Spinning Out of Control: The Hidden Costs of Appliance Efficiency Standards

March 31, 2017

Because federal regulation is intended to accomplish such big goals—sometimes at a very high cost—it is important to review the rules on the books to see if they achieve the objectives that agencies claim. In a recent presentation at the Society for Benefit-Cost Analysis conference, Art Fraas and I used data on appliance defects from class action lawsuits to identify regulations that are ripe for review.

In Impetus for Retrospective Review

Retrospective review provides agencies with an opportunity to both revisit the regulatory analysis and assumptions that underpin an existing rule, and to evaluate the regulatory outcomes. This review is crucial because markets, consumers, and circumstances all change after a rule is finalized, and revisiting regulations provides important information both about the accuracy of the agency’s forecasts and the ultimate effect on the regulated public.

One prime candidate for such retrospective examination is a midnight rule which established energy and water efficiency standards for residential clothes washers, issued by the Department of Energy in the final days of President Clinton’s second term. The rule significantly increased the market share for front-loading clothes washers relative to top-loading clothes washers, but it also (eventually) resulted in successful class action lawsuits that alleged significant problems with the new efficient washers.

Hidden Costs of Efficiency Regulation

DOE projected that its rule would increase clothes washer energy efficiency by as much as 35%. However, significantly reducing how much power and water clothes washers can use had a very tangible effect on consumers in the form of mold, mildew, bad odors, and ruined laundry.

After DOE’s new standard was adopted, front-loading washers could no longer effectively clean themselves through the typical wash cycle and, as a result, detergent suds and laundry residue would build up and molder in the washer door seals and drums. Consumers began noting strange smells emanating from their efficient Whirlpool, Kenmore, and Maytag washing machines, leading to the hassles of ruined laundry, ongoing maintenance, and service calls.

Ultimately, consumers had their day in court. In August of 2016, the U.S. District Court for the Northern District of Ohio filed a joint motion for final approval of a nationwide class-action settlement agreement between Whirlpool Corporation, Sears Holdings Corporation, and plaintiffs in the front-loading washing machine class action cases. The settlement awarded the millions of affected consumers with a cash payment of $50, a rebate of 20% off the purchase of a new clothes washer or dryer, or up to $500 in reimbursements for expenses incurred for repairs or replacing a washing machine due to mold or odors.

Although consumers in the class action suit didn’t realize it, their moldy washer problem began with the Department of Energy. DOE projected that its rule would increase clothes washer energy efficiency significantly, increasing the price of new clothes washers but ultimately saving consumers money on their utility bills. However, these rosy projections not only failed to anticipate the mold problem, but were based on analysis that overestimated how often consumers wash their clothes, and resulted in standards that left consumers paying more money for worse products.

Bad regulations and faulty analysis carry a price. In this case, consumers bore costs in the form of higher prices, continued inconvenience, expense, time, and bad odors from moldy washing machines. Other retrospective assessments of DOE’s efficiency rule have found that consumers reaped large benefits, but these analyses don’t include the information about product quality that the recent class action settlement brought to light. The recent court settlement illustrates that consumers bear burdens—including indirect burdens—as a result of regulation gone awry.

See also:

Benefit-Cost Analysis: Problems with Product Failures, presentation by Sofie E. Miller and Art Fraas