October 31, 2010

The Effect of Government Regulation on the Economy

I read an article in the Denver Business Journal concerning the recent controversy at Xcel Energy, Inc. which is converting from coal to natural gas created power. Xcel Energy put forth a 1.3 billion dollar plan that involves closing the Valmont’s coal unit in Boulder, converting the Cherokee and Arapahoe plants in Denver from coal to natural gas, and adding emissions control equipment to its plants in Colorado. This plan was designed to by implemented to comply with Colorado’s new Clean Air-Clean Jobs Act by 2017 to meet expected federal regulations on emission levels. This new Act was signed in April by Gov. Bill Ritter on the urging of several state agencies, environmental groups, Xcel, and Colorado’s natural gas industry. This new governmental regulation is expected to bring some economic hardships but it is also shows how economics is used to control pollution.

From an economist point of view by converting from coal to natural gas for energy the demand for coal will drop and will increase for natural gas. According to the article the Colorado Mining Association believes that Xcel Energy and underestimated the costs. Their preliminary estimates are looking at a minimum of 500 jobs being lost and 30,000 to 120,000 jobs when it is fully implemented as well as 11% to 50% increase in electricity rates. These costs seem much worse than they should and it’s possible that since this group is against the conversion they are somewhat biased in their results. In general by keeping those jobs there would be more output, income, and consumption which are all good for the economy. The numbers according to Xcel Energy are not mentioned but it can be assumed that their estimates aren’t as bad as what the Colorado Mining Association put out.

Economists look at pollution as a marginal cost to marginal benefit analysis. Marginal Benefits is negatively sloped because the pollution is getting less and less beneficial as it goes on. The marginal cost is positively sloped because for every additional point of pollution the costs go up. The point that the lines cross each other is the optimal pollution point. This article explains how that point is being controlled by the government by imposing regulations on emission levels. The government could also try to control pollution levels by creating taxes for all the company’s not meeting the required levels.

A more recent article explains how Xcel Energy has submitted a revised plan that will cost 1.1 billion dollars to implement. This particular plan will leave the Cherokee plant open and they will retrofit it with new emission-reduction equipment to help lower emissions and keep more workers on. It will eventually slowly be transformed to natural gas units by the end of 2022. This article gave Xcel Energy’s estimated additional cost of the plan to be a possible 1.7% raise in a typical electric bill. The first proposal would have only been 1.5% more. This case continues to be a hot topic with one side afraid of the economic impacts this will have on Colorado and the other side is more worried about Colorado’s environment.


Denver Business Journal October 15-21, 2010 “Fight heats up between natural gas, coal backers”

Denver Business Journal October 22-28, 2010 “Xcel changes Colorado coal-power plan, would keep Cherokee unit open”

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