Risks and Regulation

Lynne Kiesling

I’ve just returned from a conference on regulation in Bulgaria organized by the Istituto Bruno Leoni, a classical liberal think tank in Italy that does a lot of extremely good work developing and applying classical liberal principles and ideas to public policy issues in Italy and Europe. The topics included financial markets regulation, energy, and telecom/internet.

The organizers asked me to comment on risks and regulation with respect to energy and the environment. The topic prompted me to ask: risk to whom, and risk of what? The parties whose risks I analyze are consumers, the end users.

Risk of what? Historically, at least in the US, risks related to reliability of service and bankruptcy of firms have been the primary focus of regulatory policy. Keep the lights on, no matter the cost, and treat that as a uniform standard (by technological necessity, until the invention of good switches). Use economic regulation (rate of return + monopoly service territory for the vertically integrated firm) to ensure the firm’s financial stability. These two objectives have had the consequence of significant infrastructure redundancy at a substantial cost, and increased incentives to firms to build those redundant electro-mechanical infrastructure systems.

More recently, environmental risk has become more prominent, and increased the combined economic and environmental regulatory policy focus on electricity generation. Initially the concern was the “criteria pollutants” such as SO2, NOx, etc., but the focus has shifted in the past two decades to greenhouse gases and carbon policy. The emission policy options range from

  1. Do nothing while we do more scientific research into the complex and little-understood climate system
  2. Price carbon with a tax … but with this policy one cannot control emission quantity
  3. Constrain GHG emission quantities with emission permit markets … but with this policy one cannot control emission price
  4. Traditional command-and-control regulation: emission quotas, renewable portfolio standards … but this approach has high enforcement costs, with centralized decision-making that’s likely to be inefficient because it cannot reflect, as Hayek said “individual knowledge of time and place”

Other important economic risks to consumers include the effects of wholesale and retail price volatility as fuel prices fluctuate, and the mounting effects of the lack of innovation and new technology adoption in the customer-facing portion of the value chain.

That was the setup part of my remarks, and I’ll post the rest in a follow-up … but for now, tell me: what are some other ways to think about the risks associated with regulation, and the attempts of regulation to mitigate certain risks, that face electricity consumers?

4 thoughts on “Risks and Regulation

  1. I do not understand why, in 3 above, the inability to control the emissions price is apparently viewed as a negative. As long as the emissions allowance market is not constrained, it will assure that the price of the emissions allowances is as low as the current state of technology permits.

    The real risk here is that non-carbon technologies will not become commercially available and competitive as rapidly as the emissions cap is reduced, thus forcing the adoption of immature and uneconomic technologies to achieve compliance. The risk would be expected to become greater as the cap approached zero, since the remaining emitters would be those with the most intractable control/elimination issues.

    It would be critical, in my view, to separate any emissions control effort from any effort to increase federal and/or state revenues in the process. Any such “tax”, no matter how applied, would merely increase the cost of compliance, this further increasing consumer energy costs.

    Of course, the entire process would be an exercise in masochistic self-flagellation if the developing nations continue on their current path, since global emissions would continue to increase regardless.

  2. You have written here on several occasions regarding smart meters, smart grid, variable rates, etc. Many of the programs which have attempted to evaluate the potential of these approaches have failed because regulators refused to expose the consumer participants in the test program to real time rates or established such short test program durations that many of the investment-intensive consumer response options offered no potential to be recovered from savings.

    The smart grid is viewed by many as essential to a renewable energy future. However, the reluctance of regulators to permit construction and testing of an attractive consumer value proposition over a test period long enough to encourage permanent change, might “kill the goose” before it has the opportunity to lay any eggs.

  3. the biggest risk is regulating uncertainty as if it’s risk, i.e., pretending one knows the probability and damages of an event and then attaching regulations to those guesses.

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