Daily Archives: August 7, 2012

Federal government is trying to fix your car-buying mistakes

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Michael Giberson

One of the federal government’s first oil conservation ideas, initiated during the Ford presidency, was Corporate Average Fuel Economy (CAFE) regulation. Mostly the goal was to reduce U.S. consumption of oil as a way to reduce oil imports, though ancillary environmental benefits were also anticipated. Regulatory analysis of CAFE regulations over the near 40-year history of the regulation has come to mixed conclusions, but it is safe to say that most consumer conservation efforts since 1975 have been driven by changing fuel prices and CAFE has been a modest factor at best.

About a year ago the Obama administration announced significant increases in the fuel efficiency standards. On December 1, 2011 the EPA and NHTSA issued the formal regulatory proposal: “2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards,” Federal Register 76 (December 1, 2011): 74,854.

What may be most interesting about this latest increase in standards is that the increase is justified by regulators only incidently by projected environmental or energy security benefits. Most of the government-projected benefits come from the government correcting mistakes it thinks consumers make when buying new cars. As an analysis by Ted Gayer and Kip Viscusi shows, the EPA and NHTSA believe that less than 13 percent of the benefit of the regulation will be from environmental and energy security improvements. The other 87 percent of the benefit, according to the federal government’s analysis, comes from the government helping to correct for consumer shortsightedness.

The Mercatus Center produced this chart summarizing the official analysis:

Mercatus chart: Environmental benefits from environmental regulations are negligible

 

The analysis by Gayer and Viscusi includes a look at clothes dryer and room air condition efficiency standards in addition to automobile fuel efficiency standards. In each case the purported private benefits from the regulations, that is to say the improvements to consumer well being that come from the regulator “fixing” consumers’ choices, is much higher than the calculated environmental benefits of the proposed regulations.

Gayer and Viscusi note that counting such “private benefits” from regulation represents a departure from the OMB’s usual methods for measuring regulatory costs and benefits. Perhaps it is the so-called “soft paternalism” influence of outgoing regulatory czar Cass Sunstein. (See also Chidem Kurdas at ThinkMarkets.)

See also Ken Green’s comments at the AEI blog, “Do energy efficiency regulations benefit consumers?“

Trying to fix FERC’s demand response pricing mistake

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Michael Giberson

Last year the Federal Energy Regulatory Commission ruled that RTO and ISO markets should pay retail consumers an amount equal to the market’s real-time marginal price when consumers reduce consumption at peak periods. Economically speaking, it is the wrong price.

Parties opposed to FERC’s action have taken the issue to court. A group of “leading economists and educators” have filed an amicus brief in the case (and somehow I got invited to be part of this group). Here is the introduction:

Amici curiae (listed in Addendum A) are leading economists and educators who have designed, studied, taught, and written about the electricity markets affected by the Federal Energy Regulatory Commission Final Rule under review here, Demand Response Compensation in Organized Wholesale Energy Markets, Order No. 745, 76 Fed. Reg. 16,658 (Mar. 24, 2011), FERC Stats. & Regs. ¶31,322 (2011), reh’g denied, Order No. 745-A, 137 FERC ¶61,215 (Dec. 15, 2011). That Rule establishes the rate wholesale market participants must pay retail customers for reducing purchases of electric energy during peak-demand periods. In particular, FERC now requires market participants to pay the full “locational marginal price” (“LMP”) for electricity that is not consumed, treating non-consumption of energy as the equivalent of costlessly producing energy. See Pet. Br. 45-61.

Although the views of amici may diverge on market-design issues in other contexts, they all agree that FERC’s Rule creates a counterproductive demand response mechanism that produces economically undesirable behavior and wasteful outcomes that will injure consumers and society in the long run. Although FERC invokes economics to justify its course, the Final Rule is economically irrational. Retail customers that reduce their consumption should not be paid as if they generated the electricity they merely declined to buy. Instead, retail customers should be compensated as if they had entered into a long-term contract to purchase electricity at their retail rate but instead, during a peak demand period, resold the electricity to others at the market rate (LMP). In other words, they should be paid “LMP-minus-G,” where G is the rate at which the retail customer would have purchased the electricity. Simply put, the customer must be treated as if it had first purchased the power it wishes to resell to the market.

FERC never adequately explains its decision to adopt its contrary approach. Nor could it. By overcompensating reductions in retail purchases, the Final Rule encourages retail customers to reduce demand even when society would be better off if they continued purchasing electricity needed to engage in productive activity. It encourages inefficient self-supply of electricity. And it leaves market participants paying for the delivered electricity more than once—first to the generator that created it and then to the user who provided the demand reduction. That overpayment harms both suppliers and non-demand-response consumers, to whom the cost of the subsidy ultimately will be passed on.

So far as I can tell, the case Electric Power Supply Association v. Federal Energy Regulatory Commission hasn’t been heard yet at the U.S. District Court of Appeals. The full name of the brief is: ”Brief of Robert L. Borlick, Joseph Bowring, James Bushnell, and 18 other leading economists as Amici Curiae in support of petitioners.”