Published December 2, 2014 by James B. Bushnell.
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Flexibility in environmental regulations can lead to reduced costs if it allows additional abatement from lower cost sources or if policy tailoring and experimentation across states increases regulatory efficiency. The EPA’s 2014 Clean Power Plan, which implements greenhouse gas regulation of power plants under the Clean Air Act, allows substantial regulatory flexibility. The Clean Power Plan sets state-level 2030 goals for emissions rates (in lbs CO2 per MWh) with substantial variation in the goals across states. The Clean Power Plan allows states considerable flexibility in attaining these goals. In particular, states can choose whether to implement the rate-based goals or equivalent mass-based goals (i.e., emissions caps). Moreover, states can choose whether or not to join with other states in implementing their goals. Using a model of electricity generation across states, we analyze incentives to adopt inefficient rate-based standards versus efficient mass-based standards. We show that adoption of inefficient rate-based standards is a dominant strategy for states from both a consumer’s and a generator’s perspective. We calibrate the model for electricity markets in the Western United States and calculate significant inefficiencies from a failure to coordinate. In particular, state-by-state rate-based standards result in a substantial loss of welfare relative to business as usual. Even a harmonized West-wide rate-based standard dissipates a substantial proportion of the potential gains from regulation. Despite these large inefficiencies, the incentives for adoption of the inefficient policies are substantial particularly for generators.

Published September 1, 2014 by James Bushnell.
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Prior to the 1990s, most electricity customers in the U.S. were served by regulated, vertically-integrated, monopoly utilities that handled electricity generation, transmission, local distribution and billing/collections. Regulators set retail electricity prices to allow the utility to recover its prudently incurred costs, a process known as cost-of-service regulation. During the 1990s, this model was disrupted in many states by “electricity restructuring,” a term used to describe legal changes that allowed both non-utility generators to sell electricity to utilities – displacing the utility generation function and/or “retail service providers” to buy electricity from generators and sell to end-use customers – displacing the utility procurement and billing functions. We review the original economic arguments for electricity restructuring, the potential winners and losers from these changes, and what has actually happened in the subsequent years. We argue that the greatest political motivation for restructuring was rent shifting, not efficiency improvements, and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity restructuring has brought significant efficiency improvements in generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were based on politically-unsustainable rent transfers. In reality, the electricity rate changes since restructuring have been driven more by exogenous factors – such as generation technology advances and natural gas price fluctuations – than by the effects of restructuring. We argue that a similar dynamic underpins the current political momentum behind distributed generation (primarily rooftop solar PV) which remains costly from a societal viewpoint, but privately economic due to the rent transfers it enables.