Monday, August 2, 2010

Political and Economic Lessons from a Spent Water Heater

If you have the privilege of owning a home for more than a few years, you probably have encountered a water heater that has reached “end of life.” More times than not, water leaks (flows!) from the unit. As with downed trees from a thunderstorm—another of my homeownership travails—one needs to act quickly.
Lucky for me my eight year old water heater had a nine year warranty providing for a replacement of like quality. A manager of the big box store where I bought the unit first attempted to “honor” the warranty by applying the cost of the old water heater against the higher cost of the replacement. Unlike tire warranties, the manufacturer warranted a specific longevity and guaranteed a replacement “free of charge.” The replacement water heater cost twice as much as the original unit.

Here’s where the water heater replacement becomes instructive: the store manager finally agreed to replace the water heater, but offered insights on why the price had doubled. The federal government “took over” and now “controls” the water heater marketplace with its efficiency mandates and more demanding criteria to qualify units for the Energy Star rating.

My big box store manager friend shows how issue framing works. Government regulation, which he readily acknowledged will ensure less electricity use by the water heater, has forced his employer to double the price of the unit. Worst yet consumers might not realize any out of pocket saving from the lower electricity use, because the replacement heater cost $200 more than the original one. The store manager and consumers buying into the government control frame ignore long term benefits like marginally less demand for fossil fuels, slightly less need for more electricity generators, and a small offset to global warming—if such a thing exists.

The regulatory frame considers efficiency requirements as helping society. The government takeover frame shows government subverting the marketplace. Bear in mind that an unregulated marketplace for water heaters does not guarantee choice of units based on efficiency, particularly if no government regulation mandates disclosure of an efficiency rating and estimated annual cost of operation. And at least in my small central Pennsylvania town, the market does not guarantee competitive prices: the two major big box stores across the street from each other remarkably had nearly identical prices, just like those “robustly competitive” wireless carriers.

The unfettered marketplace probably would offer consumers choices based on length of warranty and herein lies a lesson that supports either frame one buys. While I ultimately got the free replacement (plus $200 if I wanted installation), the new water heater warranty has three new conditions should the replacement unit fail: 1) consumers can only apply the original price they paid against whatever the price is when a replacement is needed; 2) the warranty only applies if the consumer stays in the house where the water heater is installed; and 3) consumers can only qualify for one warranty replacement.

So are these warranty restrictions necessary safeguards manufacturers must impose to guard against government regulations that are guaranteed to trigger a doubling of costs? Or might water heater manufacturers become more clever about finding ways to market warranties without having to honor them, like rebates that companies don’t have to honor because a buyer failed to comply with some bogus condition?

I now better understand the importance of how regulatory and policy issues are framed by stakeholders and the media. Opponents to regulation can frame it as government controlling yet another sector of the economy. Proponents of an unregulated marketplace can readily ignore the fact that if regulation had controlled or taken over the water heater business, the government would not permit manufacturers complete freedom to limit and further limit their warranties to appoint where they come close to a “bait and switch” tactic, necessitating additional “buyer protection” payments.

1 comment:

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