Archive for August, 2011

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Penn Jillette and Hayek: “I don’t know”

August 17, 2011

Lynne Kiesling

Penn Jillette, the taller and more vocal half of the magic performance duo Penn & Teller, has written a lovely and thoughtful essay as a companion to his appearance last night on Piers Morgan’s CNN show. It defies excerpting, so I encourage you to click through and read it in its entirety.

His theme: “I don’t know”, particularly with respect to religion and to helping the poor, leading him to conclude that he is an atheist libertarian. For example, about helping the poor he writes

Then he asked me what we could do to help poor people. I said I donated money, food, medical care, and services and he said, “No,” he meant, what could society do to solve the problem of poor people. Again, I was stumped.

He said the government had to do it, which I interpreted as another way of saying he didn’t know, but he thought that made me look mean … even though I do care and do try to help. …

And I don’t think anyone really knows how to help everyone. I don’t even know what’s best for me. Take my uncertainty about what’s best for me and multiply that by every combination of the over 300 million people in the United States and I have no idea what the government should do.

In this essay Jillette is channeling some of the most important ideas about the knowledge problem developed by Hayek and others, ideas that are the foundation of what we do here at KP — the limits of individual knowledge, the necessary limits of collective knowledge, and the humility that should arise as a consequence, both individually and in collective action/policy situations. Jillette is also channeling a lot of David Hume’s skepticism, not just in terms of religion but also in terms of empiricism and the limits of human reason.

Jillette’s essay is also charming in tone, reflecting respect for those who disagree with him and those with different life experiences and abilities. A very thought-provoking read.

Posted in Economics | Tagged , , , | 2 Comments »

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Raising MPG standards, part 2: Morris well explains the relative advantages of raising the gasoline tax

August 17, 2011

Michael Giberson

At the Freakonomics blog, transportation scholar Eric Morris favors President Obama’s recent deal to dramatically raise CAFE standards (Corporate Automobile Fuel Economy standards) by 2025. A gasoline tax would be far superior public policy, he said, but it won’t work politically. Because he thinks CAFE standards do work, technically and politically, he said we should go with this “second-best solution.”

To keep the discussion here in manageable chunks, I’m responding in two posts. In part 1 of “Raising MPG standards,” I explained why I wasn’t persuaded by Morris’s evidence that CAFE standards actually work. In this post I highlight what Morris explained well: why a gasoline tax can be the superior regulatory approach.

Here’s Morris:

[E]conomists generally prefer to do things with price signals as opposed to regulatory standards. Why?

Price signals inflict pain on consumers, but let them figure out what form they want to take it in. They in turn force producers to respond to their (altered) demand, but allow producers leeway in how that demand is met. This allows consumers and producers to change behavior in the most efficient possible manner.

Instead of CAFE, why not just raise the gas tax and let drivers figure out whether they want smaller cars, lighter cars, less powerful cars, more expensive cars, shorter-range cars, or, crucially, cars that are just as heavy, powerful, and cheap—but which get driven less?

This raises the true problem with CAFE. It misses out on a potentially key part of the solution to reducing fuel use: driving less. In fact, ironically, increased CAFE standards will have a perverse and unwelcome effect; better fuel economy will increase the fixed cost of driving (i.e. vehicle prices) but will actually reduce the marginal cost (i.e. fuel expenditures). To a degree, less thirsty cars will actually cause people to increase the number of miles they drive (as I’ve written about here).

With increased gas taxes, on the other hand, less driving will be part of the consumer’s toolkit. Some who absolutely need vehicles with poor fuel economy will have the option of avoiding the tax by driving less instead. As long as their fuel use goes down, why not give them that choice? Greater economic efficiency would result. In fact, the Congressional Budget Office ran the numbers in 2004 and found that cutting fuel use through taxes was considerably cheaper in the long run than raising CAFE.

Reducing driving through a higher gas tax would have other important benefits that improving fuel economy does not, like congestion relief and accident reduction…

Another advantage of a gas tax increase is that it would start working today. Since the car fleet takes so long to turn over (according to the US Department of Transportation, automobiles these days stay on the road an average of about 12 or 13 years), it will be a very long time before the new CAFE standards actually translate into meaningful changes in emissions. But increasing the gas tax would have immediate effects.

Sure, we can counter a call for higher gasoline taxes with a long list of negative consequences. The point is that an energy tax is relatively speaking transparent and efficient. However harmful a higher gasoline tax is, a CAFE regulation aiming at the same effects would be ten times (rough guess) more costly.

The social costs of raising CAFE are surely greater than the social benefits, so “second best” policy or not, we ought not to do it.

RELATED: In part I, I criticized the evidence that Morris put forward in favor of the view CAFE actually works.

Posted in Energy markets, Environmental policy, Regulation, Transportation | Tagged , , | 2 Comments »

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Raising MPG standards, part 1: Morris is not persuasive in his claim that CAFE works

August 17, 2011

Michael Giberson

At the Freakonomics blog, transportation scholar Eric Morris favors President Obama’s recent deal to dramatically raise CAFE standards (Corporate Automobile Fuel Economy standards) by 2025. A gasoline tax would be far superior public policy, he said, but it won’t work politically. Because he thinks CAFE standards do work, technically and politically, he said we should go with this “second-best solution.”

To keep the discussion here in manageable chunks, this first post argues that Morris is not persuasive in his claim that CAFE works. A second post will highlight Morris’s more insightful discussion concerning gasoline taxes.

The evidence Morris offers that CAFE standards work is, to put it politely, weak. Here is his chart and accompanying explanation:

 This is not because CAFE doesn’t work; it does. In 1975, a few years before CAFE was implemented, average MPG for new cars and light-duty trucks was 13.1. In 2010 it was 22.5. Can this be attributed to CAFE? To a large degree, yes, as this graph makes clear:

Source: Eric Morris, Freakonomics blog.

CAFE standards were aggressively increased from 1978 to 1984, and, as the chart above shows, fuel economy responded. However, from 1985 until 2007 CAFE standards were no longer raised meaningfully—and MPG flatlined. The table makes it pretty clear that the CAFE standards created a floor under MPG for a 25-year period, when low gas prices (remember those?) rendered consumers otherwise indifferent to fuel economy.

Yes, gas prices, remember them? Beginning around 1976, gasoline prices jumped from about $1.73 (EIA data, annual average price per gallon of unleaded regular gasoline in constant 2005 $) to about $2.65 by 1981, then they drifted back to around $2.00 in 1985. In 1986, gasoline prices dropped under $1.50 and stayed around that level until about 2003. From 2003 to 2008 gasoline prices moved up with crude oil prices, in 2009 they started coming down again.

The big moves in measured CAFE came when gasoline prices were high. The long low-price period saw both measured automobile and light truck CAFE levels drifting downward.

Now look at the chart again: the average of measured “car” and “truck” CAFE levels (labelled “both” in the chart) fell faster than either the car or truck level.

How is it possible that the average of two data series fell faster than either of the component data series? Because “both” is a weighted average, and as gasoline prices stayed low consumers limited by their options in the more-tightly-regulated automobile category simply switched into light trucks (i.e., minivans and SUVs). Automakers, too, feeling constrained by CAFE standards, pushed consumers to make that shift. What exactly are the policy benefits from driving consumers out of station wagons and into SUVs and minivans of similar fuel economy performance?

CAFE “worked” when it has a supporting high gasoline price environment, but I suspect that the gasoline prices were doing most of the heavy lifting.

RELATED: In part II, I highlight what Morris explained well about gasoline taxes.

Posted in Energy markets, Environmental policy, Regulation, Transportation | Tagged , , , | 1 Comment »

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Google, Motorola, and the effects of vertical integration

August 16, 2011

Lynne Kiesling

Yesterday Google announced its purchase of Motorola Mobility, the device manufacturing half of the former Motorola. Today’s Wall Street Journal has a front page full of stories about this move, including “Bid Comes Amid Tougher Scrutiny” (You know how to read this even though it’s subscriber-only, right? Do a search at a news aggregator for the article title.) Despite being a “new industry” technology merger, this transaction actually is grounded in a long history of the economics of vertical integration, and it may provide another issue for FTC and EU regulators to analyze as they pursue their respective antitrust investigations of Google.

According to the Wall Street Journal article,

Motorola doesn’t have a dominant position in handsets. Five years ago, it sold nearly one in five cell phones worldwide; today it has just a 2.4% market share, says researcher Gartner.

Google doesn’t directly compete with Motorola. Legally, it’s more difficult for the government to successfully challenge such a “vertical” deal between two companies that aren’t direct rivals.

In vertical mergers the dominant competition issue is called vertical foreclosure — when an upstream firm (Google in this case) merges with a downstream firm (Motorola Mobility in this case), does that merger enable the upstream firm to reinforce or extend its market power and market share? And if so, does that increased market power and market share benefit consumers or not? If there are significant economies of scope, then a vertically-integrated firm may enjoy substantially lower production costs than separate upstream and downstream firms (a related issue here is reducing “double marginalization” when the demand curve is downward-sloping in both upstream and downstream markets). Also, does the vertical integration economize on transaction costs — is there a Coase “Nature of the Firm” impetus for vertical integration to lower costs? If those are the merger drivers, then the merger can improve product quality and diversity and reduce prices in ways to benefit consumers, particularly if the downstream market is a rivalrous one. I would certainly describe the mobile device market as rivalrous!

But the vertical merger story is not all rosy and welfare-enhancing. What if the merger enables the upstream firm to leverage its upstream market power into higher downstream market power by reducing availability of its product to its downstream rivals? A more concrete example may be iron ore and steel; what if a dominant iron ore producer merges with a downstream steel firm, and reduces its sales of iron ore/raises prices to the other non-related steel mills? The vertically integrated iron ore-steel firm could increase its steel production by restricting its sales of iron ore to others, and the price of iron ore to independents may increase, which would increase the vertically-integrated firm’s market share in the downstream steel market, and may lead to higher steel prices to consumers. This is called vertical foreclosure.

The concern about vertical foreclosure with Google-Motorola Mobility is access to the Android operating system and updates to it. From the Wall Street Journal article:

On Monday, several handset makers that use Android publicly welcomed the deal. But privately, some may end up questioning whether Google will grant Motorola preferential treatment. For example, Google could theoretically give Motorola its latest versions of Android exclusively, placing them at a competitive disadvantage.

One way for the Justice Department to hold Google to its promise not to discriminate against Motorola rivals would be to seek to implement a so-called “firewall” between Google and its Motorola unit.

In exchange for not challenging the deal, the Justice Department might also ask Google to sign a consent decree legally compelling it to license Android to any comers on fair, non-discriminatory terms.

This issue is one reason that the FTC and the EU may incorporate this merger into their antitrust investigations of Google. For example, as quoted in a Huffington Post article on the merger:

Others were more concerned. Gary Reback, a prominent Silicon Valley antitrust litigator, who has become a vocal critic of Google’s business practices, said that the deal deserved to be closely scrutinized.

“You’re dealing with a company that is already a monopolist, that is already under investigation for allegedly anti-competitive behavior,” he said. “By buying this, they get a huge additional dose of market power.”

At the very least, the Motorola takeover bid provides federal regulators probing Google yet another reason to subject the company to scrutiny.

Mr. Reback clearly sees this as a move that would result in vertical foreclosure, but other economists and lawyers are not as worried about such foreclosure.

I don’t see the vertical foreclosure issue as being particularly problematic here. The mobile device market is very rivalrous, with hundreds of devices and at least four different platforms (Apple iOS, Android, Blackberry, Windows, etc.). It’s also an information-rich retail market, with a lot of consumers who choose Android over Apple because they appreciate the more open Android platform to Apple’s “walled garden” approach to OS and application development; if Google tries to restrict updates preferentially to Motorola devices, that restriction is likely to trigger such “anti-walled-garden” complaints in a way that will rebound negatively on Google. Furthermore, the role of the mobile device carriers (Verizon, AT&T, Sprint, Vodafone, etc.) changes the dynamic between the operating system owner and the device manufacturer, and may add some impetus to ensuring that non-Motorola devices get the same OS updates at the same time.

Rather, I tend to agree with the analysts who say that this move is Schumpterian platform competition on a different front: patents and the threat of patent lawsuits. Last week Apple managed to block release of the Samsung Galaxy tablet in Europe because of their lawsuit alleging Samsung’s violation of Apple patents. Google’s acquisition of a large set of Android device-related patents gives them a stronger bargaining position against Apple and Microsoft specifically:

The amount of money being spent now on patent armaments is staggering. Google will spend $12.5 billion to acquire Motorola. Earlier this summer, a consortium including Apple, Microsoft, and Research In Motion, bought 6,000 Nortel patents for $4.5 billion.

For the emerging patent superpowers–Apple, Microsoft, Google–the likely end result of this nuclear build-up could be a legal stalemate that may in fact free up the giants to maneuver on the product side. While every launch may carry with it a back-room patent agreement (I’ll agree to not sue you on patent X today if you agree to not sue me on Patent Y when I launch my new thing tomorrow), the balance of power could in, in a limited way, work in favor of innovation at the large companies.

This move, too, has a long pedigree in economic history; more on that later.

Posted in Economics | Tagged , , | Comments Off

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Lomborg and Haab on light bulbs and technology

August 16, 2011

Lynne Kiesling

Thanks to Tim Haab for pointing us to this excellent observation from Bjorn Lomborg about innovation, regulation, and environmental quality:

Real reductions in carbon emissions will occur only when better technology makes it worthwhile for individuals and businesses to change their behavior. CFLs and other advances can take us part of the way, but there are massive technological hurdles to overcome before fossil fuels generally become less attractive than greener alternatives. …

Limiting access to the ‘wrong’ light bulbs or patio heaters, ultimately, is not the right path. We will only solve global warming by ensuring that alternative technologies are better than our current options. Then, people the world over will choose to use them.

Hear, hear.

Posted in Economics | Tagged , , | 1 Comment »

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Learn Liberty: Tragedy of the Commons

August 15, 2011

Lynne Kiesling

Here’s another great video from Learn Liberty: Sean Mulholland introducing the “tragedy of the commons”, which, as he accurately notes, is more accurately called the problem of open access. If you teach a class where you talk about this problem, or want to learn more about this fundamental ill-defined property rights foundation of environmental problems, this video is a good resource.

Posted in Economics, Environmental policy | Tagged , , | Comments Off

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Cleantech opportunity: clean water for fracking

August 15, 2011

Lynne Kiesling

One of the most beautiful aspects of market processes is how individuals create and take advantage of new profit and growth opportunities by creating value for others. Here’s a case in point that will resonate with many of you, given the outstanding diligence and insight of Mike’s fracking analyses here: clean water for fracking is a hot cleantech opportunity:

In an interview this week with VantagePoint Capital Partner and Founder Alan Salzman, he told me that he sees technology that can help solve the clean water issue for fracking as an upcoming hot area for investment. “We think the limiting factor for gas fracking is water. We’re not gas people, and we’re not oil people. But we are water people,” said Salzman. He declined to name any specific company the fund is backing or looking at.

But if you read the article carefully, you’ll notice a fact that mitigates against my pro-market-process comment above:

The company [ABSMaterials], which was founded in 2009, has several pilot projects in the works and is funded by the Department of Energy’s Small Business Innovation Research Program. The company’s glass expanding, absorbing product is called Osorb.

Conglomerate GE is also working on more environmental methods of recovering and reusing water from natural gas fracking and is working with the DOE on research, too.

If fracking really is here to stay and growing, as Mike has discussed extensively, are these research subsidies necessary to induce innovation in water cleaning technologies? If so, on what basis? Is there a Coase problem here — does legal precedent fail to define legal liability sufficiently to clarify the profits attached to the water cleaning? Or, if that’s not the case, is the water cleaning insufficiently valuable to be worth doing? That hypothesis is consistent with the argument that fracking does not actually create a lot of water supply damage. But if that’s the case, then why subsidize the research — isn’t that a waste of taxpayer funding on research that isn’t likely to be valuable enough to be worth pursuing?

My arm’s-length, casual empricism about water and fracking is that the water issue is more about water use in fracking than about groundwater contamination, rather like ethanol manufacturing. But I’m curious about whether or not such “how cool is this?” innovation is arising from a desire to profit by creating value for others, subsidies because of a lack of well-defined property rights and legal liability, or subsidies because of crony corporatism in energy. In this area, all three are possible, although I’d assign more probability to the latter two rather than the virtuous profit motive.

Posted in Economics | Tagged , | 1 Comment »

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Devon Energy’s bet on Barnett Shale, made 10 years ago, has paid off

August 15, 2011

Michael Giberson

Yesterday, August 14, 2011, was the ten-year anniversary of the announcement by Oklahoma City-based Devon Energy of its intention to acquire Houston-based Mitchell Energy and Development for $3.5 billion. The prime target of interest lay about halfway between the two company headquarters, in the Barnett Shale surrounding Fort Worth, Texas. Mitchell had figured out how to use hydraulic fracturing to produce gas from shale formations, and was beginning to add horizontal drilling to its mix.

As Jack Smith explains in the Fort Worth Star-Telegram‘s Barnett Shale blog:

At the time, it had drilled about 400 wells in the Barnett, and executives saw the potential for 1,200.

But over the decade, Devon would advance the ball significantly with improved horizontal drilling and an expansion of drilling far beyond areas north of Fort Worth where Mitchell Energy had focused. The result would be a drilling boom that by 2008 would draw numerous rivals into the field and make the Barnett the biggest gas-producing area in the U.S. Tarrant and Johnson counties would emerge as the top two gas-producing counties in Texas.

Contrary to reports by some people that shale gas production is economically doomed, Devon says things are looking up:

In the Barnett, “our drilling costs are down, our production is up and our efficiencies are increasing,” said Brad Foster, senior vice president of Devon’s Central Division, which includes Barnett operations.

Devon has achieved, or is on the verge of, several Barnett milestones:

It posted record production in this year’s second quarter, averaging the equivalent of 1.28 billion cubic feet of gas per day, even while keeping only 12 drilling rigs busy. That’s less than a third as many as it ran in 2008, before gas prices cratered.

Devon’s total Barnett production since the Mitchell acquisition is expected to hit the equivalent of 3 trillion cubic feet by year’s end, spokesman Chip Minty said. It’s at 2.8 trillion now.

Despite weak gas prices, now about $4 per 1,000 cubic feet, Devon is realizing solid returns from the Barnett because “our ability to drill wells economically just gets better every year,” said Chairman Larry Nichols, who was CEO during the Mitchell acquisition.

The story continues with some details that help make sense of various claims made by the industry. On the one hand the industry claims that hydraulic fracturing is an old, frequently-used technology that has been time-tested and proved safe. On the other hand, companies assert they are rapidly improving methods to cut cost and need trade secret protections for their hydraulic fracturing fluids.

The truth is hydraulic fracturing has been around for a long time, but its combination with horizontal drilling techniques and application in development of oil and gas from shale is much more recent. As the immense economic potential of shale-based production has become clear, many companies have sought out ways to do the job better.

More from Smith:

When Devon began drilling in the Barnett in 2002, it took three to six weeks to drill a single horizontal well, said David Fortenberry, Devon vice president of technology.

“The rigs we used were really too small and underpowered for horizontal wells,” he said.

Now, with higher-efficiency rigs and much more experience, Devon averages only about 12 days to drill a Barnett well, and “we’ve actually drilled some wells down in southwest Johnson County in about six days,” Foster said.

Drilling-rig design “has improved dramatically in the past 10 years,” with rigs now “ideally suited to drill these horizontal wells,” Nichols said.

Devon uses a “walking rig” device to scoot a 156-foot-high rig between surface well bores at its southwest Tarrant pad site. If well bores are 20 feet apart, the rig can move that far in just an hour. Without the walking device, it could take two days to disassemble a rig and set it up 20 feet away.

The Barnett wells that Devon has drilled this year have provided “some of the best results we’ve ever gotten,” Nichols said.

…

Ample supplies from dramatic increases in U.S. shale-gas production have kept prices low, as the industry has become “in part … a victim of our own success,” Nichols said.

Devon has dropped to 12 drilling rigs because it can keep production at least flat at that level of activity and because “at this time, the country just doesn’t need any more natural gas,” Nichols said.

Production declines have been lower than expected in Barnett wells, he said. There will be “steep declines in the first year, but it flattens out a lot sooner than we originally thought” — often after 12 to 18 months of production, he said.

Natural gas consumers are not complaining. Even while oil prices have moved much higher post-2008, domestic U.S. natural gas prices remain held in the $4 to 5 MMBtu range. And with natural gas prices playing a significant role in competitive wholesale power prices, electric consumers are seeing some benefits, too.


ALSO: Another good story on Devon’s acquisition of Mitchell and development in the Barnett Shale appeared in The Oklahoman yesterday.

Posted in Economic history, Energy markets, Technology | Tagged , | Comments Off

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Power consumption reaches new peaks in Texas, ERCOT narrowly avoids rolling blackouts

August 13, 2011

Michael Giberson

Much in the news in Texas these past few weeks have been new peak power records and several grid emergency conditions which saw the ERCOT power system narrowly avoid rolling blackout a time or two. Tom Fowler of the Houston Chronicle‘s Fuel Fix blog has been tracking the story closely, see selected links below.

Rebecca Smith provided a broad view of the events in the Wall Street Journal yesterday. She reports that power consumption has reached levels this summer than ERCOT had forecast would not be reached until 2014. Eight times this summer power consumption has exceeded the previous record, set last year, 65,766 MW. The new record, set August 3, is 68,294 MW.

Smith’s article reports some concern about the future ability of ERCOT to meet rising demand, given the lack of regulatory tools to push companies to build more power plants. Fortunately, powerful economic incentives are at work:

While most power in Texas sells for negotiated prices spelled out in long-term contracts between generators and power retailers, the grid operator also procures electricity to keep the system in balance. The price paid in this auction readjusts every 15 minutes. When supplies are thin, prices can rise rapidly.

As a result of record electricity consumption, prices repeatedly hit $3,000 a megawatt hour last week, which is three times the maximum amount that generators can charge in deregulated electricity markets in the eastern U.S. (Electricity markets in Texas have rules created by state authorities, whereas other deregulated U.S. power markets are guided by the Federal Energy Regulatory Commission.)

Note that the presence of long-term contracts at prices significantly lower than $3,000 per MW h doesn’t diminish incentive effects, since at the margin conservation or additional consumption faces that price. Also, the expectations now being formed concerning next summer’s average prices will factor in recent experiences and shift the prices higher for future power contracts.

Those powerful economic forces at work will be signaling to both generators and retailers. I am a little surprised that Retail Electric Providers in ERCOT are not yet offering smart-grid enabled products involving price-sensitive (or emergency grid condition-based) demand response, but I’ll be much more surprised if such products are not available before next summer.

MORE: FuelFix.com ERCOT story highlights from the past two weeks:

Posted in Electricity, Energy markets, Regulation | Tagged , , , | 1 Comment »

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EPA to power industry: Don’t worry about reliability, we can grant waivers

August 12, 2011

Michael Giberson

Even an article in the New York Times is characterizing the spate of EPA regulations, recently issued or coming shortly, affecting the electric power industry as a “cascade.” Regional power grid operators have been reviewing their reliability projections and becoming alarmed. Here’s Matthew Wald in the Times:

WASHINGTON — As 58 million people across 13 states sweated through the third day of a heat wave last month, power demand in North America’s largest regional grid jurisdiction hit a record high. And yet there was no shortage, no rolling blackout and no brownout in an area that stretches from Maryland to Chicago.

But that may not be the case in the future as stricter air quality rules are put in place. Eastern utilities satisfied demand that day — July 21 — with hefty output from dozens of 1950s and 1960s coal-burning power plants that dump prodigious amounts of acid gases, soot, mercury and arsenic into the air. Because of new Environmental Protection Agencyrules, and some yet to be written, many of those plants are expected to close in coming years.

No one is sure yet how many or which ones will be shuttered or what the total lost output would be. And there is little agreement over how peak demand will be met in future summers.

The E.P.A. estimates that a rule on air toxins and mercury that it expects to complete in November will result in a loss of 10,000 megawatts — or almost 1 percent of the generating capacity in the United States. Electricity experts, however, say that rule, combined with forthcoming ones on coal ash and cooling water, will have a much greater effect — from 48,000 megawatts to 80,000 megawatts, or 3.5 to 7 percent.

…

American Electric Power, a multistate utility based in Columbus, Ohio, is saying it will retire 6,000 megawatts. Much of that was scheduled to retire anyway, but the rules have stepped up those retirement dates.

Robert W. Perciasepe, the deputy administrator of the E.P.A., said his agency had not estimated all the retirements that would be set off by rules it was still preparing. His agency, he said, was trying to move promptly through rulemaking and “provide the rational basis for utility planning, instead of this continually rolling ball of uncertainty, which allows people to speculate, and creates a situation where it’s very difficult for competent utility planners to do the work they need to do.”

He said the E.P.A. had been regulating power plant emissions for 40 years, and where necessary to keep the grid stable, had granted delays and exemptions.

The industry is concerned. PJM Interconnection, the regional unit that set the demand record on July 21, has suggested that the E.P.A. rules would put the grid’s reliability at risk. “E.P.A.’s analysis of the impact of the proposed rule may understate the level of expected generation of plant retirements and does not provide sufficient flexibility or time to address potential localized reliability concerns,” it wrote in a statement filed with the agency.

The most likely replacement for the coal plants is new natural gas-powered generators. But PJM and others are complaining that if the E.P.A. follows its intended schedule, utilities will not have much time to decide whether to close or upgrade their old plants, and no one will have time to build new ones.

Marc de Croisset, an analyst for the investment bank FBR, said the uncertainties arose from the scale of the plant closings. “It’s a major transformation,” he said — the biggest since the electric companies shifted away from oil in the 1970s, possibly larger.

…

Very few companies that own coal-fired power plants have announced which ones will close, partly because they are waiting to see what their neighbors decide. If a competitor goes out of business, prices for electricity will rise and the survivor could get enough revenue to make expensive upgrades worthwhile.

“They’re playing a giant game of chicken right now, to be the last man standing, just like the airlines,” said Mr. de Croisset, the FBR analyst.

The agency is writing a cascade of rules on emissions of carbon dioxide, nitrogen oxides, sulfur dioxide and mercury, and handling of ash; it published a “Cross-State Air Pollution Rule” last month.

American Electric Power has listed 25 of 55 coal-fired generators as candidates for being shuttered, many of which have been running at full capacity lately. On that list is a 42-year-old behemoth in Louisa, Ky., called Big Sandy 2. Upgrading it would cost $700 million, the company says.

“This heat wave shows that you can’t rely on a massive amount of wind generation to fill the void,” Pat Hemlepp, a spokesman for American Electric Power, wrote in an e-mail. “That’s why we are extremely concerned about reliability.”

Others say that A.E.P. has been slower than its competitors to upgrade its plants and is now seeking delays in new E.P.A. rules to keep its competitive advantage.

There is certainly no doubt that AEP would like to work regulatory policy to its competitive advantage. Governments with wide scopes and deep reaches inspire businesses to lobby quite feverishly for advantage. The EPA’s ability to issue regulations and then grant waivers from them simply encourages  more feverish lobbying activity.

I’m sure that environmental lawyers in Washington are quite excited by the EPA’s recent actions.

Posted in Energy markets, Environmental policy, Politics | 2 Comments »

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