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Electricity Policy Prime Time

Last Saturday, I spoke at the American for Prosperity’s Defending the American Dream Summit in Washington, D.C. I was one of three presenters on energy and energy/environmental issues.

Dan Simmons of the Institute for Energy Research documented the U.S.’s abundance of energy resources from two studies he helped put together: North American Energy Inventory and Hard Facts. Myron Ebell of the Competitive Enterprise Institute reviewed climate change issues and the U.S. Environmental Protection Agency’s war on coal.

I took a different tact and would like to highlight some of the points I made in this post.

Time to Reprioritize?

As tragic as Obama’s policies have been to the fossil industry, and as wasteful as his fetish over “green jobs” has been to the taxpayer, emphasizing these points of disagreement with his administration overlooks a much more serious sleeping energy giant—electric industry policy.

I wrote on some of these issues recently on Master Resource in comments on Rob Bradley’s books on political capitalism. So consider these four points:

1. Oil is a fungible commodity that trades in a reasonably efficient and competitive global market. Thus we face price risk but not supply availability risk. Opening up more U.S. reserves would improve our economy (domestic jobs and a slightly lower price of oil) and improve our balance of trade. But none of this amounts to a “crisis” in energy markets. Similar arguments could be made about improving many other sectors of the economy.

Thus, I believe a disproportionate (compared to the risk) amount of time is spent handwringing on oil issues (from an analytical point of view; I realize the political advantages of such focus). The heartbreak of psoriasis is tragic but hardly worth a national debate.

2. Radical climate change policy was a real threat from 2009 to 2011 when the Democrats had an undefeatable trifecta in DC. Due to the tireless efforts of many “realists” and a little luck, we dodged a bullet and the threat of really dumb climate policy is no longer seriously on the table, at least for the next decade. Yet we waste a lot of resources fighting the last war.

3. Relatively little attention is paid to SERIOUS reform of electric industry policy. If there is to be a “crisis” in the next decade in energy, it will be in the electric industry.

For example, not a word is said by President Obama’s official website on electric industry reform. Similarly, Romney on his site merely nibbles around the edges but does not raise fundamental reform of the electric industry as a discrete topic.

The Uber-Regulated Electric Industry

The electric industry is probably the most regulated industry in the United States, though health care has emerged as a close competitor. Every facet is subject to government rules and regulations—fuel for generation, need for generation, generation siting, generation pricing, need for transmission, transmission siting, transmission pricing, distribution pricing, environmental policies, efficiency and conservation policies, low-income policies, economic development, and probably three or four other things that I just haven’t thought of.

Complicating all this government involvement is the fact that jurisdiction is spread out over myriad levels of government in a manner that defies both logic and efficiency.

Lastly, utilities don’t act like “normal” competitors who can often be relied on to pursue the co-related interests of its customers in its advocacy. Utilities are the eunuchs to the crown princes of regulation. As long as they behave, the regulators will take good care of them with an extra half point in rate of return. But many a CEO has pleaded with me to do in public what they dare not do for fear of alienating their regulators or monopsony buyers or monopoly sellers.

This alone would qualify for opprobrium even if the industry operated flawlessly. But the fact is that the industry under current rules and regulations is unsustainable. Unlike gasoline or cell phones, if one company runs out you can take your business elsewhere. Short of self-generating, there is no alternative to being hooked up to an electric utility. Unlike caviar, I cannot live my life with unreliable electricity. There is not one product or service in the United States that is not affected by electricity policy.

In my view, a full-scale overhaul of electric policy is needed. Comprehensive radical market-based reforms revolutionized the airline, railroad, telecommunications, trucking, and natural gas industries. All of which today are contributing mightily to our economy. I just don’t hear the same level of concern that led to these radical industrial reform efforts being talked about in the electric industry. It could be that I have my head in the clouds and am merely looking for something to do.

Or it could be that it is so complicated that we will not attack the problem until we have an Indian-style catastrophe. Forgive me, but did anyone really think that the Natural Gas Policy Act of 1978 was the right answer to what ailed the gas industry.

What about Ma Bell? Did we really think that an AT&T monopoly would ensure us the kind of innovation in digital technology that we have seen in the last 25 years? But no, we had to wait until circa 1984 (prophetic year no!) for the Reagan Administration to proffer radical reforms to these industries.

How did that work out for us? Pretty good, if you ask me.

Conclusion

So I propose four thought experiments.

1. Let’s demote oil and climate change to secondary status as analytical issues.

2. Let’s elevate the dialogue about fundamental electric industry reform to primary status.

3. Let’s debate what is wrong with current electric industry policy.

4. Let’s identify the set of policies needed to permit the electric industry to enter the 21st Century.

Any takers?

15 comments

1 rbradley { 08.09.12 at 8:13 am }

I’m ready to debate the huge gulf between public utilty regulation in theory and in practice with this policy idea on the table: regulatory ‘exit contracts’ should be negotiated between stakeholders to replace government with private contracts.

2 Tom Tanton { 08.09.12 at 8:19 am }

Contra-indicative to the old saw that Americans have short memories, they all too strongly (mis)remember the “energy crisis” in California in 2000. Unfortunately, most continue with the mistaken belief that crisis was brought on by “deregulation” not the pile-on-more regulations that actually happened. That has left a bad taste (incorrectly) for most, and perhaps the first step in righting the ship would be to truly educate Americans on just what actually happened. For me, the fundamental problem with electricity policy is the lack of consumer choice, somethig easily corrected technically, but near impossible politically. Of course, once we execute rent paying federal and state policies (execute as in executioner, not to undertake)the latter becomes easier. PTC is a case in point. STOP that, and you’ll make a major step forward towards consumer choice (most of whom would never choose wind because it just doesn’t perform.)

3 Ed Reid { 08.09.12 at 8:46 am }

Ken,

“I’m shocked! Shocked!” You appear to believe that there is “gambling” going on here. :-)

Surely you are not suggesting that the following are not complimentary, optimal policies:
1.- use 20-30% high cost, intermittent renewables;
2.- keep rates low;
3.- increase reliability; and,
4.- retain non-paying customers.
Heaven forfend!

4 Eddie Devere { 08.09.12 at 10:00 am }

Ken,
I agree with your assessment that changing regulations in the electricity industry is crucial for lowering electricity prices in states like California, New York, and those in the northeast.

I wonder whether you think that the regulations on the electricity industry could easily be defeated in court. It seems to me that the legal arguments for regulating the electricity industry will soon be gone. The arguments in the past were that (a) it was affordable to only build one electricity line to each home or apartment complex, and (b) the generation of electricity was a natural monopoly because of the efficiency of building large-scale power plants.

It appears to me that both arguments (a) and (b) are not valid or will no longer be valid. For example, homeowners now have have three viable (though possibly expensive) options for obtaining electricity: (1) the grid, (2) fuel cells operating off of natural gas piped to their homes, or (3) solar cells on their rooftops. In addition, one could also argue that the cost to add a second electricity line to each home in California is less than the cost of regulating the industry. The argument for monopoly goes away because homeowners now have options for generating electricity for themselves by using either sunlight or natural gas.

In additional, the “natural monopoly” legal argument based on large-scale efficiency improvement goes away because solar cells and fuel cells have no significant improved efficiency at large scale (compared with the drastic change in efficiency for steam or combustion turbines at large-scale.) This means that the electricity market of today is not a natural monopoly, and therefore should not be regulated as such.

From a legal point of view, the fact that electricity from solar panels or fuel cells is more expensive than electricity from a natural gas combined cycle power plant is not particularly important. From a legal point of view, what’s important is that consumers have options for buying electricity or producing electricity themselves.
It seems to me that it should be fairly easy to overturn the regulations on the electricity industry because people now have a lot more options for generating electricity than they had a century ago when regulations were being enacted. While I personally think that subsidies for wind, biodiesel, solar, ethanol, smart-meters, and fuel cells are not healthy or sustainable, I don’t get as upset with subsidies for PV solar panels, smart-meters, or home-based fuel cells as I do with subsidies for ethanol or wind turbines because it seems to me that once there are somewhat viable options for homeowners to generate electricity themselves, then it should be fairly easy to overturn the laws regulating the electricity industry. (Deregulating the industry should save homeowners a lot more money than they will have paid in taxes for the subsidies for home-based solar panels, fuel cell systems and the smart-meters that allow for real-time, automated decisions on whether to draw from the grid or from home-based electricity generating units.)

What are your thoughts on overturning the state & federal electricity regulation laws by using the argument of “multiple options for local electricity generation”?

5 Jon Boone { 08.09.12 at 10:46 am }

I’d pay to listen in on the Ed and Tom T show. Thanks, Ed, for the chuckle. And thanks, Tom, for identifying a fundamental problem: the lack of consumer choice. Now that rent seeking corporations, their political cronies, and an assortment of regulators at the national, regional, state, even local levels are seeking to regulate–and profit from–consumer demand, the potential for mayhem becomes even greater. What we now have for electricity policy is Madmen Making Mayhem.

Above all, thanks to Ken Malloy for identifying the overarching issue. Although I believe the sturm and drang of climate change/fossil fuel extraction will continue to muddy electricity policy discussion for some years to come, the quality of electricity production and transmission is central to our culture. And to the emerging modernity around much of the globe, as evidenced by the recent mess in India.

6 Kent Hawkins { 08.09.12 at 10:50 am }

This is overall an excellent article. I agree totally with the four points in the conclusion. It is in line with what I have previously said here, but not so succinctly.

I do have one observation. I suggest that the electricity industry falls into a somewhat different category than airline, railroad, telecommunications, trucking, and natural gas industries, as important at these might be. Electricity is so imbedded in everything that we do that I do not recommend we think in terms of radical or revolutionary changes at the policy level, but well-thought out evolutionary approaches. This does not prohibit faster improvement in fuel extraction, transportation and transmission means, and in energy conversion and use processes (for reliable electricity generation plants only). Our energy infrastructure, and electricity is a very important (if not the most important) part of this infrastructure, will take decades for proper changes to be understood and implemented in the context being discussed here.

7 Al Fin { 08.09.12 at 1:04 pm }

You were lucky that Obama focused on healthcare as his signature issue and wasted most of his and his congress’ political capital and credibility on that one issue.

As bad as Obamacare is going to be for US business in general and the US healthcare industry, a full-scale lefty-green climate and energy policy would have been even worse.

8 Kermit { 08.09.12 at 5:00 pm }

Regarding North American crude oil supply consider the following:

1. Not many refineries outside of the U.S. are presently capable of refining produced crude oil from the Canadian “Tar Sands” without significant capital investment with new/reconfigured process units.
2. Pipelines provide not only less expensive transport of crude oil to refineries, but also for the products (except petroleum coke).
3. The kerogen from the Green River formation has not yet proven to be converted to oil and refined without subsidy. The one refinery specifically built to retort and refine kerogen now lies in pieces on the east side of Houston, since last year (I have touched it with my hands and have photos) when it was dismantled and shipped there. Undoubtedly, an efficient and economic conversion is possible, but none has been proven yet that I am aware of.

9 Donald Hertzmark { 08.09.12 at 5:43 pm }

Ken,
Thought-provoking article. One of the clearest indications that this industry is in trouble is the accelerated rate of distribution outages due to weather or too many Christmas lights or whatever.* I do not think that the distribution level issue is resolvable without putting the utility franchise up for grabs.

Restructuring has done a pretty good job, IMHO, at the generation level and the better transmission organizations (e.g., PJM) have initiated a number of market-based solutions to induce more transmission construction.

One real stumbling block is the customer’s inability to bypass the wires company, unlike other network companies where a wireless or alternate airline hub can mitigate the poor performance of the local guys. In my opinion they have worsened since unbundling since all the cool stuff (system control, generation, trading) occurs at the Genco or RTO level and the better employees and engineers have likely migrated to the more interesting jobs.

* after repeated transformer blowouts in my neighborhood I had to have a conversation with PEPCO about upping their transformer size. Apparently, the Book said that this pole should take an “x” rated transformer. That was fine 30 years ago, before all the flat screens, computers, multiple refrigerators, etc. They finally agreed with me and the constant transformer blowouts ended. I suspect that the local wires companies are full of such rules of thumb that are outdated, outmoded and, increasingly, banes to reliability.

10 tfisher { 08.09.12 at 5:57 pm }

Great post, Ken. I’m 100% behind you.

As to point #4 in the conclusion (“Let’s identify the set of policies needed to permit the electric industry to enter the 21st Century.”) I’m eager to hear your opinion on those details. Future post at Master Resource?

11 Ken Malloy: Electricity Policy Prime Time | JunkScience.com { 08.10.12 at 1:22 am }

[...] MasterResource Share this:PrintEmailMoreStumbleUponTwitterFacebookDiggRedditLike this:LikeBe the first to like this. This entry was posted in baseload energy, Economics, grid reliability. Bookmark the permalink. ← John Merline: Do Greens Have A None-Of-The-Above Energy Policy? [...]

12 Jim Clarkson { 08.10.12 at 7:41 am }

THE UTILITY’S 23RD PSALM
Regulation is my shepard I shall not want.
Thy maketh me to lie about green programs; thy mis-leadeth the stilled public opinion.
Thy restoreth my territorial protections; thy leadeth me down paths of monopoly for thy name’s sake.
Yea, though I walk through the valley of the shadow of nuclear debt, I fear no evil cost over-runs: for thou art with me; thy guaranteed pass-thrus and thy cover-ups they comfort me.
Thou approveth sweetheart affiliate deals before me in the presence of my potential competitors; thou anoinest my balance sheet with inflated assets; my earnings runneth over.
Surely excess profits and cronyism shall follow me all the days of my life and I shall dwell in the house of regulation forever.

13 Robert Hargraves { 08.10.12 at 9:26 am }

The incrementalism in US energy policy is counter-productive. The US electric power system cries our for sensible system-wide analysis. Here is an excerpt from the energy policy section of my new book.

Lead energy policy at the federal level, not the state level.

Energy flows across state lines, as do EPA-regulated emissions and DOT-regulated trucks. NRC continues strong effective control over all nuclear plants. Energy policy seems largely ceded to the states, which conceive and implement feed-in tariffs, RECs, RPSs, tax credits, etc in 50 different ways. There is a Federal Energy Regulatory Commission, but it is silent on these matters.

Audit energy policy with neutral experts.

The Congressional Budget Office assists the Congress by analyzing the financial impact of legislation. The CBO is well regarded as professional and neutral. Congress could benefit from similar reviews of existing energy policy by operational experts. The integrated systems operators, ISOs, have regional utilities and generators as members. ISOs such as ERCOT (Texas) and ISO-NE (northeast US) manage day-to-day reliable operation of power generation and distribution and also oversee the administration of regional wholesale electricity markets. Their employees are neutral experts who understand the pricing and service impacts of intermittent power generation and the interaction of wind and solar power with hydro, nuclear, coal, and natural gas power plants. They would be ideal partners for a CBO study.

End subsidy-based energy policy.

Most energy subsidies are tax preferences. Federal and/or state governments do not make explicit payments but forego tax revenues. Tax preferences do not help innovative start-ups, which have no profits. Electricity consumers pay another large subsidy for government-favored power sources through mandated feed-in tariffs at rates 300% over market. Wind and solar power could not compete without feed-in tariffs. The rationale for such consumer-paid subsidies is that with experience the cost of technologies for solar and wind will diminish, but that is not in evidence. Subsidies ruin economic competition and raise prices.

THORIUM: energy cheaper than coal is described at
http://www.thoriumenergycheaperthancoal.com

14 Jon Boone { 08.10.12 at 4:37 pm }

“Their employees [ISOs] are neutral experts who understand the pricing and service impacts of intermittent power generation and the interaction of wind and solar power with hydro, nuclear, coal, and natural gas power plants. They would be ideal partners for a CBO study.”–Robert Hargraves

I haven’t noticed how this “understanding” about the effects of variable intermittents like wind and solar on thermal plant generation has communicated anything of value to the public, particularly given the substantial amount of wind on ERCOT. Quite the contrary. These “employees” seem just as committed to towing the line drawn by their political masters, maintaining a see no, hear no, speak no evil posture about the renewables du jour that would not auger well for a truth telling commission.

I’m disappointed, Mr. Hargraves, that your policy descriptions did not mandate firm capacity for grid based generation. Pretending that wind and solar belong in a modern power portfolio–even calling for engineers to try to make them seem respectable in a CBO “study”–is economic sublimation that will worsen any policy prescription.

15 Recent Energy and Environmental News – 14th August 2012 « PA Pundits – International { 08.15.12 at 5:03 am }

[...] fine piece about US electricity [...]

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