Power to the People is a column by Donald M. Kreis, New Hampshire’s Consumer Advocate. Kreis and his staff of four represent the interests of residential utility customers before the NH Public Utilities Commission and elsewhere.
By DONALD M. KREIS, Power to the People
Reading the recently issued New Hampshire 10-Year State Energy Strategy made me think of my new hero, the free-market economist Tyler Cowen.
An endowed professor at George Mason University, Cowen is also a blogger (Marginal Revolution), a columnist, and a prolific book author. Should you find yourself in Washington, D.C. and in need of a good restaurant, check out Tyler Cowen’s Ethnic Dining Guide.
I’m guessing that not too many of my fellow ratepayer advocates around the country have any Tyler Cowen books on their shelves. But they should read – and you should read – his 2018 volume called Stubborn Attachments.
At a mere 125 pages, it’s probably the shortest and among the most compelling books ever written about economics. I’m obsessed with Chapter 4, entitled “Is Time a Moral Illusion?”
Chapter 4 is all about discount rates. Dry stuff, you say, only to be touched by members of the Federal Reserve Board? How wrong you are.
“A discount rate tells us how to compare future benefits to current benefits (or costs) when we make decisions,” writes Cowen. “When the discount rate is high, we are counting future costs and benefits for less. . . . A five percent discount rate, defined annually, means that 100 units of pleasure today is equal to 105 units worth of pleasure a year from now.”
Here lies the beating heart of ratepayer advocacy. I am constantly, utilities are constantly, and the Public Utilities Commission and Department of Energy are constantly pondering how much in ratepayer benefits we should put off now, or how much costs we should incur now, in order to acquire even more benefits or avoid even more costs in the future.
Should we, for example, give everyone a break on their soaring electric bills by deferring wholesale power costs to, say, next year? Should we let utilities invest, at ratepayer expense, in infrastructure needed by public electric vehicle charging stations, years before most people will drive such cars?
An example that gnaws at me concerns energy efficiency. The ratepayer-funded NHSaves programs must meet a rigorous cost-benefit test – i.e., the benefits to customers must exceed the mandatory energy efficiency charges they pay on their electric and natural gas bills.
But here’s the thing: We’re stuck with paying all of the costs up front, while the customer benefits accrue over many years. Some energy efficiency measures supported by NHSaves have useful lives of 20 years or more. Right now, with PUC approval, the NHSaves utilities are using a discount rate of 3.25 percent.
What this means is that for purposes of passing the cost-benefit test, it takes $103.25 dollars of energy efficiency benefits delivered a year from now to get $100 of credit in the present. According to my law school math, the present value of $100 in energy efficiency benefits 20 years from now is about 50 bucks – again, assuming the 3.25 percent discount rate.
Alas, this discount rate of 3.25 percent is plucked right out of thin air. It is a completely made up number, based on the dubious assumption that this is how you, the consumer, value future benefits in present terms.
If you don’t believe me, check out “Time Discounting and Time Preference: A Critical Review,” by economists Shane Frederick, George Loewenstein, and Ted O’Donoghue. According to their 2002 article, when the method for calculating discount rates became “entrenched as the dominant theoretical framework for modeling intertemporal choice, it was due largely to its simplicity and its resemblance to the familiar compound interest formula, and not as a result of empirical research demonstrating its validity.”
Which brings me back around to Tyler Cowen. You might expect a free-market, pro-growth economist to be all about instant gratification. But in Chapter 4 of Stubborn Attachments, Cowen makes a compelling argument for a discount rate of ZERO, or something very close to it.
“Human beings evolved under brutal hunter-gatherer conditions; they had good reason to pay special attention to the now moment,” writes Cowen. “If you didn’t get the ‘now’ right, there might not be a tomorrow.
“If you let a piece of meat sit, it would spoil or be seized by your neighbor or consumed by marauding animals overnight. It wasn’t like sitting on T-Bills in your Fidelity account.”
So, Cowen reasons, although “we may have an innate biological preference for the ‘now,’” we “will do better if we can get past it, if we can tap into the part of ourselves that recognizes that a benefit in twenty years’ time is about as valuable as the same benefit in thirty years’ time.”
This is an insight that the authors of the 10-Year State Energy Strategy should consider.
“Addressing energy costs is a critical goal for New Hampshire,” states the executive summary of the Energy Strategy. “[P]ursuing policies that raise the cost of energy . . . directly and negatively impacts New Hampshire families and businesses and quality of life in our state.”
No ratepayer advocate – certainly not me – could argue with that, especially now that default energy service rates for customers of Eversource and Liberty will hit an obscenely high 22 cents per kilowatt-hour on August 1.
Thus, one cannot fault the new 10 Year Energy Strategy for stressing the value of cost-effective energy savings, market mechanisms, and environmental policies. I’m just sorry the document does not analyze how to value, and how much to value, benefits that will accrue to ratepayers – and New Hampshire as a whole – in the future. Even the distant future.
In 1845, Scottish philosopher Thomas Carlyle famously branded economics as “the dismal science.” He might not have been shocked to read Cowen’s observation in Stubborn Attachments that “[t]he way discounting works, if we discount the future by five percent, a person’s death today is worth about thirty-nine billion deaths five hundred years from now.”
“Upon reflection,” adds Cowen, “few people, putting aside their selfish interest in the current time period” would consider such a factoid a “basis for ethical decision-making.”
Cowen states his moral explicitly: We should make decisions today with a “deep concern for the distant future.” Cowen contends that “[w]e should believe that the end of the world is a truly terrible event, even if that collapse comes in the distant future.”
The distant future is not discussed in the 10-Year State Energy Strategy. A chapter entitled “The End of the World is a Truly Terrible Event” may not have been necessary. But valuing future energy benefits (and costs) as equal to future benefits (and costs) is, at least, a hypothesis to consider.