The EPA and Corporate Welfare: More from the Climate-Government-Industrial Complex

In a recent editorial, “The EPA’s Utility Men: Anticarbon regulations and the corporate rent-seekers who love them,” the Wall Street Journal notes that eight leading utility CEOs are cheering on the EPA’s new draconian, climate regulations and other policies because they stand to make huge profits by redistributing wealth to themselves. As the Journal notes:

[T]here are the utility CEOs cheering on the Obama Administration’s plans to wipe out large portions of U.S. electric power capacity.

The Environmental Protection Agency is preparing an unprecedented torrent of air and other regulations that will force as much as a third of U.S. coal-fired power to retire in the coming years. This gambit is meant as an anticarbon backstop now that cap and trade is in the political morgue and it will cause huge reliability problems, but some electric executives claim all this merely follows the law and is nothing to worry about.

Eight leading utility CEOs responded recently to one of our editorials with a letter defending the EPA, claiming that the coal retirements are “long overdue” and that the regulations will “yield important economic benefits.” What they didn’t mention is that those benefits will mostly accrue to the businesses they happen to head.

As the Journal further reports:

But don’t take our word for it. Here’s John Rowe, one of the letter’s signatories and the chairman and chief executive of Exelon:

“Put simply, we expect some drop in 2012 earnings. But we believe by that time that the trough in our revenues will be nearing its end. This morning, I am going to cover three reasons why we believe that. First, EPA regulations will affect both capacity and energy markets, and will do so sooner than many think,” Mr. Rowe said on Exelon’s second-quarter earnings call in July.

This “welter of regulations that are coming to the nation’s coal-fired generation fleet,” he continued, means that “Exelon’s clean generation will grow in value in a relatively short time. We are of course positioning our portfolio to capture that value.” Gotta love the can-do lobbying spirit of that “of course.”

The EPA is trying to drive out carbon-heavy coal via activist regulation of traditional air pollutants. This won’t hurt Exelon because its electricity portfolio is mostly nuclear; only about 6% is fossil fuel based. But it’s more than that. As Mr. Rowe explained, these regulations “increase operating costs for the coal-fired generators”—that is, for his competitors—”and ultimately increase the clearing price for energy.”

As wholesale prices rise at the margin, Exelon’s revenues rise but its fixed costs don’t, juicing profits. On the earnings call, Mr. Rowe said “the upside to Exelon is unmistakable,” and he even estimated that every $5 increase per megawatt-hour translates into $700 million to $800 million in new annual revenue. The Chicago-based company will also be able to colonize those markets left without adequate capacity as coal plants are mothballed.

Exelon spokeswoman Judy Rader says the air regulations won’t be as harsh as we suggest and that coal plants will shut down for other reasons as well, including the inefficiencies of older plants and current low energy prices and demand. In March, Exelon said it is closing four Pennsylvania facilities for these reasons. “Exelon and other clean, forward-thinking utilities will benefit because they have already prepared for EPA action by retiring or investing millions of dollars to clean up their aging and inefficient plants,” she adds.

But another way to think about the EPA’s regulatory deluge is as a cap-and-tax consolation prize. A carbon price would have benefited nuclear generators, and we hear Mr. Rowe personally lobbied Members before the House vote on that bill last year.

Not that this was anything out of the ordinary. Frank Clark, who runs the Exelon unit Commonwealth Edison in northern Illinois, is one of President Obama’s largest fundraisers. Rahm Emanuel helped broker the $8.2 billion merger that created Exelon in 2000 when he worked at the firm then called Wasserstein Perella. White House aide David Axelrod was once an Exelon consultant.

But Exelon is merely the best connected company trying to cash in on the White House-EPA agenda. Take NextEra Energy, whose CEO Lewis Hay also claimed that we “mischaracterized” what’s going on. NextEra, which operates in 26 states, has expanded rapidly in recent years and is now the largest producer of wind and solar power in the U.S. But that’s nothing compared to the EPA windfall he expects.

“Even without legislation in Congress, the EPA is marching forward in terms of regulating carbon dioxide. So I think that puts us in a very good position,” said Mr. Hay at a Bank of America Merrill Lynch Investment Conference in September. Right on cue, the EPA is rolling out new carbon “performance standards” next week.

“But,” Mr. Hay continued, “they’re regulating so many other things. They have rules and regulations coming out on mercury, NOX, SOX, coal ash. I’m probably missing one or two. . . . It’s not going to be economic to put the scrubbers and all the other things that one has put on to deal with this multitude of new rules and regulations coming down the pike. So, without question, we will have a large number of megawatts of capacity come out of the system over time.”

In other words, the EPA’s path of destruction for others is a growth opportunity for him.

Regulation always creates winners and losers, and energy businesses always try to game the process instead of allowing markets to shape power supply and demand. But this is an especially outrageous case.

The EPA is abusing environmental law to achieve policy goals that the democratic process has rejected, while also engineering a transfer of wealth to certain companies that will be extracted from the 25 states in the Midwest and South that get more than 50% of their electricity from coal. These industry beneficiaries then pretend that this agenda is nothing more than a stroll around Walden Pond, when it’s really about lining their own pockets.

As long as they’re on the dole, the EPA’s apologists could at least be more candid about why they’re encouraging the government to expand its control over the wealth-producing parts of the economy. We’ll gladly print the letter.

Instead, we would recommend market-based and scientifically sound, energy and environmental reforms as discussed in the following Independent Institute publications:

Electric Choices: Deregulation and the Future of Electric Power, edited by Andrew N. Kleit

Re-Thinking Green: Alternatives to Environmental Bureaucracy, edited by Robert Higgs and Carl Close

Cutting Green Tape: Toxic Pollutants, Environmental Regulation and the Law, edited by Roger E. Meiners and Richard L. Stroup

New Perspectives in Climate Change: What the EPA Isn’t Telling Us, by S. Fred Singer, John R. Christy, Robert E. Davis, David R. Legates, and Wendy M. Novicoff

Hot Talk, Cold Science: Global Warming’s Unfinished Debate, by S. Fred Singer