Author Archives: James A. Bacon

Tough on Bad Drivers

wrecked_carThe latest from WalletHub… Virginia is the third strictest state in the country when dealing with high-risk drivers. The Old Dominion is consistently among the tougher states for Driving Under the Influence penalties and prevention, speeding enforcement and reckless driving enforcement.

For what it’s worth: Red states are slightly tougher on at-risk drivers than blue states.

Understanding Your Electric Bill

Dominion's Brunswick power plant: a $1.3 billion rate "rider."

Dominion’s Brunswick power plant: a $1.3 billion rate “rider.”

by James A. Bacon

In 2009 Virginia enacted a law providing for the re-regulation of the electric power industry. There was a flurry of publicity surrounding the legislative process, then the media promptly forgot about it. Only with the sweeping mandates of the Environmental Protection Agency, which is compelling a massive re-engineering of Virginia’s electric power system, have reporters started to pay attention to how rates are set.

This morning John Ramsey with the Richmond Times-Dispatch highlighted the increasing importance of rate “riders,” also known as Rate Adjustment Clauses or RACs, in determining the rates electric consumers pay to Dominion Virginia Power, Appalachian Power Co., and local electric cooperatives. These clauses now account for nearly 9% of a Dominion customer’s monthly bill, he writes. And, I would add, they likely will account for a higher percentage in the future.

Your electric bill reflects three main components: the base rate, fuel costs, and riders. The base rate reflects the overall cost of operating the power company, excluding fuel costs. Fuel costs vary with market conditions; higher and lower costs are designed to flow through to rate payers. Riders cover new projects, most notably new power plants but also such initiatives as the hardening of the electric grid against threats like terrorism and sabotage.

Electric companies must submit these Rate Adjustment Clauses to the State Corporation Commission for approval. The SCC is not a rubber stamp. The commission recently rejected a Dominion propose to bury its most vulnerable power lines to reduce the incidence of power outages during bad weather.  (Boo! As one whose power goes out frequently, and for long periods of time, I thought it was a great idea.)

To understand how Virginia’s power companies respond to the challenge of EPA-mandated reductions in toxic emissions and CO2 emissions, it is critical to understand the incentives created by the rate structure. Writes Ramsey:

Although [Dominion’s] base rates provide for a regulated rate of return up to about 10 percent, the riders guarantee a 10 percent return. With the base rate frozen [under legislation enacted this year], new riders offer Dominion Virginia Power an opportunity to increase its profitability.

Dominion says the arrangement allows the company to recoup its investment in smaller chunks as it builds new plants, instead of waiting until construction is complete and hitting customers with bigger increases. It also allows for easier, and presumably cheaper, financing, which also benefits customers.

But Glen Besa, director of the Virginia chapter of the Sierra Club, says that Virginians will continue to see rate increases despite the freeze in the “base” rate. “We kept trying to tell the legislature that [freezing base rates] didn’t set a ceiling. It set a floor.”

Ramsey also quotes Albert Carr, who teaches a course in utility regulations at the Washington and Lee University law school, who thinks the riders make sense. “Going the rider route will give the regulator a much clearer focus on what amounts to additions to those base rates,” he says. “It eliminates some of the problems we’ve had in the past with regulation. You don’t have to take the whole car apart to fix the window.”

I’m not sure how well anyone outside of the SCC, the power companies, and a handful of utility and environmentalist lawyers really understand how Virginia’s electric rates work. Consumers certainly don’t. I don’t. I know a lot more than I did three months ago, but I’m still moving up the learning curve.

Even more opaque is how the structure for setting electric rates guides corporate strategy for building gas-fired and renewable power facilities, constructing new transmission lines, and purchasing power from the regional PJM grid. As a generality, power companies will steer capital investment to projects that provide the highest risk-adjusted rate of return. Does Virginia’s current rate structure bias utility investment in certain types of projects over others? I’m trying to figure that out.

How Germans Control the Cost of Higher Ed

Th University of Cologne: spartan but inexpensive.

The University of Cologne: spartan but inexpensive.

by James A. Bacon

Imagine a college or university stripped down to its essentials: inculcating its students with a body of knowledge and critical thinking skills. Imagine no basketball teams, no dormitories, no gymnasium, no frills. Imagine professors who spend most of their time teaching by delivering lectures in large auditoriums, not engaging in the publish-or-perish rat race. Imagine a college that doesn’t support vast bureaucracies to sort through student admissions, promote economic development or minister to the latest government concerns about diversity, sexual assault and binge drinking.

Then, imagine that institution offering free tuition to everyone meeting the admittance criteria, and students graduating without $25,000-plus in student loan debt.

There are no universities like that in the United States, certainly not Virginia. But that’s pretty much what the German higher education system looks like.

In a fascinating article in Marketplace, Kirk Carapezza profiles the University of Cologne, Germany’s largest university, with 48,000 students. The university includes a law school and medical school. The average cost of an undergraduate degree in Germany is $32,000, which the German government provides for free.

Here in Virginia, VCU students will pay $63,000 in tuition and fees (assuming 2015 rates stay constant, which they won’t), with the result that many will carry tens of thousands of dollars in student debt when they graduate (assuming they do graduate). And they will pay that astronomical fee despite the fact that the Commonwealth of Virginia pays $27,000 per student this year in state support at VCU — only $5,000 per student per year shy of what it costs Germany to educate its students for free!

The problem in Virginia, as in the rest of the United States, is not that the state fails to support higher education, it’s that colleges and universities have let costs run totally out of control. Here are some of the ways the University of Cologne differs from the U.S. system while still managing to provide a quality of education commensurate with one of the world’s leading economies:

  • Campus. The University of Cologne doesn’t lavish money on architectural extravagance. Buildings are bland and utilitarian.
  • Room and board. The University of Cologne doesn’t have dormitories and food courts. Students live off campus.
  • Garages. No garages at the University of Cologne — but there is ample parking for bicycles.
  • Big time sports. Sorry, sports fans, no football teams, no, basketball teams, no Title IX athletic programs, and no athletic facilities needed to support them.
  • Faculty. Professors teach more than American professors, earn less and spend more time handling administrative tasks, which keeps down administrative bloat.
  • Campus activities. Nope, no active student clubs.
  • Administration. The article doesn’t address this, but I would conjecture that it’s a factor: Germans don’t have the obsession with race, ethnicity and gender that has given rise to a vast “diversity” administrative apparatus in the U.S. And the non-residential experience probably avoids the problems arising from America’s alcohol-fueled hookup culture that generates so many charges of sexual assault, along with the attendant bureaucracy to deal with it.

Bacon’s bottom line: I’m not suggesting that Virginia switch wholesale to the German model. If people are willing to pay a premium to attend the University of Virginia, or even VCU, then they should be allowed to. But Virginia’s system of higher education also should provide a stripped-down educational option focusing on academics that enables students to forego the “residential experience” in exchange for vastly lower tuition and fees. It works for the Germans. It could work for us, too.

(Hat tip: Don Rippert.)

Why Doesn’t Virginia Have More Wind Power?

Map credit: National Renewable Energy Lab

Map credit: National Renewable Energy Lab

Why hasn’t Virginia made more progress in generating energy from wind power? This map from the National Renewable Energy Lab highlights the problems we face. Unlike the plains states, where almost every square mile is wind blown, Virginia has few suitable locations. Wind power is practical only offshore and on scattered mountain ridges.

Putting windmills on mountaintop ridges poses a problem because it disrupts viewsheds. Every mountain-ridge wind project proposed in Virginia has generated opposition from the surrounding population. In several instances, local governing bodies have used their zoning powers to thwart the projects. Of the half-dozen wind farms proposed over the past decade, not one has been built. As long as (a) people believe they have a right to exercise veto power over land uses for aesthetic reasons, such as protecting viewsheds, and (b) local governments have the power to restrict land uses based upon aesthetic impact, wind power projects likely will be blocked at the local level.

Building wind power projects off-shore avoids the viewshed issue because  turbines can be placed far enough at sea that they won’t be visible from the shore. However, offshore wind power on the East Coast of the U.S. faces a chicken-or-egg problem. Wind power is incredibly expensive because the supporting maritime infrastructure is not available on the East Coast; specialized ships and equipment must be brought in from Europe at great cost. But the wind-power industry is not willing to invest in establishing an East Coast presence until there is sufficient volume of business to support it.

It might be possible to overcome the chicken-or-egg problem if enough players committed to enough wind projects within a relatively narrow time frame to make it financially worthwhile for the wind industry to make that commitment. So far, no one has undertaken such an effort. Offshore wind initiatives remain frustratingly piecemeal.

Perhaps one thing the McAuliffe administration could do to advance wind power in Virginia and the East Coast would be to convene a meeting of every East Coast state with an interest in wind power along with major wind industry players to build the necessary critical mass. Hampton Roads, with its large existing shipbuilding fabrication industry and central East Coast location, is the logical location for the wind industry to be situated. We have the most to gain, so we should take the lead.

— JAB

Student Debt and the Decline of New Business Formation

by James A. Bacon

Many are the ways in which burgeoning student debt — $1.2 trillion and rising — cripple the economy. On this blog we’ve discussed how debt delays family formation, housing purchases and consumer spending. Recent research from the Philadelphia Federal Reserve Board also suggests that student debt dampens new business formation, an insight that ties into another line of inquiry on this blog: understanding the slow rate of job creation in the current economic cycle.

The engine of job creation in the U.S. economy is new business formation. The spawning of new businesses has experienced a long-term decline since 1978, but that decline has been particularly pronounced since 2005. In recent years more firms have exited the marketplace than have entered it, as seen in this Brookings Institution graph below, taken from “Declining Business Dynamism in the United States: A Look at States and Metros,” published in 2014. The numbers may have improved in the past two  years, but probably not enough to change the long-term picture.

firm_dynamism

I have argued on this blog that the massive wave of regulation enacted in the past six years has dampened the economic recovery by imposing large new costs on businesses. As the regulatory burden has increased, economies of scale have shifted in favor of larger firms which have the resources to deal with the regulations. Numerous industry sectors are consolidating: banking, hospitals and health insurance most visibly. Industry consolidation may be a factor in explaining the decline in overall net business formation but it only goes so far.

The Brookings data shows that the problem isn’t an accelerating death rate of businesses — the exit rate of firms from the economy has remained fairly stable since 1978 — it’s the dearth of business births. I would suggest that regulation has dampened new business formation by creating barriers to entry in many industries.

While I still hew to that view, I think there’s more to the story. There also is strong evidence that the surge in student debt — $1.2 trillion and rising — has depressed new business creation among young people.

Image source: Federal Reserve Bank of Philadephia

Image source: Federal Reserve Bank of Philadephia. (Click for larger image.)

The authors of the recently published Federal Reserve Bank of Philadelphia paper, “The Impact of Student Loan Debt on Small Business Formation,” has found a “significant and economically meaningful” negative correlation between geographic variation in student loan debt and net business formation for small firms of one to four employees. “Based on our model, an increase of one standard deviation in student debt reduced the number of businesses with one to four employees by 14% on average between 2000 and 2010.” (Please don’t ask me to define “standard deviation.” Here’s an an explanation.)

Image source: Federal Reserve Bank of Philadelphia. (Click for larger image.)

Image source: Federal Reserve Bank of Philadelphia. (Click for larger image.)

To launch a business, especially a small business, individuals need access to capital, the authors argue. Small businesses receive approximately 75% of this capital from banks in the form of loans, credit cards and lines of credit, which are contingent upon the borrower’s credit-worthiness. “Given the importance of an entrepreneur’s personal debt capacity in financing a startup business, personal debt that is incurred early in life and that restricts a person’s ability to take on future debt can have profound implications for growth in small businesses,” the study says.

The growth in student debt over the past decade has damaged the credit-worthiness of an entire demographic cohort: 17% of student loans are delinquent, and another 44% are not being repaid due to borrowers either still being in school or having received a repayment deferral or forbearance. Even students who are paying their debt on schedule find their credit worthiness downgraded.

As the Wall Street Journal noted in an editorial today, the Kauffman Foundation has found that new entrepreneurs ages 20 to 34 fell to 23% of self-starters in 2013, down from 35% in 1996.

The U.S. system of higher education may be creating the best educated generation in American history, but it may be the least entrepreneurial in decades.

As Virginians seek ways to reignite a state economy hobbled by the decline in federal spending and an eroding business climate, we need to give more attention to what it takes to stimulate new business formation. And that should entail taking a closer look at the link between higher ed and student debt, and the link between student debt and new business formation. All the state and federal “programs” designed to promote new business formation, I suspect, don’t amount to a hill of beans compared to the rise in student indebtedness. Tackling student indebtedness gets us into a thicket of very complex issues that aren’t easily solved but that’s no excuse for failing to focus on what really matters.

Apex Encounters Headwinds in Botetourt Wind Project

by James A. Bacon

An interesting player is emerging in the Virginia renewable energy scene — Apex Clean Energy. The Charlottesville-based company has announced that it has erected two test towers for a proposed wind farm in Botetourt County to gather data about wind strength and frequency. The company has proposed constructing up to 25 wind turbines on a ridgeline about five miles east of Eagle Rock, according to news reports.

But the Rocky Forge project is encountering legal headwinds. A lawsuit filed a month ago sought to block the project on the grounds that “industrial turbines are known to catch fire, to collapse, emit audible and low frequency noise, cause shadow flicker and to throw ice from spinning blades in the wintertime,” reported the Roanoke Times. The lawsuit also noted that turbines kill birds and bats and destroy their habitat.

Dominion Virginia Power is running into similar obstacles in Tazewell County, where the energy giant faces stiff local opposition. The Tazewell County has proposed a zoning plan that would classify solar panels and wind turbines with other undesirable developments such as medical waste facilities that require a special permit.

For Apex Clean Energy, Rocky Forge is one of two wind power projects in Virginia. The facility would have a capacity of 80 megawatts, enough to power 20,000 houses. The expected completion date is 2017-2018, according to the company website. Another project, Pinewood Wind in Pulaski County, would have a capacity of 180 megawatts, enough to power 50,000 houses. All told, the company lists 53 projects in its portfolio, with the greatest concentration in the plains states of Texas and Oklahoma.

The company was founded in 2009 with the mission of building “a new kind of energy company.” The founders, who had sold their previous company, Greenlight Energy, to BP Alternative Energy, assembled a team of wind and solar energy professionals with skill sets that could originate projects, finance them, build them and manage them.

It’s not clear from the company website or news reports what the business model is for the Virginia wind farms. Among the possibilities: Purchase Power Agreements, in which a customer signs a contract to purchase a specified amount of energy from a project; project ownership in which Apex delivers a turn-key facility along with asset-management services over to a buyer; and a Structured Purchase Agreement, a long-term price agreement that allow companies to hedge against volatile fuel prices. Or Apex simply may sell electricity into the PJM electric bid, which supports a market for green energy.

Virginia ACT College-Readiness Scores on the Rise

Source: Virginia Department of Education

Source: Virginia Department of Education

by James A. Bacon Jr.

Some seemingly good news from the Virginia Department of Education (VDOE): Virginia’s college-bound students have shown steady improvement in their ACT college-readiness scores and significantly out-perform their peers nationally as ranked by the percentage of test takers who meet college-readiness benchmarks.

I say “seemingly” because the VDOE has shown a willingness to shamelessly spin data in the past. I don’t see any obvious signs of manipulation in the latest press release, but I don’t know enough to ascertain whether the data is being tortured or not.

Source: Virginia Department of Education

Source: Virginia Department of Education

“The upward trend in the performance of Virginia students on the ACT since 2012 corresponds with the implementation of college- and career-ready state standards and assessments in mathematics, language arts and science,” Board of Education President Billy K. Cannaday Jr. said in the press release. “The progress of students toward meeting these higher state expectations is reflected in the ACT.”

What seems especially encouraging is that Virginia scores have improved even as the percentage of high school graduates taking the test has increased. An estimated 30% of 2015 Virginia graduates took the ACT, up from 22% in 2010. (The pool of test takers includes public and private high school students as well as home schooled students.)

However, it is worth probing these results. The SAT remains the dominant college-admissions test. Not all college-bound students take the ACTs. I don’t know how the student profile of the ACT test taker may differ from the SAT test taker. If those most likely to take the ACTs are the best prepared academically, then it logically follows that enlarging the pool of test takers brings in students who are less prepared. If scores are improving despite this trend, the results appear to be all the more robust. Alternatively, if ACT test takers are participating because they are disappointed with their SAT results and they want an alternative test to present to college admissions offices, they may not represent the cream of the crop, with very different implications.

As the VDOE press release indicates, the College Board is expected to release its annual report on student achievement on SATs this September. If the SAT results match the ACT results, then something really good is going on. If not… you can draw your own conclusions.

A Tax Structure Finely Tuned for… a 20th Century Economy

virginia_business_tax_burden

Virginia business tax rates. Image credit: Tax Foundation, KPMG

A new study by the Tax Foundation and KPMG of state business taxes differs from previous studies, which look at average levels of taxation, by examining how state tax structures affect different types of business. The big conclusion from “Location Matters: The State Tax Costs of Doing Business“: Firms experience dramatically different tax rates because their exposure varies to different state and local taxes.

The study’s analysis of Virginia’s tax structure suggests that established companies experience much lower overall tax burdens than new companies. The Old Dominion ranks second best in the country for mature, labor-intensive manufacturing operations but only 35th for R&D facilities.

Bacon’s bottom line: I have frequently decried the lack of entrepreneurial dynamism in Virginia as a root cause for our sluggish economic performance. There may be many reasons for Virginia’s mediocre growth record in recent years but, based upon the data shown in the chart above, one of them is certainly the structure of business taxes.

In every category analyzed, new firms experience higher effective tax rates than mature firms. Just as important, look at the comparative ratings. Virginia ranks No. 2 in the country for mature, labor-intensive manufacturing companies — neither a growth sector, nor a particularly high-paying sector — but only 35th for R&D, the kind of economic activity every state covets. If we wanted to design an economy for the 20th century, not the 21st, we’ve done a pretty good job.

(Hat tip: Larry Gross)

Lopsided Gender Ratios and the “Epidemic of Rape”

gender_ratio2
by James A. Bacon

Jon Birgir, author of “Date-onomics: How Dating Became a Lopsided Numbers Game,” advances a fascinating theory on how the ratio of the sexes in U.S. colleges affects dating behavior. In colleges with more men, “traditional” dating patterns  predominate, while colleges with more women tend to have more intense hookup cultures.

The irony is that the dating culture isn’t established by the majority gender but the minority. In male-dominated campuses, women are in greater demand, hence are in a better position to set the terms of the relationship. Conversely, in female-dominated campuses, men are in greater demand, and they set the terms of the relationships. Insofar as college-age men are more interested in engaging in sex rather than establishing long-term relationships, the campus culture tilts toward a hook-up culture.

Thus, according to Birgir’s theory, the decades-long trend in which male-dominated campuses have evolved into female-dominated campuses has tilted the dating supply-and-demand equation decisively in favor of men. The result: boorish, sophomoric, sex-obsessed college males have an outsized say on the college dating culture. Says Birgir in a Washington Post interview:

It’s not just the social science I cite in the book, you can really see it in how kids talk about dating life at those schools.

I use data in the book from Niche.com, which is a college review site. At the schools that are predominantly male, the kids talk about how students like to be in relationships. So for Georgia Tech, which is 66% male, the comment on Niche.com was, “Tech is a fairly monogamous campus.” But for the schools that are skewed female, the hookup culture becomes more intense. So James Madison, which is 63% female, one comment is, “The deficiency of guys creates a scene that tends to embrace random hookups. …

People should know generally that the average gender ratio on campus these days is 57 to 43, which is one-third more women than men, and that is going to lead to a more libertine, a looser sexual culture on campus.

Now, let’s close the loop on the “epidemic of rape” issue I’ve been dissecting on Bacon’s Rebellion. I would argue that rising incidence of rape on Virginia college campuses (and campuses nationally) does not reflect a growing number of the violent encounters, often at gunpoint or knifepoint, that we traditionally thought of as rape but an outgrowth of the alcohol-fueled hookup culture that tends to be — this is a generality, and all generalities have exceptions — more gratifying to men than to women. A result of the hookup culture is that there are many unhappy women on college campuses today. Too many engage in sex that they hope will lead to a lasting relationship only to have their hopes dashed, often cruelly; they come to regret their action, and under the prevailing doctrine emanating from the U.S. Department of Education and arising from campus anti-rape movements, such encounters are now interpreted as rape. It is also possible that a growing number of men feel entitled to sex and that, after bouts of drunken making out, some of them resort to coercion to get what they want.

The gender ratio is not the only factor influencing the campus dating/sex culture. Administrative policies have an influence. So does the cultural background of the student body. The gender ratio at Liberty University, for instance, is more lopsided than it is at the University of Virginia, but I would be very much surprised if the hookup culture at that evangelical university is anywhere near as intense, if it exists at all. Similarly, I would conjecture that commuting campuses, in which student bodies are geographically dispersed, have less intense hookup cultures than campuses in which young men and women are thrown together in dormitories and have easy access to one another.

Yet Birgir’s hypothesis makes a lot of sense to me. Now, to take his conjecture to the next step…. I don’t believe there is any reliably comparable data on the number of complaints about sexual assault on Virginia campuses, but if there were, I would predict a meaningful correlation between the incidence of such complaints and the gender ratio of the student body.

What conclusions can we draw? One tentative conclusion is that student bodies with more balanced gender ratios are less likely to have hookup cultures and complaints of sexual assault than student bodies dominated by females. Insofar as the “epidemic of rape” is tied to the rise of the hookup culture, anything that restores more traditional dating patterns would be beneficial. Unfortunately, it is all but impossible to achieve balanced gender ratios across the board when, for biological and cultural reasons, women are far more better prepared for college and are admitted in much higher numbers. There is little appetite in American culture, even one supposedly dominated by the male “patriarchy,” for undermining the meritocratic principle of college admissions.

Birgir suggests another solution, although it won’t have much impact on college campuses for another 15 years or so — holding boys back in pre-school. Giving boys an extra year to mature in school, he suggests, will make them more competitive in college applications. Says Birgir: “If we essentially red-shirted boys and had them begin kindergarten a year later than girls, it would go a long way to closing this gap.”

Bureaucratizing the War on Men

campus_rapeby James A. Bacon

The bureaucratic machinery for prosecuting the Obama administration’s war on a supposed “epidemic of rape” — is building with frightening rapidity in Virginia. The University of Virginia spent about $1.5 million over the past year to comply with the U.S. Department of Education’s Title IX requirements, while Virginia Commonwealth University spent about $1 million, according to the Richmond Times-Dispatch.

Now state universities are discussing creation of a network of shared resources and investigators to address campus assaults. At a meeting of university presidents at the State Council for Higher Education in Virginia (SCHEV), UVa President Teresa Sullivan said a regional collaboration would help schools with fewer resource meet requirements of federal Title IX investigations.

This summer, UVa hired a new Title IX coordinator, two investigators and a coordinator for the federal Clery Act, which requires the disclosure of crime statistics. “Would I have rather hired four faculty members with that money? Yes, I would,” she said. “But we needed to do this to be in compliance.”

The “epidemic of rape” movement has overshot the mark, going way beyond the commendable objectives of combating campus rape and supporting the victims of rape. The new regime criminalizes sexual encounters — typically involving excess consumption of alcohol — that women regret in retrospect. Under the new logic, women are absolved of any responsibility for their own actions, while men who fail to obtain a woman’s “consent” during their drunken couplings are declared guilty of rape or sexual assault. The  apparatus being foisted into place is not merely solicitous to women but sometimes encourages them to file complaints when they were not initially disposed to do so, while administrative proceedings are stacked against men. As a consequence, an increasing number of men are heading to the courts to seek redress against university sanctions.

Meanwhile, a new puritanism is descending upon college campuses, as witnessed by the reaction to a sophomoric stunt by some Old Dominion University frat boys last week. Their offense: hanging a banner from their house saying, “Rowdy and fun—hope your baby girl is ready for a good time.” Suggestive jokes now are deemed worthy of administrative review and possible punishment.

To be totally clear, I find repugnant the kind of casual drunken sex on college campuses that leads to all too many regrettable and/or violent sexual encounters. I’m all in favor of throwing the book at rapists. I believe in chastising young men who treat young women boorishly. But I don’t favor criminalizing non-criminal acts, dismantling basic legal protections for men and squatting on free speech in order to accomplish that aim. There has to be a better way.