Archive for July, 2011

The first city in Delaware to significantly lower electricity rates will see an economic boom. America is seeing an industrial renaissance as companies move operations back from overseas to realize lower transportation costs, better quality, and to escape rising labor costs elsewhere. There are more manufacturing jobs in the U.S. now than before the recession began. Delaware is still losing jobs as companies bypass us and existing companies leave, partially because electricity rates are 50% higher than the national average.

The Delaware Electric Coop (DEC) is offering to acquire municipal electric companies to diversify its portfolio and expand volume to achieve lower contract prices for the electricity they buy. Coop prices average about 28% lower than those offered by the City of Dover and could save Dover homeowners and businesses $25 million a year. For a large user, like Dover Downs, the lower rates might save $750,000 a year and make the difference between profit and loss and offer the potential to avoid layoffs. Individual homeowners may save $400 to $500 a year. Those savings will be spent elsewhere and could boost the economy enough to add 175 jobs spread around city businesses. It is difficult to think of a better economic development strategy.

More importantly, Dover would become the first city with these more competitive electric rates and it would become a magnet for companies seeking to locate or expand in Delaware. Manufacturing companies like to locate near cities for ready access to utilities, manpower, and transportation. Dover has a lot to offer anyway and the addition of lower electric rates should reap rewards.

There are concerns about having to raise property taxes to cover lost general fund revenues from the electric company. Homeowners can receive tax deductions for property taxes but not for utilities. However, the sold electric company facilities are subject to property taxes or an excise tax and the large cash payment for the facilities can generate income. Combine this with tax revenue from economic growth and it is likely the city will see higher overall revenue and preclude the need for higher property taxes. It is natural for people to become concerned with change so the review of the DEC proposal should be reviewed by an independent consultant.

It is a tough recession that is not likely over yet. The electric rates savings will be welcomed by citizens and businesses alike. Who doesn’t want more money in their pocket right now?

David T. Stevenson
Director, Center for Energy Competitiveness

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The field of our youth‟s education is plagued with the locusts of doubt with constant cries of falling skies and failing systems. Being the number one nation in the world has stricken us with the ever looming fear of being overcome by the shadow of mediocrity. The system itself is a bit dated, bogged down in bureaucracy and in need of reform but, the schools are not failing, and the nation is not slipping into insignificance.

The past decade has been subject to a calculation, turning our students into numbers and pegging them against other faceless figures around the world. The study TIMSS (Trends in International Mathematics and Science Study) conducted by the IEA (International Association for the Evaluation of Educational Achievement) claims to be “the largest, most comprehensive, and most rigorous international study of schools and students ever conducted.” The study was performed on students in the fourth and eighth-grade and the final year of secondary school from 41 different countries. In mathematics, it claimed that fourth-graders were above the international average but outranked by seven other nations. Eighth-graders in the same subject scored below the international average and twelfth-graders were found among the lowest of the 21 participating nations. Science scores found fourth and eighth-graders above average but twelfth graders below. Considering the estimated 196 nations worldwide, being in the top 20 may not be „exceptional‟ but is nothing that will make the sky fall.

The concern is reasonable, but overstated. We should always strive for improvement especially when considering our future. However, there are certain factors to appreciate when looking at America‟s education system compared to any other nation. We are an exceptional nation, after all.

First, secondary education ends in the United States at the twelfth grade with an average age of 18.1 years. As addressed by http://azschoolsmakeadifference.org, Grade 14 students were in the tested populations of Austria (19.1), Canada (18.6), and Iceland (21.2), while France (18.8), Germany (19.5), Switzerland (19.8), Italy (18.7), and the Czech Republic (17.8), included grade 13 students. In South Africa they only tested twelfth grade students, but their average age was 20.1 (South Africa, along with Denmark, Germany and Slovenia, also did not follow the student sampling guidelines).

Two years can make a very large difference in education. Often times, young adults can go through drastic changes in less than the course of one half year.

Second, Denmark excluded students who completed their formal schooling after grade 9, presumably low scoring students not expected to go to high school. In Denmark the percentage of 25-34 year-olds who have completed “secondary education” is 69%, in the Netherlands it is 70%, in New Zealand 64%, in Australia 57%, in Italy 49%, while in the U.S. it is 87%. Russia and Cyprus excluded vocational students, the Netherlands excluded apprenticeship students. The United States has been pressing the importance of education with legislature like the “No Child Left Behind” laws under Bush and Obama in his state of the union boldly claiming “To compete, higher education must be within the reach of every American.” So comparing our high school students to their “secondary” students is comparing apples to oranges.

Third, an MIT sponsored conference on brain research and education pointed out that despite countries like China and Singapore outperforming the U.S. on mathematics tests, they can‟t compete with our top technical universities from which big tech companies are recruiting. China has actually been spending the last few years examining the structure of American classrooms and trying to restructure its approach to create more divergent (creative) thinkers rather than convergent thinkers who can narrow choices down on a multiples choice test. Basically, what good are the score comparisons if our citizens are still the ones in demand for the jobs?

Finally, we purposefully sought to provide a free education to every child in America. The initial push for our free public school system for all children started in response to child labor. It was also designed to prepare those children to grow up with basic reading and writing skills to work in factories during the industrial revolution. It was never designed to be “in-depth,” though it has improved over the last 30 years or so with the standards movement. The greater issue isn‟t necessarily having inadequate schooling, but trying to overly homogenize education by using identical curricula or methods for every school when the geographical and ethnic scope of education today is so large.

Recently, Education Secretary Arne Duncan suggested that the “No Child Left Behind” law be revised and made more flexible, as reported by the New York Times. The change of heart resulted in response to an overwhelming amount of requests of states to be waived from the legislature‟s strict requirements in proficiency in reading and math. The mandates in NCLB were completely unrealistic and too broad. Special education students were factored into performance scores, it did not take into account developmental timetables of some students and states were fudging test scores making them ultimately meaningless. Schools were facing major penalties like school closings, which would seriously disrupt communities. NCLB had great intentions, but was underfunded and had serious flaws.

If the United States wants to increase its global competitiveness, the current system needs reform at the philosophical level. We need to decide how to educate everyone effectively without stifling creativity. We should be able to create a school system that is diverse in its approaches, have high expectations, and be inclusive. The battle over education is increasingly gaining steam in the capital and will become a major issue if it is not considered so already. The future of American education will certainly be an odyssey of epic proportions. Should the powerful teachers‟ unions continue to have a monopoly, or should competition be increased through charter schools and voucher systems? Educational Improvement is important and worth everyone‟s time for many reasons, but we should not allow inappropriate international comparisons to create a sense of gloom.

Molly Capriotti, Assistant Research Analyst
Caesar Rodney Institute

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A plan to offer a guaranteed price for Solar Renewable Energy Credits (SREC) to purchasers of solar panels is way off course. A homeowner or small business who buys a solar panel can sell one SREC for each megawatt-hour of power produced by the panel. A typical home unit might generate 7 to 12 SREC’s a year. This is on top of state and federal tax credits that offset the purchase price of a solar panel by almost half the first year. The total value of all the subsidies is worth more than the purchase price of the system and is on top of the actual energy savings. That is the equivalent of stopping for gasoline and instead of paying $4 a gallon for gas the station pays you sixty cents.

SREC’s had been selling on the spot market for about $270 each to power companies who are required by law to purchase an increasing number each year through 2025. The power company passes on the cost to their customers which could cost as much as $90 million a year in the future. Solar panel buyers expect a rate of return of 13% a year based on current subsidies, quite a bounty considering current money market and Treasury bond rates are 1 to 3%.

But SREC prices can vary and, in fact, have dropped from about $300 to $100 in Pennsylvania because of the large number of systems installed. In Delaware, SREC prices dropped to $100 over a several week period at the end of March and traded at $105 on June 28 according to Flett Exchange, an auction company. Fuel cells were added to the Delaware Renewable Portfolio Standard in June and will reduce SREC requirements by 30% suggesting SREC prices will fall further. With the added potential credits from a planned 30 megawatt fuel cell plant, Delmarva Power would not need to buy more SREC’s until 2020. The Renewable Energy Task Force has been considering a request by Delmarva Power to establish a pilot program offering an “administratively set” fixed price for twenty years. The price they are considering is $270 a SREC for the first ten years and $50 in the second ten years. Obviously, such a high price is way out of line with current market price.

There are several other problems with this plan. The return on investment for solar panels is very sensitive to the value of SREC’s and the only risk a panel buyer has is the value of SREC’s. In our opinion, the fixed price being offered is not discounted for the removal of this risk or to current market value. A guaranteed SREC price will tend to keep panel prices high. The suggested $270 fixed SREC price for the first ten years supports an installed solar cost of $5.75/watt, typical of current contract estimates. At $100/SREC the supported price drops a third to $3.90/watt. Why should a solar installer offer a lower panel price if they are offset by high SREC prices? Electricity rate payers will make out much better allowing market conditions to set SREC price. Solar panel buyers already receive too high an amount in subsidies at the expense of lower income electric rate payers who can’t afford the solar panel purchase price. Let those panel buyers bear some of the risk.

David T. Stevenson
Director, Center for Energy Competitiveness

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The detailed provisions of the Patient Protection and Affordable Care Act (PPACA/ObamaCare) are just now beginning to be evaluated at the state level. There is no question that the impact on Delaware will be significant by the additional costs to be covered by the state’s budget and further damaging of the traditional doctor-patient relationship.

Recognizing the financial significance of PPACA on Delaware’s economy, the Caesar Rodney Institute has formed the Center for Health Care Policy and is pleased to announce that Clare L. Gray, MD has accepted the position as Director. This new Center is CRI’s third center established for focused analysis and alternative solutions to Delaware public policy issues.

Dr. Gray brings extensive medical experience to the Caesar Rodney Institute and has the credibility to influence decision makers regarding health care policy. Dr. Gray is a nationally recognized writer, speaker, and health care policy analyst. In 2006, he founded Physicians for Reform, a non-profit organization dedicated to preserving patient-centered healthcare and is the author of the recently published The Battle for America’s Soul. Additionally, his writings and editorials have been featured in The Washington Times, Investors Business Daily, The Hill, and on Fox News.

With the Caesar Rodney Institute, Dr. Gray will work for patient-centered healthcare reform and offer solutions to prevent Delaware’s Medicare and Medicaid programs from financial collapse. Dr. Gray’s profile may be found on the CRI website at www.CaesarRodney.org and he may be contacted at clgraynmd@caesarrodney.org.

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We can upgrade our electricity grid to improve efficiency and reliability at very low cost. A new book by John A. Moore and Toby Shute titled “The Hidden Cleantech Revolution” explains how. The authors present practical solutions and have developed a scale1 to rate effectiveness of different approaches to solving our electricity problems. Most people have never heard of these technological breakthroughs. You may also be surprised that two technologies you hear about all the time are not very useful near term; Smart Meters and Energy Storage.

The availability of electric power must always be balanced with demand as practical storage does not exist. During peak use times we can turn on expensive peaking plants or we can use Demand Response. There are successful voluntary plans like the Delaware Electric Coop’s “Beat the Peak Program” where customers turn off power during peak use periods saving as much as 20% on the annual cost of electricity. There are also load switches that can be added to appliances such as air conditioners that can be activated remotely to trim use. Participants receive a rate incentive to participate. Demand response is effective and low cost and rates 85 points.

The grid is not 100% reliable and sometimes breaks down. Human action is needed to adjust the grid for these problems and these actions are not always fast enough or information is lacking. Electronic sensors with two way communication capability can be installed at critical locations on the grid such as transformers. The sensors are monitored by automated systems that respond quickly to real time information. Such a system could have prevented the 2003 Northeast blackout that cost an estimated $4.5 Billion. The entire grid could be upgraded for the cost of one natural gas fired generating plant. Distribution Automation scores 81 points.

A leading cause of power outages is falling tree limbs. Reducing these outages 50% could eliminate the need for two very large 1000 megawatt power plants. By combining Global Positioning Satellite data with Light Detection and Ranging data from helicopter observation of power lines it is possible to prioritize tree trimming and reduce outages. Smart Vegetation Management scores 72 points.

Transmission lines sag depending on temperature and other factors. The more sag the less electricity can safely be moved through the lines. Because utilities have not been able to estimate sag accurately they leave a large margin of error. Now monitoring instruments exist to determine real time line sag allowing more power to be transmitted over existing power lines. Don’t think this matters much? If every utility used this we could effectively increase our electric generating capacity by an estimated 7% and avoid building $70 Billion in new power plants! That is why Dynamic Rating scores 68 points.

An important outcome of using Smart Meters to determine electric use is the addition of time of use information to utilities. Use power in a peak time and it will be charged at a higher rate. Residential customers and small commercial users are unlikely to pay close attention to this so electric bills will go up. This is why Smart Meters only receive 8 points.

Gasoline stores 80 times the energy of a lithium ion battery. Low energy density in batteries has been the bane of electric cars for over 100 years. A battery with 100 times the storage capacity of today’s batteries would be a game changing breakthrough for electric cars and the electric grid allowing storage of energy from renewable sources. Unfortunately, the pace of improvement has been so low historically there is little chance Energy Storage will improve anytime soon so it only receives 6 points.

David T. Stevenson
Director, Center for Energy Competitiveness
Caesar Rodney Institute

Note 1: Points are awarded for making energy cleaner, safer, more reliable, and cheaper. The score is then rated based on whether the technology is proven and whether it can be implemented in the next decade.

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When we started the Delaware Small Business Development Center (SBDC) at the University of Delaware, Bill Wyer was the president of the Delaware State Chamber of Commerce (DSCC). Bill was a junk yard dog for business in Delaware. Under his leadership the DSCC fought against any tax increases and invasive regulations, and the encroachment of government into the marketplace. With Bill at the helm, the DSCC was skeptical that a government subsidized service such as the SBDC would do much good.
Times have changed. A few years ago the DSCC acquiesced to a 25% increase in Delaware’s gross receipt tax rate. The DSCC is a proponent of alternative energy in Delaware, mandating utilities to shift to less market competitive sources of energy that will add billions of dollars to the already less competitive electricity costs in the state. This disadvantages Delaware businesses, especially manufacturing. While supporting the implementation of Vision 2015 for improving public education, the DSCC has no specific alternative to the monstrous Affordable Care Act put forward by President Obama.

The DSCC is still an advocate for Delaware business, recently opposing a New Castle County surcharge on building permits for fire service and an increase in the “voluntary” school assessment fee cap to be paid by developers. But, the DSCC seems less committed to market solutions today and more likely to recommend “public-private” partnerships. What has happened?

The answer is simple and is not unique to Delaware: exclusive of regulations, government is a larger player in the economy than ever. Between 1984, the midpoint of Bill Wyer’s tenure, and 2009 private industry’s share of Delaware’s output dropped from 71% to 61%.

Government’s share of the action in Delaware’s economy has risen over six fold while private industry’s portion has barely risen three fold. Government’s economic impact on Delaware includes: operating spending by Federal, state and local government, state and local government construction spending (i.e., the capital budget), Federal government transfer payments (e.g., Social Security, Medicaid, Medicare), Federal grants to individuals and organizations, Federal procurement contracts (e.g., from the Department of Defense), and Federal aid to state and local government under a wide range of programs.

Private companies are attracted to the growing resources of government. Irving Shapiro was the first lawyer appointed CEO of the DuPont company following stints in the U.S. Office of Price Administration and the Department of Justice. A current example is Jeffrey Immelt, CEO of General Electric, who seems to be a fixture in the White House economic team. Yet these “partnerships” appeared to have more to do with the redistribution of wealth (what economists call “rent seeking”), than with the creation of wealth in a competitive market environment.

As demonstrated again and again in analysis by the Caesar Rodney Institute, in the long haul state and local government tax revenue in Delaware will only grow if the private economy grows. Today, in order to understand the complete picture, one must not just focus on the operating budgets of government in order to understand the full impact of government on the economy of Delaware and the nation.

Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis

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