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2018 | OriginalPaper | Chapter

Paying for Energy

Author : Bruce R. Huber

Published in: Energy Law and Economics

Publisher: Springer International Publishing

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Abstract

The energy sector is amid an expensive transformation, especially in the United States and Europe. As aging coal and nuclear power plants are replaced by natural gas and renewable energy, it is worth asking how energy consumers will pay for the infrastructural overhaul that lies ahead. The way that energy costs are borne has important consequences: some technologies are underused because agreement about how to pay for them cannot be secured, while others are overused simply because their costs may easily be imposed on ratepayers or taxpayers. This article begins with a brief historical survey of energy policy to demonstrate the importance of the various ways to pay for energy. It then moves to an analysis of some of today’s most vexing energy problems, and demonstrates that the adoption of acceptable cost-sharing mechanisms is crucial to the upgrade of energy infrastructure. To identify such mechanisms, one must look not only to the distribution and magnitude of costs—who will pay, and how much—but also to the operation of the relevant political, legal, and regulatory institutions. The key point is that superior technologies are not self-executing. Clean, safe and abundant energy depends not simply on technological improvement, but on securing a viable way to pay for it.

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previous chapter A Shocking Truth for Law and Economics: Consumer Welfare Explains the Internal Market for Electricity Better Than Total Welfare

next chapter Energy Market and Policy Revolutions: Regulatory Process and the Cost of Capital

U.S. Nuclear Regulatory Commission (2016), p. 49 (Table 7, listing year of expiration of operating licenses for all nuclear power plants currently in operation). The licenses of all currently operating nuclear power facilities will expire by 2049 unless changes are made to current regulations.

Overall demand growth for electricity has and may continue to decline in recent years. U.S. Energy Information Administration (2015), p. 8. Although some regions now predict negative growth in demand in the short term, the upcoming wave of plant retirements will not be offset entirely by reduced demand and a great deal of new generating capacity will nonetheless be required.

U.S. Energy Information Administration (2015), p. 24 (projecting that “natural gas fuels more than 60% of the new generation needed from 2025 to 2040, and growth in generation from renewable energy supplies most of the remainder”).

Fucci (2011).

Frischmann (2005), pp. 924–925.

Standard economic theory posits that a fundamental market failure exists with respect to “public goods,” goods jointly consumed by all without possibility of exclusion. Paul Samuelson is often credited with key developments in public goods analysis (Samuelson 1954) although Samuelson’s work built on the innovations of economists such as Eric Lindahl and Ugo Mazzola.

U.S. Federal Energy Regulatory Commission (2012).

This is the so-called “energy efficiency gap.” Early and seminal analysis include Jaffe and Stavins (1994) and Brown (2001).

For example, see Baker (2012), Michelsen and Madlener (2016), and Arimura et al. (2012).

Decisions may also distort incentives downstream as actors seek to protect existing investments. Owners of coal-fired power plants in the United States, for example, have been very successful in winning grandfathered exemptions from Clean Air Act regulations. Hsu (2006).

Flynn and McManus (2010). For a leading account of the role of individual behaviours in shaping overall energy consumption and thus environmental outcomes, see Vandenbergh (2004).

Levinson and Niemann (2004) note, for example, that tenants set their thermostats between one and three degrees warmer during winter months when the landlord pays for energy directly, all else being equal. See also Davis (2011) and Jaffe (2012).

See, e.g., Follett (2016).

Levinson and Niemann (2004), p. 51 (noting the persistence of inefficient arrangements even when they are clearly to the detriment of both tenant and landlord).

Ferrey (2011), p. 227. See also Matter of Campo Corp. v. Feinberg, 279 A.D. 302 (N.Y. 1952) (upholding decision by New York’s Public Service Commission to disallow submetering).

Some leading historical accounts are McDonald (2004), Wasik (2008), Platt (1991), Klein (2008), and Jonnes (2004). In McDonald’s words, “[Insull], more than any other man, was responsible for founding the business of centralized electric supply; … he either formulated or borrowed from others and first successfully applied on a large scale the concepts of the load and diversity factors (on which all utility rates are based); … [and he] was the father of effective governmental regulation of public utilities and a progenitor of rural electrification…” Supra at pp. vii–viii.

McDonald (2004), p. 57 (“Insull knew … that the only sensible way to sell electric lighting was to have no competition … [His competitors believed] that electricity should be considered as a luxury product that t should be sold at the highest possible price. Insull’s thinking … was based on the premise that electricity should be considered as for everybody, ‘even the smallest consumer,’ and that it should be sold at the lowest possible price.”).

King (2011) and Hughes (1993).

Platt (1991), pp. 77–78 (see especially Table 7, listing competitors purchased by Insull’s Chicago Edison Company).

Platt (1991), p. 87; McDonald (2004), pp. 113–128.

See generally Hirsh (1999).

Platt (1991), pp. 83–87.

Platt (1991), p. 121 (see Chart 6, showing exponential growth in electricity generated in Chicago between 1898–1912).

This phenomenon is known as the Averch-Johnson Effect after Averch and Johnson (1962).

Phillips (1993), pp. 340–342.

Breyer and MacAvoy (1974).

Pierce (1984).

Ackerman and Hassler (1981).

Revesz and Westfahl Kong (2011).

Reisner (1993).

White (1991), pp. 484–487 (characterizing large dams like the Hoover as a “symbol of the New Deal in the West”).

Reisner (1993).

Reisner (1993), pp. 134–144.

For a sense of the nature of the opposition, see, e.g., Russell (1949).

Reisner (1993), pp. 167 et seq. (noting that “[w]ater projects came to epitomize the pork barrel”).

White (1995), p. 50 (noting that The Dalles Dam in central Oregon generates fully 13 times the electricity demanded by the city of Portland).

Blumm et al. (2006).

Reisner (1993), pp. 473–475.

See generally Manganiello (2015).

See Lowi (1964). In this seminal piece, the eminent political scientist Lowi explains the preponderance of what he terms “distributive policies” from Congress—policies whose hallmark is the distribution of money and other “goodies” to various jurisdictions.

Elliott (2013).

The key pieces of legislation were the Public Utilities Regulatory Policies Act (PURPA) of 1978, 16 U.S.C. § 2601; the Energy Policy Act of 1992, Pub. L. No. 102-486 (Oct. 24, 1992); and the Energy Policy Act of 2005, Pub. L. No. 109-58 (Aug. 8, 2005). Among the key FERC Orders were No. 888, 61 Fed. Reg. 21,540 (1996) and No. 2000, 65 Fed. Reg. 810 (2000).

NCSL (2001).

Indeed, the entire restructuring movement can be thought of as a response to the inefficiencies of the regulatory model and an attempt to create cost savings through greater competition. The changes I have in mind are oriented towards a broader set of goals beyond simply the consumer price of energy.

Benjamin (2007), p. 36 (the author, a FERC commissioner, notes that “transmission networks provide the foundation for wholesale electricity market competition”).

NAERC (2001), p. 5; Shahidehpour (2004), p. 15 (noting that “current transmission and distribution systems were designed primarily for the industrial era of the 1950s and 1960s,” and that under-investment in grid improvements has led to higher costs and more frequent service interruptions).

Klass and Wilson (2012), pp. 1809–1811.

Some 38 U.S. states now have RPS laws in place, although these laws vary significantly from state to state; see Fershee (2011), pp. 80–83.

Planned upgrades in the Western Interconnection alone are estimated to cost at least $200 billion. Klass and Wilson (2012), p. 1812.

Many believe that a larger federal role is appropriate. “Federal law governing the responsibility for siting transmission facilities was written in 1935. At the time, transmission facilities were not interstate, and there was virtually no interstate commerce in electricity.” Shahidehpour (2004), p. 16; Klass and Wilson (2012), pp. 1859–1867; Ostrow (2011).

Furthermore, “[t]ransmission lines were historically built to link large stationary power plants to nearby electricity demand centers like cities.” Klass and Wilson (2012), p. 1802.

The interconnection push led to only a relatively small increase in transmission links between vertically-integrated power systems. This is because interconnection was not principally a vehicle for delivering power across a regional market, but only a backstop to address temporary shortfalls in generation. Benjamin (2007), pp. 36–37.

16 U.S.C. § 824–825.

Dworkin et al. (2011), pp. 538–541.

Benjamin (2007), p. 41.

See, e.g., Inquiry Concerning the Commission’s Pricing Policy for Transmission Services Provided by Public Utilities Under the Federal Power Act, FERC Stats. & Regs. 31,005 (1994), clarified, 71 FERC 61,195 (1995) (this document is often called the “Transmission Pricing Policy Statement”); Order No. 888: Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 75 FERC 61,080 (1996).

It is in this sense that the problem is multi-scalar, as many scholars have noted. See Osofsky and Wiseman (2013).

Klass and Wilson (2012), p. 1830.

News Release, PJM, PJM Grid Operator Plans Billions In Transmission Improvements To Meet Massive Generator Fuel Shift (7 March 2013) (crediting a planning process, the PJM Regional Transmission Expansion Plan, with successfully managing fuel shifts).

Illinois Commerce Comm’n v. FERC, 576 F.3d 470 (7^th Cir. 2009); Illinois Commerce Comm’n v. FERC, 721 F.3d 764 (7^th Cir. 2013).

Some have gone further and advocated the nationalization of the grid, e.g. Carpenter and Prevost (2012).

Regional greenhouse gas trading programs, for example, have struggled to maintain cohesiveness. The Regional Greenhouse Gas Initiative (RGGI) in the northeastern U.S. has endured numerous threats of departure from member states; thus far, New Jersey in the only state of the original ten to formally withdraw.

Sartori et al. (2012).

Hassett and Metcalf (1993).

Di Maria et al. (2010), pp. 48–50.

Gillingham et al. (2006), pp. 175–180.

Id. Financial incentives may be superior to information campaigns, however; see Kaufman (2014), pp. 497–499.

FHFA argued that PACE assessments are unlike routine tax assessments in that they are voluntary and longer in duration.

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Title: Paying for Energy
Author: Bruce R. Huber
Publisher: Springer International Publishing
Book: Energy Law and Economics
Print ISBN: 978-3-319-74635-7

Electronic ISBN: 978-3-319-74636-4

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-3-319-74636-4_7

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