Saturday, April 27, 2013

Coal-Fired Cartels

"In the long run my observations have convinced me that some men, reasoning preposterously, first establish some conclusion in their minds which, either because of its being their own or because of their having received it from some person who has their entire confidence, impresses them so deeply that one finds it impossible ever to get it out of their heads. Such arguments in support of their fixed idea as they hit upon themselves or hear set forth by others, no matter how simple and stupid these may be, gain their instant acceptance and applause. On the other hand whatever is brought forward against it, however ingenious and conclusive, they receive with disdain or with hot rage — if indeed it does not make them ill. Beside themselves with passion, some of them would not be backward even about scheming to suppress and silence their adversaries."  --Galileo Galilei

In 1970, United States Senator Gaylord Nelson from Wisconsin celebrated an event entitled "Earth Day" on April 22.  There has been an earlier teach-in event in New York City that same year.  This past week, we celebrated yet another Earth Day.  But things have changed in our policy discussion over our ecological footprint.  The pollution cartels are now running our policy-making institutions.  In particular, the interests which mine coal and own coal-fired power production have produced a strong cartel with the assistance of state and federal laws and regulations. 

Cartels can flourish under direct government fiat, or by private enforcement by the cartel members.  Government regulation can help cartels along by creating barriers to entry for competitors even when the government does not directly create the cartel through licensing schemes.When the United States Congress ratified the Clean Air Act Amendments of 1977, they created a form of cartel through the New Source Review ("NSR") program.  While the goals of the NSR program are laudable and understandable, its side effects have been quite intractable.  In effect, existing power plants were allowed to continue operating with antiquated pollution control technology, while any new power plants had to meet stringent technological standards.  To build a new coal plant became far more expensive than just repairing  the old ones.

By making it much more expensive to build newer types of power plants, the holders of older permits and their suppliers could maintain a market advantage.  The cost of new controls created a barrier to market entry for new firms.  Technology prescription can have this effect in ways that other environmental control strategies may not, such as taxing pollution or setting performance standards.  Of course, any scheme which allows one group of users to avoid paying the tax or adopting the standard is creating a cartel.  This is usually referred to as "grandfathering" rather than "cartelling."

As with all cartels, pressure will build from the outside or the inside to break the cartel.  In the case of new source review, the pressure to break the cartel came from EPA in the form of costly litigation.  The industry claimed that it was entitled to rely on EPA's prior endorsement of its cartel arrangement-for more than a decade EPA had allowed firms to repair the grandfathered units so long as they did not exceed a cost threshold.  The result of this has been that a barrier to market entry for new forms of power has been created.

In addition to this, add the existing barrier posed by the organizations that license electrical distribution monopolies, including FERC and state Utilities Commissions.  The sad result is that new sources of energy are not attempting to compete in a free market, but begging for entry from a coal-fired cartel.  It is little wonder that the cartel feels its market power threatened and fights back hard.  Cartels usually do.

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