The Bootleggers and Baptists of Utility MACT





Travis Fisher

Economist,

Federal Energy Regulatory Commission (Washington, DC)

 

 

The Bootleggers and Baptists of Utility MACT

Travis Fisher, Economist at the Federal Energy Regulatory Commission

travis.scott.fisher@gmail.com


Disclaimer: the views expressed here are the author’s and do not necessarily represent

the views of the Federal Energy Regulatory Commission or the United States.

 

Introduction

The Bootleggers and Baptists theory of regulation is unique in its ability to explain bizarre coalitions between moral crusaders and morally indifferent businesses. The name comes from a paper written by Bruce Yandle in 1983 for Cato’s Regulation magazine. As Yandle later stated, 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.”[1] Since coining and popularizing the term, Yandle has applied the theory to many regulations, including the Kyoto Accord.[2]

One such “unholy alliance”[3] has emerged between environmentalists and some utilities in the context of the Environmental Protection Agency’s recent Utility MACT[4] rule, which places a new federal regulatory burden on coal- and oil-fired electric generators.[5]

Among the proponents of Utility MACT are the health and environmental groups one might expect: the Sierra Club, the Natural Resources Defense Council, the American the Clean Skies Foundation,[6] the American Lung Association.[7] But several large electric utilities and natural gas producers support Utlility MACT right alongside environmentalists. Those unfamiliar with the Bootleggers and Baptists theory may conclude that the energy companies of the 21st century are enlightened at long last, while those who know the theory will take a more cynical view.[8]

Yandle’s theory explains how entrenched interests, though usually opposed, can reinforce certain types of regulation – in this case the EPA’s Utility MACT.[9] Shakespeare once wrote, “Misery acquaints a man with strange bedfellows.”[10] Apparently, so do regulations like Utility MACT.

 

Overview of Utility MACT

The EPA is required under the Clean Air Act of 1990 (CAA or Clean Air Act) to regulate hazardous air pollutants (HAPs).[11] 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 CAA’s stringent section 112 for HAPs including mercury, other metals, and acid gases. 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, actually 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,[12] under a deadline later enforced by consent decree.

The George W. Bush EPA initially challenged the ruling, but with a new administrator appointed by President Obama in 2009, the agency dropped its challenge and accepted the court ruling. In 2011 the agency proposed a new rule on Mercury and Air Toxics Standards, interchangeably referred to as Utility MACT because it mandates the use of Maximum Achievable Control Technology to remove toxics from the combustion exhaust (scrubbers in this case).[13] 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.[14]

Utility MACT is the EPA’s most expensive regulation under the Clean Air Act, projected to cost $10.9 billion per year. The new rule has been controversial from the start. It prompted the House Energy and Commerce Committee to hold hearings at which members interrogated Administration officials on its effects,[15] and it sparked a national debate on electric grid reliability as some argued the rule would increase the risk of blackouts.[16]

The public feud, largely framed as coal-fueled economic growth[17] versus health and the environment, has left a trail of dueling studies by consultants and competing advertising campaigns.[18] Thus, the struggle over Utility MACT may seem to be between the coal industry and environmentalists, but a review of the ultimate impacts of Utility MACT reveals why so many energy companies are squarely in the environmentalist camp. For some companies, Utility MACT not only means “environmental responsibility” but also hundreds of millions of dollars in new revenue.

 

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 further in the next section)[19] of regulating mercury emissions with scrubbers is that scrubbers also remove fine particulate matter,[20] 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 essentially 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.”[21] 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.”[22] 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.

Let’s 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 over the base case[23] due to the combined effect of Utility MACT and the Cross-State Air Pollution Rule.[24] 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.” [25] (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,” meaning “There Ain’t No Such Thing As A Free Lunch.”[26] 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. The next section expands on this.

There is one more type of bootlegger within the scope of suppliers “unaffected by the new regulations” – utilities that have already complied with state-level regulations that require the same type of technology as Utility MACT. Naturally, the utilities in those states want their competitors to face the same regulatory burden they are already facing. A clear example of this type of bootlegger is Constellation Energy. Given the passage of Maryland’s Healthy Air Act in 2006,[27] which bound Constellation to the standards just now being placed on its competitors, Constellation has been calling for the EPA to level the playing field.[28]

Another winning class of electric utilities is the regulated, cost-of-service utility that can earn a guaranteed return on capital investments, scrubbers or new generation in this case. The tendency to accumulate excessive capital in the regulated rate-of-return environment is known as the Averch-Johnson effect,[29] or more colloquially “gold-plating.” In that environment, even coal-intensive utilities stand to make record profits in the face of expensive technology mandates such as Utility MACT. As the Bernstein Report points out:

“If they can persuade regulators to allow the replacement of their unscrubbed coal-fired power plants — generally older, fully depreciated assets – with new generating capacity, these firms may accelerate the expansion of regulated rate base, and with it the growth of earnings.”[30]

However, it remains to be seen how much of a rate increase state commissions will tolerate, as they vary in their structures as well as their priorities. In fact, some alternatives to the Averch-Johnson theory hold that regulators are more concerned with nominal prices than fair rates of return.[31] States’ various reactions to Utility MACT-related costs may serve as an experiment to test these theories.

Other groups that benefit financially from Utility MACT include owners of EGUs fueled by something other than coal or oil – particularly natural gas, nuclear, and wind EGUs. Still other organizations fall under a broader umbrella of businesses that will benefit for 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.”[32]

T. Boone Pickens typifies this style of entrepreneurship,[33] which some have called political entrepreneurship.[34] If political entrepreneurship proves successful, we may see a more explicit union between bootleggers and Baptists. For example, 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.[35]

 

The Losers

Some of the utilities that stand to lose revenue and incur costs from Utility MACT have been very vocal. Analogous to The Clean Energy Group for the winners is the Electric Reliability Coordinating Council for the losers. ERCC also filed comments with the EPA on Utility MACT, but in stark opposition to the rule and The Clean Energy Group’s positions.[36] The ERCC’s motivation is essentially the mirror image of The Clean Energy Group’s – where The Clean Energy Group sees new revenue in environmental rules, the ERCC sees new cost. 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[37] that “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.” [38] (Emphasis added.)

Bastiat goes on to highlight that the profits to the winning seller are offset by the losses to the losing seller and also by the losses to the consumer. As economists, Bastiat argued it is for us to repair omissions and to complete the analysis. Hence we must also highlight the effect on perhaps the least vocal loser, the individual consumer. Utility MACT affects the consumer through increases in electricity and natural gas prices, and also through the secondary hardships caused by higher prices, such as unemployment.

A study by NERA Economic Consulting estimates the effects of utility MACT (along wiith the Cross-State Air Pollution Rule) and concludes 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.”[39] 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. According to NERA’s estimates, the effects of Utility MACT are at odds with the prosperity of the consumer.

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.[40] If it is flawed, the consumer is a clear loser for being subjected to known costs in exchange for overestimated benefits. If it is correct, we may have a new “unseen” loser worth shedding light on – the misled citizen.

As the EPA states in the executive summary of the RIA for Utility MACT:

“This proposed rule will reduce emissions of Hazardous Air Pollutants (HAP) including mercury from the electric power industry. As a co-benefit, the emissions of certain [particulate matter] precursors such as SO2 will also decline…. The great majority of the estimates are attributable to co-benefits from reductions in [particulate matter]-related mortality.[41] (Emphasis added.)

The EPA calculates the benefits from reducing mercury emissions as the difference between the base case and the Utility MACT scenario in total present value of intelligence quotient (IQ) losses. Basically, the EPA finds that less mercury means less IQ loss, and then places a monetary value on IQ by estimating the associated lost future earnings.[42] 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, assuming a 3% discount rate, and $0.5 million to $1 million, assuming a 7% discount rate.”[43]

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.”[44] 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.


References

"U.S. Utilities: Coal-Fired Generation Is Squeezed in the Vice of EPA Regulation; Who Wins and Who Loses? October 2010. Bernstein Research. http://207.114.134.6/coal/oh/downloads/bernstein-report.pdf (“Bernstein Report”)

“Green Bootleggers and Baptists,” Bjorn Lomborg, 2011. http://www.project-syndicate.org/commentary/green-bootleggers-and-baptists

“Pigs Don't Fly: The Economic Way of Thinking about Politics,” Russ Roberts, 2007. http://www.econlib.org/library/Columns/y2007/Robertspolitics.html

Ackerman, Bruce and William T. Hassler (1981). Clean Coal/Dirty Air: or How the Clean Air Act Became a Multibillion-Dollar Bail-Out for High-Sulfur Coal Producers. Yale University Press. http://yalepress.yale.edu/book.asp?isbn=9780300026436

Bruce Yandle on Bootleggers and Baptists, EconTalk Podcast. http://www.econtalk.org/archives/2007/01/bruce_yandle_on.html

EPA’s Utility MACT Proposal: Negative Economics for What? Master Resource blog, 2011, http://www.masterresource.org/2011/03/epa-utility-mact-proposal/

“Carolina Beat No. 821: Bootleggers, Baptists, and the Clean Smokestacks Bill,” Roy Cordato, 2005. http://www.carolinajournal.com/articles/display_story.html?id=2379

 

Notes:

[1] “Bootleggers and Baptists in Retrospect,” Regulation, Vol. 22, No. 3. http://www.cato.org/pubs/regulation/regv22n3/bootleggers.pdf

[2] “Bootleggers, Baptists, and Global Warming,” Hoover Digest, 2001 No. 1. http://www.hoover.org/publications/hoover-digest/article/6219

[3] “The Climate-Industrial Complex,” Wall Street Journal, 2009. http://online.wsj.com/article/SB124286145192740987.html

[4] MACT stands for “Maximum Achievable Control Technology”

[5] The formal name of the Utility MACT rule is “National Emission Standards for Hazardous Air Pollutants from Coal- and Oil-fired Electric Utility Steam Generating Units and Standards of Performance for Fossil-Fuel-Fired Electric Utility, Industrial-Commercial-Institutional, and Small Industrial-Commercial-Institutional Steam Generating Units.” Federal Register Cite: 77 FR 9,303. http://www.epa.gov/ttn/atw/utility/utilitypg.html

[6] http://www.cleanskies.org/

[7] “Toxic Air: The Case for Cleaning Up Coal-fired Power Plants,” March 2011. http://www.lung.org/assets/documents/healthy-air/toxic-air-report.pdf

[8] “Exelon Leaves U.S. Chamber Over Climate Dispute,” New York Times, September 28, 2009. http://www.nytimes.com/gwire/2009/09/28/28greenwire-exelon-leaves-us-chamber-over-climate-dispute-74577.html

[9] http://knowledgeproblem.com/2009/02/23/the-continuing-relevance-of-the-bootlegger-and-baptist-model/

[10] From Shakespeare’s The Tempest, 1610 (Act II, Scene II). http://www.phrases.org.uk/meanings/248250.html

[11] The U.S. Court of Appeals found that the Clean Air Act applies to electric generating units. New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2008) (No. 05-1097). http://www.cadc.uscourts.gov/internet/opinions.nsf/68822E72677ACBCD8525744000470736/$file/05-1097a.pdf

[12] Id., page 6. “Because coal-fired EGUs are listed sources under section 112, regulation of existing coal-fired EGUs’ mercury emissions under section 111 is prohibited, effectively invalidating CAMR’s regulatory approach.”

[13] EPA’s Fact Sheet: http://www.epa.gov/airquality/powerplanttoxics/pdfs/20111221MATSsummaryfs.pdf

[14] Section 112 of the Clean Air Act allows for a one-year extension by the EPA Administrator (§112(i)(3)(B)) and an extension of “not more than 2 years” by the President (§112(i)(4)).  http://www.epa.gov/ttn/atw/112ipg.html

[15] “Energy and Commerce Leaders Press Administration Regarding EPA’s Costly Utility Rule,” Press Release, December 13, 2011. http://energycommerce.house.gov/News/PRArticle.aspx?NewsID=9158

[16] ERCC Comments on Utility MACT, August 4, 2011. “EPA's proposed Utility MACT rule, combined with the impact of other existing and upcoming rules, poses a serious threat to the reliability of the nation's electric supply.” Section III(b). http://www.electricreliability.org/news/ercc-comments-utility-mact

[17] “New Analysis Shows Economic Damage Caused by EPA Regulations,” September 22, 2011. http://www.americaspower.org/new-analysis-shows-economic-damage-caused-epa-regulations

[18] “Utility Groups Trade Blows on New EPA Emissions Rules,” June 8, 2011. http://www.nytimes.com/gwire/2011/06/08/08greenwire-utility-groups-trade-blows-on-new-epa-emission-87246.html

[19] “EPA's Utility Rule Harms Economy for No Benefit,” December 21, 2011. http://cei.org/news-releases/epas-utility-rule-harms-economy-no-benefit

[20] “In addition to reducing emissions of mercury and other toxic air pollutants, the controls needed to meet the standards will result in reduced emissions of sulfur dioxide and fine particles, which will lower airborne soot levels throughout the United States.” http://www.epa.gov/mats/pdfs/20111221MATSimpactsfs.pdf

[21] Bernstein Research, “U.S. Utilities: Coal-Fired Generation Is Squeezed in the Vice of EPA Regulation; Who Wins and Who Loses?” page 1. http://207.114.134.6/coal/oh/downloads/bernstein-report.pdf (“Bernstein Report”)

[22] http://www.thecleanenergygroup.com/

[23] The “base case” assumes Utility MACT and the Cross-State Air Pollution Rule do not take effect.

[24] Bernstein Report, Exhibits 73 and 74.

[25] “Comments Of Exelon Corporation On U.S. EPA’S Proposed National Emission Standards For Hazardous Air Pollutants From Coal- And Oil-Fired Electric Utility Steam Generating Units And Standards Of Performance For Fossil-Fuel-Fired Electric Utility, Industrial-Commercial-Institutional, And Small Industrial Commercial-Institutional Steam Generating Units,” August 4, 2011. http://www.exeloncorp.com/assets/performance/docs/comments_EXC_ToxicsRule.pdf

[26] http://en.wikipedia.org/wiki/There_ain't_no_such_thing_as_a_free_lunch

[27] Maryland’s Healthy Air Act, 2006. http://mlis.state.md.us/2006rs/billfile/sb0154.htm

[28] http://www.eenews.net/public/Greenwire/2011/12/08/2

[29] “Behavior of the Firm Under Regulatory Constraint.” American Economic Review 52 (1962): 1052-1069. http://www.jstor.org/pss/1812181

[30] Bernstein Report, p. 16.

[31] A TEST OF TWO VIEWS OF THE REGULATORY MECHANISM: AVERCH- JOHNSON AND JOSKOW http://www.clevelandfed.org/Research/workpaper/1987/wp8713.pdf

[32] http://www.supportcleanair.com/resources/letters/file/Business-Leaders-Thank-Senators-for-Supporting-Clean-Air.pdf

[33] “T. Boone Pickens: American Hero or Savvy Lobbyist?” The Atlantic, July 2011. http://www.theatlantic.com/business/archive/2011/07/t-boone-pickens-american-hero-or-savvy-lobbyist/241956/

[34] “Bootleggers, Baptists, and Political Entrepreneurs: Key Players in the Rational Game and Morality Play of Regulatory Politics,” The Independent Review, Winter 2011.  http://www.independent.org/pdf/tir/tir_15_03_3_simmons.pdf

[35] Exclusive: How the Sierra Club Took Millions From the Natural Gas Industry—and Why They Stopped http://ecocentric.blogs.time.com/2012/02/02/exclusive-how-the-sierra-club-took-millions-from-the-natural-gas-industry-and-why-they-stopped/

[36] ERCC Comments on Utility MACT, August 4, 2011.

[37] “What is Seen and What is Not Seen,” 1848. http://www.econlib.org/library/Bastiat/basEss1.html

[38] Id. at paragraph 1.136.

[39] “Draft Proposed CATR + MACT,” Prepared for: American Coalition for Clean Coal Electricity, May 2011. http://www.eenews.net/assets/2011/06/08/document_gw_04.pdf

[40] Technical Comments on the Regulatory Impact Analysis Supporting EPA’s Proposed Rule for Utility MACT and Revised NSPS, pages 13-22. http://www.nera.com/nera-files/PUB_Smith_EPA_report_0811.pdf

[41] “Regulatory Impact Analysis of the Proposed Toxics Rule: Final Report,” March 2011, at 1-1. http://www.epa.gov/ttnecas1/regdata/RIAs/ToxicsRuleRIA.pdf

[42] Id. at 5-61 (Section 5.8.3, Estimation of Lost Future Earnings).

[43] Id. at 5-107.

[44] “Technical Comments on the Regulatory Impact Analysis Supporting EPA’s Proposed Rule for Utility MACT and Revised NSPS,” August 3, 2011. http://www.nera.com/nera-files/PUB_Smith_EPA_report_0811.pdf


Click to view a printable version of this article.