The Good, the Bad, and the Ugly of the recent EPA Mercury Air Toxics Standards (MATS)

Posted by David on Dec 27, 2011 in Market Insights, Power | 1 comment

Mercury Air Toxics Standards (MATS) recently released along with the associated analysis show some interesting numbers.  There are quite a few good points in the ruling and the corresponding analysis, even if you are a coal plant owner.   Let me first say this and the recent Cross State Air Pollution Rule (CSAPR) was / should have been expected.  For those claiming these rules are all of the sudden, they need to get a new risk and planning group and/or better consultants.  In the analysis, the EPA did quite an extensive job in analyzing all the benefits of MATS.  Overall, I believe they listed out the benefits and cost appropriately, but I am not sure neither the extent nor the valuation of the benefits may be appropriate when put in context of other situations (see the ugly).  I actually do agree with their cost estimates.  On an annualized basis to 2030 it will cost slightly under $10 billion annualized per year.

There are coal units that are beyond their age that do need to retire.  MATS should make these units retire.  With the recent shale gas evolution, the economics to replacing these old coal units make it more justified.

The Bad

It is interesting the EPA cost conclusions focus on the claim – increment cost of only 3%.  In my analysis, that I worked with the University of Texas Center for Energy Economics, we came to that similar conclusion.  However, as this professor would say compounding rates can be misleading.  His conclusion “The greatest shortcoming of the human race is our inability to understand exponential functions.”  When we presented the analysis, we showed it in the bar graph form below.

EPA-CSAPR+MATS Fixed Cost

Instead of annualizing the cost, we showed from the reference case the cost would be over 80% from the base case for the time period of 2012-2030.  (Note the CSAPR case includes MATS.  More details of this analysis can be obtained by emailing or calling me.)   Annualizing the data does produce 3%, but people need to understand the math of compounding if you plan to present it that way.  Annualized 3% increases will double the cost in 24 years.

Another bad is the fact the totals cost are being reflected across the system.  However, there are regions/states where the cost increase will be much greater.  Several states could see an annualized increase of 6% over the reference case.  Generalizing numbers for the entire system is good for understanding overall impacts, but actual implementation does require some local understanding and reality checks.

Another outcome of this ruling, which is not good but is not ugly, will be inefficient decision making from local utilities and commissions.   I already hear from my various sources many plants will be installing very expensive control equipment under the concepts of maintaining jobs and the cost will be fully recovered through the rate base.   Without full prudent unbiased evaluation of these types of decisions, the rate based will be overburden.  It has been my experience when inefficient decision making occurs in regulated utilities, reliability will fall.  This happens because the rate base can only take so much.   Cost cutting becomes inevitable to make up for the costly decisions.  Unfortunately, we don’t live in the university economics land where cost cutting is optimally done.   Cost cuts will likely first come from the downstream portion of the business (Distribution), as many executives are farther removed from these decisions.

Another point to ponder, bordering on the ugly, is the point a good friend told me few years back. Eventually environmental mitigations become a subsidy for the wealthy. This takes much thought to fully appreciate this point. If the environment becomes clean to remove immediate concerns, but we continue to make it cleaner.  In effect, we are making society pay for issues that are probably not directly affecting them as compared to other issues.   As an example, I would surmise the poor will be more concern about food, education, housing, transportation, etc… before they are concerned about the environment, whereas the wealthy already has all those issues resolved for them.   Therefore the wealthy would like the environment to be even cleaner.  By making society pay for cleaner environment, eventually you are asking the poor to subsidize the wealthy in their agenda.

The Ugly

The ugly comes from the development / de-evolution of our society.   Society has chosen to focus and develop specialties reducing the role of generalist/universalist who cover multi-fields.   This trend has led to our lobbyist nature to find a particular subject and attack it at all cost regardless of the collateral damage it may set on other issues.   This thinking along with insatiable use of debt has created a system that has lost the concept of capital allocation.   We cannot solve everything at full levels of commitment.  There are finite resources for both human and capital resources.  I spoke about this at the 15th Annual Washington Energy Policy Conference, US Electricity Dynamics:  Markets and Policy Options.

As I mentioned in the good, I do agree there are harms being generated from burning of fossil fuel and in particular coal.  Coal does produce particulate matter and releases toxic chemicals.  However, the report does not talk about the benefits of burning and using coal.   These benefits can be seen in learning and reflecting upon the history of our electrification and the benefits it has so greatly given to us.  There is also no context of the amount of pollution that has been reduced.   Most people don’t know the amount of SO2 being emitted in the US is now close to the levels seen in the 1920’s.   Considering we have more people and a much larger economy this is an amazing accomplishment.   I do believe as a human race we can always say things can be better.   It is a matter of balancing which of these things we focus on (e.g. healthcare, education, environment, security, poverty, hunger, etc…)

Below are key statements from the EPA analysis I want to focus on:

“EPA estimates that this final rule will yield annual monetized benefits (in 2007$) of between $37 to $90 billion using a 3% discount rate”

“The reduction in premature fatalities each year accounts for over 90% of total monetized benefits.” 

“The great majority of the estimates are attributable to co-benefits from 4,200 to 11,000 fewer PM2.5-related premature mortalities”

“For a period of time (2004-2008), the Office of Air and Radiation (OAR) valued mortality risk reductions using a value of statistical life (VSL) estimate derived from a limited analysis of some of the available studies. OAR arrived at a VSL using a range of $1 million to $10 million (2000$) consistent with two meta-analyses of the wage-risk literature.”

“The mean VSL across these studies is $6.3 million (2000$).”

If we look at the first statement, we can multiply the benefits by 90% to get a sense of the value of an unborn person.  Using the 11,000 saved figure per year from premature fatalities the value of an unborn person amounts to $3 to $7 million.  I do not have or thought of value to life, but I do believe I have the logic to put suggested values into context.  A $3million value for an unborn is a very considerable figure, particularly when we put this into context.   Currently, there are around 1 million abortions per year in the US.  Based on the EPA logic this amounts to, on the low end, a $3 trillion dollar loss per year if we could prevent those.  Perhaps the above context may have not been the best linkage for an unemotional discussion, but it was the only direct context I found that directly involved unborn with a potential for mitigation.

Non-direct context is to compare the cost to other issues to evaluate whether this is a more appropriate issue to allocate $10 billion per year.   Personally I like to focus on children issues since they are not directly at fault with any of the current problems, plus they have a full life ahead of them to make it better.   I found the following statements from the Children Defense:

 “A total of 15.5 million children, or one in every five children in America, lived in poverty in 2009, an increase of nearly four million children since 2000.”

 “According to the USDA, over 16 million children lived in food insecure (low food security and very low food security) households in 2010.”

According to Feeding America, they note $1 can represent 8 meals.  This is a very fascinating figure, I am not sure the reality of that figure, but imagine $10 billion a year being allocated to give the 16 million children food security.  Using $1 represent 2 meals, each of those 16 million children could have 3 meals a day for the entire year.   Is it best to allocate $10 billion a year to 11,000 unborn or to help those 16 million children who are currently hungry?

I know the argument to my logic is the allocation of capital is not that fungible.   In addition, poor funding is inevitable therefore to optimize this spending will just result in wasteful spending somewhere else.  This is the ugly part of our system that I cannot disagree.   We do spend on issues, which perhaps could be allocated to other parts of society that would be more productive. 

Conclusion

The truth is we have fixed amount of human and capital resources.   Any spending will be taken from something else.  We do not directly see this now, because much of our spending is based on debt.  Debt spending is taking the ability from future generation to make decisions.  Increasing the cost of compliance across this country will result in allocating capital to an issue to save 11,000 unborn fatalities.   Can this cost be better allocated?   I do agree this expenditure is a worthy cause, I just don’t know if it is the best or even a top 10 cause given all the other issues.  We need to bring back the Universalist thinkers so we can make better decisions not just for the immediate future, but for future generations.

I have done numerous Policy/Regulation impact studies. Please do keep All Energy Consulting in mind for your consulting needs. Let us write you a proposal.

Your Energy Consultant,

David K. Bellman