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”  

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.

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.