Energy Monopolies and Federal Efficiency Mandates
The NCFCA policy debate topic turns on energy markets and energy governance: Resolved: The United States Federal Government should substantially reform its energy policy.
Just as we have local, regional, state, and federal governments, we have local, regional, state, and federal energy markets, monopolies, and various energy rules and regulations.
Federal energy policies didn’t create and don’t mandate state and local electric utility and natural gas monopolies, but neither have federal policies restricted these monopolies. Perhaps they should. Federal antitrust enforcers go after many companies claimed to have “too much” market power or concentration. But not monopoly electric and natural gas utilities.
This 1996 speech ANTITRUST ENFORCEMENT IN THE ELECTRIC INDUSTRY (DOJ Justice News, February 2, 1996) looks at markets and regulations:
Regulation substitutes the judgments of people for the workings of a market with respect to price and output. In many respects that is both costly and risky. It’s hard to get it right, to induce efficiency, investment, innovation and, at the same time, achieve beneficial social ends by regulatory decisionmaking. Where real competition is possible, it is indeed preferable. Our nation has proven throughout its history that markets are superior, that competition produces lower prices, better service, and more innovation.
We can’t, however, lose sight of the fact that regulation is the right course where markets don’t work. Where there’s natural monopoly, or for other compelling public policy reasons markets can’t function, regulation shouldn’t simply go away.
In this regard, we are mindful that universal service is an important principle in your industry. Nobody wants the poor to lose the ability to have electricity which is necessary for survival or any modicum of a reasonable quality of life. But competition ultimately ought to lower the price of providing universal service.
So do current state and federal electric utility regulations help low-income families have access to electricity? Or are regulations raising prices and reducing grid and electric appliance reliability?
Federal energy efficiency mandates, it is claimed, have helped American families and business save money:
…the average American family saved nearly $500 on utility bills in 2015 as a direct result of the new standards for appliances and lighting. Total business utility bill savings from standards reached nearly $23 billion in 2015, according to the report.
The Economic Impact of Energy Efficiency Standards, February 28, 2017
Everyone likes to save money so federal energy efficiency mandates for home appliances, light bulbs, etc. seem like a good thing. But why not mandate even higher energy efficiency so families and companies can save even more money? How much energy efficiency is enough for toasters, light bulbs, and washing machines?
New designs to comply with federal energy mandates can raise prices of toasters, light bulbs, and washing machines. Critics of federal mandates take aim at home appliance regulations:
It is hard to find anything in Washington more inefficient than an efficiency standard for home appliances. Each standard can require more than 30 bureaucratic steps and generate thousands of pages of documents over several years, yet the end result often leaves consumers worse off. …
The goal [of federal efficiency standards] is to reduce energy bills, but even DOE admits that for some consumers, these standards raise the up-front price of appliances more than what will be earned back in the form of energy savings. This was particularly true of air conditioner standards but also refrigerators and several others. Low-income and senior households are most likely to experience net costs, according to the agency.
The inefficiency of efficiency: Appliance standards often cost more than they save, (Washington Examiner, March 6, 2019)
Two decades earlier the same author wrote Wasting Energy on Appliances (CEI, May 20, 1997); federal energy efficiency standards weren’t invented by the Obama or Bush Administrations, but earlier:
Most recently, the Department of Energy announced a new energy efficiency standard for refrigerators.
Vice President Al Gore hailed the new regulation as “a prime example of what we’re doing to reinvent government.” Unfortunately, he may be more correct then he realizes. The new energy efficiency requirement is indeed a prime example — of what is wrong with so many environmental regulations. It accomplishes little, ignores nonregulatory alternatives, and benefits special interests at the expense of the public.
The new standards will require a 30% decline in energy use in refrigerators by 2001. But already tough standards have been in effect since 1993, and many currently available models cost less than $60 a year to run.
In debate workshops on energy topics, I ask students who they buy their energy from. If they know I ask why their family chose that company instead of another.
A first insight into the nature of energy markets and governance is that energy services are usually provided by regulated monopolies. These are single companies that are granted privileges by state and local government to be the monopoly supplier of electricity or natural gas. In return for their monopoly status, local regulators have to approve rate increases and investments and profits.
For an entertaining and informative history of how regulated utilities came to be in the U.S., see Marvin Olasky’s classic 1986: Hornswoggled! How Ma Bell and Chicago Ed conned our grandparents and stuck us with the bill.
Everybody loves to hate the phone company. And the electric company. And the gas company. And any other company that can act with unresponsive arrogance just because it has the government’s protection as a legal monopoly. But when angry consumers and other critics call for an end to these monopolies, choruses of utility PR people and government regulators recite the same old story—once upon a time there was competition among utilities, but “the public” got fed up and demanded regulation. Again and again comes the tale: Free enterprise in utilities lost in a fair fight.
Hornswoggled! (Reason, February, 1986)
To promote their case for regulated monopolies, utility executives encouraged managers to get involved with the Boy Scouts, and even debates:
“Total community coverage” was the goal, as came out during the FTC hearings of the 1930s. Included among the hearings’ exhibits, for example, is the recommendation of E.C. Deal of the Electric Bond and Share Company that the ideal public-utility manager “should identify himself with the Boy Scout movement…and should encourage some of his lieutenants to become scout executives, scout masters, etc.” Sheridan of Missouri even went so far as to dispatch a colleague to investigate the judging of St. Louis high-school debates about electric railways—the debates had been won by those critical of the regulated-monopoly position, so Sheridan wanted to “ascertain the means employed to initiate, manage and judge these debates in the public schools.”
In Is It Time to Deregulate All Electric Utilities? (Wall Street Journal, November 13, 2016) features a debate on electric utility deregulation:
Andrew N. Kleit, a professor of energy and environmental economics at Pennsylvania State University, argues that more states should deregulate their electricity markets. Making the contrary case is Kenneth Rose, an independent consultant and a senior fellow in economics at the Institute of Public Utilities at Michigan State University.
In Unnatural Monopolies: Do power companies have to be crony capitalists? (R Street, August 4, 2016) reviews some of the challenges created by regulated monopolies:
Contrary to good-government myths of disinterested administration, regulatory decisions are inherently political: they involve winners and losers, and utilities are highly motivated to place themselves in the former category. The pressures they bring to bear on PUCs are often subtle and act through a convoluted network of influence. Even where regulators aren’t dependent on the expertise of the companies they oversee, political factors push them in the utilities’ desired direction.
Unnatural Monopolies: Do power companies have to be crony capitalists? (R Street, August 4, 2016)
Regulated monopolies have produced plenty of power in some placed (too much even), and not enough in others. Ratepayers in some places are stuck for the over-building bill, and in other places suffer outages:
Regulatory encouragement led to excessive build-outs of new power generation in the 1970s and 1980s that cost ratepayers billions. Remnants of this excess persist in the South and Great Plains, where power systems remain oversupplied. The same faulty incentives have led to chronic underinvestment by utilities in energy efficiency. The natural-monopoly regulatory model has also proven slow to respond to disruptive market developments, such as the advent of cheap natural gas. The whole system looks more like 20th-century socialism than like the 21st-century innovation economy.
Unnatural Monopolies: Do power companies have to be crony capitalists? (R Street, August 4, 2016)
A PBS’s Frontlines, Public vs. Private Power: from FDR to Today, looks at the history of federal regulations. Partial deregulation since the 1990s has boosted innovation and competition, but created significant incentive an infrastructure challenges as well.
This LearnLibery.org video, featuring Prof. Lynne Kiesling, reviews the history and economics of electric utility monopolies in the U.S.: Regulating Monopolies: A History of Electricity Regulation (February 10, 2012
The article explains what the electric grid is and how it works, and reviews problems: The old, dirty, creaky US electric grid would cost $5 trillion to replace. Where should infrastructure spending go? (The Conversation, March 16, 2017)
Further electrification, with more people owning, driving, and charging their electric cars, adds additional pressure to improve electric grid resilience. Increased Electrification and Renewable Energy Require Massive Transmission Investment (Institute for Energy Research, March 20, 2019):
…the Brattle Group evaluated two scenarios that involved increased generation due to the electrification of transportation, space heating, and advanced industrial technologies that would require billions of dollars in transmission investments over the next several decades. Electrification could increase U.S. annual electricity demand by 5 percent to 15 percent by 2030, and up to 85 percent by 2050. The transmission investment required to accommodate new renewable resources could reach $90 billion by 2030 and over $600 billion by 2050.
Wealthy neighborhoods with many electric cars face local grid challenges. How many electric cars can the grid take? Depends on your neighborhood (Ars Technica, January 23, 2018):
…The researcher simulated “a residential distribution transformer connected to six households” with 11 vehicles total. The transformer could handle up to six electric cars charging with Level 1 charging, but the simulated transformer saw demand in excess of its nominal capacity as soon as one EV with Level 2 charging was added to the neighborhood.
While electrical transformers are built to withstand such temporary surges in electrical demand, Muratori cites research that shows the expected life of transformer equipment can decrease “by two orders of magnitude when a transformer hits ’50 percent above its nominal capacity.'”
How many electric cars can the grid take? Depends on your neighborhood (Ars Technica, January 23, 2018)
State and federal subsidies of electric cars are paid for by today’s and tomorrow’s taxpayers, but upgrading the electric grid to handle home charging will be shifted to all electric utility customers.
Engineers face trade-offs in designing equipment, and when federal regulations mandate higher energy efficiency, other features tend to get traded off. Trump administration seeks to juice dishwashers by scrubbing energy regulations (Washington Times, August 7, 2019), notes:
For years, consumers have complained about slower, noisier dishwashers that produce dirtier dishes, the result of tighter federal efficiency regulations that the Trump administration is now seeking to unload.
The debate over how the EPA, an agency of the Executive Branch of the federal government, should regulate dishwashers continues at the federal level. NCFCA debaters could avoid taking sides in this debate and just make the case that the EPA shouldn’t be regulating dishwashers or other electrical appliances.