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Out of Control Policy Blog Archives: 12.15.13–12.21.13

How Federal Regulations Get in the Way of Renewable Energy Development

 

Leave it to the federal government to provide billions of dollars in subsidies promoting renewable energy projects, while also requiring municipalities implementing those projects to navigate a federal regulatory web so onerous that it discourages any future renewable energy project undertakings.

The City of Logan, Utah knows this feeling quite well. In 2004, the city saw an opportunity to install a micro-hydropower turbine in their culinary water system which would generate enough clean, low-cost electricity to power 185 local homes. Assisted by a $700,000 Recovery Act grant in 2009, the city went ahead with the micro-hydro turbine project which would require no new construction and have no additional environmental impacts. But what started out as an economically feasible idea, which helped solve a problem with the city's water infrastructure, turned into costly and almost unnavigable regulatory maze.

A paper recently released by the Mercatus Center, examines the extent in which federal regulations adversely impacted this relatively small scale renewable energy project in Utah. "Although it is tempting to point to one specific regulation as the root cause of today's impediments to small hydropower development, a federal nexus of regulation is the real problem," the Mercatus Center paper, written by Utah-based authors, states. Even after receiving the stimulus grant (which covered half of the projected $1.4 million dollars needed for the project) the projected benefits from the project will be insufficient to meet its costs.  

After four years, the total cost of the project ended up being $2.8 million (twice what was originally projected) of which $2.1 million were borne by Logan, Utah taxpayers alone. The cost overruns were the result of a myriad of regulations that the city had to comply with in order to complete the project. For one, the Recovery Act grant contained a "Buy American" stipulation requiring that "all of the iron, steel, and manufactured goods used in the project are produced in the United States." This ban prevented the city from purchasing a lower-cost, foreign made turbine. The city also had to comply with a bevy of costly Federal Energy Regulatory Commission (FERC) regulations which included conducting a biological assessment to make sure the project would not harm any species or critical habitat protected under the Endangered Species Act (ESA). The City estimates that it spent $400,000 on FERC compliance alone.  Ironically, many of the same regulations designed to protect the environment created obstacles for Logan City's supposedly environmentally friendly, "green" micro-hydro project.

Logan officials have stated that there is no economic benefit to conducting a project of this size again.  The paper notes that cities in Wyoming and Vermont have had similar experiences. It's an example of how federal regulation can discourage communities from pursuing useful, innovative projects.  It also raises questions about U.S. competitiveness as compared with other countries-a project like this in Canada would cost between $225,000 and $375,000 compared to nearly $3 million in the U.S. In order for Logan City to break even on the project, they would need to run the turbine 24/7 for the next 37 years. Since the project is operating under capacity, it will likely take closer to 50 years.

When it comes to the implementation of "green" energy projects, the federal government is sending mixed messages. They're willing to promote renewable energy projects with subsidies, but they come with a barrage of federal regulations and costly stipulations that make the projects difficult to implement. These federal regulations, supposedly in place to protect the environment, are actually hampering the implementation of environmentally friendly technologies.

 

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Portland Oregon Cannot and Should Not Be Emulated

Portland, Oregon is known for its smart growth policies and urban growth boundaries. And Portland boosters happily provide tours to out-of-town government officials on the Portland model. City leaders from across the U.S. return to their local municipalities and try to emulate Portland. But as I found on a recent trip to Portland that is a big mistake for four reasons. 

Firstly, Portland officials and leaders admit they have made mistakes. When Portland implemented its smart growth plan, it had no good U.S. model. As a result it made some bad choices. The city has engaged in too much traffic calming by deliberately slowing  almost every route. This has made it challenging to travel anywhere during rush hour. According to travel design guidelines, at least one route every ¼ mile should offer unencumbered travel and Portland falls woefully short of this standard. Some types of vehicles need a congestion free alternative. A two-minute delay for an ambulance can be a matter of life and death. 

The city has built several bike trails to nowhere. Bike trails are like roads; they must connect at least one origin with at least one destination. If the path travels for 1/2 block into a dead-end street, it is not going to be used. Yet Portland has built several of these type of bike trails. The city received federal grant funding and instead of funding a needed highway, it supported these trails. 

The streetcar is a poor use of transportation resources. While many Portland boosters are excited about the economic development benefit of Streetcars, such boosters do not consider other transit options that may be more effective at transporting passengers from point A to point B. And even by streetcar standards the Portland Streetcar is exceedingly slow with an average speed is 8 miles per hour and an average gap of 15-18 miles between each train. An Oregonian reporter walking at 3.25 miles per hour actually walked the streetcar’s route in less time than his wait and ride would have taken on the streetcar. Inclement weather may play a part in people’s desire to ride the streetcar. But the streetcar funds certainly could have bought a lot of high-quality buses.

There are too many light-rail stations and they are spaced too closely together. Stations downtown are spaced 0.1 to 0.2 miles apart. Typically stations are spaced between .25 and .50 miles depending on neighborhood density, topographic characteristics, etc. Stations spaced too far apart may discourage riders but spacing stations too close together slows down the speed of the train and also discourages riders. 

Secondly, Portland is unique. In 1973, Portland passed an Urban Growth Boundary, a regional governance system and a light-rail plan. Portland was able to pass such a plan for many reasons:

1) It was a small city and had a small number of local officials

2) The region had a lot of quality farmland and was worried it might be developed. (With increased agricultural yields this issue is completely moot today, yet it was important to some folks in the 1970’s.)

3) The population was/ very homogenous. Even today, more than 78% of all metro residents are white, fifth highest in the country. This is more than 20% above the national average and substantially below other major west coast metro areas such as San Francisco and Seattle. The metro area was also very liberal and very educated. A homogenous population made public acceptance of such a plan much more likely.

4) Portland eschewed growth. Most politicians want their communities to grow, seeing growth as a political legacy. But Portland leadership was obsessed with keeping itself unique. As a result leaders wanted to adopt urban growth boundaries to keep Portland special. 

Thirdly and most importantly, Portland’s urban growth boundary has not led to increased transit usage. Driving, either alone or as part of a carpool, is by far the dominant mode. Despite the urban growth boundaries and all the money poured into construction of light-rail and streetcars, public transport still accounts for less than 7.0% of all travel in the urbanized area. In 1985 before Metro’s transit system was built, 2.1% of motorized travel was on transit. In 2009 after billions was spent to build the system, 2.1% of motorized travel was on transit. In 1980 Portland’s work-trip transit market share was 9.5%. By 2007 it had fallen to 6.8%. So Portland spent billions of dollars to replace buses with trains and the percentage of people commuting by transit decreased. 

Despite the hype, Portland’s share of bicycling and walking are not that impressive. Even with all the bike paths and the extra wide roads in the region, biking only accounts for 2.5% of all travel in the urbanized area. In fact more than twice as many people work at home—a travel mode that requires virtually no resources at all. 

Portland Census Commuting Population



Mode of Travel

Metropolitan Statistical Area*

Urbanized Area**

City*

Drove Alone

71.5

69.9

61.1

Carpooled

10.5

9.5

9.4

Public Transportation

6.3

6.9

12.4

Walked

3.2

3.9

5.0

Bicycle

1.8

2.5

5.1

Worked at Home

5.7

6.3

6.0

* Data from 2010

**Data from 2012 

Fourthly, growth boundaries have major negatives. They may protect land but they also increase housing prices for the poorest residents. In fact, considering all factors such as income, college education, demand, etc. Portland was 37th of 37th or worst in housing affordability in the country. Growth boundaries have increased gentrification in some areas of downtown Portland, where wealthy individuals are displacing poor families. Low-income residents have been forced out of the Portland metro because there is a lack of affordable housing. Remaining lower income residents have much lower rates of high school completion and a much higher unemployment rate than in comparable metro areas across the country. Portland also has one of the highest rates of homelessness of any city in the country.

Additionally, growth boundaries have negative employment consequences. Portland has insufficient land to attract capital-intensive firms that would add jobs and increase the tax digest. Portland, OR has only one Fortune 500 company headquarters despite being the 24th largest metro area in the country. 

For another city to adopt a successful urban growth boundary, it needs to have characteristics similar to Portland for the growth boundary model to work. These include a small close-knit leadership group, a homogenous population and little interest in growth. But even if a region were to have these features, would a region want a model that spends billions of dollars on transit, yet fails to noticeably increase transit ridership? Would a region want a model that makes its affordability worse than San Francisco or New York City? No region should want that model and so far none has adopted it. Political leaders that are awed by the Portland model would do well to take a cold shower in the facts before they try to implement such a model back home.

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Southwest's Atlanta Decisions are Puzzling

Southwest Airlines is evolving. Yet a Coach-only, 737-only, operating style may not be successful in the country’s most lucrative airports. 

Last week, we detailed how Southwest Airlines is no longer the low-fare leader. We also discussed how it has started charging fees to increase its revenue. Today we are going to look at Southwest’s operations in Atlanta—a major metro area with no secondary airport and a large legacy airline hub. Atlanta is a fascinating case study because Southwest bought a successful airline—AirTran—dismantled its hub and spoke network and rebuilt its presence in Atlanta’s around a focus city network. 

First a little background: Delta, United and American have hub and spoke networks. Travelers in hub cities such as Atlanta have direct flights to all other cities in the Southeast and many cities around the country. But travelers in spokes must connect through a hub to reach another spoke. Hub cities have flight peaks typically in the morning and evening with smaller peaks in the afternoon. Airlines schedule multiple flights taking off and landing within several hours so travelers can make their connections without long waits. Southwest uses a focus city network that features smaller hubs with more point-to-point flights. Travelers can go directly from a non-hub city such as Kansas City to another non-hub city such as Las Vegas. Since Southwest does more point-to point flying, it does not schedule these flight peaks because fewer people need to change planes. (In reality, focus cities still serve as mini hubs but with 40% connecting traffic instead of 60%. And since the cities are not scheduled as hubs, connecting times can be much longer.) 

More point-to-point flying is a definite advantage for some types of cities. While legacy airlines offer direct service to only two or three cities from their non-hubs, Southwest offers direct flights from most cities in its network to multiple cities in its networks. For example, if I live in San Diego and choose a legacy airline, I can fly to a few cities--Atlanta on Delta or Denver on United. But if I choose Southwest, I can fly to those cities and many others including Baltimore-Washington, Kansas City, Nashville, and Sacramento. So instead of having to fly to a big airport and changing planes to fly to my destination as I would on a hub and spoke network, on Southwest I can fly direct to 17 different cities. 

This business model works in three types of cities. The first type is medium sized cities such as Austin and Baltimore, which are either too small or located in too poor a geographic area to serve as hubs. The second type is large tourism cities such as Las Vegas and Orlando that do not have sufficient business travelers to serve as hubs. The third type is secondary airports in major cities such as Chicago-Midway or Houston-Hobby where customers enjoy the ease and convenience of flying out of the secondary airport. Not surprisingly these are the types of cities where Southwest flies. 

However, if Southwest wants to make it to the big time it has to fly into two other types of cities--superhubs like Atlanta and large airports served by numerous airlines such as New York (Newark, LaGuardia, Kennedy) and Los Angeles. These are just the types of cities that Southwest has been focusing on the past two years. Southwest received several new gates in Los Angeles thanks to the airport expansion and will be gaining six gates at New York LaGuardia thanks to divestitures required from the American-US Airways merger. But Southwest struck gold with its acquisition of AirTran. 

When Southwest bought Airtran all eyes were on it to see what would happen with the Atlanta hub. It made three major changes. First, it cut the number of cities it serves from Atlanta by 14 by eliminating service to 18 cities while adding four new cities. It was mainly smaller cities that Southwest cut. And some—Atlantic City, Branson, Key West, Newport News, Sarasota and White Plains —have lost Southwest service entirely. It also eliminated its Atlanta service to other smaller markets that Southwest serves from other focus cities including Bermuda, Bloomington, Buffalo, Portland, Rochester and Wichita. Finally, and surprisingly it pulled out of other airline’s hubs: Charlotte (USAirways), Memphis (a diminishing Delta hub) and Washington-Dulles (United). (It also pulled out of Dallas-Fort Worth but will likely resume flights from Dallas-Love Field.) Cutting flights to small cities such as Atlantic City was not a surprise. Clearly Southwest has no intention of serving these cities either directly or in partnership with a commuter airline. Its decision to cut medium cities such as Buffalo and Wichita is a little more puzzling but Southwest must have felt these were better served by other hubs. And its decision to eliminate service to Charlotte, and especially Memphis was downright bizarre and inexplicable. 

Once Southwest decided it no longer intended to serve small cities, it no longer needed AirTran’s 717s. So it made a deal with one of its competitors—Delta--to trade its 717s for some of Delta’s 737s. Clearly, Southwest really wanted to get rid of the 717s. But in trading them to Delta it allowed its major Atlanta competitor to replace some of its regional jets with 717s improving the Delta travel experience. Delta competes with American and United on these routes, not Southwest, so there are no direct consequences. But by operating a more efficient network Delta will have more money to compete with Southwest in Atlanta. So Southwest made a curious decision to indirectly help its competition. 

Finally, Southwest dehubbed Atlanta. This sounds a lot more dramatic than it actually is. Since Southwest’s flights are more evenly distributed throughout the day it does not need as many gates. Offering more evenly spaced flights may make Southwest more attractive to local travelers. This decision also has the major advantage of reducing the number of gates needed and the costs of these gates.

Southwest Airlines’ stated goal in Atlanta is to make itself more attractive to local services. But its recent actions do not seem to further its goal. 

The best way to build a strong local base is to attract frequent fliers. If I live in Atlanta I am most likely a member of Delta’s SkyMiles or Airtran’s A+ Rewards. (Southwest is integrating customers into its Rapid Rewards program.) If I regularly fly to one of the 14 cities that Southwest no longer serves, my best option is to choose a direct flight on Delta. This works for all of the cities except Atlantic City and Branson. (No airline currently offers direct service from Atlanta to these two cities. By so doing Southwest has steered some passengers to Delta. Southwest probably figures these are small cities so they will not be losing a lot of customers. But business travelers that fly regularly to these cities are unlikely to agree. 

Southwest frequent flyer program is less attractive than AirTran’s program. Under AirTran’s program, customers with 3 round-trip Business Class trips or 4 round-trip Coach trips received a free one-way ticket. Under the plan ten or more A+ credits in a 90-day period or 25 in a 365-day period result in elite status. AirTran’s program was one of the most valuable in the industry. Clearly Southwest’s program was going to be a step down. But instead of improving its Rapid Rewards flyer program Southwest recently announced it is planning to devalue it. Starting in March 2014 passengers booking “Wanna Get Away” tickets will need to use 70 points per dollar instead of 60 points. Southwest is trying to convince AirTran customers to continue flying Southwest, while simultaneously devaluing its own frequent flyer program by 16%. 

Another way to build a strong local base is to offer a first class. First class seats have a much higher profit margin and upgrades to first class serve as a strong incentive for all to fly the airline. Coach passengers may be upgraded to first class but only if the airline offers first class. Eliminating first class does allow Southwest to fit more total passengers on its planes. But the new 737-800s, which Southwest is placing in operation, could offer a very small first class section and still have the same number of coach seats as its 737-700s. Yet Southwest has no plans to offer first class in the near future. 

Southwest’s one positive move is the addition of early morning flights to New York LaGuardia and Washington Reagan National where it is trying to aggressively compete with Delta. Southwest’s earliest flight to New York-LaGuardia is 7:05. But for those who want to leave earlier, Delta has flights at 6:00 and 6:45. In fact while Southwest offers 6 flights a day on 737s (and 717s before they ship them off to Delta), Delta offers 16 flights a day, almost every hour, on A319s, MD88s, 737-800s and 757-200s. Plus Delta offers direct flights to Newark, Kennedy and White Plains. At Washington-Reagan Southwest does operate a 6:40 AM flight while Delta’s earliest flight is 7:20 AM. But while Southwest offers 6 flights on 737s (and 717s before they ship them off to Delta), Delta offers 14 flights a day, almost every hour on MD-88s, MD-90s, 737-800s and 757-200s. And Delta offers direct flights to Washington-Dulles a route Southwest cut from Atlanta. So I do not think the new early flights will lead to a substantial increase in passengers. 

How does the Atlanta situation look for Southwest? Not good. Delta’s Atlanta-based frequent flyer numbers have swelled in the past three years while AirTran’s/Southwest’s have declined. Further, Delta’s costs have been decreasing while Southwest’s have been increasing. Southwest has much higher unit costs than AirTran. Many experts have speculated that the real reason Southwest bought AirTran was to shutdown a major competitor. It is easier to compete in Atlanta when you have one major competitor instead of two. 

AirTran showed that there is room for a second airline with a major hub presence flying out of Atlanta. And AirTran’s model of offering flight banks early in the morning/late at night, traveling to smaller cities such as Atlantic City that Delta does not serve, and offering a generous rewards program worked. There are likely many other successful models by ultra-low-cost airlines, low-cost airlines and conventional airlines that will also work. Can Southwest’s current operating style work in Atlanta? Southwest leadership is a very sharp bunch but the early returns are disappointing. 

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E-Cigarette Regulations Likely to Harm Anti-Smoking Efforts, Yet NYC Still Considers Ban

In my latest Orange County Register column, I note that the wave of regulations local officials are enacting or proposing to restrict the sale or use of e-cigarettes is more likely to harm public health instead of benefit it, primarily by making it more difficult for smokers to transition to safer nicotine delivery alternatives, thus keeping them smoking longer. Here's an excerpt:

The rationales for these regulatory actions vary, but often revolve around misplaced fears that e-cigarettes will serve as a gateway to the use of conventional cigarettes by kids and non-smokers, as well as misperceptions that e-cigarette vapor is as harmful as cigarette smoke to users and bystanders.

Both fears are unsupported by evidence. Regarding the “gateway” theory, the Register reported last month that a University of Oklahoma study found that only 43 out of 1,300 college students (3.3 percent) reported that e-cigarettes were the first form of nicotine they'd tried, with only one student later taking up regular cigarette smoking.

And there is growing evidence that e-cigarettes have nearly none of the harmful properties of conventional cigarettes, primarily because nothing is burned in “vaping,” so it doesn’t produce the cancer-causing toxins and multitude of chemicals that result from the combustion of tobacco. A study released by Drexel University’s School of Public Health this fall found no evidence that e-cigarettes expose users or bystanders to levels of contaminants that would warrant health concerns.

Despite the fact that 62 of Americans support governments allowing the use of e-cigarettes in public places, New York City is one of those cities where politicians seem bent on regulation...in this case, proposing to loop e-cigs into the city's public smoking ban. CASAA, the Consumer Advocates for Smoke-Free Alternatives Association, reports that the City Council may take action on the proposal as early as this week.

As reported today on Politico's Capital New York City Hall Pro newsletter, former U.S. Surgeon General Richard Carmona has sent a letter to NYC council members warning that the proposed regulation could be counterproductive to the city's anti-smoking efforts. An excerpt:

[...] Legislative action that would keep smokers smoking would obviously have serious health consequences – and could cost lives. Worse still, it could lead to the adoption of similar ordinances in other cities, creating a domino effect that would further magnify the potential public health danger in this scientifically unsupported approach.

I will also observe that the concerns expressed about the possibilities that electronic cigarettes could addict non-smokers, condemning them to a lifetime struggle with nicotine addiction, echo concerns expressed about nicotine gums and patches when these first were introduced to the market. We have seen clearly, however, that such products did not have that affect. At the same time, while gums and patches have helped a small minority of smokers successfully quit smoking, it is clear to those of us have been engaged in this battle that we need more impactful solutions to the continuing problem of tobacco smoking, and that is where we see electronic cigarettes playing a central role.

Read the full letter here. Be sure to check out this new Time article by Eliza Gray and today's New York Post op-ed by National Council for Public Policy Research senior fellow Jeff Stier as well. Also, be sure to check out Reason.com's archive of material on e-cigarettes here.

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