[Continued from yesterday's Part 1.]

 

By: David A. Smith

 

As we saw yesterday, using as our text a protracted City Journal editorial essay by Nicole Gelinas, when eminent domain is used for economic development (ED4ED) with a private developer as the implementing party, the potential for mischief is simply enormous – because the law of economic gravity creates political pressure that disenfranchises the economically disadvantaged.

5. A subjective standard creates a power imbalance

 

When the state tries to crowbar a small property holder off his land, the contest is unequal, and the politically weaker are at an enormous disadvantage. 

 

Standing up for the politically weaker party: Justice Thomas

 

This is a civil-rights problem, both in its abstract sense and in racial or ethnic terms, because when power is unequal, it is normally the racially disadvantaged who lose, which is why Justice Thomas so articulately dissented in Kelo:

 

Today’s decision is simply the latest in a string of our cases construing the Public Use Clause to be a virtual nullity, without the slightest nod to its original meaning.

 

Allowing the government to take property solely for public purposes is bad enough, but extending the concept of public purpose to encompass any economically beneficial goal guarantees that these losses will fall disproportionately on poor communities. Those communities are not only systematically less likely to put their lands to the highest and best social use, but are also the least politically powerful. If ever there were justification for intrusive judicial review of constitutional provisions that protect “discrete and insular minorities,” United States v. Carolene Products Co., 304 U.S. 144, 152, n. 4 (1938), surely that principle would apply with great force to the powerless groups and individuals the Public Use Clause protects. The deferential standard this Court has adopted for the Public Use Clause is therefore deeply perverse. It encourages “those citizens with disproportionate influence and power in the political process, including large corporations and development firms” to victimize the weak. Ante, at 11 (O’Connor, J., dissenting).

 

“Citizens with disproportionate influence … can victimize the weak.”

 

Those incentives have made the legacy of this Court’s “public purpose” test an unhappy one. In the 1950’s, no doubt emboldened in part by the expansive understanding of “public use” this Court adopted in Berman, cities “rushed to draw plans” for downtown development.

 

B. Frieden & L. Sagalayn, Downtown, Inc. How America Rebuilds Cities 17 (1989). “Of all the families displaced by urban renewal from 1949 through 1963:

 

63% of those whose race was known were nonwhite

56% of nonwhites and 38% of whites had incomes low enough to qualify for public housing, which, however, was seldom available to them.”

 

Id., at 28.

 

“The deferential standard this Court has adopted for the Public Use Clause is therefore deeply perverse.”

 

Time and again, ED4ED has been used with the stated purpose of improving neighborhoods and cities – and along the way, as collateral damage, minority and lower-income neighborhoods are demolished.  The Poletown neighborhood of Detroit, for instance, was leveled to make way for a GM plant.  Robert Moses’ highways cut conveniently through blackening neighborhoods in Harlem.

 

Public works projects in the 1950’s and 1960’s destroyed predominantly minority communities in St. Paul, Minnesota, and Baltimore, Maryland. Id., at 28—29. In 1981, urban planners in Detroit, Michigan, uprooted the largely “lower-income and elderly” Poletown neighborhood for the benefit of the General Motors Corporation. J. Wylie, Poletown: Community Betrayed 58 (1989).

 

Urban renewal projects have long been associated with the displacement of blacks; “[i]n cities across the country, urban renewal came to be known as ‘Negro removal.’ ” Pritchett, The “Public Menace” of Blight: Urban Renewal and the Private Uses of Eminent Domain, 21 Yale L. & Pol’y Rev. 1, 47 (2003).

 

Urban renewal came to be known as ‘Negro removal’

 

Over 97% of the individuals forcibly removed from their homes by the “slum-clearance” project upheld by this Court in Berman were black. 348 U.S., at 30. Regrettably, the predictable consequence of the Court’s decision will be to exacerbate these effects.

 

The same power dynamics are at work in the cases being contested today, such as the billion-dollar Brooklyn struggle over Atlantic Yards

 

Historic?  Blighted?  Or both?  You decide

 

When the state held public hearings in 2006 to decide whether to approve Atlantic Yards, hundreds of supplicants, hoping for a good job or a cheap apartment, easily drowned out the voices of people like Goldstein, who wanted nothing from the government except the right to keep their homes.

 

What’s not to love about ACORN?

 

In the twenty-first century, things are different because of the information revolution.  The combination of the Freedom Of Information Act and the internet has enabled citizen journalism, neutralizing the previous power imbalance of the media, to the point where Norman Oder, an individual with no platform other than a blog and no motivation other than a burning desire to uncover the truth, can out-investigate the (conflicted) New York Times with reporting worthy of a Pulitzer.  However, the playing field is still not level:

 

Another violation: the government responded poorly to property owners’ document requests under the state’s freedom of information law, hampering their right to mount a solid case. Such requests are particularly important in eminent-domain cases because New York property owners don’t enjoy the right to a trial with a discovery phase, but must go straight to appeals court—a seventies-era “reform” meant to speed up development projects.

 

6. ED4ED advocates can always procure a blight finding

 

Just as the condition of insanity has been diluted because it provides such a helpful criminal defense, so too has ‘blight’ become a currency so debased it can be minted more or less anywhere.

 

Papoon for President, he’s not insane

 

But wait, you say: people don’t buy half-million-dollar apartments in “substandard” or “unsanitary” neighborhoods. You’re right; that’s why the consultants had to stretch. In the 1930s, as Goldstein’s attorney, Matthew Brinckerhoff, pointed out, “substandard” and “unsanitary” meant “families and children dying from rampant fires and pestilence” in tuberculosis-ridden firetraps.

 

In 2006, by contrast, the UDC’s consultants found “substandard” conditions in isolated graffiti, cracked sidewalks, and “underutilization”—that is, when property owners weren’t using their land to generate the social and economic benefits that the government desired.

 

Forty years ago, Larry Niven in his Known Space stories imagined a world where organ transplants were easy and reliable, resulting in a market in organ-legging, and the death penalty for parking tickets.

 

Death penalty for parking tickets

 

Similar creativity has taken place, at least in court, with regard to what constitutes blight:

 

In New York, this creative definition of blight is the new central-planning model. Consultants have also cited “underutilization” in West Harlem, where the city’s Economic Development Corporation wants to take land from private owners and hand it to Columbia University for an expansion project.

 

If blight has come to mean under-utilization, it has come to mean absolutely nothing, since the group has never been formed that lacks a bottom quartile.

 

Says Norman Siegel, who represents the owners: “A private property owner has the right to determine the best productive use of his property. It’s not a right to be ceded to any government.”

 

There’s only one way to fight a specious finding of blight – get your own dueling finding of no-blight:

 

Blighted?  I’ve worked hard to become so

 

The Harlem owners were able to convince the lower court partly because they had commissioned their own “no-blight” study. “We said, ‘Let’s create our own record . . . as a counterweight,’ ” said Siegel. The owners also presented as evidence a government study, performed before Columbia showed interest in the land, that West Harlem was revitalizing itself.  

 

7. If it’s not blighted today, I can make it blighted tomorrow.  Blight, like financial weakness, can be a self-fulfilling prophecy:

 

And in Queens, the Bloomberg administration is preparing a similar argument to grab swaths of Willets Point, an area adjacent to Citi Field that’s populated with auto-repair shops. The city’s recent “request for qualifications” from would-be developers drew a sharp response from the people who owned the land: “We . . . hold the most significant qualification of all: we own the properties. We are motivated to improve and use our own properties, consistent with the American free market system.  We would have done so in spectacular fashion already, had the city upheld its end of the bargain by providing our neighborhood with essential services and infrastructure.”

 

The residents are agin it

 

One of my many definitions of a slum – the municipal definition – is a place where private investment has outrun public infrastructure.  As a result, if the city averts its eyes from a neighborhood, then it will become a slum regardless of what its denizens say or do. 

 

Instead, the city has done the opposite, letting streets disintegrate into ditches to bolster its blight finding.

 

A city’s failure to deliver infrastructure is a breach by a city of its obligations to its citizens, and if I were such a citizen, I would sue them.  The issue is hugely important in the global south, where municipalities grapple with proliferating slums.

 

The perversity is astonishing: rather than doing its own job of maintaining public infrastructure and public safety, the government wants to do the private sector’s job—and is going about it by starving that private sector of public resources.

 

A vacant lot, for example, now sprawls where the historic Ward Bakery warehouse was, until recently, a candidate for private-sector reinvestment. Today, Prospect Heights finally shows what the state and city governments want everyone to see: decay.  

 

If a neighborhood is going down, there’s an easy way to help it along: remove businesses and demolish buildings, leaving a deconstructed urban visage.

 

Blighted or not?

 

The decay, though, isn’t the work of callous markets that left the neighborhood to perish. It’s the work of a developer wielding state power to press property owners to sell their land “voluntarily.” It’s also the result of a half-decade’s worth of government-created uncertainty, which stopped genuine private investment in its tracks.

 

8. If cities are always messy, there is always a bottom quartile. Except for Lake Wobegon, where all the properties are above-average, cities by their nature have better and poorer neighborhoods, to say nothing of the challenge of evaluating which is which.

 

In Lake Wobegon, we have only appreciative neighborhoods

 

To cure yourself of the notion that the government can do better than free markets in producing economic vitality, stroll around Atlantic Yards. You’ll walk past three-story clapboard homes nestled next to elegantly corniced row houses—the supposedly blighted residences that the state plans to demolish. You’ll see the Spalding Building, a stately sporting-goods-factory-turned-condo-building that, thanks to Ratner and his government allies, has been slated for demolition and now stands empty. You’ll peer up at Goldstein’s nearly empty apartment house, scheduled to be condemned and destroyed.

 

And you’ll see how wrecking balls have already made the neighborhood gap-toothed.

 

Can we agree that’s blighted?

 

We had to blight the neighborhood in order to take it?

 

[Continued tomorrow in Part 3.]

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By: David A. Smith

 

Is blight, like beauty, in the eye of the beholder?

Houses to be condemned to make way for Atlantic Yards in Brooklyn. Look blighted to you?

 

Or is blight just a planner’s word for a city’s natural messiness?

 

Does this look blighted to you?

 

Though the question is metaphysical, the answer is anything but.  On that finding of judicial ‘fact’ hinges the most contentious issue in eminent domain for economic development (ED4ED) today, as explored in a protracted City Journal editorial essay by Nicole Gelinas.

 

Spot the blight: Atlantic Yards

 

Indeed, what seems an intractable policy problem – when is ED4ED permissible, and when must it be prohibited? – can be reduced to a problem of boundary –what is blight?  In turn, the entire problem, over which so many hours of legal wrestling have been held, can be solved easily – the fuzzy boundary has to be construed against the party with power, so either define blight objectively and observably, or eliminate it as a valid reason.

 

To see why, we must descend the rabbit hole of current jurisprudence, in particular the way ‘blight’ has been redefined out of all observable meaning (Part 1 of this post), and then resurface elsewhere to see how ED4ED is requisite for urban improvement (Part 2), and hence how to reconcile the competing pressures.

 

1. If property is ‘blighted,’ government can take it.  Lost in the political uproar that followed the Supreme Court’s Kelo v. New London 5-4 decision is that the jurisprudence on ED4ED is half a century old, as laid down in a landmark 8-0 decision in 1954 [Same year as Brown v. Board of Education of Topeka, another landmark – Ed.], Berman v. Parker.  Under Berman, a Supreme Court enraptured with the promise of economic development allowed the District of Columbia Redevelopment Authority to demolish and rebuild a large chunk of southwestern Washington, based on the finding of ‘blight’, which in the 1954 decision was concluded to exist because:

 

“64.3% of the dwellings were beyond repair, 18.4% needed major repairs, only 17.3% were satisfactory; 57.8% of the dwellings had outside toilets, 60.3% had no baths, 29.6% lacked electricity, 82.2% had no wash basins or laundry tubs, 83.8% lacked central heating.”

 

I think anyone today would agree that even in 1954, properties without indoor plumbing, central heating, or running water, constituted blight.  Indeed, under today’s laws – absent in 1954 – those buildings could be condemned as unsanitary. 

 

 The court that gave us Brown v. Board of Education also gave us Berman

 

As Justice William O. Douglas, writing for the unanimous court, put it:

 

Miserable and disreputable housing conditions may do more than spread disease and crime and immorality. They may also suffocate the spirit by reducing the people who live there to the status of cattle. They may indeed make living an almost insufferable burden. They may also be an ugly sore, a blight on the community which robs it of charm, [p33] which makes it a place from which men turn. The misery of housing may despoil a community as an open sewer may ruin a river.

 

Unfortunately for Justice Douglas’s defenders, the greatest blight now inflicted on many northern urban communities are the slums inside, the high-rise public housing properties such as the French banlieues, all of which should be torn down, and many of which have been torn down or are being torn down.

 

We’re not sorry to see you go

 

Justice Douglas was doing more than penning a manifesto.  (No one ever accused Justice Douglas of lacking in legal imagination, as when in Roe v. Wade he found that a right to privacy ‘emanates from the penumbra of the Constitution’ – in other words, that were was no Constitutional language to support it.)  Here he was grounding the decision in an expanded concept of ‘public health’ so as to argue that blight goes beyond the optical:

 

In the present case, the Congress and its authorized agencies have made determinations that take into account a wide variety of values. It is not for us to reappraise them. If those who govern the District of Columbia decide that the Nation’s Capital should be beautiful as well as sanitary, there is nothing in the Fifth Amendment that stands in the way. ["Nor shall private property be taken for public use without just compensation," the 'takings' clause. -- Ed.]

 

Berman proved to be the opening salvo in a half-century of ever-expanding municipal authority and judicial deference to local findings.  In 1984 the Supreme Court even expanded municipal discretion through the Midkiff decision, so that when in 2005 the court upheld New London’s taking of Suzette Kelo’s house, the remarkable point was not that the city won, but that it won ‘only’ 5-4, and in winning provoked an impressive and sustained voter backlash.  As the City Journal essay put it:

 

In 2005, in Kelo v. New London, the Supreme Court decided that these “public purposes” could even include economic development. But New York’s constitution theoretically holds the state to a higher standard. In 1967, Empire State voters voted not to add a “public purpose” clause to their constitution, preferring to stick with the stricter requirement of “public use.”

 

2. Once ‘blight’ is found, the state can flip property to a private developer.  In parallel with the thread of government having a police power to take small parcels and aggregate them into more rational urban uses ran another thread, that the state can contract these basically technical functions to a private third party.  Here too it was the supremely confident Douglas who wrote the sweeping apologia:

 

The firebrand justice: William O. Douglas

 

Here, one of the means chosen is the use of private enterprise for redevelopment of the area. Appellants argue that this makes the project a taking from one businessman for the benefit of another businessman. But the means of executing the project are for Congress, and Congress alone, to determine once the public purpose has been established. See Luxton v. North River Bridge Co., supra; cf. Highland v. Russell Car Co., 279 U.S. 253.

 

The public end may be as well or better served through an [p34] agency of private enterprise than through a department of government — or so the Congress might conclude.

 

We cannot say that public ownership is the sole method of promoting the public purposes of community redevelopment projects. What we have said also disposes of any contention concerning the fact that certain property owners in the area may be permitted to repurchase their properties for redevelopment in harmony with the over-all plan. That, too, is a legitimate means which Congress and its agencies may adopt, if they choose.

 

Now enters the worm of self-interest, for if the state can gobble up small parcels from small and politically unconnected holders, and bestow them in a bundle on a politically connected private redeveloper, then both the redeveloper and the municipality have a selfish interest in doing so.  Land that is redeveloped becomes more valuable.  Land that is rezoned becomes more valuable.

 

Raise the height, raise the value, raze the incumbents

 

None of this bothered Douglas, taken as he was by a vision of the city council as philosopher-kings:

 

Subject to specific constitutional limitations, when the legislature has spoken, the public interest has been declared in terms well nigh conclusive. In such cases, the legislature, not the judiciary, is the main guardian of the public needs to be served by social legislation.

 

Evidently they trusted their government more back then.

3. By now, the practical definition of ‘blight’ has been diluted into ‘economically underperforming’.  If finding a word translates into giving someone more money, then the word is increasingly found.  With ‘blight’ the key to unlock potent government power to take property from A and then to give it to B, why then will develop, in short order, an active marketplace in finding blight.  [The same thing has happened, on a multi-billion-dollar global scale, in the counterfeiting of certified emission reduction (CER) certificates, otherwise known as carbon credits … but that's another story, about which I may post in the context of India. – Ed.]

 

You cannot outreach the long arm of the law

 

Kelo highlighted this and empowered other opponents of ED4ED, such as in Brooklyn, with its billion-dollar battle over Atlantic Yards, which has been going on for more than half a decade.  As City Journal puts it:

           

Brooklyn’s Prospect Heights, industrial and forlorn for much of the late twentieth century, was looking better by 2003.  Government was doing its proper job: crime was down, and the public-transit commute to midtown Manhattan, where many Brooklynites worked, was just 25 minutes. That meant that the private sector could do its job, too, rejuvenating the neighborhood after urban decay. Developers had bought 1920s-era factories and warehouses and converted them into condos for buyers like Daniel Goldstein, who paid $590,000 for a place in a former dry-goods warehouse in 2003.

 

My $590k says my home isn’t blighted

 

These new residents weren’t put off by the Metropolitan Transportation Authority’s railyards nearby, and they liked the hardwood floors and airy views typical of such refurbished buildings. They also settled in alongside longtime residents in little houses on quiet streets. Wealthier newcomers joined regulars at Freddy’s, a bar that predated Prohibition. Small businesses continued to employ skilled laborers in low-rise industrial buildings.

 

Two questions are entangled here:

 

1. From an urban-vibrancy perspective, would we ‘like’ to see redevelopment?

2. Is the neighborhood ‘blighted’ today?

 

It’s entirely possible to answer Yes to the first question – making us wish we could assemble the land – and No to the second, meaning we cannot do it, tempted though we may be.

 

I can resist everything but temptation

 

Except that it is all too easy to substitute “I am entitled to” for the phrase “I want to” – especially if one is adjudicating for oneself.

 

The state hasn’t let this inconvenience derail its plans for Prospect Heights, however. For seven decades, courts have let New York seize and demolish slum housing if it’s blighted—which New York State defines as “substandard” and “unsanitary.” So the Urban Development Corporation (UDC), a public entity of New York State, decided that the “public use” of Atlantic Yards would be blight removal. The city had already designated part of the neighborhood as “blighted” 40 years earlier, long before its resurgence. As for the rest, the UDC commissioned consultants—previously employed by Ratner—who soon returned the requisite blight finding.

 

I applaud the commission’s consultants

 

4. When courts confront a blight dispute, they tend to defer to the public agency.  Judicial deference to legislative or executive decision-making is generally a sound principle for separation-of-powers. 

 

Property owners have looked to the judiciary to check the overweening grasp of the legislative and executive branches.

 

Yet the courts seem to have difficulty grappling with the municipality’s economic conflict of interest:

 

In Brooklyn, Goldstein and his neighbors have lost their lawsuits—most recently, in New York’s highest court, the court of appeals. In November, the court decided 6–1 that “all that is at issue is a reasonable difference of opinion as to whether the area in question is in fact substandard and insanitary. This is not a sufficient predicate for us to supplant [the state’s] determination.”

 

Goldstein’s got his dander up

 

Except that the harm is unbalanced, because either way, the decision is irrevocable.  If a court finds blight, then owners are dispossessed of their property – uprooted.  With that dispossession goes their entire way of life.  I’m especially sensitized to this by all my global South experience, where slum dwellers are routinely dispossessed of land, once it has become valuable.  The slumdwellers lack legal title – they gained their occupancy rights by squatting – so their claim is weaker, but the principle is the same: occupancy vests political legitimacy.

 

The court essentially abdicated its duty to protect property owners from the governor and the Legislature.

 

I choose to abdicate my duty

 

That’s City Journal’s conclusion, not ours, but it’s in line with the factual record.

 

[Continued tomorrow in Part 2.]

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By: David A. Smith

 

[Continued from yesterday’s Part 1.]

 

Yesterday, in our most recent installment of No Good Deed Goes Unpunished, we explored the got-to-be-a-good-idea of smart meters for single-family residential customers.  As revealed in a recent Wall Street Journal article, the meters are an unequivocal advance, since they enable both producer and consumer to know what it costs to produce one more kwh, and one it costs to consume that hour. 

 

We’re all just part of SkyNet

 

That matters, because as pointed out in a similar New York Times article (Times New Roman, indigo)

 

Power companies say the meters will allow utilities to vary the price charged to their customers by the hour to correspond to what those utilities are paying for energy in the wholesale market. This can help consumers save money, they say.

 

They also say the meters will be crucial to remaking the electric system to handle intermittent power sources like wind turbines and solar cells while continuously meeting customers’ needs.

 

But any change, however rational, in the price of a commodity, always triggers the same knee-jerk response – angry noise.

 

WASHINGTON — Millions of households across America are taking a first step into the world of the “smart grid,” as their power companies install meters that can tell them how much electricity they are using hour by hour — and sometimes, appliance by appliance.

 

But not everyone is happy about it.

 

Customers in California are in open revolt, and officials in Connecticut and Texas are questioning whether the rush to install meters benefits the public.

 

Let them eat kilowatts!

 

Some consumers argue that the meters are logging far more kilowatt hours than they believe they are using.

 

Whenever a customer gains transparency into the marginal cost of something, the customer always believes that he’s being overcharged.  This is true for taxi meters, true for internet cafes, true for time spent on the phone.  People think they’re consuming less than they are.

 

“What it told us is that people aren’t really knowledgeable about smart meters coming down the pike and they don’t pay much attention to rate changes,” says Dian Grueneich, a member of the California Public Utilities Commission, which is monitoring the situation.

 

“Monitoring the situation” is code for we know the utilities are right, but if we tell the public that, they’ll think we’re in cahoots with them.

 

Meddling on your behalf

 

(Don’t forget, California has a thoroughly screwed-up utility rate-setting structure.)

 

No, really, it all connects up

 

In politics, it would be called ‘rational ignorance’ – in utilities, it’s called emotional self-defense.  Why learn about rate changes before they happen?  What can you do differently, other than become upset?

 

“It told us there needs to be a lot of consumer education” before making big changes.

 

“Consumer education” means carefully explaining this to minimize the internet flame wars that must inevitably ensue.  It also means creating a rate structure that has both substance – options for the consumer – and optics – how those options are presented and computed.

 

PG&E now has a voluntary program in which customers agree to pay higher peak rates of 60 cents a kilowatt-hour for no more than 15 days a year, in exchange for a discount of three cents a kilowatt-hour for electricity used at other times. So far some 26,000 customers have signed up.

 

It is remarkable how giving people a choice sugars the pill.

 

Yummy!

 

To date, 16,000 to 18,000 people have participated in more than five dozen pilot tests involving smart meters and experimental rate plans, according to Ahmad Faruqui, a consultant with the Brattle Group who has helped utilities develop some of the programs.

 

Faruqui wants to help the herd be more observant

 

Showing the observant herd that the early adopters do better is critical to moving the herd your way.

 

He says that while it is sometimes disheartening to see utility executives ignore their own findings, he understands the desire to move slowly until people become comfortable with smart-meter technology.

 

The executives aren’t necessarily ignoring their own findings, they’re just considering human behavior in choosing when and how to make the change.

 

We’ve got to get them to move somehow

 

Pepco Holdings Inc. recently did a pilot test in Washington, D.C., of three rate plans designed to gauge how customers respond to different price signals.

 

1. One plan [Passthrough – Ed.] pegged the price, which ranged from a penny to 37 cents a kilowatt-hour, to the wholesale cost of electricity.

 

2. One [Surcharge – Ed.] charged a “critical peak price” of 75 cents a kilowatt-hour during certain hours on a handful of days, and 11 cents per kwh at other times.

 

3. The final plan [Conservation rebate – Ed.]gave customers 75 cents for each kilowatt-hour of energy saved and charged 11 cents per kwh for power used.

 

Of the three – passthrough, surcharge, or rebate, which do you think was most effective? 

 

The right rate is behind … Door Number Three!

 

Results showed that people responded most when threatened with the 75-cent-per-kwh peak pricing.

 

Would that it were not so, but in terms of immediate impact, we react best to threats and penalties.

 

Those customers cut their overall energy consumption between 22% and 34%, depending on whether they also had programmable thermostats that could automatically change temperature settings.

 

Once the surcharge was used as motivation, then the real-time metering enabled customers to save more – and probably, after they had habituated to the changes, to become much greener electricity users.

 

Cold?  Who’s cold?

 

Customers offered rebates reduced their usage 9% to 15%—again, with the deeper cuts among those who had smart thermostats.

 

So rebates work – but get-their-attention punishments work better. 

 

Despite evidence that sticks are better motivators than carrots, the utility intends to offer rebates in the future in an effort to change behavior.

 

Would you rather be hit?

 

The reason is simple: while using a punitive structure gets more rapid compliance, it also angers the customer, which has long-term costs.  People who feel wronged will often do non-economic things to gain revenge.

 

Gonna be bad for the franchise …

 

“Our general sense is that consumers would prefer a rate structure with no downside,” says Steven Sunderhauf, a program manager for Pepco.

 

Personally, I’d like a life with no downside.  I’d like free health care at no cost to taxpayers.  I’d like to be able to dunk a basketball.  I’d like to be immortal. 

 

I is the dunk-ee, not the dunk-er

 

“From a purist’s standpoint, I may prefer critical peak pricing because it gets the boldest response … but using rebates will help people get comfortable with smart meters.”

 

Rules you don’t enforce are worse than useless; a plan that people will not follow is worse than useless.  An inferior plan that people embrace is superior.

 

Most importantly, getting homeowners to embrace a plan is the big savings, because customers have the most flexible usage patterns:

 

Last summer, Connecticut Light & Power Co., a subsidiary of Northeast Utilities Service Co., gave new meters to 3,000 residential and business customers, testing three types of rates. Like other utilities, it found that homes facing the highest peak-hour pricing—$1.60 per kwh at certain times—responded the most, cutting peak use 16% to 23%, depending on whether they had other aids like smart thermostats. Commercial customers, in a similar test, cut their demand far less, only 7%.

 

This is just like airline pricing.  Right now it costs a fortune to fly from Boston to Washington, because everyone in a suit is hurrying down to our nation’s capital to convince someone of something.  To fly to Baltimore, an hour away by train, costs one-fifth as much, because one is presumed to be a leisure traveler, not a commercial one.

 

“Because we think you’re cheap”

 

That was instructive, says Jessica Brahaney Cain, director of CL&P’s smart-grid planning, because it told the utility that many commercial customers don’t have the option of cutting usage during times of peak demand. “A restaurant has to use its ovens,” she says. “A dentist has to use his drills.”

 

Sure enough, if we want to cut electricity consumption, changing the behavior of people – meaning residential apartments – is the big win.

 

One surprise, says Ms. Cain, was that almost all of the customers who participated in the pilot test reported more satisfaction with the Berlin, Conn., utility than those who didn’t.

 

Because they chose to participate.  People want to believe they made smart choices, so merely by opting in, the customers improved their morale.

 

They liked that the meters gave them greater insight into how they use electricity, she says.

 

People are smart.  People want to know.

 

Keep those mental wheels turning

 

Southern California Edison says it also plans to adopt a rebate strategy by the end of the year, even though it won’t have all its meters in place until 2012.

 

“If customers do nothing, they’ll get the same bill they otherwise would get,” says Lynda Ziegler, senior vice president for customer service at the Edison International unit. Those that cut peak consumption will get a credit of 75 cents to $1.25 for each kilowatt-hour of reduction. The main concern of regulators, she says, is making sure meter readings are accurate.

 

Getting a financial savings for reducing consumption would be a big win.

 

The utility chose rebates over penalties partly because a law passed during the California energy crisis a decade ago –

 

More of California’s misguided meddling in utility rates.

 

“I’d've been able to impose surcharges if not for those meddling regulators.”

 

–  limits its ability to involuntarily switch people to higher peak-hour pricing plans right now.

 

Since one man’s rebate is another man’s surcharge, the California statute effectively incentivizes the utilities to charge everybody the higher rate, achieving the arithmetic equivalent but the wrong way around. 

 

A new law may allow it after 2013.

 

Don’t hurry or anything.

 

But the utility also concluded that it wouldn’t be fair to really crank up peak pricing until homeowners have greater access to automation tools such as smart appliances and controllers.

 

I have seen the future, and its pricing is an integral.

 

Your future electric bill

 

In the future, devices will contain computer chips and software so they can go into energy-saving mode in response to a signal sent from the utility or another energy manager that higher prices are kicking in.

 

Be nice to have someone to blame

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By: David A. Smith

 

When people know what they are doing, they do it smarter.  That’s the principle behind biofeedback.

 

Now, as you can see, reading AHI blogs makes you happier

 

When people know what they are spending, they usually spend less.  Of the three main costs of sheltering a family – cost of occupancy, cost of transportation (to job and leisure), and cost of operations – people make big choices bout the first two, how and where to live, but the third is ruled by a host of small choices to which people are curiously indifferent, mainly because they cannot perceive that switching on this light or that boombox means thus-and-such amount of money. 

 

What if we gave homeowners real-time insight into their utility spending?  With smart meters, this is now possible, leading to unexpected consequences, as revealed in this Wall Street Journal article:

 

What Utilities Have Learned From Smart-Meter Tests…

…And why they aren’t putting those lessons to use

 

Utilities have learned a lot about how smart meters can compel consumers to save electricity. Unfortunately, too often they aren’t putting the knowledge to good use.

 

Do you really want to see the numbers scrolling red?

 

Let’s stipulate, for the moment, that tie Journal knows what ‘good use’ is …

 

Smart meters are more precise than traditional meters in that they send readings on electricity usage to utility billing departments throughout the day. Not only do smart meters provide customers with a clearer picture of how they use electricity on a daily basis, they also make it possible for utilities to charge more for power when demand is highest—in the afternoon—and less when usage falls off—at night.

 

Information is a two-edged sword – one edge cutting consumption, the other edge pricing up production.  So too is computing power – when one side gets smarter, the other can too.  All of us encounter this every time we search for airline flights, since it’s quite clear that the Web-based systems are an extended game of ELIZA where we ask, “What does it cost?” and the computer answers coquettishly, “how badly do you want to go?”

 

Rates are cheaper during the day

 

But really, it’s hard to argue that you shouldn’t pay more for power when it’s more expensive to produce, particularly if you can shift your consumption. 

 

By making variable pricing plans possible, smart meters are expected to play a big role in getting customers to reduce their peak-hour energy consumption, a key goal of utility executives and policy makers.

 

That’s the theory behind everything from the price of reserving a tennis court (which varies by day and week and demand) to the cost of a stadium seat on a stadium (it may be the same game and you may all have the same eyeballs, but not all seats are equivalent).

 

The better to heckle from

 

Equally significant, a host of small consumption-related and reversible decisions can collectively aggregate to a single production­-related and irreversible capital decision:

 

Electricity grids are sized to meet the maximum electricity need, so a drop in peak demand would let utilities operate with fewer expensive power plants, meaning they could provide electricity at a lower cost and with less pollution.

 

Small increments accumulate into big discontinuities.  The same moral reasoning behind recycling newspapers and plastic applied to the cost of LEDs and HVAC’s.

 

Utilities have run dozens of pilot tests of digital meters and found that people cut power consumption the most when faced with higher peak-hour rates.

 

Note the spike at 8:00 pm

 

People value what they pay for, and if you help them save, they will.

 

But utility executives and regulators have been reluctant to implement rate plans that penalize people for too much energy use, fearing that if customers associate smart meters with higher bills, they will stall the technology’s advance just as it is gaining traction.

 

Now we head into behavioral economics – saving $1 and being charged $1 surtax may be equivalent to an economist, but not to a human being.

 

Only about 5% of U.S. electric meters are “smart” today, according to the U.S. Department of Energy, but that figure is expected to grow to about one-third in the next five years.

 

I’m growing smarter, Dave

 

Two lines govern these innovations:

1. The cost of technology, which always declines.

2. The value of behavioral change, which always ascends.

 

“Efficient technology is like the flu: sooner or later everyone gets it”

 

In the office where I write this post, there is a motion-detector light switch.  First posited in 1938 by Robert A. Heinlein in The Man Who Sold the Moon (which also prefigured Richard Branson?), it only became commercially viable a few years back. 

 

Enough bucks, you can find Buck Rogers

 

And even more economically effective are setback thermostats for hot water heaters, motion-detector sensors in stairwells, auto-shutoff car headlights, and a host of on-only-when-needed devices.

 

So, many utilities are trying an approach that is less controversial, but also less effective: offering rebates to customers who conserve energy in key periods of the day.

 

Fuzzy boundaries are bad boundaries: a crude simulation that people observe is better than precision that people flout.  A simpler maritally-imposed decision rule I can remember (”use the Amex in this country, the Visa overseas”) will yield more savings than the more complex rule I’ll forget.

 

By doing things like turning off clothes dryers and adjusting air conditioners on hot summer afternoons, customers earn credits that can reduce their electricity bills.

 

Not a good thing

 

Somewhere I read that for a manager, the proper ratio of praise to blame is 5 to 1.  (For a spouse, it’s 20 to 1, if not higher.)  Something similar works for customer relations – offer people a cookie for doing something positive, and your customer pool will be much happier than if you penalize a sluggard for doing nothing.

 

“Most CEOs struggle over this issue more than anything else,” says Ted Craver, chief executive of Edison International, the Rosemead, Calif., parent of Southern California Edison, which is in the midst of a massive smart-meter rollout.

 

“You could have a real rebellion” if smart meters push up customers’ rates, especially if utilities’ other capital expenses are increasing, he says.

 

Fixation on rates is foolish but human, because people’s perceptions of expense relate to how a thing is priced.  It’s always seemed to me nonsensical that in the aggregate cost of driving a car, we fixate on gasoline prices to the exclusion of capital costs and depreciation. 

 

“Your Mileage May Vary”

 

The average price of an American car is $25,000 or so, and the average American car is driven 12,000 miles a year.  Say it lasts five years and is then traded in for $5,000.  That’s 33 cents a mile even before considering anything else – tires, maintenance, repairs, insurance, financing costs. 

 

At least we disclosed it

 

Conversely, even with gasoline at $3.00 per gallon, at (say) 25 miles to the gallon that’s 12 cents a mile.  In other words, gasoline is less than one-third as price as the car costs, yet the American public goes bonkers when gas prices go up.  Why?  A combination of the difficulty of equating the effective cost of the large-purchase choice versus the constant reinforcement that for gasoline, the only thing relevant is price at the pump.

 

How about, NFW?

 

Pacific Gas & Electric Co., a unit of PG&E Corp., got a taste of the public-relations risk last summer when it installed smart meters in Bakersfield, Calif., as part of a broad upgrade in its Northern California service territory.

 

What do you do when your meter start tattling on you?

 

Especially not an electronic one

 

When customers—who weren’t participating in any sort of experimental rate plan—received dramatically higher bills shortly afterward, they blamed the meters for what they assumed was faulty billing.

 

When in doubt, blame someone else!

 

The San Francisco utility investigated and concluded that the meters were functioning properly. It found that the higher bills were simply a case of unfortunate timing: An increase in conventional rates had taken effect just ahead of unseasonably hot temperatures.

 

How then to get people to embrace a smarter meter without going ballistic on selectively higher rates?

 

We’ll just not tell you the score …

 

[Continued tomorrow in Part 2.]

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By David A. Smith

 

Sitting here in Limbo
Waiting for the tide to turn.
Yeah, now, sitting here in Limbo,
So many things I’ve got to learn.
Meanwhile, they’re putting up a resistance,
But I know that my faith will lead me on.

– Jimmy Cliff

 

And then the harder they come, the harder they fall, one and all!

 

Whither the GSEs?  A year and a half into their conservatorship, nobody knows – and we could easily wait another whole year with no progress.  As reported in the Washington Post:

 

The federal government has spent the past half year seeking to roll back its emergency efforts at propping up the financial markets – with the notable exception of its involvement in mortgage giants Fannie Mae and Freddie Mac.

 

Taking over Fannie Mae and Freddie Mac wasn’t about propping up the financial markets, but rather keeping upright the housing markets.

 

Houses, not banks

 

As recently as December, the Obama administration said it expected to release a preliminary report on how to remake Fannie Mae and Freddie Mac around Feb. 1.

 

The best laid schemes of mice and Administrations gang aft agley.

 

But no plan was produced, and in response to questions from lawmakers, Treasury Secretary Timothy F. Geithner clarified last month that it would be another year before the government proposes how to restructure the firms.

 

That’s for me not to know and for you to speculate about, isn’t it?

 

Sixteen months after they were seized to prevent their collapse, the companies remain wards of the state –

 

Regarding the GSEs’ continued limbo, I’m of two minds:

 

1. Don’t risk open-heart surgery.  The GSEs are a lifeblood of the American housing finance system – and hence of the global capital markets.  Tinkering with them now risks a disruption we simply cannot afford.

 

Don’t tug on that … you never know what it might be attached to

 

2. Doing nothing is unacceptable too.  Because the GSEs are so important, they cannot be left with no hand at the strategic tiller.  The GSEs should be part of the solution, not simply a metronome ticking away on momentum.

 

Further, lack of management isn’t just bad strategy, it’s bad governance, and dangerous:

– running a tab that has now exceeded $125 billion in what has become the single costliest component of the federal bailout for the financial system.

 

Lack of transparency means lack of practical oversight … and we know how well opacity worked for them before, don’t we?

 

It looked really good until it failed miserably

 

Some members of Congress have complained that the huge public commitment is unsustainable.

 

It is – and without transparent reporting, we have no way of knowing whether the GSEs are rebuilding their balance sheets and net equity or continuing to run up losses not of their past executives’ making.

 

But the administration has been reluctant to start reforming Fannie Mae and Freddie Mac, officials and analysts say, because the firms in their current form play an essential role in supporting the housing market at a time when it is still under severe stress.

 

Absolutely, categorically true – we cannot allow the housing market’s financial heart to stop pumping liquidity.  Even if it’s artificial.

 

Don’t worry, your Federal government is at th econtrols

 

As other financial firms have exited the market and credit has seized up, Fannie and Freddie have been behind the vast majority of mortgages made since the start of the financial crisis. The companies now own or back more than half of all U.S. home loans.

 

With FHA right behind, and itself weakening.

 

Moreover, the companies are helping the administration pursue policies designed to make new homes more affordable, ease the burden on struggling borrowers and direct funding to parts of the country especially hard hit by the downturn.

 

Allow us to be crystal clear here – by continuing to supply liquidity, and to “ease the burden on struggling homeowners” [translation: forbear – Ed.], the Administration is almost certainly increasing Fannie Mae’s and Freddie Mac’s losses. 

 

A rising tide lifts all boats?

 

Their bet is simply that the gains to others (e.g. homeowners, other banks, securities holders) and the macroeconomic benefits (lower interest rates, support for employment) outweigh the costs. 

 

Any initiative to remake the firms could distract energy from these programs or, in some cases, put an end to them.

 

By their actions, Fannie and Freddie are taking a concentration of the pain that would otherwise be diffused throughout the economy. 

 

The companies have also been tapped by the Treasury Department to rewrite the terms of home loans for struggling borrowers facing foreclosure. But this program – carried out by Fannie, Freddie and other firms – has had less success. Although 1.3 million borrowers have been eligible, only about one-tenth have had permanent mortgage modifications.

 

Many of those eligible are under water in all scenarios; most of them should never have been homeowners in the first place.

 

And keeping the companies solvent has been costly. To cover their losses, the firms have both said they will need additional federal money beyond the more than $125 billion already committed.

 

As a taxpayer, I think and hope their strategy has been right for the country – I’m willing to pay more if it serves to strengthen the economy.  Were I a director of either institution, I’d want explicit exculpation from breach-of-fiduciary-duty claims.

 

Yes, something like that

 

Nor is the administration eager to foster a debate over Fannie Mae and Freddie Mac in an election year, according to analysts and lawmakers.

 

As a policy wonk, I had overlooked this.  Yes, raising the GSEs’ future now has to be a net loser for the Administration.  With all their current political tribulations and pitched battles on Capitol Hill, the Democrats can ill afford to open another political front.

 

The pair have long been lightning rods for criticism by many Republicans, who call them [1] an intrusion into the free market and [2] a Democratic patronage haven.

 

Yes on [1], probably No on [2].  Democrats and urbanists like housing subsidies more than Republicans do, so the leadership of Fannie and Freddie probably veers toward the liberal. 

 

Many Democrats, even as they faulted companies’ excesses, have defended the firms’ role in fostering homeownership.

 

Well, if the GSEs haven’t done that, why did we give them all those awfully big advantages?

 

And with Obama’s campaign to overhaul financial regulation facing resistance on Capitol Hill, administration officials don’t want to add another divisive issue to the mix.

 

Especially if the Administration is unsure what it wants to do.

 

“We’ve obviously had our hands full, as has the Congress,” said Michael Barr, assistant Treasury secretary for financial institutions. “We’re just beginning to see some positive signs in the housing market, but we’re not out of the woods yet and so we want to be careful to be sure that we had an appropriate, paced process.”

 

There’s a Barr in them financial woods

 

Barr said Treasury officials have been meeting informally with their counterparts at the White House and the Department of Housing and Urban Development and exchanging policy papers to develop principles for overhauling Fannie Mae and Freddie Mac.

 

All well and good – maybe it starts to coalesce a thought cloud – but a far cry from actual progress, particularly as the Republicans will weigh in strongly before anything happens.

 

These principles include, for instance, that the government ensure borrowers could still get mortgages even when the private market is no longer offering loans.

 

A laudable principle if the reason the private market isn’t lending relates to a credit crunch.  But if the private sector is sensibly pulling back from risk, and the GSEs zag when they should have zigged, we will be much worse off.

 

You are here …

 

But whatever replaces Fannie and Freddie, it should not be allowed to grow so large that its failure could threaten the financial system.

 

Oh, brilliant …

 

“And that’s how there’ll never be any financial crisis ever again.”

“Great, Jackie.”

 

“They weren’t planning to do much about it,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, in an interview. “They’re busy, and it’s hard and it’s complicated and they’re trying to put it off.”

 

So the Administration, understandably, put GSE reform into the too-hard-revisit-later basket.

 

Where did I file it?

 

Frank said he is “forcing” the issue by scheduling a committee hearing later this month, summoning Geithner and other officials to discuss options for reforming the firms.

 

A hearing, useful though it may be, will not force the issue, but at least it will raise the issue.

 

Once among their strongest supporters, Frank has more recently called for their abolishment.

 

As independent entities, that is. 

 

“Independence may be overrated”

 

Future scenarios for reforming Fannie Mae and Freddie Mac range widely – from total privatization to total nationalization. But no consensus has emerged over the best fix.

 

Nor will it any time soon.  This is guaranteed to be divisive. 

 

Spokesmen for Fannie Mae and Freddie Mac said their current focus is on keeping funds flowing into the mortgage market and helping distressed borrowers remain in their homes.

 

As it should be.

 

The companies did not address the question of how they should be restructured.

 

In view of their obvious self-interest, nothing would be gained by the GSEs’ management vocalizing about their future.  They will be keeping their heads down.

 

When the Bush administration seized the firms, it said it would make $200 billion available to them. The Obama administration a year ago doubled that figure, then decided late last year to offer them unlimited financial assistance as a signal to investors that the companies’ solvency was guaranteed.

 

But critics warn this has given Fannie Mae and Freddie Mac a blank check.

 

That is the problem.  They do have a blank check.

 

Fill in the zeroes later

 

“This idea of having money laying around that they can spend on whatever they think politically makes sense is certainly consistent with what we’ve seen from this administration,” said Rep. Jim Jordan (R-Ohio), a member of the House Oversight and Government Reform Committee who has called for an investigation into the delay in planning for the companies’ future.  

 

True enough, but there are good reasons for caution.

 

“Any suggestion now about future changes could destabilize the market,” said Karen Shaw Petrou, managing director of analysis firm Federal Financial Analytics and a longtime observer of housing finance policy. “The U.S. mortgage market is so fragile that all Treasury needs to say is ‘boo’ and it could fall apart.”

 

But time could be tight. Under the firms’ agreement with the Treasury Department, they must shrink their mortgage portfolios every year, eroding their ability to support the market.

 

That is, unless the rules get changed … yet again.

 

I’m smiling outside, and crying inside

 

James Lockhart, a former top regulator of Fannie Mae and Freddie Mac, said the administration is erring by waiting another year to begin the reform process.

 

“The clock is ticking. We need to reinvigorate the private mortgage market and create something new and we know how long Congress takes,” Lockhart said. “It’s unhealthy to have as much government involvement in the mortgage market as we have in this country.”

 

He’s right, of course, but limbo is no state for us to be in.

 

Could be dangerous

 

Sitting here in Limbo

Waiting for the dice to roll.
Yeah, now, sitting here in Limbo,
Still got some time to search my soul.
Meanwhile, they’re putting up a resistance,
But I know that my faith will lead me on.

– Jimmy Cliff

 

I said forgive them, Lord, they know not what they done

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