Tariff Stochasticity
No. 13 | March 21, 2025
I didn’t want to write about a tariff-ridden U.S. economy, and I’ve resisted doing so until now. But, tariffs are unavoidable, even within the ringfence that is US energy trade, and even within electricity trade more specifically. So I wrote something for Halcyon, which you can read in its fullness here.
In the US context, I focus mostly on electricity and transport markets, which are distinctly different when it comes to tariffs. Electricity, in particular, has a very low demand elasticity of price - lower even than road transport fuel. Electric utilities also have regulatory provisions which can buffer both their balance sheets and customer pocketbooks from the jarring impositions of overnight tariffs. Automakers do not, to put it mildly.
So why write about tariffs in electricity now, specifically? Because two Washington State utilities are petitioning their regulator for deferred accounting of tariffs. Even in the spare language of utility regulatory filings, we can see the confusion (and possibly irritation) at work.
Avista: we don’t know how to account for tariffs…
As of now the Company does not know whether such tariffs would be reflected in the embedded cost of the Canadian commodity (and therefore flow through the Company’s natural gas Purchased Gas Cost Adjustment Mechanism (PGA)), or would be considered something more akin to an excise tax (such taxes are not tracked in the PGA deferrals)
Puget Sound Energy: we don’t know if tariffs even apply to electricity!
Under the Chapter 27 of the Harmonized Tariff Schedule of the United States, electrical energy is identified as a good, but has a “free” tariff designation and is not subject to the border entry procedures through which Customs Duties are imposed. Public statements from a representative of the U.S. International Trade Commission have suggested that—consistent with historical treatment of electrical energy as an intangible and the complexity of tracking and invoicing interchange of electrical energy across the U.S./Canada border—electrical energy generated in Canada and imported into the U.S. may be wholly exempt from the tariff.
The short, and very much un-sweet, vision of a tariff-bound economy is that it is stochastic. We can observe it, measure it, analyze it, but we cannot really predict it. Intra-day tariff rates, as Justin Wolfers notes, are not really something that most supply chains are able to predict, or plan for.
But if tariff policies are stochastic, real economy companies are deterministic, and sincerely desire to create, and embody, as much stability as possible.
Which brings me to my chart of the month, courtesy of George Pearkes and Bespoke Investment Group.
The Federal Reserve Board’s Beige Book summarizes anecdotal information on economic activity across the Federal Reserve Districts and Banks, and summarizes them eight times a year. The Beige Book has been published since 1970. Here is a look at how many times the word ‘uncertainty’ is mentioned in each report for the last 55 years.
Read my latest for Halcyon here.
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