Category — Corporate Governance

Editor note: This post from one year ago is reprinted for its continuing relevance to the climate-change debate. The “bootleggers” are hard at work in the post-Enron era with nearly 150 companies, lead by Exelon Corp., Entergy Corp., and Constellation Energy Group Inc., buying 30-second television spots running from today through President Obama’s State of the Union address on Wednesday. 

The climate-change public policy debate might be thought of as a straightforward morality play. In one corner, we have the good guys laboring mightily against all odds to save the planet from rampant consumerism, human short-sightedness, and corporate greed. In the other corner, we have the bad guys, laboring mightily to preserve their profits by stoking materialism, economic selfishness, and fear of big government. Behind the curtains of this morality play, however, is a fascinating dance between the “good guys” (the Baptists) and “bad guys” (the bootleggers) to pass some form of mutually beneficial prohibition.

The emergence of the bootlegger and Baptist coalition in climate change politics has never been more obvious than last week, when the United States Climate Action Partnership (USCAP – a coalition of big business and big environmental groups) put forward its plan to reduce greenhouse gas emissions by 80 percent below 2005 levels by 2050 through a mandatory, economy-wide cap-and-trade program. While this is somewhat less ambitious than President Obama’s proposal (an 80 percent reduction over that same time period relative to 1990 levels), the real give-away about what’s going on can be found in the proposed emissions standards for new coal-fired power plants. To wit:

• any such facility permitted after Jan. 1, 2015, could not emit more than half of the carbon dioxide emissions now considered normal for coal-fired power plants; and

• any newly permitted coal-fired power plant today would have to have the ability to be retrofitted to meet that standard.

This, dear readers, is little but a replay of the old-source/new-source standards incorporated in the Clean Air Act (CAA), which likewise established tough emissions standards for future power plants but much lighter rules for plants currently in operation. The best review of what happened then and why is the classic Clean Coal/Dirty Air, pointedly subtitled How the Clean Air Act Became a Multibillion-Dollar Bail-Out for High-Sulfur Coal Producers and What Should Be Done about It (Yale University Press, 1981). The authors, Bruce Ackerman and William Hassler, were environmentalists with sterling credentials who simply could not stomach the deal necessary to bring the business community into the pro-CAA camp. Alas, their whistle-blowing operation gained so little attention and had such little impact that, today, environmentalists cannot discuss the Clean Air Act without making the sign of the cross and whispering in awed reverence. [Read more →]

This post by Richard Schlesinger of EnergyBizInsider is reproduced with permission. The problem of rent-seeking by corporations (political capitalism) has been explored previously at MasterResource.

Although the electric industry has endorsed the concept of cap-and-trade as the least onerous approach to carbon regulation, at least one major company endorses it with unalloyed enthusiasm. Exelon not only supports the idea, it stated in a second-quarter conference call to analysts, which it posted to its Web site, that it expects to see a “$1.1 billion and growing annual upside to Exelon revenues from implementation of Waxman-Markey.” Is that number real or simply wishful thinking? Does Exelon know something that’s escaped the rest of us?

Actually, if one makes a couple of assumptions, the potential earnings boost is very real. Here’s how it works. Exelon’s 17 nuclear plants, the largest nuclear fleet in the country, generated just over a record 132 million megawatts-hours of power in 2007. That’s fact. Assumption number one: The Senate follows the House and passes an unchanged version of the Waxman-Markey bill.

At the start of the program, about 85 percent of the permits would be given away. Over time, the percentage of free permits would decline. About 15 percent of the permits would be auctioned off to begin with, and that percentage would increase over time. What concerns us is the value of these permits, because that value translates into increased costs for generation. Which brings us to assumption number two: The EPA estimates that during the early years of the program, a permit to emit one ton of CO2 would cost approximately $15. [Read more →]

“I see no force in modern society which can cope with the power of capital handled by talent, and I cannot doubt that the greatest force will control the other forces.”

- William Graham Sumner. “Economics and Politics” [1905]. In Earth-Hunger and Other Essays. 1913. Edited by Albert Galloway Keller. Reprint. New Brunswick, NJ: Transaction, 1980, p. 329.

“It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference.”

      – Ludwig von Mises, Human Action (4th Edition), p. 337.

Jim Rogers (Duke Energy), Aubrey McClendon (Chesapeake Energy), John Rowe (Exelon), T. Boone Pickens, Matt Simmons…  The list goes on of the political capitalists (aka “rent seekers”) who, in the tradition of Ken Lay and Enron, are politicizing the energy market for momentary advantage–but all in the name of saving the planet.

Try to name some counterweights, some prominent free-market capitalists.  I can think of one in the energy sector who does not want the publicity (Charles Koch, Koch Industries) and one in banking (John Allison, BB&T). Any others of note (please add a comment if so)? They are few and far between.

Rent-seeking political capitalists are hardly new. The New Deal featured a variety of business leaders wanting special government favors at the expense of taxpayers, consumers, and/or competitors. And in the decades before FDR’s power grab, leading voices from the public utility industries championed entry-and-rate regulation by government, fearing market “raiders” more than mandated rate maximums (this story comes later in the series).

Energy Favors

The history of the U.S. energy industry is replete with examples of government intervention originating within the industry. As documented in Oil, Gas, and Government: The U.S. Experience (1996), there is government intervention sponsored by “Big Oil” and many more instances of intervention stemming from “little oil”–or nonintegrated independents who were particularly vulnerable to shifts in the marketplace.

Mom-and-pops with good political connections or working through trade associations could and did wield the political ax against bigger competitors and/or unorganized consumers, I found in my study.

One of the most interesting examples of the industry at political work concerns the first state motor fuel tax, passed in Oregon in 1919 at, you guessed it, $0.01 cents per gallon.

Was this tax the work of a far sighted reformer? Or was it a confluence of private and public interests creating a demand for and supply of government favor?  It was the latter.

Specifically, “Big Oil” was behind the Oregon gas tax. The major oil companies via their trade association calculated that the demand for gasoline and thus the price of gasoline would rise more from tax-financed new road construction than demand for the same would fall from the tax.

Oregon’s beginning led to road taxes in all 48 states within a decade to fund road construction.

Problem was that gas tax revenue started to be diverted to other uses to the chagrin of the American Petroleum Institute (API). “Phantom roads” became an issue. Government intervention giveth and taketh away.

Here is the story of the first motor fuel tax reproduced from Oil, Gas, and Government (pp. 1375–76). [Read more →]

Last week, at the first Senate Environment and Public Works Committee hearing on S. 1733, the Kerry-Boxer “Clean Energy Jobs and American Power Act,” Department of Energy Secretary Steven Chu explained the economic rationale for adopting a Kyoto-style cap-and-trade program.

His argument, in a nutshell, goes like this:

1. Reducing emissions globally will require a massive investment in “clean technologies” — an estimated $2.1 trillion in wind turbines and $1.5 trillion in solar voltaic panels by 2030. These investments will create many green jobs.
2. “The only question is — which countries will invent, manufacture, and export these clean technologies and which will become dependent on foreign products.”
3. The United States is falling behind. “The world’s largest turbine manufacturing company is headquartered in Denmark. 99 percent of the batteries that power America’s hybrid cars are made in Japan. We manufactured more than 40 percent of the world’s solar cells as recently as the mid-1990s; today we produce just 7 percent.”
4. To seize the opportunity of clean tech and keep from falling farther behind, “we must enact comprehensive climate legislation,” the most important element of which is a “cap on carbon emissions that ratchets down over time. That critical step will drive investment decisions towards clean energy.”

There is so much silliness packed into Chu’s testimony that it’s hard to know where to begin. [Read more →]

Editor note: This piece is reproduced from the website www.politicalcaptitalism.org with the permission of the author. This post, the first in a series, is germane to the current debate over climate/energy legislation that is backed by a number of large U.S. corporations (Enron then; GE, Duke, DuPont, etc. now).

Political capitalism is a private-property, market-oriented system that is compromised by business-sponsored government intervention. It is a socioeconomic system in which many or most regulations, subsidies, and tax-code provisions result from the lobbying efforts of directly affected businesses and their allies.

Today in the United States, there is greater political transparency and competition between political elites than was evident in the business-dominated past (the 19th and most of the 20th centuries). Interventions routinely result from non-business special interests representing education, the environment, labor, minorities, religion, retirees, science, and taxpayers, among others. Still, business interests—unified or in opposition—are arguably the most important of the elites that compete for special government favor in American politics today.

There are two avenues to business success under a private-property, profit-and-loss system. When using the economic means, or free-market means, businessmen provide goods or services in an open market and rely on voluntary consumer patronage. When using the political means, businessmen obtain a governmental restriction or favor that provides the margin of success beyond what consumer preference alone would give. Market entrepreneurship is the way of capitalism; political entrepreneurship, or rent-seeking as it is known in the economics literature, is the way of political capitalism.

Business interests welcome competition for the things they buy (to minimize costs) far more than for things they sell. They may profess support for free enterprise in general but not in their particular area. There, competition is disparaged as “unbridled,” “cut-throat,” “excessive,” or “unfair,” and calls are made to constrain the free market.

Historian Gabriel Kolko has defined political capitalism as “the utilization of political outlets to attain conditions of stability, predictability, and security—to attain rationalization—in the economy.” [Read more →]

“Waxman-Markey is largely top-down regulation dressed in cap-and-trade clothing.”

David Schoenbrod and Richard Stewart, “The Cap-and-Trade Bait and Switch“, Wall Street Journal, August 24, 2009.

The Environmental Left is pushing hard to provoke a civil war between natural gas industry (its “friend”) against the coal (and oil) industry. John Podesta (Center for American Progress) and Tim Wirth (UN Foundation) have cooked up a menu of bribes (taxes, a.k.a. “incentives,” “credits,” “allowances,” and “expand”) as follows:

Electricity

• Establish incentives to retire aging, inefficient, dirty coal-fired power plants, and replace them with renewable and low-carbon electricity.

• Create a renewables integration credit to offset specific costs associated with producing high levels of renewable energy and to reward those who go beyond the renewable electricity standard.

• Establish a dedicated incentive for development and deployment of “dispatchable” renewable energy to build markets for electricity storage technology.

• Require that the carbon price and other costs are included when determining the dispatch order for moving electricity onto the grid in order to prioritize natural gas and other clean electricity.

• Expand carbon capture-and-storage provisions to include other permanent storage technologies in addition to geologic sequestration. Ensure that carbon capture and storage research and deployment efforts include retrofitting existing coal- and gas-fired power plants.

Transportation

• Expand the market for natural gas as a heavy-duty transportation fuel by increasing incentives for gas-powered buses and heavy trucks.

• Create incentives for communities to develop mass transit systems that employ buses fueled by natural gas.

Decision-makers in the gas production, transmission, and distribution businesses should reject this Trojan Horse. Obama energy policy spanks natural gas, the predominant swing fuel in electric generation, by forcing renewables and conservation (conservationism) in the market. And fair warning: the more natural gas gains in market share relative to oil and coal, the less friendly the environmentalist movement will be. (Take note of the hydraulic fracturing debate between environmentalists and the oil and gas production sector.)

Don’t Take ObamaBait

Low natural gas prices have created a desperate industry, but the answer is not quick-fix politics that create political dependence and hurt the general economy. The modus operandi of ‘Mr. Natural Gas’ Ken Lay back in Enron’s heyday, and Boone Pickens today, should be rejected–as should political (“rent seeking”) capitalism as a philosophy. [Read more →]

“No, I have to do this my way. You tell me what you know, and I’ll confirm. I’ll keep you in the right direction if I can, but that’s all. Just… follow the money.”

- Deep Throat to Bob Woodward, All The President’s Men (1976).

Yesterday’s post at MasterResource presented seven areas where the American Clean Energy and Security Act of 2009 (H.R. 2454, aka Waxman-Markey) bribed segments of the electric utility industry into support. So it should come as no surprise that there are specific companies and technologies that are well positioned to gain quick, big bucks by its legislative requirements should climate legislation become law  in its current form.

I have discussed carbon legislation with many of these companies that publicly declare their concern about anthropogenic climate change yet privately see this as the greatest money-making opportunity of their lifetimes. The Bootleggers and Baptist model of government intervention is in clear evidence. Adam Smith must be turning over in his grave given the enormous “invisible handout” that Waxman–Markey provides to a select few in the electricity generation market.

Five Link Chain

In “Federal Actions Will Greatly Affect the Viability of Carbon Capture and Storage as a Key Mitigation Option,” released September 30, 2008, the GAO found that a key technological barrier to carbon capture and storage (CCS) deployment was a lack of experience in capturing significant amounts of CO2 from commercial-scale power plants. The significant cost of retrofitting existing plants, which it deemed “the single-largest source of CO2 emissions in the U.S.,” also hampered deployment. The GAO also found that both the EPA and DOE had yet to comprehensively tackle the full range of issues that would require resolution for large-scale deployment. The GAO was spot-on in their conclusions. [Read more →]

“I expect all the bad consequences from the chambers of Commerce and manufacturers establishing in different parts of this country, which your Grace seems to foresee…. The regulations of Commerce are commonly dictated by those who are most interested to deceive and impose upon the Public.”

- Adam Smith, 1785 letter. In The Correspondence of Adam Smith. (1)

The American Clean Energy and Security Act of 2009 (H.R. 2454, aka Waxman–Markey) was narrowly adopted by the House of Representatives on June 26. As has become standard practice, few legislators were familiar with the final 1,428-page bill, given all the horse-trading hours before the final vote.

Waxman–Markey was a low point in the political process, but what made passage possible was worse: highly organized support from some quarters of the electric utility industry and a lack of protestation from much of the rest.

Some industry parties believe that their lobbyists successfully watered down an extremely disruptive legislative draft to the point that the final was merely distasteful. But compared to killing the bill, which could have been done had the industry been so minded, getting “a seat at the table” resulted in passage.

I remember when ”getting a seat” in legislative negotiations included infiltrating and defeating bad proposals. Today, it means ensuring your company gets a piece of the political pork. Such “rent-seeking” substitutes political capitalism for principled free-market capitalism and leaves virtually all of us poorer.

There are a variety of sections buried in the 1,428-page Waxman–Markey climate bill that clearly benefit a select few electric utilities. My post tomorrow will discuss which vendors and electric utilities are best positioned to greatly benefit by these legislative requirements should they become law.

The Winners (at our Expense)

A new study by the Energy Information Administration (EIA), Energy Market and Economic Impacts of H.R. 2454, reveals several very interesting, perhaps unintended, consequences that Waxman–Markey will have on the electric power industry. [Read more →]

A calm has descended over the federal government’s initiatives in energy amid the furor over health insurance legislation. The respite is welcome, but the sturm und drang of clashing interests will resume in earnest after Congress’s summer recess. There is too much money on the table–our money–for the favor-seekers to ignore.

A Banana Republic?

Increasingly, it is clear that the initial cap-and-trade legislation was insufficiently opaque. Numerous analyses of Waxman-Markey (HR 2454) on this site and others have shown that the proposed cap-and-trade legislation will cost consumers dearly by raising the prices of electricity and gasoline, while ignoring viable sources of clean energy that have not yet found the key to the federal treasury.

With so much money at stake, each of the contestants (call them rent-seekers, some of them reluctant players in the political capitalism game) will attempt to gather up as much of the pot as possible. The only people not at the table, those of us who will pay for this orgy of confiscation, wonder just what it is that we will receive in return for our cash.

Rent-seeking is defined as follows in Wikipedia: [Read more →]

Some environmental leaders have said that I am naïve to think that there is an alternative to cap-and-trade, and they suggest that I should stick to climate modeling. Their contention is that it is better to pass any bill now and improve it later. Their belief that they, as opposed to the fossil interests, have more effect on the bill’s eventual shape seems to be the pinnacle of naïveté.

- James Hansen, “Strategies to Address Global Warming,” July 2009.

Welcome to the science of politics, Dr. Hansen–and welcome to a tradition in political economy that is more than a century old. “I see no force in modern society which can cope with the power of capital handled by talent,” stated William Graham Summer in 1905, “and I cannot doubt that the greatest force will control the other forces.” And said George Will in our time: “The world is divided between those who do and do not understand that activist, interventionist, regulating, subsidizing government is generally a servant of the strong and entrenched against the weak and aspiring.”

The political hijacking of climate legislation is why the Left is now embarrassingly split on the issue. And just maybe this is the opening wedge to get the Left to reconsider climate alarmism in its wider dimensions. After all, higher energy costs disproportionately affect the poor and slow the drive to mass-electrify the developing world. And the climate crusade is  resurrecting (uneconomic) nuclear power–a Left no-no. And geoengineering–that too is an unwanted stepchild of climate exaggeration.

And there is even the spectre of Big Brotherism in this energy road to serfdom. Remember Jimmy Carter’s winter/summer thermostat regulations? [Read more →]