the dispersed knowledge problem” but do not apply this with any specifics to RTOs/ISOs in the mandatory open access world.
NO RESPONSE–Once again: disengagement when she needs to answer questions that get to the heart of her “synthetic theory of regulation and technological change,” her paradigm of electricity statism in place of a free market and true market discovery process in electricity.
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[1] This is the fourth concession by Kiesling of note in our exchanges. First, her claim (on Facebook soon after the Texas debacle of February 2021) that ERCOT was not a government entity, which inspired my rebuttal here and here. Second, and third, in her wide-ranging rebuttal to me, she labeled her electricity program “a synthetic theory of regulation and technological change” and stated, “the grid is a common pool resource in which it is literally—literally—impossible to define and enforce property rights.” (Amazing: assume government control to make it a “common pool resource” when it was not before.) And fourth, ISOs/RTOs are central planning agencies subject to the knowledge problem (the subject of this post).
A plea: End the dodge and debate the pros and cons of the real free-market alternative that for decades was at the center of debate from the classical liberals.
[2] In an exchange with Vernon Smith, he questioned the ISO/RTO approach and hinted (reluctantly, it seemed) to the knowledge problem of a central planning agency. Another exchange with Eric Shubert gets to the free market vs. ISO/RTO approach when he defines (assumes?) electricity as a “public good” for mandatory open access central planning.