Energy Lobbying, Environmental Costs, and Zero-Sum Competition

Exelon Corporation, one of the largest energy companies in the United States, has come out in favor of the EPA's Clean Power Plan and has even asked for a carbon pricing schema. This stands out, as one does not typically expect to see large energy companies endorsing aggressive carbon regulation. And I should hasten to add that what follows is not a specific speculation on Exelon's motives. Exelon might have any number of reasons for the position it's taking, not the least of which could be a fear that absent their intervention the EPA plan could end up being more environmentally protective (and thus more economically burdensome). Nonetheless, in general it does seem a little odd: why would an electricity company support EPA rules that almost certainly would place greater costs on its line of business.

The answer might lie in the difference between competitive and monopoly electricity markets. In the former there are multiple firms competing for customers and market share. In the latter, there is a single firm with a guaranteed franchise and customer base. These two models have been struggling for primacy in the electricity sector for the past several decades -- as it stands, we have competition in the generation and wholesale sectors, whereas most (but not all) states have maintained a retail electricity monopoly. At first glance, though, this different market structure is unrelated to support of greater environmental regulations. For either it increases costs, and we can stipulate (though this may or may not be true) that it equally increases costs for firms operating in a competitive versus a monopoly context. It is therefore unlikely that any firm will unilaterally adopt superior environmental restrictions (with some allowance for trying to gain public goodwill or carve out a unique market share). And so it seems unlikely that any firm would lobby to put in place a regulatory regime which increases these costs.

But look a little closer. For the monopoly firm, a policy proposal which increases its costs is an unmitigated bad. The cost increase may be minor, in which case it will be moderately opposed, or significant, in which case it will be significantly opposed, but there is never a corresponding benefit to the cost increase. But in a competitive world, things are different because there is also the opportunity to take over one's competitor's turf. Here, cost increases can be a good thing if one is in a position to better ride them out than one's adversaries. Imagine Company A has already significantly invested in renewable energy infrastructure such that new carbon mandates are likely to only cause a small price increase. Company B, by contrast, is less prepared to handle these new mandates and would be forced to increase prices quite a bit. Company A may well lobby for the regulatory shift because it would give it the opportunity to gobble up market share currently held by B.

This matters because it suggests that, in a competitive context, there is sometimes a business incentive for firms to lobby on behalf of cost-increasing environmental regulation where it feels it can better absorb the costs compared to other companies in the field. To the extent that environmental regulation often in practice needs business buy-in to be effective, this is an avenue worth exploring.

I said that this was not a speculation on the Exelon situation, particularly, and it isn't. That said, I did notice that the speaker who delivered this missive to FERC was described as "Exelon’s senior vice president of federal regulatory affairs and wholesale market policy." If Exelon's wholesale division (remember that wholesale electricity is a competitive sector) thinks that it is better positioned than its rivals to meet EPA carbon requirements, then that would explain why it would come out in support of this initiative even though in absolute figures it probably will raise its cost of doing business.