Weighing environmental costs in utility regulation: The task ahead

Kenneth Gordon is chairman of the Maine Public Utilities Commission.

Previously he has served as an economist at the Federal Communica-

tions Commission and taught economics at the university level,

most recently at Smith College. Dr. Gordon holds a Ph.D. and M.A. from the University of Chicago and

an A.B. from Dartmouth College.

I I

Weighing Environmental Costs in Utility Regulation: The Task Ahead The structure and methods for taking account of environmental costs in utility regulation are not yet clear. When key policy and analytic questions are resolved, not only the economy but our National Energy Strategy should benefit.

Kenneth Gordon

I 'n no arena is the tension be-

.tween environmental goals and our other economic goals more

stark than in the energy industries. ~ Energy facilities include

things of great controversy such as nuclear power plants, widely

abhorred hazards such as oil spills and the possibility of major

change such as the greenhouse effect. Because a clean environment is an economic resource like any other, a decision to invest in a cleaner environment will mean that we have less of other goods and services, including energ)~ at least in the short run. Here, as elsewhere, there can be no free lunch. 2

A clean environment is impor-

tant both because people derive

satisfaction from it directl~ and because it can contribute to a

healthy life and a productive economy. Both goals are legitimate.

Concomitantly, achieving these goals must not needlessly lower

our standard of living or prevent those with legitimate aspirations

for growth and development from achieving those goals.

The object, then, is neither to reduce pollution at all costs, nor to keep the price of energy as low as possible at all costs; the goal is to

get the right amount of both. It is essential, therefore, that pol-

icy makers approach environmental management with the same analytic rigor that is applied to

54 The Electricity Journal

traditional utility regulation. The approach to managing environmental resources to date has not always met this standard. In- stead, environmental regulation has too often been the result of special interest appeals, ad hoc re-

actions to particular situations and based on emotion, unsullied by logic or facts. It is time to move beyond this; environmental- ism should come of age. 3

I. Recent Developments Over the past five years, a sub-

stantial number of utility commissions have required "least-cost p lanning ' - -a highly explicit optimization framework in which demand management activities by utilities are placed on a level play- ing field with supply-side activities. As generally formulated, such requirements direct utilities to finance conservation at prices up to the avoided cost of generation. These requirements are de- signed to correct imbalances in the direction of society's resources, but they may do so in ways with peculiar market implications.

R ecentl~ a few public utility commissions have begun to

explore ways to incorporate environmental considerations into the least-cost planning review process explicitly. Typically, resources thought to be environmentally be- nign, such as demand-side activities, are given a "leg up" in the least-cost utility planning pro- c e s s . 4 Similar proposals are likely to be forthcoming throughout the nation. This article explores the potential of this approach, identi-

ties some problems that are likely to be encountered as the process goes forward, and lays out some principles that should guide these efforts. Alas, it raises many more questions than it answers.

II. Utility Regulators' Roles in Environmental Actions

Many agencies are specifically

Environmental regulation has too often been the result of special interest appeal. It is time to move beyond this; environmental- ism should come of age.

charged with carrying out society's environmental choices-- so many that some may wonder why utility regulators, whose charter and expertise have not directly included environmental re- sponsibilities, should become involved in the process.

Environmental regulation itself is highly fragmented, and frequently is not grounded in a co- herent cost-benefit framework. Often it can fairly be said that the left hand often does not know what the right hand is doing. 5

For utility regulators to incorporate environmental costs directly

in the least-cost utility planning

process could compound the potential overlap and duplication, increase the likelihood of conflict- ing requirements, and worsen what is acknowledged to be a complex environmental regulatory situation. It could also turn out to be a major administrative addition to the existing tasks and functions of regulators.

J ustifying the entry of utility regulators into a brand new field,

when their plate is already so full, requires some reason for believ- ing that both economic utility regulation and environmental regulation will benefit as a result. It is this possibility that suggests incorporating environmental externali-

ties directly into the utility planning process. If successful, such an approach might not only ratio- nalize the utility planning process, but also the process of environmental review and management. In the longer term it could provide a model whereby environmental actions can be ra- tionalized on a broader front. This will only happen, however, if the proper principles are applied.

III. Least-Cost Planning: Characteristics and Origins

The least-cost planning process widely adopted by utility regulators in recent years provides both a partial explanation of why utility regulators have become inter- ested in incorporating environmental costs in a direct way and a partial model for how environmental management itself might take place.

A t its simplest level, least-cost planning does nothing more

October 1990 55

than refine traditional regulation

by requiring an explicit analysis of all available alternatives for

meeting a goal--here, the lowest cost of reliable electric service. As

least-cost planning has prolifer- ated, utilities are no longer free to

decide simply on the basis of intu- ition or "experience" to build a

plant here or sign a contract there. Utilities must demonstrate, in ad-

vance, that they have carefully considered a full range of alterna-

tives to justify their choices. This demonstration has been required

because utilities, as regulated cost- based monopolies, do not have

the same incentives to reduce

costs that competitive businesses

do. Least-cost planning was insti-

tuted in the hope that it would serve as a substitute for the pres-

sures that the market imposes on most firms. Its analytic roots are

embedded in optimization and pursuit of efficienc)~ traditional regulatory goals. 6

A s it has developed, there is a

major element of least-cost planning that does not necessarily

flow from the competitive market model: the inclusion of non-traditional alternatives to electricity supply--in particular, demand-

side activities that might reduce the need for new generation. This

is a more subtle, and in some ways, more significant aspect of least-cost planning. Indeed, some allege that least-cost planning is really a euphemism for the pro- motion of demand-side manage-

ment. This emphasis is qualita- tively different from the optimizing discussion mentioned

earlier in that it expands the range

of activities in which the regulated entity engages. 7

It is probably also fair to say that the driving force behind the

emphasis on demand-side management, and consequent avoid-

ance of new transmission and generation facilities, was environ-

mental concerns; incorporating environmental effects into the

least-cost planning process is a natural extension of this process.

There is reason to believe that directly incorporating properly es-

timated environmental costs into firms' and customers' decision-

making would both promote an improved environment, and do

so at a lower cost than direct regulation. What has not yet been shown is whether environmental costing can be successfully inte- grated with least-cost planning.

IV. The Economics of Environmental Effects

The goal of economic activity is the production of goods and ser-

vices that consumers want. Some are desired for the direct satisfac- tions they provide; others are

used to produce still other goods or services. Unfortunatel~ there

are limited resources available to support those wants. The list of goods that consumers might wish to purchase is endless. All, di-

rectly or indirectly, go into the production of consumer satisfaction.

l 'f electricity is one important ser- .vice that consumers demand,

surely a clean natural environment is another. If we inquire

about the reasons for demanding good environment, we might list

its contribution to health, to the re- duction in such problems as corro-

sion and crop damage, to the avoidance of expensive mitiga-

tion projects, and last but not least, to aesthetics. Whatever the

particular reasons, the essential point is that it is valued by con-

sumers. Environmental quality is also an

economic good; it can only be produced at some cost. That cost

may be attributable to direct production costs, or it may be a reflec-

tion of the foregone production of other things. While it is some-

times hard to say just what value consumers place on the environ-

ment, it is clear from observing both the marketplace and the po-

litical process, that that value is significant. Consumers/voters

have frequently demonstrated a willingness to give up valued alternatives in exchange for a better environment.

Environment plays a different role from the perspective of a producer of electricity, chemicals, ag-


ricultural or other products.

From a producer perspective, use of the environment reflects its

value as a production input. It is

on the same footing as labor, capi- tal or the use of other raw materi- als. It has a value in the produc-

tion of goods and services, but there is often a difference from

other inputs. The difference centers around the fact that the pro-

ducer may not have to pay for the use of this particular input.

If a company is permitted to dis-

charge unlimited waste gasses, or

is allowed to discharge waste liq- uids or heat freely into a water-

way, or is able to engage in dump- ing or some other unpriced use of

the environment, too much of the environmental resource, in com-

parison to other inputs, may be employed. The production of

whatever product is involved--

let's say electricity--will be car-

ried out inefficiently. Too much of the environmental resource will

be used and too little of some other resources will be used. 8 Be-

cause our legal system sometimes

permits people to dump waste products into the environment

without any payment, the production process is inefficient. 9

An important additional aspect

of this inefficiency must be considered. Environmental costs will

not be reflected in the price paid by the final purchaser of the prod-

uct either. Therefore, too much of the product will be consumed.

The price is, in essence, subsi-

dized. To summarize, the real

cost of production is higher than it appears to be, and these costs

are not passed on to consumers. The economic approach to deal-

ing with pollution and similar en-

/ f ,qu

L I | n o

n m n m ~ ~ I~ J.

e o o a I. 1~ II n

e l s n n

The air industry uses for its effluent is a resource, just like any material input.

vironmental externalities relies in

large part on finding ways to properly price use of the environ-

ment, and thereby insure that the

price of the final product properly reflects all of its societal costs. The

object is to "internalize the exter-

nalities" to the decision-making

process of firms and consumers.

If we fail to do this, electric producers will use too much "envi-

ronment" for whatever amount of electricity is produced, and con-

sumers will purchase too much

electricity. The broad issue utility regula-

tors must address is whether addi-

tional government intervention--

specifically utility regulatory

involvement---can improve the situation, and if so, how regula-

tors should go about it.

T he fact of market failure

and /o r continued less-than- perfect action by other agencies of

government is not by itself license for initiating still further govern-

ment action. 1° There must be

some reason to believe that addi-

tional government involvement will leave us better off as a result.

To date, society, principally through action by legislatures, has

usually adopted a command-and- control approach to dealing with

environmental externalities. Stan- dards have been set. Emission

rates have been specified for vari- ous substances and specific tech-

nological requirements, such as scrubbers, have been imposed on emitting facilities.

This approach, although subject

to a wide range of both theoretical economic and practical criticism,

has been widely employed and is

October 1990 57

the dominant approach to solving

environmental problems in the U.S. economy and others. Indeed,

efficient or not, the fact that so much environmental activity of

this character has occurred must be taken into account when we propose additional means for dealing with these problems. A

serious issue is whether new approaches will substitute for, or

simply be added on to, existing

regulation. An approach recommended by

some environmental analysts is to

create property (e.g. ownership) rights in the environment that is

subject to abuse. This relies on the incentives of the resource "owner" to assure that it is used

wisely. The property rights approach might work well for rivers

and solid waste, when combined with proper application of the law of nuisance and the institution of

class actions. But because the transaction and legal costs may be

high, such approaches may be less practical in the case of atmo-

spheric pollution and aesthetic is- sues, and therefore will not be fur-

ther examined in this essay. 11

V. The Economic Approach The more commonly proposed

economic approach has been to price the environment through the use of emission taxes based on damage costs. At least since the

1930s, externalities have been recognized as a problem area that neither the legal system nor the marketplace handle very well.

The suggestion has been ad- vanced that taxes be used to ensure proper use of the environ-

ment. Again, the notion is simple.

One should pay for the right to dispose of a ton of sulphur diox-

ide into the atmosphere. In such a setting the company will find it re-

duces costs when it reduces emission levels. In addition, the fees paid will, like the costs of other inputs, flow into the final price of

the product. Consumers can then decide how much of the product

to purchase based on the true cost

of that product. If the tax levied reflects the true

marginal cost of using the envi-

ronment for waste disposal--that is, reflects the value of the fore-

gone alternatives for using that environment, the "right" amount

of electricity will be produced. In addition, it will be produced as

cheaply as possible, and the "right" amount of environmental

quality will be provided. This ap-

proach implies that there is some

positive level of pollution that is permissible, and that there is

some positive amount of produc-

tion of electricity that is optimal as well. It is in this area of getting the incentives right that least-cost

planning procedures may offer important opportunities to help

assure the correct production of both environmental quality and

electricity.

T he tax approach to pollution so favored by economists has

not been as popular with politi-

cians and the general public. There are several reasons for this.

First, the administrative agency concerned with environmental

protection would acquire the power to tax, not a usual practice

in our system of government. We are less familiar with using

taxes to control behavior than for

The externality argument someimes resembles the theological question of how many angels can dance on the head of a pin.


raising revenue. Nevertheless, it

is widely acknowledged that the

behavior of finns and individuals is strongly influenced by taxes, and that could be expected to be

the case here as well. (To the ex- tent that too much revenue was

raised by pollution taxes, it could simply be used to offset other

taxes.) A second objection to a tax ap-

proach may simply be that it would w o r k and that environmen-

tal costs of production would raise product prices and reduce

competitiveness. Finall~ some have found the idea that the opti-

mal level of pollution is non-zero unacceptable, or resist an ap-

proach that appears to give the "right to pollute" only to those

who can afford it.

VI. Problems in Applying the Damage Cost Approach

A. Estimating Damage Costs The most difficult task to be car-

ried out in any economic ap-

proach to pollution control,

whether or not in a least-cost planning framework, is valuation of

the damages. Doing this involves placing a value on the environment.

C onsiderable progress has been made in recent years at

valuing the environment. The

problems in arriving at credible estimates are not trivial, but this is

not the place to go into them. While it is certainly true that there

is not yet and may never be a standard reference manual for envi-

ronment emissions and their valuation, it is also true that we are not completely bereft of information

and techniques by which we can

develop that information. Organi- zations such as Resources for the

Future have for some time been developing techniques for damage evaluation. The Environmen- tal Protection Agency has col-

lected information which could be used to develop damage costs,

and no doubt other sources exist. It seems likely that the lack of

good damage estimates results, in part, from the fact that such esti-

mates have not been widely de-

manded by parties seeking to im-

plement a more market-based approach to pollution control. If a

serious effort to do so occurs, a

substantial effort to develop better estimates is likely to o c c u r . 12

It is important to remember that the amount of money spent on mitigation of damages or pollution control is not a measure of

damages. There is simply no logi- cal link between such spending

and damages themselves, in the absence of a model specifying de- cisional relationships used to es- tablish such a connection. It re-

quires great confidence in the rationality of the political process

to rely on it for that linkageY

l 't is also worth noting that a col- .lecfive evaluation is often neces-

sary in environmental damage es- timation and that different

individuals' assessments of the value of environment and, there-

fore damage to it may vary widely. Not all consumers will

agree on the appropriate level of abatement.

Finally, although to date we have rarely determined effluent

taxes or environmental costs explicitly we do make these valua-

tions implicitly every time we set standards and require specific c o n t r o l s . 14 A major virtue of the

economic approach is that it

makes these calculations explicit and therefore subject to checks for

reasonableness and plausibility. Equally important, the eco-

nomic approach allows industry and consumers to act on these val-

uations in a more flexible and efficient manner. 15 Once damages

have been estimated they can be

converted into a tax rate per unit

of effluent. Ideally this number should reflect the marginal or in-

cremental environmental cost of effluent. The effluent must then

be monitored and the collection of fees from the emitter enforced.

B. The Optimal Area of Control A second major class of prob-

lems centers on the geographic re-

gion in which the economic approach will be applied. Least-cost planning processes are carried out exclusively at the state level.

Complications of several sorts could arise if and when environmental considerations are incorpo-

October 1990 59

rated into that process.

First, and most obvious, pollution problems do not originate en- tirely in the state undertaking action, nor will the benefits of

pollution control be confined to a particular state. Spillovers abound. For example, a significant share of Maine's and New

England's pollution problems do not arise within the region at all,

but are brought to the region by prevailing wind patterns from the

Upper Midwest and Ohio Valley. Clearly, taxing effluent emitters in

Maine or even in the New En-

gland region will do nothing to al-

leviate that problem. It may be possible to take such

factors into account. Regional emitters should only pay effluent

taxes according to the incremental damage that they do, not accord-

ing to the total damage that is

being done by pollution. This

does suggest, however, that a geo- graphically limited approach to

the problem only gets us part way

to the solution we are seeking. The other side of the coin also

raises potential difficulties. Sup-

pose that a substantial fraction of the pollutants generated within a

state falls on other states. If we take the in-state approach to taxing pollution, the companies in

question will still be producing such effluents at too high a rate. If we adopt an effluent tax that ac- counts for all the pollution costs, some of the benefits will be en-

joyed outside the region. Additionally, industries operat-

ing inside the control region will experience substantially higher costs than those outside the re-

gion. The result will be that un-

less other jurisdictions take similar actions, controlled firms will have a harder time competing with untaxed firms in their indus-

try.

T his suggests that any ap-

proach that incorporates effluent costs should be as broad as

possible, so that one state or a few firms are not disadvantaged. This

does not, however, mean that the

No jurisdiction will want to be the only one

to adopt full scale environmental

internalization.

effluent tax should be uniform

across all regions. Costs may

va13~ even vary widely, across different regions, and businesses

should be allowed to take advan- tage of that fact in locational deci-

sions. This is, of course, a case where

the economics appear clear, but

the politics may be much less so. If the introduction of environmental externalities into the least-cost planning process actually involves passing on the full cost of damages to consumers, the regional spillover problem could be extremely serious. Because of this, no jurisdiction will want to be the only one to adopt full scale

internalization. Ultimatel~ this

approach to solving environmental problems must, if it is to make a real contribution toward environmental improvement, extend

over a broad area. C. Industry Coverage A third problem whether envi-

ronmental externalities should be

considered only in the utility planning process or across all indus-

try. Two points should be made. First, while the utilities are obvi-

ously a major contributor to pollu-

tion problems, they are by no means the only contributor. A solution to environmental problems

that leaves consumers as well off as they can be, and thereby allows

the maximum amount of environmental improvement, must cover all industries, the transportation

sector, and any other sources of pollution including households. There is a real danger that by di-

rectly incorporating environmental externalities in the least-cost

utility planning process, an inefficiently large share of the burden

will be borne by the utility industry. The regulatory process by it-

self provides an ideal administrative forum to pursue environmental and, for that matter, many other social goals that

are not closely related to tradi-

tional utility regulatory concerns. a second point is that the size

of the regulated industry

might shrink if the cost increases were substantial. If utilities pass through to consumers the full costs of environment degradation

but nonutility energy producers do not, there will be a clear incen-

tive to substitute nonutility gener-


[

ation of electricity for utility generation. Because self-generation can already, independently of this effect, sometimes be cost effective, it would not make sense to ban such shifts. Rather, the incorpora- tion of environmental costs must cover the broadest scope of energy production. That cannot happen through a least-cost utility planning process by itself. Thus, while we may begin the process with utilities, it should be understood that this is an initial step in extending these practices to a broader framework.

D. Redundancy, Overlap and Conflict

A fourth major problem area is how integrating environmental costs into least-cost planning will fit in with existing environmental regulation. There is already a massive amount of environmental regulation. A principal attrac- tion of turning to an economic/tax approach to controlling pollution is that it could simplify the process of controlling pollution and allow firms and individuals the flexibility to respond with the most efficient means of handling the problem. Ideally it would be most desirable to have this approach adopted as a replacement for current requirements placed on utility companies wherever possible.

l 'f, however, firms in the utility .industry were to continue to be

subject to all the requirements of existing environmental laws, this process might simply create an additional layer of complexity and erect one more hoop to jump

I

through. At a minimum, ways must be

found to take into account the fact that utilities already must meet substantial environmental compliance requirements, and care must be taken that this approach not lead to excessive pollution control costs. In short, this approach to environmental compliance is most appropriately viewed as a substitute for, not an addition to, existing environmental requirements.

The progress made to date in including environmental costs in the least-cost planning process is rather modest.

It is clear from the foregoing that there are substantial barriers to implementing an economic approach to pollution control through the least-cost planning process. Nevertheless, with due regard for the fact that all solu- tions are imperfect in the real world, it may be possible to fash- ion ways to apply these principles at least partially and provide a model for action in other industries.

VII. Evaluation of Current Ap- proaches

The progress made to date in in-

cluding environmental costs in the least-cost planning process is rather modest. The mechanisms adopted in a number of states typically give a credit to particular technologies for meeting pro- jected load according to whether or not they appear to be associated with environmental damage. Thus, conservation might get a substantial credit, hydroelectric power a somewhat lesser credit and a dirty coal plant no credit at all.

T he principal difficulty with the process so far is that the

adders appear to be, for all practical purposes, arbitrary. They are not based on any analysis, qualita- tive or quantitative, of the economic damages associated with particular activities. Moreover, unless activities are specified in perhaps unrealistically exquisite detail, important opportunities for flexibility on the part of industry are foregone by this approach. For example, if it were determined that a coal plant should re- ceive a 10% cost adder to reflect environmental costs, that could ar- bitrarily discriminate against those coal plants that are de- signed with an eye toward mini- mizing emission levels. It could also discourage the development of environmentally improved coal technologies. 16

In short, by looking only at the particular type of input and incorporating a generalized environmental impact figure into the planning process, rather than fo- cusing on the emission damages themselves, we lose the ability to make inportant distinctions that

October 1990 61

are at the heart of the reasons for

pursuing a least-cost economic approach.

A nother problem with some

existing methodology, just as

fundamental if environmental

gains are to be significant, is that

the process typically is only used for reordering the place of a re-

source in the utility's selection process. The actual environmen-

tal costs of a resource are not reflected in the final product price,

therefore the beneficial consump- tion-reducing effect of including

real costs is almost completely

lost. Only if the process of attach-

ing costs in the least-cost process actually alters the order of re-

sources to a more costly ordering, is there any effect whatsoever,

and there the effect is simply the cost that results from shifting to a

resource mix that would have

been non-optimal but for the con-

sideration of externalities. In short, by attaching disadvan-

tages to broad classes of re-

sources, rather than looking at the actual environmental costs they

impose in each setting, and by

then failing to pass on to consumers the full costs of pollution, the

approach as it has functioned to date probably throws out both the

baby and the bath water. If this is all the matter ever amounts to,

then given the additional degree

of complexity it poses, it may not be worth bothering with.

Finall~ proposals to date focus

exclusively on new resources, not existing facilities. While such ap-

proaches may be justified on the basis of gradualism or pure politi-

cal practicality, they may also in- troduce a serious distortion that,

at least for the short or intermedi-

ate term, could worsen, not im-

prove, environmental perfor- mance. This could occur if the im-

plicit asymmetrical treatment of

old and new facilities led to life ex- tensions of older, dirtier plants,

rather than replacing them with more modern fac i l i t i e s . 16

VIII. Possibilities In spite of all these criticisms

and difficulties and the limita-

tions of effort so far, the environ-

mental community and the electric regulatory community have

explicitly recognized that environ-

mental costs should be brought directly into the decision making

process of the firm. After weigh-

ing all the advantages and disad- vantages, this insight is right on

target, even if we have not yet found an efficient way to incorpo-

rate it into the firm's decision

Every type of resource has its own case to plead when it comes to environmental mitigation.


m a k i n g process .

The s igni f icance of soc ie ty ' s

g r o w i n g a w a r e n e s s tha t the eco-

n o m i c costs of e n v i r o n m e n t a l d e g -

r a d a t i o n s h o u l d be b r o u g h t in to

f i rms ' d e c i s i o n - m a k i n g p roces se s

c a n n o t b e ove r s t a t ed . M o r e o v e r ,

the spir i t of i n t e g r a t e d r e source

p l a n n i n g for utilities, w i t h its

h e a v y e m p h a s i s o n explici t q u a n -

t i ta t ive c o n s i d e r a t i o n of costs a n d

cons ide r a t i on of the full r a n g e of

a l te rna t ives , p r o v i d e s a f o r m a l ve -

h i d e w h e r e b y s u c h a p rocess

m i g h t b e u n d e r t a k e n .

W e still h a v e a long w a y to

g o ana ly t i ca l ly b e f o r e s u c h

p rocesses can b e a d o p t e d rou-

tinely, e v e n in the electric ut i l i ty

industr)¢ b u t w i t h t i m e a n d ef for t

it m a y b e c o m e poss ib le . If so, a n d

the p rocess p r o v e s effective, the

long r a n g e benef i t s wil l e x t e n d far

b e y o n d the b o u n d a r i e s of r egu-

la ted uti l i t ies to i m p r o v e e n v i r o n -

m e n t a l m a n a g e m e n t t h r o u g h o u t

the ent i re e cono m y . •

Footnotes:

1. R. Fri, Energy and Environment: a Coming Collision, RESOURCES (Winter 1990).

2. For an elegant and informative exposition of these principles and their implications see W. E BAXTER, PEOPLE OR PENGUINS, THE CASE FOR OPTIMAL POLLUTION (Colum. U. Press 1974).

3. See generally, D. Schoenbrod, Envi- ronmental Law and Growing Up, YALE J. ON REG. 357-368 (1989).

4. Some plans differentiate among supply-side resources as well. For a useful recent survey of different states' approaches see R. OTTINGER, THE ENVIRONMENTAL COST OF ELEC- TRICITY (Oceana Publications, forthcoming). See generally THE ELEC. J., July 1990 special issue on "Externali- t i e s - t he Next Wave in Planning."

5. See, for example, R. W. Hahn, The Pol- itics and Religion of Clean Air, REGULA- TION (Winter 1990).

6. Utilities have acceded to least-cost planning, at least in part, to help insu- late themselves from the consequences of mistakes they may make.

7. The optimal range of activities for a firm to be engaged in is of course also a matter of markets and economic efficiency. For a careful treatment of this

topic see O. E. WILLIAMSON, THE ECO- NOMIC INSTITUTIONS OF CAPITALISM, esp. ch. 4-6 (Free Press 1985).

8. It might also be the case that too much of a resource which is closely related to environmental impacts, such as fuel, is being used.

9. It is more correct, perhaps, to point to the absence of clearly defined property rights in the environment as the source of the problem.

10. See C. WOLF, JR., MARKETS OR GOV- ERNMENTS, CHOOSING BETWEEN IMPER- FECT ALTERNATIVES (MIT Press 1988).

11. Emissions rights trading is also a kind of property rights approach that can improve the efficiency with which

administratively determined standards are met. Incorporating these rights into the least-cost planning process would have to be done with care, but appears to present no fundamental obstacles.

12. For example, legal actions against companies responsible for oil spills (e.g., Exxon Valdez) and fish kills in hydroelectric facilities have generated demand for exactly these types of damage estimates.

13. We hope that society would not have spent $10,000,000 cleaning up a particular problem unless it thought the damages were at least that high. More precisely, society would hope that the last dollar spent on mitigation yields at least a dollar's worth of environmental benefit.

14. But such inferences must be made with the greatest care. See the previ- ous paragraph and footnote.

15. The locational choices consumers make surely already include environmental considerations. This may provide a basis for estimating the value placed on environmental quality.

16. But see S. Putta, Weighing Externali- ties in New York State, THE ELEC. J., July 1990 at 42 for a more discriminating approach, which may gain favor in some states.

17. The possibility of a similar effect has been demonstrated by The Analy- sis Group for Regional Electricity Al- ternatives at MIT. In some scenarios examined by this group vigorous pursuit of demand-side options led to a worsening of environmental condi- tions. See C. Andrews, S. Connors, D. Greenberg, W. Schenler, R. Tabors, D. White, K. Wulfsberg, Assessing the Tradeoffs Between Environment, Cost and Reliability: Developing a Coordi- nated Strategy to Ensure New England's Electricity Supply, paper presented at the New England Envi- ronmental Exposition Session on New England Energy Policies in the 1990s, Boston, Mass., Apr. 12, 1990.

October 1990 63

Weighing environmental costs in utility regulation: The task ahead

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