Streetwise Professor

August 15, 2011

A Threefer

Filed under: Economics,Energy,Politics,Regulation — The Professor @ 3:02 pm

Michael Giberson at Knowledge Problem has an excellent post that illustrates perfectly three fundamental problems with the metastasizing regulatory state.   EPA rules on air toxins and mercury are going to force–or at least accelerate–the closure of large numbers of coal-fired power plants especially in the East and Midwest.

Problem One: making uncoordinated policy decisions that have myriad impacts in tightly connected systems.  The EPA decision focuses on one thing: air quality.  But its chosen remedy has the potential to cause major disruptions in areas outside of EPA jurisdiction, considerations that EPA did not take sufficiently into consideration.  Specifically, the loss of such large quantities of baseload generation threatens electricity supply, and electricity reliability.  The stability of the grid depends crucially on the spatial configuration of load and generation; those have to be balanced tightly in order to ensure reliability.  Shutting down just one plant can upset that delicate balance in a way that greatly increases the system’s vulnerability.  So in its zeal to do good, EPA has created a huge potential for bad.

Problems Two and Three have their roots in EPA’s response to Problem One.  EPA says: “Don’t worry!  We’ll use our discretion to try to mitigate these bad effects!  We might give waivers!”

As Richard Epstein pointed out, Government by Waiver has at least two serious defects.  First, it is an invitation to rent seeking, lobbying, and politicking–all just different flavors of corruption.  Resources are wasted in competing for favors.  And favors are allocated to those who have a comparative advantage in politicking, not those who have a comparative advantage in producing or consuming efficiently.

Second, it creates substantial uncertainty.  Investments in generation and transmission (which can be both a complement to or a substitute for generation) have very long lives.  The return on any investment can depend decisively on regulatory decisions.  Yeah, EPA can say it is striving “to provide a rational basis for utility planning,” but anyone out of diapers knows how the game is really played.  The outcome of the regulatory process is very difficult to predict because it depends on the uncertain outcome of the rent seeking process, fluke events (e.g., one utility is the subject of a damaging revelation, perhaps untrue, which makes it a political pariah), and other unfathomable possibilities.  “Regulatory discretion” is a recipe for radical uncertainty.  Anyone contemplating making a huge investment that can turn into a long-lived white elephant at a regulator’s whim will often decide to wait until that uncertainty is resolved.  Thus, this policy uncertainty tends to retard investment, leading to higher prices and lower reliability.

Markets rely primarily on the price system to coordinate the actions of millions of dispersed decision makers acting on little pieces of information.  Prices tell people about the consequences of their actions, give them an incentive to act efficiently and take these consequences into account even if they could not possibly articulate what those consequences are.

There is no analogous mechanism to coordinate the actions of regulators.  Regulators routinely take actions that are perfectly sensible within their narrow, legally circumscribed spheres, but which impose huge costs elsewhere.  There is a feedback mechanism of sorts, but the ways that regulators respond to the feedback creates its own problems.  In this instance, EPA did something in pursuit of its legislative mandate which will have severe adverse consequences outside of it.  The affected industry howled, providing feedback, so EPA is extemporizing a response.  But that extemporization brings on its own bad effects, in the form of corruption and investment-killing uncertainty.

Like Reagan said: The nine most terrifying words in the English language: “‘I’m from the government and I’m here to help.”

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5 Comments »

  1. To save a few millionths of a person from that horrible toxin Mercury (while simultaneously mandating a lot more exposure to it via CFLs) they’re going to kill a whole lot of people with freezing and heat stroke by busting the electricity supply.
    And at the last minute they added in the embarrassingly job-producing Republican state of Texas and took out some Democrat states.
    It’s like being governed by the Mafia, except the Mafia isn’t forever telling us they’re raping us for our own good.

    Comment by Lark — August 15, 2011 @ 11:10 pm

  2. @Lark–couldn’t agree more. Your pointing out the absurdity of regulating mercury in power plant emissions while simultaneously demanding that we bring it into our homes in CFLs was spot on.

    The ProfessorComment by The Professor — August 16, 2011 @ 11:04 am

  3. Adopting the Russian system that was a Soviet legacy-make everything imaginable a violation of some regulation but acceptable under some type of waiver. As you point out Professor these waivers then come at some cost. CFL’s were mandated by Rupulican sponsored legislation. The effective live was touted as much longer than incandescents. In practice they last far less than was claimed and this is consistent with my personal experience. It is bad technology. Wind farms are another bad technology foisted on us. I always wondered why in West Texas so many units were not running. It turns out the transmissions are very unreliable and the maiemance costs are astronomical. That is why so many are always down. Even the Sierra Club is calling them a failed technology. The guiding hand of the government always finds the wrong path.

    Comment by pahoben — August 17, 2011 @ 9:47 pm

  4. Great minds, pahoben. I made the same comparison to my wife the other day: everything is illegal unless it is expressly permitted. The power that gives to those who can grant the permission.

    Speaking about permission, what say you about the Exxon/Statoil-DOI standoff over the Julia lease?

    The ProfessorComment by The Professor — August 18, 2011 @ 8:44 pm

  5. I am horrified. We have an immense Federal bureaucracy driven by a left wing agenda and that agenda is contrary to the interests of the US. I am shocked every day to see the latest policy or decision from DOx (your choice of x). I pray that it will be dismantled quickly after 11/12.

    I have doubted Perry but now he really looks to me like Gandalf riding over the horizon at the battle of Helm’s Deep.

    Comment by pahoben — August 18, 2011 @ 11:45 pm

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