PSEG Explains How Markets and Pollution Trading Schemes Fail and Regulation Works
Deregulated markets and economic incentives sacrifice public health
PSEG explains “market failure”
PSEG: “EPA imposed the least stringent standards the statute allows”
PSEG Mercer Generating Station on the Delaware River, Hamilton NJ – old coal plant converted to natural gas
It’s always fun when your opponent makes your argument for you and you can throw their words back in their face.
So, today, we use PSEG’s own arguments to confirm our long-standing criticism that markets and pollution trading schemes are not only fatally flawed, but don’t actually work, while traditional regulation works.
PSEG made some remarkable admissions about the failure of market based pollutant trading schemes and the success of regulation that absolutely destroy a lot of political and policy myths about the economics of pollution control regulations.
So, it is vitally important that these arguments see the light of day instead of lying dormant in a legal brief.
There is some danger in relying on this lazy man’s tactic instead of laying out one’s own critique, because PSEG’s arguments are narrow and do not include our far broader and more radical critique. But, in this case, I can mitigate that by putting PSEG arguments in context, briefly noting their flaws – and I don’t think there is any danger of readers confusing my arguments with those of PSEG.
PSEG recently submitted a legal motion to the US Supreme Court, seeking to convince the Court not to take the case of industry’s challenge to EPA’s mercury emission standards for power plants.
In that highly unusual and blunt motion, PSEG took the same side of and confirmed longstanding criticisms by environmental groups.
PSEG told some very basic and hard truths about what’s really going on behind the smoke and mirrors of corporate PR and the controversial politicized debate about environmental regulations.
PSEG wasn’t doing that because they had some epiphany and suddenly realized that public health was important and pollution was bad. They were interested only in protecting their own economic bottom line and shareholder profits.
You see, NJ DEP regulations forced PSEG to spend over $1.5 billion to stop mercury pollution from their old coal fired power plants. Those pollution costs hurt PSEG’s competitive position in energy markets, particularly with respect to “cheap” power from old coal plants that have no pollution controls.
PSEG was foolish in spending that enormous sum of our money on pollution controls, instead of retiring those dinosaur coal plants and investing in efficiency and renewables, but that’s another story not for today.
Anyway, here are key points that PSEG made (verbatim, in their own words) in their motion, almost all of which none of their energy industry colleagues would publicly admit to. The arguments are presented and excerpted in the order they were made in the PSEG motion, not in terms of priority. In fact, the best arguments are the last few. The headline to each excerpt from the PSEG brief and boldface are mine:
1. The real issue is all about coal industry profits and the real problems were caused by greed and a lack of foresight and planning by major polluters:
The [EPA] Toxics Rule establishes consistent national limits on emissions of these pernicious pollutants by power plants. While many power plants are already capable of achieving these standards, others will require additional capital investment in order to meet the standards, and it is expected that some older, less efficient plants will retire, reducing the demand for coal. Coal producers, a segment of their power plant customers and a block of states aligned with those interests comprise the coalition seeking this Court’s review. Unlike many of their peers among the petitioners, Industry Respondents made significant investments in their generation fleets to prepare for the Toxics Rule.
2. Industry crafts “narratives” that blatantly lie about the costs of compliance with EPA regulations and ignore public health impacts
Petitioners dress up their contention by grossly distorting EPA’s benefit- cost analysis, and ask this Court to ignore the enormous health benefits that the Rule will produce because those benefits undermine petitioners’ narrative.
3. Industry evades and delays compliance with regulation to maximize profits – not to avoid “red tape” or produce “jobs”:
The Toxics Rule ends the free ride for power plant owners that have avoided the expenditures necessary to reduce hazardous air pollutants and have profited at the expense of owners of cleaner generation units, such as the Industry Respondents.
This free ride has been a long one. The electric generation industry has anticipated the Toxics Rule since EPA first determined that it was “appropriate and necessary” to regulate power plants under Section 112 in 2000.
4. Delays in regulation translate to higher industry profits and negative impacts on public health
The ten-year delay in the Rule’s development has harmed the industry, especially those members who, like Industry Respondents, participate in competitive wholesale power markets, where the massive capital investments necessary to maintain the integrity of the nation’s power grid are protected only by foresight dependent on regulatory certainty. Those markets are disrupted when some generators are permitted to externalize the costs of their pollution, reaping higher profits at the expense of other, cleaner generators. Even as it improves public health, the Toxics Rule finally levels the playing field for power plant owners.
5. The Regional Electric Grid has huge excess capacity, is very costly, and inefficient – by design.
PSEG makes the case here for energy efficiency, demand management and local, distributed, renewable power which is far more efficient, cheaper, more reliable, and cleaner:
Because demand and supply must be balanced at all times, it is essential that the system include enough generation capacity to satisfy the largest expected electricity demand, plus a margin of safety, to assure an uninterrupted electric supply. The generation fleet, therefore, is sized according to peak demand.
6. The price of power is set based on the HIGHEST COST GENERATION SOURCE
When I first read about the PJM power auction, it was so absurd that I was sure that I was misunderstanding how the auction set the price of power. Since then, every time I read this my head explodes.
I don’t think the public has a clue about how the so called deregulated “free market” in energy actually works or how the so called competitive power auction works. Just think if when you went shopping, if you were forced to pay the price of the highest priced item – the filet mignon and Cadillac for everything!
In a must read story, David Kay Johnston exposes how the auction markets are rigged by industry fraud.
PSEG explains this clearly – how the auctions lead to high prices and consumer ripoff even when they work as designed and are not rigged:
The price that each generator receives for the power it produces is not ordinarily established by its own bid. Wholesale markets operate on the principle of the “single market clearing price.” All generators are paid the same price based on the bid of the last unit that “cleared the market,” that is, the most expensive unit needed to meet demand.
7. There is a direct conflict and tradeoff between pollution and profits. Competition and prices and profits harm the environment and public health. The market produces a cost cutting race to the bottom.
This pricing scheme creates a powerful dual incentive to reduce operating costs: units with low operating costs and low bids are both dispatched more frequently than units with higher costs and higher bids, and produce a higher profit margin when they do operate. This incentive serves to reduce wholesale electricity prices to their minimum, but has negative implications for air pollution control.
The operation of pollution control systems can entail significant operating costs for higher-priced fuels, treatment chemicals, waste disposal and power and water consumption, in addition to any capital costs that may be involved. Hence, power plants operating pollution controls tend to have higher operating costs, resulting in higher bids and less frequent dispatch compared to uncontrolled units. Every power plant that incurs additional costs to reduce its emissions is at risk of being undercut by cheaper, dirtier plants that do not incur these pollution control costs. Industry Respondents’ cleaner, environmentally- controlled generation units can be more expensive to own and operate than uncontrolled units, and so are placed at a disadvantage in electricity markets where they compete against higher-emitting units with lower operating costs, such as uncontrolled coal-fired plants.
8. Loopholes in the Clean Air Act are what have allowed polluters to exploit the regulatory regime at the direct sacrifice of clean air and public health.
If all competing power plants faced identical regulatory requirements, operating costs for pollution controls might make little difference, but these requirements vary from plant to plant. For each generation unit, the applicable standards for conventional pollutants are determined by the year of the unit’s construction. See, e.g., 40 C.F.R. pt. 60 subpt. Da (new source performance standards for fossil fuel-fired units).7 New units are required to be equipped with state-of-the-art controls, and must operate those controls to meet more stringent mandatory permit limits. Older plants are required to meet only the far less stringent limits in place at the time they were built. More than half of the coal-fired units in operation in 2010, representing more than one-third of coal-fired generation capacity, were in existence when the Clean Air Act was enacted in 1970, and the vast majority of those units had no pollution controls.
9. State regulatory leadership is essential for clean air and to protect public health
Pollution control requirements also vary from state to state. Many states impose more stringent pollution control requirements than their neighbors because these controls are needed to attain air quality standards or to serve some other public health goal. In their brief, the State and Local Respondents identify fourteen states that have adopted limits on emissions of mercury, one of the hazardous pollutants limited by the Toxics Rule. State Resp. Br. at III. Indeed, petitioner Michigan had such a requirement in place, but suspended it after EPA adopted the Toxics Rule.
10. The fundamental economics of the grid and deregulated markets undermine clean air and public health protections
This is a perfect example of what Noam Chomsky referred to as an “institutional logic that is deeply pathological”:
Most grid operators cover multiple states, and power from one region can be sold into another. Therefore, when it comes to dispatch decisions, power plants do not compete only against plants in the same state, of the same age and subject to the same regulations. They compete against units in other states, including states where pollution control requirements are less stringent. They compete against older units with few if any pollution control requirements. In this price competition, cleaner power plants are dispatched less frequently and make less money when they do run, while dirtier power plants run more often and make more money. The economic calculus of the wholesale electricity market institutionalizes a disincentive to incur costs to reduce air pollution.
11. The 1990 Clean Air Act’s Acid Rain market based pollutant trading program was a failure
It is important to consider PSEG’s admissions here, because the acid rain trading program is held out as the example of success the demonstrates why cap & trade market based trading program should be established for greenhouse gas emissions.
However, there is no doubt that instead of the market based trading scheme, had EPA imposed regulatory requirements to install scrubbers, the benefits in clean air would have been far greater, much faster, and at lower cost.
B. The Role Of Section 112
Section 112 was adopted in its current form in 1990 concurrently with the Title IV Acid Rain Program, which introduced the first large-scale market-based system for reducing emissions of sulfur dioxide (“SO2”) from coal- fired power plants. See Clean Air Act Amendments of 1990, Pub. L. No. 101-549, 104 Stat. 2399 (1990). Title IV did not impose mandatory emission limits on individual power plants, but rather established an allowance trading program to create economic incentives for generators to install and to operate emission controls, especially flue gas desulfurization systems, or “scrubbers,” to control SO2. See 42 U.S.C. §§ 7651-7651o. In allowance programs, once the total amount of permissible emissions is determined (in tons per year), an equal number of tradable “allowances” is auctioned or distributed, and each power plant must turn in one allowance for every ton of pollution it emits. The owner of any power plant is free to decide whether to buy the allowances necessary to cover its emissions, or to reduce its emissions, enabling it to sell surplus allowances to other plants. Congress adopted Section 112(n)(1)(A) to give EPA an opportunity to assess the impact of, among other things, Title IV on hazardous emissions from power plants before deciding whether they should be regulated under Section 112. See 76 Fed. Reg. 24,976, 24,978 (May 3, 2011). Scrubbers installed to reduce SO2 also reduce hazardous acid gas pollutants, including hydrochloric acid and hydrofluoric acid, and in certain configurations scrubbers will also reduce mercury and non-mercury metals, also hazardous pollutants.9 Although Title IV prompted the installation of some scrubbers, most plants either switched to low sulfur coal without adding controls, or took no action at all, using allowances to meet their obligations. Only 27 of 261 power plants surveyed by EPA in 1997 installed scrubbers.10 More than fifteen years later, less than two-thirds of plants had scrubbers, and fewer still had configured their scrubbers to remove hazardous pollutants.11
12. In contrast with the failed market based trading scheme, strict regulation works to protect public health
The logic here shows why market incentives fail and why regulator mandates work:
Furthermore, much of the control equipment that was installed in response to Title IV and other programs fails to reduce hazardous pollutant emissions because it is not operated consistently. Allowance programs such as Title IV rely on economic incentives to reduce emissions, rather than mandatory limits. When those economic incentives are insufficient to cover the cost of operating pollution controls, even generators who already installed controls operate those controls only to the minimum extent necessary to comply with their permits.12 For the past several years, allowance prices have been so low that it has been cheaper for many generators to buy allowances rather than to reduce pollution by operating already- installed controls. Neither Title IV nor any other provision of the Act requires or even encourages generators who have thus far avoided installing hazardous pollutant controls to install them now, absent the Toxics Rule. As a result, uncontrolled power plants remain the leading source of many hazardous pollutants in the air we breathe.
13. The benefits of regulation exceed the costs of compliance, but Cost Benefit Analysis is inherently prone to industry manipulation and abuse.
Petitioners’ arguments are premised on a mischaracterization of the economic consequences of the Rule and EPA’s approach to benefit-cost analysis. The three petitioners’ briefs are intended to create the misapprehension that EPA found that the Rule would create only a few million dollars of benefits. The real story is quite different: EPA determined that the benefits of the Toxics Rule will be $37 to $90 billion, at least triple the costs of the Rule. 77 Fed. Reg. at 9,305-9,306, and Table 2. Petitioners’ rhetoric is not based on a comparison of all benefits to all costs, as proper economic analysis requires. Instead, petitioners exclude all unquantified benefits, and all quantified benefits other than the benefits of avoided IQ loss for children exposed to mercury through recreationally-caught fish. See NMA Pet. at 2 (citing 77 Fed. Reg. at 9,306 Table 2); UARG Pet. at 15-16; Michigan Pet. at 9; 77 Fed. Reg. at 9,428. Nowhere do petitioners offer a legal or scientific rationale for ignoring over 99% of the benefits of the Toxics Rule.
EPA analyzed the costs and benefits of the Toxics Rule under Executive Orders 12866 and 13563, as it must with all major rules. See 77 Fed. Reg. at 9,432. The purpose of these orders is to provide a detached, unblinking look at the benefits and costs of rulemaking, direct and indirect, quantified and unquantified. EPA applied best scientific practices and approved, peer-reviewed guidelines, and correctly showed that the benefits of the Rule vastly exceed the costs. See id. An independent peer review of EPA’s methodology submitted with Exelon’s comments on the proposed Toxics Rule confirmed EPA’s methodology and found that, if anything, EPA underestimated benefits and overestimated costs.13
Petitioners’ criticism of EPA’s benefit-cost analysis appears to be that it is too inclusive, taking into account all costs and all benefits, but this is exactly the point of the exercise. It is true that the Toxics Rule will yield reductions in conventional pollutants (e.g., fine particulates) in addition to reductions in hazardous pollutants. Congress would not be surprised at that result.
14. Strict regulation is economically more efficient and more equitable than market based approaches
3. The Toxics Rule does nothing more than level the playing field, counteracting the economic disincentive to pollution control, and does not threaten reliability.
Petitioners’ unwavering focus on total cost of the Toxics Rule is intended to imply that the emission standards established in the Rule are onerous and unreasonable, but that is not the case. The cost of compliance is a function of the large number of power plants that have escaped regulation and remain uncontrolled; if anything it is an indication of how urgently the Rule is needed. The emission standards in the Toxics Rule are achievable by all types of facilities through the application of widely available and well-understood control technologies already in place at many plants. In nearly every case, EPA imposed only Floor Standards, meaning that the Rule requires power plants to do nothing more than match the performance of their best performing peers.
In fact, EPA found that 69 coal-fired units already met all of the Rule’s standards, without any further investment. 77 Fed. Reg. at 9,387.16 Contrary to petitioners’ doomsday predictions, these cleaner plants have continued in business, even while suffering a competitive disadvantage to dirty, uncontrolled plants. The Toxics Rule will go a long way to eliminating this disadvantage by requiring those uncontrolled plants to install and operate emission controls.
15. EPA set a far LESS STRINGENT standard than scientifically justified and legally allowed under the Clean Air Act and already adopted by 15 States
This argument completely destroys the myth that EPA is engaged in a “War on Coal” or is under the influence of environmental zealots.
I think it is stunning that PSEG admitted that EPA has the legal authority under the Clean Air Act to PROHIBIT mercury emissions!
In fact, EPA found that 69 coal-fired units already met all of the Rule’s standards, without any further investment. 77 Fed. Reg. at 9,387.16 Contrary to petitioners’ doomsday predictions, these cleaner plants have continued in business, even while suffering a competitive disadvantage to dirty, uncontrolled plants. The Toxics Rule will go a long way to eliminating this disadvantage by requiring those uncontrolled plants to install and operate emission controls.
EPA’s nearly exclusive use of Floor Standards is significant for another reason: it contradicts petitioners’ portrait of an agency determined to regulate as aggressively as possible. Had that been EPA’s motivation, EPA would certainly have adopted more aggressive emission standards under the authority of Section 112(d)(2). 42 U.S.C. § 7412(d)(2). That provision consigns the stringency of emission standards to a series of EPA administrative judgments about achievability, cost, non-air-quality health and environmental impacts and energy requirements, and even expressly authorizes a prohibition on hazardous emissions. Id. All of these judgments would fall squarely within the protection of Chevron deference. Instead of exploiting this potent statutory authority to adopt more stringent standards, EPA imposed the least stringent standards the statute allows.
The basic process of setting Floor Standards is largely ministerial: collect emissions data; determine best performing 12%; average results. See 42 U.S.C. § 7412(d)(3). The Toxics Rule’s Floor Standards are based on real world performance by real operating power plants. They are not based on the sort of result-oriented exercise of administrative discretion of which petitioners accuse EPA. In perfect harmony with the Congressional mandate animating Section 112, it is petitioners’ cleaner industry peers that have set the bar for performance under the Toxics Rule, not EPA.
16. The Lights Won’t Go Out – Energy Industry “reliability” arguments are a Big Lie
This is one of my favorites, because it exposes the sham argument that PSEG itself often deploys.
The energy industry often tries to scare the public and regulators with claims that if they don’t get what they wont, that the lights will go out. PSEG puts the lie to that claim:
EPA gave especially close attention to the issue of electric reliability. In the final rulemaking, EPA summarized the many comments it received on this issue, some suggesting the Rule would compromise reliability, some suggesting the opposite.18 77 Fed. Reg. at 9,406-9,407, UARG App. 379a-383a. EPA painstakingly addressed each of these concerns, adjusting its own analysis of plant retirements based on revisions to the final rule and concluding in the end that the Toxics Rule would not adversely affect reliability. 77 Fed. Reg. at 9,407-9,411, UARG App. 383a-402a. EPA found more than adequate evidence in the administrative record to support its conclusion.
