Cato @ Liberty
Privatizing Puerto Rico Power
Fri, 16 Feb 2018 16:43 EST

Many Puerto Ricans are still without power after Hurricanes Irma and Maria knocked out the island’s electric grid in the Fall. The federal government has poured in resources, but there are still hundreds of thousands of people without power. The sad episode has highlighted the gross failings of Puerto Rico’s government-owned electricity infrastructure. 

Even before the hurricanes, the power grid in Puerto Rico was in bad shape. A 2016 audit of the state-owned Puerto Rico Electric Power Authority (PREPA), found that “transmission and distribution systems are falling apart quite literally: they are cracking, corroding, and collapsing.” The audit found very old and dilapidated assets, and also that the utility has inexperienced staff, terrible record keeping, and a vastly bloated bureaucracy. PREPA has had a poor environmental record, and its power systems have constantly broken down, causing costly forced outages.

Before his resignation in November, the head of PREPA indicated that a “transformation plan” was in progress. But the bankrupt government company has no way to pay for modernization since it is heavily indebted and its finances are a shambles.

The good news is that Puerto Rico’s Governor, Ricardo Rossello, has unveiled a plan to privatize PREPA. Calling the company “a heavy burden on our people, who are now hostage to its poor service and high cost.” PREPA, he said, “does not work and cannot continue to operate like this.”

Rossello’s plan should be good news for Puerto Ricans, who are sick and tired of high-cost and unreliable power. Vast experience around the world since the 1980s shows that privatizing infrastructure, including electric utilities, increases operational efficiencies, improves capital investment, and enhances customer service. Moving PREPA’s assets to the private sector, within an appropriate regulatory framework, should reduce costs and lead to efficient new investment in Puerto Rico’s electric system.

Puerto Rico’s electric utility is not the only one that should be privatized. President Trump’s new budget proposes privatizing the Tennessee Valley Authority and the federal Power Marketing Administrations. Those reforms are long overdue, as privatization of state-owned businesses has swept the world outside of the United States since the Thatcher reforms of the 1980s.

Read more about privatizing the TVA and PMAs here and here, and more about the general benefits of privatization here.

Cato intern Johnathan Postglione helped assemble this post.

Air Pollution Regulation and Grandfathering
Fri, 16 Feb 2018 15:37 EST

A recent New York Times article discusses an exemption for heavy-duty diesel truck emissions standards. First enacted by the Clinton administration, the standards include a provision that exempts truck engines built before 1999. Some entrepreneurs are taking advantage of this provision to circumvent the regulations by installing rebuilt pre-1999 engines in new truck bodies. According to the article, the rebuilt trucks sell for at least 10 percent less than compliant new trucks and also cost less to operate.

The focus of the article is the lobbying directed towards maintaining the exemption, but I want to focus on the real underlying problem: the exemption of existing sources from more stringent emission standards, also called grandfathering. If emissions and degraded ambient air quality have negative effects on morbidity and mortality, then those effects occur regardless of whether the emissions come from “existing” or “new” sources. So there is no public health or scientific rationale for grandfathering. Emissions are emissions regardless of their origin.

Instead, grandfathering eliminates the expense of retrofitting or scrapping existing durable equipment and imposes the cost of compliance gradually. This reduces the explicit cost of compliance and thus limits political opposition to emission control.

The downside of grandfathering is that it incentivizes the retention and operation of old equipment. In the cover story of the spring 2006 issue of Regulation, Shi-Ling Hsu describes the thirty-year struggle over the imposition of emission controls on coal-fired electricity power plants. When the Clean Air Act was amended by Congress in 1977, existing plants were exempted from the pollution control measures that were required of new power plants. Ever since, much ink has been spilled, and large legal fees and campaign and lobbying expenditures have been spent in the struggle over whether emission controls would ever be imposed on such plants because the right to emit without controls is very valuable.

The emissions loophole for trucks is similarly valuable, and old trucks are also exempt from excise taxes on new trucks and other regulations increasing the value of the exemption. 

What should be done about grandfathering? One possibility is emission taxes rather than regulation, but that works only if the politics of tax exemption differ from the politics of regulatory exemption. A second possibility is to set a certain end date to the grandfathering exemption. But that requires the legislature to resist the temptation for a grandfathering extension in return for political support, the subject of the Times article. Experience suggests this temptation is large.

Assuming that limiting emissions is a worthy goal, emission standards or taxes should be applied equally to all sources of emissions. So good public policy would not grandfather, but instead would require Congress to impose explicit costs on all existing emitters or explicit taxes on the rest of us to pay for emission reduction. And that appears to be as difficult as it sounds.

Written with research assistance from David Kemp.

How Will The Supreme Court Rule on Partisan Gerrymandering?
Fri, 16 Feb 2018 09:03 EST

Ballotpedia asked five redistricting buffs to comment on how the Supreme Court might rule on the two gerrymandering cases it is considering, Gill v. Whitford from Wisconsin and Benisek v. Lamone from Maryland. My response

One clue is timing. Rather than fast-track consideration of Benisek v. Lamone, the Court instead set an oral argument date of March 28. That leisurely pace ensures that any decision will come late enough in the term to wreak havoc on this year’s [election] cycle if it announces the imposition at once of a new constitutional standard. Few if any Justices wish to wreak such havoc avoidably. From which I deduce that the Court either 1.) does not expect to announce a new standard, or 2.) expects to do so only in a staged or prospective way that allows states time for compliance or kicks in with the next Census cycle.

While I believe Justice Kennedy remains open to the development of some constitutional standard in this area, I also think he is looking for a fix that is objective and mechanical enough that 1.) it yields the same results from state to state and from Republican-appointed as from Democratic-appointed lower court judges, and 2.) the clarity of what it calls for and how to comply cuts off a need for continual massive litigation and judicial supervision (compare here the success of the one-person, one-vote revolution). Kennedy’s having joined with the conservatives to stay the Gill ruling leaves me thinking that as of then he wasn’t convinced that the “efficiency gap” standard fit that demanding bill.

I’m also pleased to note that my essay on gerrymandering from a libertarian/classical liberal perspective, which appeared originally in Cato Unbound, is featured in the latest Cato Policy Report. You can read it here


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