Option 2: Describe a specific instance, not described in class, where you believe political contributions, lobbying, or both were successful in moving regulation toward an industry’s interests. Present arguments that the contributions/lobbying actually persuaded politicians, as opposed to the simultaneity and selection concerns we discussed in class. Does the fact that this political persuasion was successful fit with the predictions of the Peltzman model?

The Peltzman model, the theory generally referred to as economic theory of regulation, mathematically illustrates the trade-off between political support from two parties - consumers and regulated firms - that regulators face when making decisions on regulations. Typically, consumers and regulated firms have conflicting agendas because the former prefer low rates while the latter prefer high rates to maximize personal wealth or profit. The iso-political support function, which is utilized to locate the optimal balance, shows varied forms depending on factors such as influence, and cohesiveness of each agent.

M = Political Support Function = Allowed Level of Profit Earned by the Regulated Firm
P = Price Established for Regulated Service (By Regulatory Authority)
Figure 1) The Peltzman Model

Although there are countless number of real life examples to which the Pelzman model could be applied, the recent decision by Oklahoma’s legislature in early 2014, to pass the bill that allows regulated electric utilities to charge a higher base rate to the customers who sell excess electricity they produce using solar power exemplifies how political contributions and lobbying may affect regulations. Led by Koch Industries, a multinational corporation operating refining, chemicals and energy business, many major electric utilities have been spending heavily to fight incentives for renewable energy, specifically the practice known as “net metering”, which gives customers 1:1 kilowatt-hour credit for excess energy customers produce using renewable energy sources.
This apparent success of the attack on green energy policies could be attributed to the high level of lobbying and contributions of electric utilities to various government agencies, especially to American Legislative Exchange Council (ALEC). The major player in the market, Koch Industries alone recorded $2,922,960 of contributions for 2014 election cycle and spent $10,430,000 for lobbying in 2013, boasting its substantial influence over regulators. Because many personnel in Koch Industries had direct connection with ALEC - the top lobbyist being ALEC’s former chairman and the firm being ALEC’s corporate board – it was very natural for the emphasis to be put more on firms’ side over consumers’ side.

Electric Utilities ranks 12th place in total political spending for 13-14 election cycle (To current incumbents in Congress) Figure 2) Top Contributing Interest Group for 13-14 Election Cycle Source: OpenSecrets.org

In addition to the personal connections and political contributions, the legitimacy of the argument put forth by electric utilities also contributed in persuading politicians. Electric power industry argued that net metering provides unfair advantages to the customers using renewable energy because they do not make proper payment for the maintenance of power grid, although they make full use of it. With fewer people being charged for power grid operations, additional costs incurred gets shared by everyone. Asserting that this could ultimately impair the utility business model, the utilities asserted that it could actually end up hurting consumers.

Figure 3) Diagram for Net Metering System
Source: Florida Power & Light

The trade-off was evident for this change – customers benefitting from net metering, now having to pay higher prices, were discontented, while the regulated firms which could reduce the costs given out through those benefits showed much satisfactions. The maximization of the political support was fairly well attained in weighing two conflicting interests. This was because the market had weak consumers and strong industry; the number of consumers affected was quite limited in that only total of 400,000 individual solar panels was reported by the end of 2013, and advocates of solar panels were sparely located across different states. This specific instance clearly illustrates how regulators adjust their positions based on trade-off associated with favoring one side between conflicting agents, in finding the right balance where they can secure the most political support.

Figure 3) US Quarterly Photovoltaic Cell Installation by Market Segment Source: GTM Research and SEIA

Figure 4) Estimated Photovoltaic Cell Installations Source: GTM Research and SEIA

Bibliography)
Rowley, Charles Kershaw., and Friedrich Schneider. The Encyclopedia of Public Choice. Dordrecht: Kluwer Academic, 2004. Print.
Graves, Lisa. "ALEC Exposed: The Koch Connection." The Nation. 1 August 2011.
Evan Halper, “Koch brothers, big utilities attack solar, green energy policies,” Los Angeles Times, 27 May 2014.
Kann, Shayle. “U.S. Solar Market Insight Report | Q1 2014 | Executive Summary” Solar Energy Industries Association. Seia.org, March 2014. Web.
"New Poll Says 77% of Floridians Support Net Metering. Where Do You Stand?" Lifestyle Homes, 14 Apr. 2014. Web.
Opensecrets.org, - Lobbying – Industry: Electricity Utilities,“https://www.opensecrets.org/lobby/indusclient.
php?id=E08&year=2014”