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Peer Review of NRDC Report (9/24/18) on Prop 127’s Impact on the Arizona Economy

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Rounds Consulting Group, Inc. (RCG) has been following this economic issue closely and decided to comment on the validity of the NRDC report dated September 24, 2018. A “peer review” is a review of materials that are intended to be published for academic purposes or for use in more complicated decision-making where accuracy is critical. The process includes outreach to subject matter experts. The NRDC report is a combination of energy analysis and economics. This means peer reviews would normally be performed by experts in both fields of study.

The energy analysis was produced by ICF and utilized NRDC assumptions related to utility sector inputs. ICF then utilized an Implan economic model to estimate the impacts related to new infrastructure spending that would be required to accommodate a 50% renewables requirement by 2030.

Primary Conclusions: The NRDC report contains multiple economic omissions and would be subject to significant revision if produced for a formal journal or used in the development of complex economic public policy. The report’s Implan model produces results that appear to be approximately 30% to 40% too high in each of the primary economic categories of employment, income, and output. This degree of error indicates bias in the economic inputs. The utilization of an industry multiplier that is excessive would also contribute to this scale of error.

However, this is a moot point since the report also fails to account for the opportunity costs related to more efficient uses of resident income as opposed to the early disposal of existing and useable infrastructure and by not following market forces.

Think about it like this. If you throw a rock through your front window and then hire somebody to replace the broken glass, you cannot claim you created a job. It was premature destruction and the money used to replace the window would have been spent elsewhere and more efficiently, creating additional economic activity. If the window was already leaking and cracked and required near term replacement, then the opportunity cost would be negligible.

The NRDC report fails in this very basic economic example. On the other hand, a combined energy/economic analysis would be very useful if designed to blend new solar infrastructure with economic efficiency calculations, and in consideration of the state’s economic characteristics and the normal physical depreciation of existing infrastructure. This did not occur. The 2030 timing requirement was not established by economic analysis, nor was the 50% utilization value.  Thus, the employment gains identified in the NRDC report remain negative, meaning net job losses.

The NRDC report should not be used in any policy formation until significant revisions are incorporated.

The following is a list of the most noticeable economic concerns that were identified in this economic peer review. A preliminary review of the energy related assumptions being utilized by NRDC also identifies a lengthy list of poorly crafted assumptions. The below only focuses on the major economic errors.

  • The “report” was published with moderate but limited detail and as a blog. This is very unusual and is inappropriate for such an important topic. This masks many of the energy related assumptions that would be subject to review and critique. Enough detail was provided to identify several major economic errors though.
  • The report indicates nearly 16,000 new jobs would be created by 2030 under Prop 127. A test Implan model was created by our firm to see if the calculations were roughly accurate (aside from the fact that the calculations are a moot point because of other major errors in the analysis). The independent test model identified the only means of reaching the NRDC employment counts are by using average wages that are double the normal market rate. This results in the report’s economic values being overstated by between 30% and 40%. This is beyond what one would consider an acceptable margin of error.
  • This economic modeling error is not as significant of a concern since the report is also void of basic economic principles and all values in the report should be ignored absent a major revision. For example, the report ignores the basic concept of opportunity cost. Prop 127 requires billions of dollars of useable infrastructure to be retired earlier than normal, and this financial scale is reached even without considering Palo Verde.
  • Prop 127 requires replacement infrastructure to be built. This costs money that will be covered by the public and will have a similar impact as a new tax. If residents are indirectly taxed through higher utility bills, there will be less willingness to be directly taxed for uses like K12, community colleges and universities, roads, public safety, etc.
  • These alternative public expenditures would produce a higher return on investment (ROI) than what would be required under Prop 127, based on the economic characteristics of Arizona. The NRDC report does not separately analyze the state’s economic profile, need for investment in all areas that make an economy function, current and past industry subsidies, among dozens of other important factors.
  • Alternatively, if residents were to keep the extra money that Prop 127 would take away in the form of higher energy costs, the additional local spending would also generate economic activity. The report ignores these inputs.
  • The report fails to provide a review of the extent the local Arizona markets will support the indirect and induced “multiplier” benefits that are implied in the Implan model. Research and development of solar applications and the manufacturing of high value equipment do not require a sunny climate, they require an educated workforce, proper economic development tools and, in many cases, excessive economic incentives. The NRDC analysis does not include any review of the local economic development profile or its ability to support the industry.
  • The NRDC analysis also provides contradictory statements. Prop 127 is said, in the report, to generate 16,000 new jobs by 2030. These jobs need to be funded by somebody, and that will be Arizona residents. Economic efficiency would be achieved, and net new jobs created, only if Prop 127 was designed with a ramping up of the renewable thresholds over time and in consideration of proper infrastructure retirement and opportunity costs. This did not occur. Under this plan the state will actually lose jobs.
  • This is not a simple difference in opinion on modeling assumptions. These are fundamental economic concepts. There will not be 16,000 net new jobs created by 2030 in any realistic economic scenario, nor will there be billions of dollars in net new economic activity. These findings were artificially forced into the analysis.
  • This is very similar to what we occasionally see in Arizona with certain economic development projects. When a company is seeking incentives, inflated input numbers are provided to an “independent” consultant, and the consultant then identifies ridiculously high economic and fiscal impacts to influence the provision of the incentives. This is what the NRDC appears to be doing in the promotion of Prop 127.
  • The NRDC report also attempts to refute the unfavorable findings contained in the ASU/Seidman Institute study. The Phoenix Business Journal interview of the author of the NRDC study indicates the Seidman report did not include scenarios for new job creation from the additional infrastructure spending required by Prop 127. This may have been directly communicated in the interview but is only implied in the NRDC study. Regardless, the Seidman report did indeed include these job gains, and utilized a methodology that would overstate the net job gains, not understate.
  • In reality, the Seidman report similarly ignored the opportunity cost of alternative public investment which artificially made the job impact numbers appear more favorable, not less. The NRDC essentially criticized the Seidman report for the exact same error that they produced.

I have reviewed at least one hundred economic thesis documents, dissertations, and other economic papers and articles over the years, and analyzed hundreds of economic reports for use in litigation cases and public policy formation. The NRDC report included in this economic peer review is one of the more biased documents I have reviewed.

The analysis needs to be withdrawn and resubmitted after considerable corrections are made.

JimRounds

Post by: Jim Rounds

 

 

 

 

 

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