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Bootleggers, Baptists, and Utility MACT

The “Bootleggers and Baptists” theory of regulation, coined by Bruce Yandle in 1983 in Regulation magazine, uniquely explains what otherwise would be considered bizarre coalitions between moral crusaders and morally indifferent businesses.

In a later telling, Yandle explained how the theory

draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral ground. Bootleggers tolerated the actions gleefully because their effect was to limit competition.

One such unholy alliance has emerged between environmentalists and some utilities in the context of the Environmental Protection Agency’s recent Utility Mercury and Air Toxics Standards (Utility MACT) rule.

Those unfamiliar with the Bootleggers and Baptists theory may conclude that those compliant energy companies are enlightened at long last. But those who know the theory will take a more cynical view.

Shakespeare once wrote, “Misery acquaints a man with strange bed-fellows.” Apparently, so does Utility MACT.

Overview: Utility MACT

The EPA is required under the Clean Air Act of 1990 to regulate hazardous air pollutants (HAPs). At the end of the Clinton administration in December of 2000, the EPA determined that it was “appropriate and necessary” to regulate coal- and oil-fired electric generation units (EGUs) under the Clean Air Act’s stringent section 112 for HAPs, including mercury.

However, the agency’s first attempt to do so was not until 2005, under the George W. Bush administration. The Clean Air Mercury Rule (CAMR), as the 2005 law was called, removed EGUs from the section 112 list and established a more lenient system of tradable mercury permits under section 111. In a subsequent twist, the DC Court of Appeals vacated CAMR in 2008, reversing the section 112 de-listing and forcing the EPA to establish a technology-based standard for mercury under section 112.

George W. Bush’s EPA initially challenged the ruling, but with a new administrator appointed by President Obama in 2009, the agency dropped its challenge. In 2011 the agency proposed Utility MACT.

The rule was finalized on February 16, 2012, and took effect on April 16, 2012. Utilities will have three years to comply, i.e., to re-configure their EGUs to burn fuels other than coal or oil, install a scrubber, or shut down. The Clean Air Act does allow for possible one- or two-year extensions.

Utility MACT is the EPA’s most expensive regulation under the Clean Air Act, projected to cost $10.9 billion per year, but a review of the ultimate impacts of Utility MACT reveals why so many energy companies are squarely in the environmentalist camp.

The Winners

Baptists Through the lens of the Bootleggers and Baptists theory, the “Baptists”, i.e. environmentalists, clearly win. Environmental and health organizations argued for federal mercury regulation, and they got it.

The moral, environmentalist motivation behind Utility MACT is to protect people (especially young children) from the harmful effects of mercury and other toxics, and, judging by the rule’s successful passage, environmentalists made a compelling and actionable case.

An incredible co-benefit (some argue the entire benefit, discussed below) of regulating mercury emissions with scrubbers is that scrubbers also remove fine particulate matter, which, although regulated by a separate rule, is the main driver of quantifiable benefits in the EPA’s cost-benefit study on the implementation of Utility MACT. Environmental advocates scored a win-win with Utility MACT.

Bootleggers Among the financial winners, as highlighted in a report by Bernstein Research, are the “competitive generators whose nuclear or environmentally compliant coal-fired power plants are unaffected by the new regulations, but will enjoy materially higher power prices.”

As the theory explains, Bootleggers support legal means to reduce competition, and Utility MACT reduces competition from coal producers. In fact, utilities that operate un-touched generation resources stand to gain handsomely from the post-Utility MACT scenario in which they face significantly less coal-fueled competition.

Some of these utilities essentially self-identify by forming groups like The Clean Energy Group, which describes itself as “a coalition of electric generating and electric distribution companies that share a commitment to responsible environmental stewardship.” Using Yandle’s theory as a policy analysis tool, it is clear why some profit-maximizing companies have such a strong commitment to the environment. Just as bootleggers likely never said “please reduce my competition,” the public comments of utilities that are part of The Clean Energy Group tend to focus on health and the environment, not the bottom line.

Take Exelon, a member of The Clean Energy Group, for example. The Bernstein report shows that Exelon stands to increase its total revenue by between $323 and $362 million in 2015 due to the combined effect of Utility MACT and the Cross-State Air Pollution Rule(see Exhibits 73 and 74).

Not surprisingly, given that estimate, Exelon whole-heartedly supported Utility MACT in its 100-page comment in the EPA docket:

The proposed Toxics Rule represents a reasonable approach to reducing emissions of HAPs from coal- and oil-fired EGUs that has been delayed far too long. Addressing this problem does not present the nation with a choice of health or prosperity. To the contrary, controlling emissions will promote health and the economy (emphasis added).

Now let’s take a step back. In the early stages of an economics student’s education, the professor usually teaches the class the acronym TANSTAAFL (“There Ain’t No Such Thing As A Free Lunch”).

The term is a reminder of a fundamental law of economics, that resources are scarce and opportunity costs are ever-present. With this principle in mind, when a business or trade group publicly announces that a multi-billion dollar regulation presents no opportunity costs whatsoever, the economically literate observer should suspect a bootlegger.

Other organizations fall under a broader umbrella of businesses that will benefit from Utility MACT in one way or another. Some of those organizations did not actively lobby for Utility MACT, but some did. In line with the Exelon quote above, a coalition of businesses in the supply chain of the pollution control industry wrote in a letter to President Obama, “experience has shown that the Clean Air Act yields substantial benefits to the economy and to businesses.”

T. Boone Pickens typifies this style of entrepreneurship, which some have called political entrepreneurship. Others have highlighted the $26 million donation from Chesapeake Energy, a major natural gas producer, to the Sierra Club as one of the more explicit instances of Bootlegger-Baptist cooperation.

The Losers

Some of the utilities that stand to lose revenue and incur costs from Utility MACT have been very vocal. However, the distributional effects between large utilities are not the whole picture. Frederic Bastiat wrote in his famous 1848 essay What is Seen and What is Not Seen:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Farther along in the essay, Bastiat notes that arguments for barriers to competition tend to be only half right and ignore fundamental trade-offs, as Exelon’s public statements did. In the quote below, we could substitute Exelon for Mr. Protectionist:

[E]nchanted to learn that it is so easy to increase the wealth of a people simply by legislation, the manufacturers of laws voted in favor of the restriction…. And, in fact, the law had all the consequences predicted by Mr. Protectionist, but it had others too; for, to do him justice, he had not reasoned falsely, but incompletely. In asking for a privilege, he had pointed out the effects that are seen, leaving in the shadow those that are not seen…. It is for us to repair this omission, whether involuntary or premeditated (emphasis added).

Bastiat argued it is for us, as economists, to repair omissions and complete the analysis. Hence we must also highlight the effect on the least vocal loser, the individual consumer. A study by NERA Economic Consulting estimates that “average U.S. retail electricity prices in 2016 would increase by about 12%, with regional increases as much as about 24%,” that “Henry Hub natural gas prices [in] 2016 would increase by about 17%,” and that “net employment in the U.S. would be reduced by more than 1.4 million job-years over the 2013-2020 period.”

None of those estimates support Exelon’s claim that there is no trade-off between health and prosperity, unless we are to focus solely on the prosperity of Exelon.

Still, some “Baptists” may point to the EPA’s Regulatory Impact Analysis (RIA) for Utility MACT and the projected net benefits of between $42 billion and $130 billion per year, and thus conclude that the rule must be a net gain for the consumer. Without wading through the details and assumptions of the RIA, the net benefits calculation is at best misleading, and at worst severely flawed.

The EPA calculates the benefits of reducing mercury in terms of avoided IQ loss. In the section of the RIA that details the results, the EPA states:

The present economic value of avoided IQ loss from reduced mercury air emissions due to implementation of the Toxics Rule in 2016 is estimated at a range of $4.1 million to $6.1 million ….

Technical comments by NERA Economic Consulting demonstrate what that means in terms of total quantifiable benefits, including those from reducing particulate matter. NERA stated that “estimated benefits for reducing the air toxics that are the purpose of the Proposed Rule … are between 0.0004% and 0.011% of the total benefits that the EPA is attributing to this rule.”

It follows that the other 99.989% or 99.9996% of quantifiable benefits come from reductions in particulate matter.

Following the 2008 court vacatur of CAMR, the EPA was legally bound to use a MACT standard under section 112 of the Clean Air Act to regulate mercury. That approach is easy to administer and provides a clear political signal that the EPA is regulating mercury from coal- and oil-fired EGUs.

However, given the high cost of Utility MACT and the estimate that 99.99% of the rule’s benefits come from outside its stated purpose, it is worth wondering if there exist less expensive and more transparent ways to accomplish the rule’s stated goal, either by legislation or administratively at the EPA.

Conclusion

By providing a logical framework based on public choice economics, the Bootleggers and Baptists model explains the phenomenon of “green” energy companies and their alliances with environmentalist organizations.

Policymakers may find the model useful in identifying business interests that call for regulation as Bootleggers – that subset of rent-seekers fortunate enough to receive moral backing from Baptists. Economists may find the model useful in carrying out Bastiat’s imperative – addressing the “unseen” effects of economic regulation and correcting the incomplete analysis in the public comments of both Bootleggers and Baptists.

——————-

Travis Fisher is economist in the Office of Energy Market Regulation, Federal Energy Regulatory Commission (FERC). The views expressed here are his alone and do not necessarily represent the views of the Federal Energy Regulatory Commission or the United States.

This essay is taken from a longer article of the same name published in USAEE, Dialogue Vol. 20 No. 2 (2012), here).

2 comments

1 Jon Boone { 05.29.12 at 3:02 pm }

“… a fundamental law of economics [is] that resources are scarce and opportunity costs are ever-present. With this principle in mind, when a business or trade group publicly announces that a multi-billion dollar regulation presents no opportunity costs whatsoever, the economically literate observer should suspect a bootlegger.”

This is the essence of this compelling piece. Although Mr. Fisher tells it like it is with Utility MACT, the Baptist/Bootlegger bedfellows are legion in the renewables game–but with a twist. Whereas one can make the case that requiring actual scrubbing equipment to mitigate mercury (rather than trading schemes) will likely result in a measurable diminution of the byproduct, one cannot correspondingly do so in the renewables arena. The claims by those bootleggers and their hosts (Big Energy) are both unsubstantiated and unsubstantiatable. It does please the renewables Baptists, however, since their faith in the technologies require no evidence beyond bringing the technology to life.

The cost of scrubbers may well prove beneficial to the larger society. The costs of renewables bring dysfunctional to society. What to me is intriguing is that the confraternity of renewables Baptists and bootleggers is engaged in the classic definition of bunco: a swindle in which unsuspecting people are cheated, with the perpetrators promising much, delivering nothing–and making off with the unsuspecting people’s loot.

The situation is almost the perfect piracy.

2 Marc { 06.22.12 at 2:02 pm }

I like reading information about Baptists and bootleggers. Are you sure about what you was writing? Best wishes, Marc.

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