UCAN

A long long time ago, way way back when some people still had 8-track tape players, there was The Phone Company. Except for a couple little insignificant private companies (like GTE and Continental) all of that wire belonged to Ma Bell. It was pretty easy to picture how your voice got from Miami to Madison because this network was pretty much one-dimensional.

The Internet, today, is not "owned" by any one company. It originated as a private academic/military network with a single provider connecting all the users together but became a public network-of-networks with multiple providers. If you're a capitalist (or an evolutionist) you like diversity because it provides choices and engenders quality and advancement.

But What's It Look Like?
The Internet is composed of major networks (providers like sprint, uunet, verizon, qwest, level3, etc) called Autonomous Systems or "backbones".  They connect the local ISPs (known as "last mile" providers, like your DSL provider and my cable company) to the rest of the world. They might be considered freeways while our last mile providers would be surface streets. Try to picture a spider web in 3D. Now picture a couple more of them above and below each other. A spider can go all over his web but can't get to another one. So they have places called peering points where these webs are connected to each other. Now, if my cable company uses LEVEL3 as their backbone provider and yours uses AT&T, my packets go from my house, thru TimeWarner cable's net to LEVEL3's backbone, to a peering point, to AT&T's backbone, to your ISP to you. Here's a very cool map, from CIO.com, of the NA internet - it's not geographic, it
just shows connections and who the main backbone players are.

See For Yourself
You can actually see the path that data packets take from you to any web site, mail server, etc. Kinda like an Internet GPS "make the next turn at Verio Router, LAX. Now make a right at your destination, Yahoo.com"  Using Windows, from a command prompt, type:  TRACERT  AnyWebAddress  <enter> (in MacOS use Network Utility > Traceroute; for Linux/Unix, see here)   You will slowly get a collection of steps showing you each router "hop" between your end and the destination. Conventionally, engineers name the routers using nearby airport codes. So a router in the LA area would include LAX in the name and one in San Diego would incl SAN and Bogota would include BOG. It's interesting to see the geographic path that your packets take to get someplace and, if there's an internet outage along the way, you can see where the packets stop.

The fact that there are multiple networks, and the fact that there can be routers and fiber out of commish anyplace at any time (and the beauty of IP is that it allows routers to report to each other about best routes - like traffic reports) explains why the "best" route from you to your favorite web site might not be the geographically best route.

Here is a good, basic, overview of what "the Internet" is, without all the tech talk. To get an idea how much it's changed since 2000, go here and, starting from the bottom of the page, see the historical charts.

Net Neutrality
The CIO.com article mentioned above is about an important subject, one dear to the hearts of the folks at newmediarights.com and UCAN.ORG, and that is about keeping the internet free of content restrictions. If there were only one backbone provider, they could say "we will block the transmission of (e.g.) music files because we also sell music on our web site and ones you buy elsewhere thus compete with us". They could be less protectionist and more protective of themselves from litigation: "we will block the transmission of (e.g.) music files because they may be copied and we could be sued if they go across our network". And they could be interested in filtering your 1st Amendment-protected free speech because they don't agree with you. These examples are pretty black-and-white but there are other, less clear issues currently in play. For example, some networks won't allow people to use mass-dowload applications, like BitTorrent, because, they believe, these people are using more than their fair share of the bandwidth available. I can see where I, personally, might not want to have my email be delayed or have my rates go up because some people need to download large files (full length movies, for example). I can also see where the provider might want to block something I want to download. Some balancing has to happen.

Net Redundancy
The main reason there's more than one backbone provider is, simply, redundancy. Having all your bits in one basket isn't a good idea. And while, not so long ago, The Internet was a toy for amusement and non-realtime academic interchange, today a lot of people rely on it, now, this instant. Having more than one means that your packets have options.

Voodoo Economics: Why you should question the free market zombies who say it is all about "supply and demand."

Beyond "Supply and Demand" 

On Saturday, August 9, 2009, the San Diego Union-Tribune's Business Section ran a lead story by Onell Soto about high gas and oil prices. Mr. Soto is a careful reporter and researcher, and his article quoted me as saying " ... the problem is the low supply of surplus gasoline, which drives up prices." 

I was quoted accurately, but the statement sounds as though I was saying that gas prices are set by the laws of  "Supply and Demand." 

News Flash: They aren't.  Gas prices are set by Refinery Pricing Managers. 

Not only that, but the supply of gasoline that determines these prices can be manipulated.  

Zombies should stop reading here

Explaining all this requires an understanding of how the market works and how prices are set, and a willingness to peel back the corners on cherished American dogma. I'll try and do it  before your eyes glaze over and you take the easy way out by parroting the mainstream dogma in a zombie-like fashion saying ...  it is all about supply and demand ...    it is all about supply and demand ... Ayn Rand is a sex goddess ... the hidden hand of the market place is God-like in its wisdom  etc.

How prices are manipulated

The industry uses two basic tactics to drive up prices. They are retail price redlining, and control of supply. Once you understand how these two factors work, you can stop drinking the free market Kool-Aid offered up by the oil industry.  But the first thing you need to understand is the vital role of unbranded independent gasoline stations.

Unbranded vs. Brand Name gas

There are three types of gas stations: Company-owned gas stations, brand-name gas stations that are owned by a local franchisee, and unbranded gas stations. Company owned stations are vertically integrated (i.e. owned by Shell, supplied by Shell, and managed by Shell). 

Branded Independent Dealers are locked into prices set by the refinery.

Branded dealerships are often owned by local business people who tend to be more inclined to discount their gasoline to their customers.  A branded dealer typically operates a franchise, similar to a Burger King or McDonald's franchise: He or she agrees to follow certain rules in order to sell gas.  It doesn't matter if the station is Shell, Mobil, Chevron, or BP/Arco, if you are selling their gas and displaying their corporate logo you agree to their terms.  Perhaps the most important thing a dealer agrees to is that you will pay whatever the refinery decides to charge you for gasoline (see price redlining below).

Unbranded Independent Dealers can shop around for the cheapest gas

Unbranded dealers are not affiliated with any particular brand of gasoline. These "Indies" buy their gasoline from jobbers who purchase gasoline on the spot market. An unbranded dealer can actually shop around for the best price. 

Gasoline Price Redlining:

Most people assume that local gas prices are set by the local gasoline retailer.  We logically assume that if a gas station is charging 25¢ more per gallon than the same brand a few miles away that it is because the dealer is making an extra 25¢.  This isn't true.

The industry exercises powerful control over local gasoline markets by using a type of price redlining called zone pricing.  With zone pricing, the refinery  sets the price for each dealer depending on the dealer's location.  All oil companies do this. 

The oil industry says it uses zone pricing to "compete" more effectively, but the reality is that  zone pricing has become a powerful tool for controlling the retail price of fuel, for disciplining dealers who price their gasoline too cheaply, and for limiting the damage caused by price wars. 

This is why Refinery Pricing Managers set the price of gasoline instead of allowing the free market to do it for them.  Brand-name dealers are locked into a specific wholesale price for gasoline - a price that can be arbitrarily changed at a moment's notice by the refinery. In fact, the dealer's only real choice is to RAISE the price of fuel - if he or she cuts the price too much, the refinery will simply step in and raise the wholesale price to that specific dealer.

This process, known as "disciplining the dealer" puts more profit in the refiner's pocket and helps turn the branded dealer into a corporate share-cropper.

The refiners can get away  this because the dealer can't shop around for cheaper gasoline. This means the refinery can use its arbitrary prices to prevent price wars and cost-cutting in specific areas. As long as the competition is civil, prices (and oil company profits) will remain high.

In the oil business, everybody hates a cost-cutter.  One of the ways the industry punishes cost-cutters is by "zoning" the price of gasoline more cheaply to stations that are located near a cost-cutter.  In fact, refiners will underprice gasoline in areas where there are cost-cutters and subsidize this activity by overpricing it in areas where competition has been successfully removed, or "tamed." 

So who are these cost-cutting heroes?  It isn't Arco, which generally offers the cheapest name-brand gasoline in California.  And thanks to zone pricing, it isn't always the brand-name stations.  It is the "unbranded independents" and many are more aggressive in their pricing than Arco.

Why Unbranded Independent gas stations are the only real competitors

The most competitive dealers are Unbranded Independents.  Unbranded dealers buy surplus gasoline (usually from a jobber) and pass the savings on to you.  It is that simple ... and also where things get complicated, because these dealers live or die based on the spot price of gasoline.

About 90% of the time, in about 90% of all California markets, the price of gasoline at unbranded stations sets the pace and the price of gasoline in their trade areas.

Unbranded gas stations tend to charge 10 to 15 cents less per gallon than the major brands. Our research shows that one unbranded gasoline station can depress gasoline prices for a five mile radius. 

This is because the major brands are forced to "zone" their gas at cheaper prices to stations that are close to an unbranded independent. 

The fact is, that communities with unbranded gas stations pay less for their gasoline.  In these communities, the primary competition to the unbranded stations is Arco. The reason for this is that the majority of unbranded stations (and 100% of all Arco stations) only accept cash or debit card payments. 

That's why we have referred to Arco, not as a "low-price leader," but rather as a "high price enabler." 

Arco, by default, maintains the price floor for gasoline in California.

Most unbranded dealers have learned that if they price their gasoline more than two cents below the price charged by the nearest Arco, that they risk being "disciplined" as described above. Even retail giants like Costco have learned not to undercut the nearest Arco by more than a few pennies.

The role of the Spot Market in controlling supply

Gasoline refining is a volume business with huge startup costs.  For this reason, the last barrel of gas a refiner produces is the cheapest barrel - at least in terms of manufacturing costs.  As a result, the major refineries tend to produce surplus gasoline in order to make sure that they can supply enough gas to their local dealers.  

This surplus gas often  finds its way onto the spot market, where other companies can buy their gasoline for cash "on the spot."  Local jobbers and dealers will buy this gasoline and sell it at a discount through unbranded outlets.

In a time of surplus, everybody wins .... except for the refineries. For them, selling fuel on the spot market is a little like a farmer growing his own crows.  That's why refiners prefer to NOT sell their excess gasoline on the spot market, because the gasoline is purchased by cost-cutters. And in the oil business, nobody likes a cost-cutter.

Arco, for example, has a long history of shipping gasoline to Japan at a loss in order to keep the price high on the West Coast. 

In a sense, the Los Angeles Spot market serves as a strategic reserve for the industry - when a refinery has a problem and can't produce gasoline, it will buy gasoline at the spot price on the spot market from its colleagues at other refineries (note that I used the word "colleagues" not "competitors").

At the refinery level, the competition for market share between colleagues is civil; not unlike the gentlemanly elbowing of guests at the Sunday after-church crab and lobster buffet.

Sometimes, the refineries avoid dumping their gas on the spot market.

Proof that Refiners prefer cooperation over competition.

In the case of Chevron and British Petroleum/Arco the two companies actually enjoy a pleasant and mutually beneficial trading relationship.  Remember the classic Grey Poupon Mustard commercial where the passenger of a 1958 Rolls Royce Silver Princess pulls up to another Rolls Royce and says "Do you happen to have any Grey Poupon?"  Well, that's pretty much how the refiners treat each other when they run out of gasoline. 

Obviously, with these sorts of supply trading agreements, the wholesale market can't be very competitive.

It is a little like Burger King asking McDonald's to give up some of its beef because Burger King had a splash of the Mad Cow, thank you. 

Remember, the strategy is to keep a tight control over the supply of gasoline. By trading with its alleged competitors, a refiner keeps excess gasoline from reaching the spot market, thereby starving the independent dealers. 

In the unlikely event a refinery can't buy more gasoline from one of its industry chums, it shops the spot market and buys up every barrel it can get its hands on, creating shortages (and FEAR of shortages) which drive prices and profits up.

Both of these factors can drive the price of spot gas up to a level where the unbranded stations can not buy gas at a competitive price.

This raises the price floor by eliminating the only real competitors left in the marketplace.

Fixing Price Manipulation

So how do you fix the problem of price manipulation? Here are five ways:

First:  Lawmakers must outlaw price-redlining and zone pricing.

Second:  Break up the vertically integrated oil industry.

Third:     Ban trading agreements between competitors.

Fourth:   I nspect refineries for safety, and to make certain they are not intentionally shutting down capacity to scare prices higher.

Fifth:      Break up the "oiligarchy."  In 1910, Teddy Roosevelt broke up the Standard Oil Trust.  Now, 100 years later, we need to do it again.

Supply and Demand

A market economy can work, but the laws of Supply and Demand won't work until the oil industry is forced to compete like any other business. An undtil that happens, we'll keep paying through the hose.

A hallmark of your credit card was that your interest rate was always fixed. Well let me correct that you had a fixed introductory rate. Then you had a new fixed rate until you made a late payment. Then you had a very high fixed rate (the default rate) for making that late payment.

Then when the financial crisis hit the company likely changed your interest rate again to a new higher interest rate regardless of what rate you were paying before. And now you can forget all I just wrote because the industry is again changing your cards and giving new cards variable interest rate.

Now instead of fixed 17.99% your interest rate will say something such as "prime + 13.99%" meaning you will pay at least 13.99% (or whatever percentage the company decides to make it) and then the current Federal Reserve Prime Rate.

However, do not be surprised if instead of a fixed rate plus the prime that the Company has offers a fixed range for example 8.67% to 17.47%. The range is just another method through which the company will try to maintain a high rate of return for itself. Through this method when your balance is paid off your interest rate can be the low end of the range plus prime, but when you have a balance due the interest rate will magically shift to the high end of the range.

It is enough to make one wonder why Credit Card companies do not merely set the interest rate at the typical default rate of 29.99%. At least then a consumer would know their rate and could choose whether it is worth it to have a credit card. Enough with these hide the ball tactics on interest rates and how those rates are calculated.

"Too Much Credit" created by Flickr user Andres Rueda, used under Creative Commons Attribution-Noncommerical 2.0 license.

That heavy thud in your mailbox
isn't the last of the fireworks from Independence Day - it's the sound of the
new water rates - higher bills begin landing this month. It's déjà vu all over
again. Rate increases of 8 percent on top of January increases will raise bills
for a typical family home by about $8 a month - $16 per bill - higher than they
were one year ago.

Don't look for water costs to level
off anytime soon. Water prices will rise again this year by as much as another
20 percent, to pass on the costs of buying the ever more expensive and scarce
stuff.

You have to be able to do some
mighty fine ciphering and gazintas, as Jethro Bodine used to say, to understand
much more than that. Water bills are a complicated stew of water and service
fees - the largest chunk of the bill - and the actual amount of water used,
which is pretty cheap.

(Imagine what you'd think if your
gas station charged entry and exit fees, and about a quarter of what the
gasoline costs at the pump. Your interest in the cost per mile, the miles to a
gallon, and the gallons burned would go from 60 to zero mph, and you'd just try
to avoid going to the gas station and paying the cover charges.)

But we can't stop going to the
meter - it's there every billing cycle.

At the meter, charges are assessed
based on the size of the pipe. Size matters - more than the volume we use. So
if you use 14 hcf (like filling the bedroom, 12-feet by 14 feet by 8 feet),
about $42 worth of water, your monthly use - half the bill - will be $58 with
3/4 inch pipe and $63 with 1 inch pipe. That's $5 for a ¼ inch difference,
using the same amount of water.

The second time you fill that
bedroom - are we soggy yet? - it will cost $45.20, just $3.20 more, and the
third filling gets us to $50.75 or so for that last 14 hcf (at a rate of
$3.625). A typical San Diego household fills that bedroom twice in the
two-month billing cycle.

Most houses have 5/8 or 3/4 inch pipe that's charged
at the same rate - put the hammer back in the drawer - and will see the cost
for that flat rate rise from $33 to $35.18 on the bi-monthly bill.

So that puts a typical household's bill for water
alone at about $103 for two months.

http://www.sandiego.gov/water/rates/rates.shtml

Add to that a sewer fee of between $28 and $30, and
charges of $3.36 for each HCF they believe ends up in the sewer - they say 9
hcf is typical. Sewer rates went up in May.

http://www.sandiego.gov/mwwd/residential/rates/singlefamily.shtml

So a typical family is looking at looking at water
bills of about $160

WANTED: MORE INFORMATIVE BILLS

How do we save money? The only place to look for
savings is in the water we're using.That first $75 or so is pretty much fixed.

It
would be great if the city's water bills helped us better understand what we're
doing with the stuff. For a lot of us, the water bill is the only bit of
information we get about how we use water and it ain't much.

Once
every two months the bill shows up - and the hunt for clues begins.

Am
I conserving? Is there a leak in the pipes? How am I doing for the size of my
house and the size of my family? Are my efforts to conserve succeeding?

Hard
to tell. I can tell if I used more water than this time last year. If only I
could remember what I was doing this time last year. How was the weather? Did I
have guests? Was I home? Hmmmmmm.

Wouldn't
it be great if there were some measures in the bill that gave me more
information? And if it was in a form I understood?

Confusion
starts with the measurements: water is billed in HCF - a hundred cubic feet.

What
that means in gallons, I have to use a calculator to figure out. That makes
things tough. I see water talked about in acre-feet, hcf and gallons - often in
the same place. Consistent measurements would be nice, and one that I could
picture, like gallons, would be even nicer.

But
the bill could tell us more.

Is that waaaay a lot of water?

It
could tell us if we're using an awful lot of water for a home our size - by
linking our lot size to our water use. The cities and counties already have
that information in our parcel data. The bills could take the typical number of
people in homes in our neighborhood; add it to what it would take to water a
lawn on the parcel (lot square footage minus house square footage, with some
allowance for pavement).

The Water Department does have 275,000 customers and that's a lot of data. But most spreadsheets can do that simple math, like {(lot size)-(house size) x 80%} x (how much water needed to keep landscape healthy) for 25,000 records at a time. 

Did something go wrong?

A
lot of people find out about a leak when the bill comes - just yesterday I
heard a story from a neighbor who'd checked his water lines because his bill
showed he used 3 HCF more than normal and found a pipe leak in the main, near
the water meter.

Of
course, with cheap water, letting the water pour out cost less than $10, far
less than the $375 repair he paid for. And another acquaintance fixed his
continuously running toilet only after it got bad enough to run through a
couple of HCF in a two-month billing cycle.

Wouldn't it be great if there were some big red
letters on the bill to suggest there may be a problem, especially since the
water department has the information on hand to identify a one-time jump in
water us