All in the Public Interest: Part 1 – Energy Regulation

We have heard about all those “good deeds” enacted in the “public’s interest.”  However, not only do some of these “good deeds” turn out to do more harm than good for consumers, but they often have a disproportionate and negative impact on low-income consumers.  Let’s look at a few examples.

Carbon Taxes

The idea behind carbon taxes is to reduce greenhouse gases by making fossil fuel consumption more costly, thereby encouraging green energy solutions.  On quick review, this may seem to be a well-intentioned idea, but alternative energy solutions often cost consumers more and tend to hit lower income consumers the very hardest. 

According to the Bureau of Labor Statistics data on Consumer Expenditure Survey, a household earning only $8,000 spends 40% of their income on energy utilities and fuels, including gas and oil for their automobile, while a household earning $250,000 spends 4% of their income, as shown in the chart. 

Energy Cost Chart

With alternative energy prices expected to become more competitively priced over the next decade, a greener solution should eventually work for everyone.  But, right now, it does not work very well for consumers, particularly those of lower incomes.   

Distributed Generation

Net Metering is a policy found in a number of states that is designed to encourage alternative energy production.  The policy lets consumers put solar panels on their roofs, benefit directly from cleaner solar energy, and then sell back any excess energy to the public utility.  On the surface, the concept is not a bad idea.  However, an increasing number of states have allowed consumers with solar panels to be paid more selling the energy back to the public utility than the public utility can resell it to anyone else, including consumers. 

When regulated wholesale and retail prices set out of whack, net metering effectively increases public utility costs, which means that everyone without solar panels on their roof will pay higher prices for electricity.  Because consumers owning solar panels tend to have much higher incomes than other consumers, lower income families are effectively subsidizing higher income families.  It is welfare for the rich.  

Conclusion

“Good Deed Doers” enact policies that are conceptually designed to do the right thing for consumers, but sometimes have adverse effects that increase market costs and ultimately consumer prices.  Call it the law of unintended consequences.  In the absence of market failure, public policies would be better served letting the market sort things out, rather than creating market distortions that ultimately and negatively affect consumer welfare.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research.

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