Fool Me Twice, Shame on Me
Fool Me Twice, Shame on Me
Learning from History on Electricity Rate Data
The Clean Air Act proved that studies predicting big electricity price hikes will be wrong, write Daniel Weiss and Nick Kong.
Recent studies by the National Association of Manufacturers, the Chamber of Commerce, and the National Mining Association are predicting a rate increase for electricity if the Lieberman-Warner Climate Security Act (S. 2191) becomes law. These studies—just like others we have seen in the past on acid rain legislation and other bills that address pressing environmental issues—are meant to spark fear in the hearts of legislators and paralyze them with worries about an angry public blaming them for skyrocketing electricity prices and other ills.
These types of predictions have been proven wrong time and time again. Public officials should ignore the rerun of these scare tactics.
During the Clean Air Act debate 20 years ago, electric utilities commissioned many authoritative studies to demonstrate the huge cost of reducing acid rain pollutants from their coal-fired power plants. On September 7, 1989, Southern Company President Edward I. Addison testified before the House Subcommittee on Energy and Power about such a study commissioned by the Edison Electric Institute. Mr. Addison told the subcommittee:
“We estimate that the acid rain provisions alone of H.R. 3030 could cost electric utility ratepayers $5.5 billion annually between enactment and the year 2000, increasing to $7.1 billion per year from 2000-2010. These estimates were developed in an analysis conducted by Temple, Barker & Sloane.”[i]
Mr. Addison warned that rate-payers in states with many coal-fired power plants would face particularly high increases. Consumers in 10 states—Alabama, Georgia, Illinois, Indiana, Kentucky, Missouri, Ohio, Pennsylvania, Tennessee, and West Virginia—would face utility rate hikes of 5.5 percent to 13.1 percent by 2009. Mr. Addison concluded that these calculations “underestimate the rate shock that would actually occur.”[ii]
Mr. Addison darkly predicted that President George H.W. Bush’s national program to slash the power plant pollution that caused acid rain would devastate the utility industry. “A law that sets unrealistic compliance dates will increase the cost, risk the reliability of electric service, disrupt the long-range planning of utilities, frustrate the regulatory process, and foreclose the use of clean coal technologies.”[iii] To increase the credibility of his alarms, the economic evaluation by Temple Barker and Sloane included prediction of individual state electricity rate increases.
The rate increase predictions by Mr. Addison, the Southern Company, Edison Electric Institute, and Temple Barker and Sloane were unquestionably, undeniably, unambiguously, unarguably wrong. Despite EEI and Southern Company’s opposition, the acid rain program was included in the Clean Air Act of 1990. Since then, national electricity rates have actually declined by an average of 19 percent from 1990 to 2006 (2006 dollars). At the same time, sulfur and nitrogen oxide emissions from coal power plants were reduced by 46 percent and 49 percent, respectively. The EPA determined that the “estimated public health benefits from ARP [Acid Rain Program] emission reductions exceed program costs by a margin of more than 40 to 1.” And a third round of reductions not included in the Act was required when the Bush administration issued the Clean Air Interstate Rule in 2005.
Of the 10 states Mr. Addison specifically identified that would suffer some of the highest rate hikes, the average electricity price in 2006 dollars was 35 percent lower in 2006. Missouri’s electricity rate fell nearly 59 percent, almost a 71 percent difference than what the Edison Electric Institute predicted. Their Illinois and West Virginia predictions had similar outcomes, with a difference of nearly 68.5 percent and 55 percent respectively.
How could the Edison Electric Institute so badly miscalculate their predictions? Because the study failed to account for the innovation and savings that occur once managers and engineers have binding reduction targets with firm deadlines. In other words, Temple, Barker and Sloane’s study could not predict or account for future ingenuity.
What became of the people who made such errant predictions? One of Temple, Barker and Sloane’s senior partners became a Vice President for Charles River Associates. Edison Electric Institute commissioned Charles River Associates to do a study on the Lieberman-Warner bill. It was so flawed that a number of major EEI utilities forced President Tom Kuhn to redo it with “revisions.”
The National Mining Association also commissioned Charles Rivers Associates for its just released analysis of the Lieberman-Warner Climate Security Act. Not surprisingly, this CRA study predicts a huge loss of Gross Domestic Product due to the Lieberman-Warner bill. The Environmental Protection Agency analysis found the opposite. It estimated only a “0.04 Percentage Points” reduction in “average annual growth” of Gross Domestic Product from 2010-2050 under Lieberman-Warner.
Twenty years on, the companies and trade associations responsible for global warming pollution are commissioning economic evaluations of the Lieberman-Warner Climate Security Act like a desperate Hollywood mogul commissions screenplays. These studies, too, will be unable to account for the economic benefits and cost reductions caused by innovation.
Like the Edison Electric Institute acid rain study, these analyses will include authoritative-looking charts, graphs, and tables. They may even include projected electricity rate increases by state. And like the EEI acid rain and electricity price analysis, this extra layer of detail is an attempt to increase the studies’ veneer of credibility. All of these studies will conclude that reducing the health and environmental threat posed by global warming will be ridiculously expensive and most harm middle- and low-income Americans. The purpose of these studies is not to help public officials make better policy choices. These studies are designed to paralyze legislators with fear of action.
Hopefully, senators and their staff will ignore these credible-sounding, but fatally flawed and inaccurate studies. Instead, they should focus on the costs of inaction on global warming—more smog, more asthma attacks, more ferocious storms, more drought, more wildfires. We are already suffering from many of these consequences, and if unchecked, they will prove more costly than pollution reductions.
Legislators should ignore industries’ doomsday studies and should seize the opportunity to begin the transition from a high-carbon, high-fossil fuel economy to a low-carbon, energy-efficient economy that spurs new technologies, new industries, and new jobs. An enhanced version of the Lieberman-Warner Climate Security Act could jump start this process.
[i] United States, Cong. House of Representatives. Subcommittee on Energy and Power, Hearing on HR 144, HR 1470, HR 2568, HR 2909, HR 3030 and HR 3211. 101st Cong., 1st sess. Washington: GPO, 1990. p. 574. An electronic version of the hearing is currently unavailable.
[ii] Ibid, p. 562.
[iii] Ibid, p. 562.
Chart source: Edward L. Addison, President and CEO of Southern Company, on behalf of Edison Electric Institute on Clean Air Act Reauthorization September 7, 1989 House Subcommittee on Energy and Power EIA-Electric Power Annual, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sum.html
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Daniel J. Weiss