EME 801
Energy Markets, Policy, and Regulation

Why Do We Regulate?


Why Do We Regulate?

Economic Regulation

In theoretical economics there is the idea that certain services and goods are most efficiently provided by what is defined as a “natural monopoly.” A natural monopoly is a type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing. As such, a natural monopoly has only one efficient player. This company may be the only provider of a product or service in an industry or geographic location. Here's a nice definition of a natural monopoly. One can see that there are places in the energy value chain where it might be most efficient to have a natural monopoly. For instance, it does not make sense from an efficiency standpoint to have more than one set of electricity distribution wires in the street. This also makes sense for natural gas distribution. Electric and natural gas transmission also are more efficient with fewer rather than many players. In the case of natural gas transmission, regulators allowed for limited competition among certain pipeline companies to many city gates in the Northeast and Midwest while there is pretty unbridled competition in the Texas and Louisiana markets. Regardless, large infrastructure projects are usually more efficient if not duplicated. For instance, do we need more than one wastewater system or more than one transit authority in a particular geographic region?

While it is quite likely that the best outcome from an efficiency perspective comes from a natural monopoly, there is an asymmetry that occurs with respect to pricing power particularly when the good or service provided is considered to be very important by the end user like heat or water or power. This price “inelasticity” for the consumer sets up the owner of the natural monopoly with significant pricing power. This pricing power over time could make the goods and services unaffordable to the consumer and allow for significant monopoly rents to be earned by the supplier.

This is where utility regulation seeks to “level the playing field” by regulating the prices (rates) of these granted natural monopolies. We will further discuss this process in section 9.4

Environmental Regulation

Environmental regulations are governmental incentives or laws passed in attempts to protect the environment in a variety of ways: such as by reducing waste, requiring companies to cut back on production in order to reduce nation-wide emissions, or banning the use of harmful chemicals and substances to protect the environment, human health, and biodiversity.

In general, environmental regulation is dedicated towards the initial activities at the production site and how the waste is handled following the manufacturing process of a product.

The main goal of environmental regulation is to require strict rules on the measures necessary in order to reduce emissions and protect the environment – many of which would not occur if it weren’t for environmental regulations. Environmental regulations do the same: many wouldn’t commit to the environmental measures necessary on their own, but with the environmental regulations – it no longer becomes a choice, but a legal requirement that makes a global difference. There are many other courses in the RESS curriculum that cover Environmental regulation and policy. It is an extremely important topic and compliance with these regulations can be costly and is something that in a more complex development of a project like the ones we are doing here would require significant due diligence. Further - there are environmental policies which promote the development of renewable energy like Renewable Portfolio Standards (RPS), carbon taxes and feed-in tariffs. Please check out this link if you want more information about this: Our 2023 Guide to Environmental Regulations in the US

Other Regulations

Municipalities, State and the Federal Government also have other regulations such as labor, zoning, procurement and land use regulations. Think about some other types of regulation your project may come under as you work through it.