The Importance of GWWC Cohort Data

There are a few pieces of information that are required to properly analyze the value of Giving What We Can‘s membership.

They’re necessary for GWWC’s managers to evaluate different strategies. If GWWC was an object-level charity, we wouldn’t donate to it without knowing these numbers. And if GWWC were a public company, investors would not provide funding without such disclosure. As such, hopefully these metrics are already being collected internally, and publicly sharing them should not be very difficult, though very valuable. If not, GWWC should start collecting them!

GWWC already publishes the number of members it has at any given point and the total amount pledged. From this it’s easy to derive how many joined in any given year. However, it’s hard to judge what these people did later – how many fulfilled the pledge, and how much did they donate? Worse, this makes it hard to forecast the value of a new member, so we can’t tell how much effort we should put into extensive growth. As far as I can see (sorry if I just couldn’t find the data), we do not currently release the data required to make this analysis.

As part of it’s annual report, GWWC should release data on each cohort: how many of that cohort fulfilled the pledge by donating 10%; how many were ‘excused’ from donating 10% ( e.g. by being students); how many failed to abide by the pledge, donating less than 10% despite having an income; and how many did not respond.

Example Disclosure

In case it’s confusing what exactly I’m suggesting GWWC release, here’s an example (with totally made-up numbers). As part of it’s 2014 annual report, GWWC could report:

• 2011 cohort:
  • Of the 107 who joined in 2011…
  • 75 donated over 10% in 2014
  • 15 were students and did not donate 10% in 2014
  • 10 had incomes but did not donate 10% in 2014
  • 7 could not be contacted in 2014
  • Total of $450,000 donated in 2014
• 2012 cohort:
  • Of the 107 who joined in 2012…
  • 50 donated over 10% in 2014
  • 53 were students and did not donate 10% in 2014
  • 2 had incomes but did not donate 10% in 2014
  • 2 could not be contacted in 2014
  • Total of $300,000 donated in 2014
• 2013 cohort:
  • etc.

While in the 2013 annual report, GWWC would have reported

• 2011 cohort:
  • Of the 107 who joined in 2011…
  • 45 donated over 10% in 2013
  • 56 were students and did not donate 10% in 2013
  • 3 had incomes but did not donate 10% in 2013
  • 3 could not be contacted in 2013
  • Total of $250,000 donated in 2013
• 2012 cohort:
  • Of the 107 who joined in 2012…
  • 16 donated over 10% in 2013
  • 89 were students and did not donate 10% in 2013
  • 1 had incomes but did not donate 10% in 2013
  • 1 could not be contacted in 2013
  • Total of $100,000 donated in 2013

This would allow us to see how each cohort matures of time, answering some very important questions:

• How much is a member worth, after taking into account the risk of non-fulfillment?
• How much does the value of a member differ with the discount rate we use?
• How does the donation profile of a member change over time – does it rise as they progress in their career or fall as members drop out?
• Are the cohorts improving or deteriorating in quality? Are the members who joined in 2012 more likely to still be a member in good standing in 2014 than they 2010 cohort were in 2012? Do they donate more or less?

There are some other numbers that might be nice to know, for example breaking the data down by age, sex, nationality, or even CEA employee vs non-employee, but it’s important not to impose too high a reporting burden.

Why this is not idle speculation

This might seem a bit ambitious. Yes, it would be nice if GWWC released this data. But is it really a pressing issue?

I think it is.

Bank problems: Extend and Pretend

Sometimes banks will make a series of bad loans – loans which are repaid at a significantly lower than expected rate, perhaps because the bank was trying to grow aggressively. When the first signs of this emerge, like people being late on payments, banks have two alternatives. The honest one is to admit there is a problem and ‘write down’ the loan – take a loss to profits. The perhaps less honest one is to extend and pretend – give the borrowers more time to repay and pretend to yourself/auditors/investors that they will come good in the end. This doesn’t actually create any value; it just delays the day of reckoning. Worse, it propagates bad information in the meantime, causing people to make bad decisions.

Unfortunately they neglected the Litany of Gendlin:

What is true is already so.
Owning up to it doesn’t make it worse.
Not being open about it doesn’t make it go away.
And because it’s true, it is what is there to be interacted with.
Anything untrue isn’t there to be lived.
People can stand what is true,
for they are already enduring it.
—Eugene Gendlin

GWWC: Dilutive Growth?

About a year ago, people were concerned that GWWC’s growth was slowing – only growing linearly, rather than exponentially. This would be pretty bad, and people were justifiably concerned. However, GWWC made a few changes with the aim of promoting growth. Most pertinently:

• Allowing people to sign up online, rather than having to mail in a hand-signed paper form. This happened between April and June 2013.
• Adjusting the pledge to become more cause-neutral, rather than just about global poverty. This happened late 2014.

source

The latter change was somewhat controversial, but I didn’t see much discussion of the former at the time.

The concern is that, though these measures have increased the number of members, they may have done so by reducing the average quality of members. Making it easier to join means more marginal people, with less attachment to the idea, can join. This is still good if their membership adds value, but they dilute the membership, which means we shouldn’t account for the average new member being signed up now as being equally valuable as the members who joined up in 2010. Additionally, the reduction in pomp and circumstance might reduce the gravitas of the pledge, making people take it less seriously and increase drop-out rates. If so, moving to paperless pledges might have reduced the value of sub-marginal members as well as diluting them.

The comparison with banks should be pretty clear – a bank that’s struggling to grow starts accepting less creditworthy applicants so it can keep putting up good short term numbers, but at the cost of reducing the long-run profitability. Similarly GWWC, struggling to grow, starts accepting lower quality members so it can keep putting up good short term numbers, but at the cost of reducing the long-run donations. This makes it harder to forecast the value of members, and might lead to over-investment in acquiring new ones.

This seems potentially a big risk, and it’s the sort of issue that this data would allow us to address. Of course, there are many other applications of the data as well.

And GWWC in fact has even stronger reasons than banks to report this data. The bank might be wary of giving information to its competitors, but GWWC has no such concerns. Indeed, if releasing more data makes it easier for someone else to launch a competing, better version of GWWC, all the better!

If you liked this you might also like: Happy 5th Birthday, Giving What We Can and GiveWell is not an Index Fund

Utility Regulation: The bad, the ugly and the good.

Summary: in an attempt to solve one problem, the regulation of public utilities unwittingly introduces another, potentially much worse one. But there is hope – we also discuss a potential improvement.

The Bad: Unregulated Natural Monopolies

Water, electric and natural gas utilities are often used as an example of natural monopolies – a service where the economies of scale are so great that it is efficient to only have one supplier in an area. This company would then be incentivized to charge inefficiently high prices, causing deadweight loss, as they prevent some customers from purchasing who otherwise would have at a competitive price. As such, people argue, they need to be regulated by the government, to ensure they don’t charge so high a price. As an added benefit, the regulation can ensure that they serve everyone in the service area, including those in hard-to-reach rural areas.

Which sounds very nice in theory. Unfortunately, in trying to fix this problem, regulation introduces another problem.

The Ugly: How Utilities are regulated in the United States

At present utilities are basically allowed to earn a profit on whatever services their regulator thinks they should provide. So the utility identifies certain projects that need to be done – putting in new transmission lines, or substations, or generation¹, and present these projects to their regulator. The regulator approves the projects, and approves an ROE – (Return on Equity) – for the utility. The collection of approved and completed projects is called the utility’s Rate Base. The utility is then allowed to charge its customers enough to cover its costs and earn that ROE on its Rate Base.

So if a utility identifies a $100m project, and is awarded a 10% ROE, they make the investment, and then can charge customers enough to cover both their direct costs (labor, fuel, taxes etc.) and earn a $100m*10% = $10m profit on top.

This profit is very stable – it’s been granted to you by the government, who won’t allow anyone to compete with you² – so investors are happy to fund the project. In fact, they’d be happy to fund the project even at lower ROEs – why ROEs have stayed high while interest rates have fallen is a mystery with basically no explanation other than regulatory capture. Suppose investors required a mere 6% return – then the extra 4%, or $4m in the above example, is pure monopoly profit – exactly what regulation was meant to avoid occurring!

But that’s not the main problem.

Utilities are not really businesses.

Normal businesses make money by selling stuff to customers for more than it cost them to make. If they can cut costs – use less of the earth’s precious resources – they can make more profits, either by earning more per unit or charging customers less and selling more units. As such, firms are incentivized to be as efficient as possible.

With utilities, however, you’ll notice this is not true. They’re allowed to charge customers enough to cover their costs and make a profit – if they cut costs, their regulator will make them return the savings to customers by lowering price. So utilities don’t really have any incentive to cut costs.

Worse, if they cut costs they might end up over-earning – earning a higher profit than their regulator has allowed – in which case they’ll be made to give money back to customers. To avoid this happening, utilities are deliberately wasteful in their operating expenses to ensure they can control exactly how high their costs are. They deliberately waste resources.³

But this is not even the worst part.

Remember how we discussed the $100m project earlier? It’s well known that the cost of construction projects is hard to estimate – government projects routinely go 100% over-budget. Well, what happens if instead of a $100m project, it was a $500m project? The utility would be allowed to earn a 10% on its Rate Base of $500m, or a $50m profit. So by building a more expensive and less efficient project, the utility makes 5x as much profit. And this is not idle speculation – utilities deliberately do this.

As a result, utilities are basically on a constant mission to find as many capital projects as possible, and to pay as much for them as possible. They spend twice as much to build a power plant as competitive firms spend to build one of the same type and capacity.

So regulation has taken one problem – utilities charging a high price and earning high profits – and replaced it with a far worse one – utilities charging a high price, earning reasonable profits but wasting most of the money on unnecessary spending. At least with unregulated monopolies someone benefits!

It’s possible that a similar thing might be happening with healthcare insurance companies now, as maximum Medical Loss Ratios mean that spending on drugs/treatments/etc. increases the amount they’re allowed to profit, but this is a relatively new issue for them – only becoming nationwide with obamacare. Utilities, on the other hand, have had this trouble for about 100 years.

The Good: How to save money by allowing unlimited profits

The problem is that utilities basically operate on a cost-plus basis. Here’s a simple alternative.

• The utilities is allowed to charge a certain amount – either a total revenue sum or a per-kWh amount. This will rise by 1% a year.
  • Slightly below the current rate of increase. Alternatively you could tie this to inflation, say CPI -1%
    
• The utility is legally obliged to connect all customers within its service territory.
• The utility is fined for every blackout, with the fine set by a formula (e.g. $15/kWh not provided, which is roughly 100x what they would have charged for that kWh).

Now the utility is incentivized to be as efficient as possible. It can’t raise prices, but every dollar of savings will increase its profits. All of a sudden it goes from being a sleepy and inefficient company, whose only purpose is corrupting the regulator, to being a lean cost-cutting machine, dedicated to supplying electricity as efficiently and reliably as possible.

How should the initial revenue allowance be set? As we already have utilities, it would probably make sense to keep their current revenue allowance. It will take time for them to reform their infrastructure and become more efficient.

But if you were building the system anew, you might auction off regions. So you’d ask different companies to submit bids for the right to become the utility for an area, and accept the company who asked for the lowest revenue requirement. You don’t have to worry about their cutting corners, because electricity is homogeneous, and they’re massively penalized for any lack of reliability.

Unfortunately this would be politically vulnerable. If a highly competent management team reduced costs by 50%, they could increase their profit margins from 20% to 60%, and raise their ROE from 10% to 30%. Customers would see their bills continue to rise (albeit below inflation) and blame the profit-gouging utility. Voters might then pressure the politicians to steal from the utility, which cannot threaten to leave the area. The only way the utility can respond is by lobbying and obfuscating their profits, which basically gets us back to where we are now – highly inefficient cost structures so that profits look small compared to costs. Still, it’s worth thinking about what an enlightened electorate, or benevolent dictator, could do. And actually this is a little like what FERC is doing with transmission in RTOs.

---

If you liked this post, you might also enjoy How not to reform the insurance industry and The Future of Socialism is Privatizing the Atmosphere.

 

---

1. Outside of the North East and Texas, where generation is operates in a semi-competitive market ↩
2. I hear you asking: “If it’s a natural monopoly, why does the government need to prevent competition?” ↩
3. Source: conversations with CEOs, CFOs, regulators etc. of utility companies. ↩