The good news is that limited-government groups are showing up. And they are not pro-industry (such as the natural gas industry) but pro-consumers, pro-taxpayers, and pro-marketplace. The bad news is that too many business leaders–and think T. Boone Pickens in this instance–are using their resources to politicize industry.

Elements of the gas industry want to use special government favor to increase demand and thus prices of their product. A quick summary of the New Alternative Transportation to Give Americans Solutions Act was given by the Leftie group DeSmogBlog:

As stated in an earlier article, “The bill is 24-pages long and rewards [natural gas vehicles] with tax [subsidies] to help ‘drive’ consumption. The bigger the vehicle, the more tax credits given.” The bill’s main purpose is to build up a massive fueling and vehicle infrastructure for the natural gas industry, which currently does not exist in the United States.

The NAT GAS bill was written by and for natural gas insiders, chief among them energy magnate T. Boone Pickens, Chesapeake Energy CEO Aubrey McClendon, and Clean Energy Fuels CEO Andrew Littlefair — referred to in an earlier post as the “self-enriching trifecta.” The bill currently possesses 183 bipartisan co-sponsors and until finally getting a hearing Friday, had sat in the Congressional coffers since early April.

The Left smells a rat at such corporate welfare, and so does the free-market Right. Regarding the latter, Calvin Beiser makes the case well in his post,  Natural Gas a Natural Winner? Let the (Transportation) Market Decide!

Another post has gone over the self-help opportunities of the domestic gas industry in addressing the (low) price for its product. The principled entrepreneurial approach revolves around increasing demand through the market means, not the political means. (For other criticisms of the 18-wheeler mandate and, more generally, “The Strange Case of T. Boone Pickens,” see here.)

The letter below is particularly directed to Senate Majority Leader Harry Reid (D-Nev.) now that the legislation has ripened for consideration.

November 21, 2011

Dear Member of Congress:

In May, this coalition sent a letter opposing the New Alternative Transportation to Give Americans Solutions (NAT GAS) Act (H.R.1380), which creates and expands a host of tax credits to subsidize the use of vehicles that run on natural gas.

Despite an unprecedented number of representatives removing their support for the bill, it seems that a Senate companion (S. 1863) for this subsidy has recently emerged.  We write to renew our opposition and urge you not to support new efforts for Washington to pick winners and losers in the energy markets.  If we’ve learned anything from the Solyndra debacle it’s that politicians do a terrible job trying to prop up their favored energy industries.  

The NAT GAS Act would subsidize every aspect of the natural gas-fueled vehicle industry, from production to purchase and the infrastructure needed to fuel such vehicles. It would also extend the tax credit for natural gas used as a transportation fuel, even though natural gas is currently significantly less expensive than diesel or gasoline. Tax incentives like these allow government to decide which energy sources thrive or fail—and thereby distort the market. America’s experience with a number of similar energy subsidies dating back to the 1970s has shown that businesses benefiting from these incentives become reliant on government handouts in order to stay in business, causing the price of the subsidy to rise over time and leaving taxpayers to support industries for decades.

We respectfully requested that all members of the House and the Senate follow some basic guidelines when considering new energy legislation in the 112th Congress: 

Evenly applying lower taxation across the board

By targeting tax subsidies toward one type of transportation fuel—natural gas—the NAT GAS Act does not evenly apply lower taxation across the board. It does the exact opposite. America’s tax code is already overburdened with too many carve-outs for special interests that raise compliance costs, distort economic decision making and give advantages to the politically well connected.

The last thing Congress should be doing is making the tax code more complex.

Americans sent a strong message to Members of Congress in the 2010 mid-term elections: It’s time to stop wasteful government subsidies and end the destructive nature of special interest politics. Co-sponsoring this misguided legislation is a sign that you have not heard the message and are not serious about eliminating expensive, counterproductive energy subsidies.

Sincerely,

Thomas J. Pyle: President, American Energy Alliance

Tim Phillips: President, Americans for Prosperity

Dave Ridenour: Americans for the Preservation of Liberty

Tom Schatz: President, Council for Citizens Against Government Waste

Chris Chocola: President, The Club for Growth

Matthew J. Brouillette: President & CEO, Commonwealth Foundation

Myron Ebell: Director, Freedom Action

Michael A. Needham: Chief Executive Officer, Heritage Action for America

Seton Motley: President, Less Government

Amy Ridenour: President, National Center for Public Policy Research

Jim Martin: Chairman,  Plus Association

Ryan Alexander: President, Taxpayers for Common Sense

Morton C. Blackwell: Chairman, The Weyrich Lunch

Federal support for energy in FY 2010 alone includes the following activities:

Direct Expenditures to Producers or Consumers – $14.3 billion. Federal programs involving direct cash outlays that provide a financial benefit to producers or consumers of energy.

Tax Expenditures – $16.3 billion. Provisions in the federal tax code that reduce the tax liability of firms or individuals who take specified actions that affect energy production, consumption, or conservation.

Research and Development (R&D) – $4.4 billion. Federal expenditures aimed at a variety of goals, such as increasing U.S. energy supplies or improving the efficiency of various energy consumption, production, transformation, and end-use technologies.

Loans and Loan Guarantees – $1.6 billion. Federal financial support for certain energy technologies.  .  .  [in particular] innovative clean energy technologies. ¹

Electricity programs serving targeted categories of electricity consumers in several geographic regions of the country – $0.6 billion. Theses are primarily activities of the Tennessee Valley Authority (TVA) and the Power Marketing Administrations (PMAs), which include the Bonneville Power Administration (BPA) and three smaller PMAs.

Of this total of over $37 billion, about $21 billion went to energy production, the remaining $16 billion was spent on electricity transmission & distribution, conservation and efficiency and automobile programs.  This paper focuses on federal subsidies to energy production.

False Administration Propaganda on Energy Subsidies

To listen to the current administration, and its renewable energy cheerleaders, one would think that the oil and gas industries were basking in federal largesse, unable to operate even minimally without the kind hand of the federal government.  Renewable sources of energy, on the other hand, are starved of resources, and, therefore, unable to complete with the “subsidized” conventional energy sources. 

The facts do not support this view.  Fully two thirds of federal production-related expenditures in FY 2010 went to non-hydro renewables – biomass, wind, solar, and geothermal.

Most of the federal money went to direct expenditures ($4.7 billion) and tax “expenditures” ($11.2 billion) – 61% of total production-related expenditures.  In the dreaded tax “expenditure” category, that sink of favoritism and corruption purportedly benefiting only the oil and gas plutocrats, the largest recipient of federal favors was (drum roll, please) biomass (ethanol and “biofuels”), with 56% of total “expenditures” ($6.8 billion).  Throw in another $1.4 billion for wind and solar and the share of renewables comes to just over 66%, roughly two thirds of the total.  Oil, gas and coal together took just over 26% of these tax “expenditures.”

Direct expenditures, monies that the federal government pays to producers, are tilted even more heavily toward renewables.  Oil, gas and coal take less than 1% of production-related direct expenditures of $4.7 billion.  Wind was responsible for fully 76% of direct expenditures ($3.56 billion), and solar got another $496 million, or 10.6% of this category.

Bad News Energy – Federal ’Dry Holes’

Federal government subsidies for energy production in FY 2010, at about $37 billion, were roughly twice as high as in FY 2007, and about four times the FY 1999 level.  Added to the overall increase in subsidies is the reduced productivity of such expenditures.  In 2007 each million BTU of wind energy converted to electricity cost the taxpayers $6.85 ($23.37/MWh).  By FY 2010 subsidies for wind had increased so much that the federal outlay per million BTU of output had risen to $15.44 ($53/MWh).  For solar the trends are even more alarming (unless you are a solar energy company).  In 2007 each million BTU of energy from solar cost taxpayers about $7.13.  By 2010 the taxpayers were supporting solar energy to the tune of $274 per million BTU (Solyndra, anyone?).  As a baseline the market price for natural gas at the Henry Hub hovers around $4/million BTU while crude oil costs about $15/million BTU from OPEC and domestic sources.

Subsidies for Energy Production in FY 2010

As the table indicates, the unit subsidies for oil, gas and coal are negligible relative to production, less than 10¢ per million BTU.  Even nuclear is hardly subsidized compared to renewables.  For non-hydro renewables in general subsidies cost the public almost $3 for every million BTU produced.  Comparing expenditures and production by energy source the 2010 figures look like this:

As shares of total energy output or subsidy expenditure the figure shows that most of the money goes to relatively insignificant energy producers and most of the energy production comes from unsubsidized sources.  Hmmm, is there a message is there somewhere?

Now for the Good News

Some forms of energy received less money from the federal government in 2011 than they did in 2007.  Support for coal use and transformation dropped by more than 60%, from $3.3 billion to $1.36 billion.  Support for oil and gas has hardly risen in real terms since 1999. 

Nuclear energy-related expenditures have increased by only $1 billion since FY 2007.

Where Does the Money Go?

According to a recent article in the New York Times, many of the recipients of federal renewable energy subsidies can be found among the largest banks, investment houses and industrial companies in the country.  As the article notes, “When the Obama administration and Congress expanded the clean-energy incentives in 2009, a gold-rush mentality took over.”

“The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, utilities like Exelon and NRG — even Google.

A great deal of attention has been focused on Solyndra, a start-up that received $528 million in federal loans to develop cutting-edge solar technology before it went bankrupt, but nearly 90 percent of the $16 billion in clean-energy loans guaranteed by the federal government since 2009 went to subsidize these lower-risk power plants, which in many cases were backed by big companies with vast resources.”

In words reminiscent of Citicorp’s Charles “when the music is playing you gotta get up and dance” Prince, Excelon’s CEO, David W. Crane, told Wall Street analysts early this year the government’s largess was a once-in-a-generation opportunity.  Government loan guarantees secured $5.2 billion for four large solar projects by Excelon.  State government mandated purchase agreements anchored the income side of the transaction as well.

“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”

Political Capitalism Does Not Produce Useful Energy For The US Economy

Aside from higher deficits it is hard to see what all this spending has produced for the US.

1. Are we better off as a result?  The answer would have to be no, for we have spent much more to produce energy from renewables than we needed to spend to produce higher quality energy such as natural gas.
2. Is the air cleaner on account of these subsidies for wind and solar?  Hard to say, but both wind and solar require hydrocarbon generation mirroring and backup, so any reductions in emissions are minimal, if at all.
3. Are more Americans working at adding value to the US economy as a result of these subsidies?  Not likely, studies elsewhere have shown quite conclusively that subsidized renewable energy jobs lead to a net loss of jobs in other parts of the economy.  This is a normal result of value subtracting activities – i.e., industrial processes that turn labor, machinery and materials into a product that is worth less than the value of the labor, materials and machinery that went into its production.
4. Is the energy system more reliable or robust?  No, in fact increased reliance on intermittent sources of energy reduces the reliability of electric power supply and increases the reliance on long distance transmission lines to provide the needed backup and mirroring for wind and solar.

Is this the road to robust energy supply and increasing independence?  As the man in Maine said, “if I wanted to go there I wouldn’t  start from here.”

“They about had an orgasm in Biden’s office when we mentioned Solyndra,” read a Feb. 27, 2010, email from [Ken] Levit to [Steve] Mitchell. A follow-up email from Mitchell to Levit later that day responded, “That’s awesome! Get us a [Department of Energy] loan.”

- Quoted in “Emails Reveal Biden Team’s Enthusiasm Over Solyndra Loans,” Fox News, November 9, 2011.

Kids in the taxpayer candy store. That describes the heady days when Solyndra executives and lobbyists gleefully found out that the politicians loved their speculative, defective product. It turns out that Solyndra was a photo-op for President Obama and his “dream ‘green’ team”–one that may well end up being their undoing. (Does Obama use the term ‘green jobs’ anymore?.)

Enron was the canary in the renewable-energy coal mine. Ken Lay had a vision for Enron to become the world’s leading renewable energy company, part of the company’s green and Corporate Social Responsibility imaging. [1]

Enron’s investments in solar and wind produced financial losses in each year of operation, but many photo ops were generated, including a solar project that duped the New York Times.

Solyndra’s orgasmic glee in Vice President Biden’s office reminds me of the dreamy memo by John Palmisano, Enron’s lobbyist in Kyoto, Japan, written the day after the Kyoto Protocol was ratified in late 1997.

With the tenth anniversary of Enron’s bankruptcy filing just weeks away, this is an opportune time to remind one and all of just what the whole global warming crusade meant for the most rent-seeking of all rent-seeking companies, Enron. Excepts follow….

“ THIS AGREEMENT WILL BE GOOD FOR ENRON STOCK!!”

BY John Palmisano, “Implications of the Climate Change Agreement in Kyoto & What Transpired” (12/12/1997)

“If implemented, [the Kyoto Protocol] will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed. While the trading system will be implemented by 2008, I am sure that reductions will begin to trade with 1-2 years. Finally, Enron has immediate business opportunities which derive directly from this agreement….

“I do not think it is possible to overestimate the importance of this year in shaping every aspect of the agreement. Three issues of specific importance to Enron are: (1)the rules governing emissions trading, (2) the rules governing joint implementation within Annex-1, and (3) the rules governing the proposed clean energy fund (which promises to dwarf the GEF as a fund for wind, solar, and power plant conversions.)….

“The clean development will be a mechanism for funding renewable projects. Again, we won. (We need to push for natural gas firing to be included among the technologies that get preferential treatment from the fund.)

“The endorsement of emissions trading was another victory for us.…

“I gave three speeches and received an award on behalf of Enron. The speeches dealt with emissions trading, energy efficiency/renewable, and the role of business in promoting clean energy outcomes. The award came from the Climate Institute and was for Ken Lay and Enron for our work promoting clean-energy solutions to climate change….

“Through our involvement with the climate change initiatives, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF, NRDC, GermanWatch, the US Climate Action Network, the European Climate Action Network, Ozone Action, WRI, and Worldwatch. This position should be increasingly cultivated and capitalized on (monetized).

“(Parenthetically, I heard many times people refer to Enron in glowing terms. Such praise went like this: “Other companies should be like Enron, seeking out 21^st century business opportunities” or “Progressive companies like Enron are….” Or “Proof of the viability of market-based energy and environmental programs is Enron’s success in power and SO2 trading.”)….

“I predict business opportunities [for Enron] within 18 months. I predict this agreement will have very significant influences on the energy sector within OECD and transitional economies and will accelerate renewable markets in developing countries. This agreement will be good for Enron stock!!

—————-

[1] Bradley, Capitalism at Work: Business, Government, and Energy, (2009) pp. 8, 306–312.

Like virtually everyone else who knew him, I remember Bill as a scholar and gentleman. He had one tone of voice and reliably imparted insightful logic. He was what I like to call a scholar’s scholar, role model for the rest of us.

Career

William Arthur Niskanen Jr. (1933–2011), born in Bend, Oregon, graduated from Harvard University with a degree in economics in 1954. He earned his economics doctorate in 1962 from the University of Chicago.

After teaching at the the University of California at Berkeley, Niskanen Joined Ford Motor Company in 1975. Forced out at Ford (see below), Bill worked as an economist at the Rand Corp., the Department of Defense, and the Office of Management and Budget.

Niskanen then joined Ronald Reagan’s Council of Economic Advisors (1981–85), after which he joined Cato where he served as chairman for 23 years before becoming chairman emeritus in 2008. He was the ‘establishment’ figure that Ed Crane needed badly for Cato to reach the next level, and Ed pulled off the deal to make it happen.

‘Blunt Libertarian Economist’

The New York Times obituary described Niskanen as “a blunt libertarian economist.” But Cato’s Gene Healy, in his tribute Farewell, to the Most Honest Man in Washington, brought attention to the “vastly more interesting and admirable” side of the man. “Bill Niskanen had the kind of character that’s vanishingly rare in Washington DC,” wrote Healy. “He was a man who put principle above partisanship and personal gain.”

Bill Niskanen will be remembered for various things. One was his root insight into how the government really works as versus the romantic view of government.

The bureaucrat, in Niskanen’s words,  “is a ‘chooser’ and a ‘Maximizer’ and … not just a ‘role player’ in some larger social drama.” [Bureaucracy & Representative Government. New York: Aldine Atherton, 1971, p. 5.]

Ford Motor Company: A Great Freedom Moment

Rent-seeking in the mixed economy, or political capitalism, has been alive and well in America for a very long time. Political economists in the eighteen and nineteenth century saw the peril of business and government working together to restrict competition. And Niskanen’s mentor Milton Friedman opined:

The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.

Enter Bill Niskanen at the Ford Motor Company in the troubled 1970s when energy shortages from federal price and allocation controls ruined the business-as-usual economics of Detroit’s auto makers.

I tell the story in Capitalism at Work: Business, Government, and Energy (2009), pp. 176–77:

In The Suicidal Corporation (1988), Paul Weaver described Ford Motor’s “corporatism—broadly, the management of a nation’s markets and politics by companies, unions, and/or other producer groups in their own interest, backed up where necessary by the power of government.” The mentality among his peers was “less a set of ideas than an attitude” that

whatever would benefit the company was all right for them to seek. They believed that any method that would secure those benefits was all right for them to use. They believed that pursuing corporate advantage through the public-policy process was their duty and right. Whatever my colleagues felt like doing, they did.

Political promiscuity was joined by public- and investor-relations promiscuity. Ford’s press releases were “Good News Only and No Bad News,” even as billions of dollars in losses were recorded. “We lied,” Weaver remembered.

“Boundless ambition” created a “good for Ford, good for society” mindset. Conscience-free political capitalism and perception-over-reality public relations went together.

Ford’s rent-seeking peaked in 1980 when senior management decided to lobby for federal import restrictions against Japanese automobiles, ironic for a company that in the era of Henry Ford and Henry Ford II had been a force for open trade and internationalism. Ford’s chief economist, William Niskanen, who left a tenured position at the University of California at Berkeley in 1975 to join the company, was nonplussed. In meetings and memos he bluntly admonished Ford’s top brass to either meet the competition or get out of the car business. One memo came with a philosophical flourish: “A common commitment to refrain from seeking special favors serves the same economic function as a common commitment to refrain from stealing.”

Ford went hard for automobile protectionism, and Niskanen was dismissed for his intransigence. “In this company, Bill, the people who do well wait until they hear their superiors express their views,” his boss explained. “Then they add something in support of those views.”

Ford’s political and personnel actions were hardly surprising. Corporate rent-seeking was old hat, as economists from Adam Smith to Milton Friedman documented. A corporation is not a free-market think tank. Niskanen went to war and lost. An in-the-ranks uprising at Enron over the company’s renewable energy and global warming strategy replayed the tape a decade later, although Ken Lay found a compromise to prevent a high-profile firing, as discussed in Book 3.

Niskanen went on to bigger and better things. He was appointed to President Reagan’s Council of Economic Advisers soon after leaving Ford and in 1985 became chairman of the libertarian Cato Institute in Washington, D.C. One of Niskanen’s most important projects at Cato would be corporate accountability and regulatory standards in the wake of the Enron debacle, resulting in learned books on the subject.

Weaver, Paul. The Suicidal Corporation: How Big Business Fails America. New York: Simon and Schuster, 1988.

“corporatism … government” (Weaver, 182); “Less … attitude” (Weaver, 183); “whatever … they did” (Weaver, 184); “Good … News” (Weaver, 186); “We lied” (Weaver, 186); “Boundless ambition” (Weaver, 185); “good … society” (Weaver, 184);

“Sorry to bother you with this…. Rob is obviously not a fan of renewables or the global warming issue.  Unfortunately, he works for a company that is.”

- “Rob Bradley’s Writings.” Tom White [chairman & CEO of Enron Renewables Energy Corp. ] to Ken Lay [chairman & CEO of Enron Corp.], June 8, 1998.

The Confluence, a blog advertising itself as “Democrats Putting Principle Over Party,” recently criticized a new initiative of the Institute for Energy Research, Stop the Energy Freeze. After reciting some peak-oil arguments against IER’s case for expanding access and production of domestic oil and gas resources for new jobs and greater BTUs, the post Sunday: Spreading the mess to YouTube goes after yours truly.

I also bothered to look up who was behind this Stop the Energy Freeze campaign.  It’s the Institute for Energy Research and it seems to be particularly concerned with oil that is currently off limits in the Gulf of Mexico, for some strange reason.  Maybe that’s because they’re based in Houston?  Or maybe it’s because it’s because it’s been touted by Rush Limbaugh who hasn’t met a resource (natural or human) that he hasn’t considered exploitable?

Ahhh, this little tidbit is interesting.  The co-founder and CEO of The Institute for Energy Research is some dude named Robert L. Bradley.  And HE used to work for Enron and Kenneth Lay.  You know, the Smartest Guys in the Room?  The ones whose traders used to yuck it up about how they were going to f$^& over some Granny in California by manipulating the energy market?  The company that made all of its employees invest in Enron stock in their 401Ks and then locked them out of their accounts when the price plummeted so that they lost EVERYTHING? 

Yeah, that Enron.  Bradley was the PR guy.  He’s also an adjunct “scholar” of the Cato Institute.  How charming.  Is that where he learned to deceive unsuspecting youtube viewers?  Is the liberty to make the end really justify the means ensconced in the Constitution somewhere?  Are we free to pull the wool over citizen’s eyes with bullshit?  I guess it’s the responsibility of every rugged individualist to be on his guard.

Well, I founded (not co-founded) IER, and headquarters is in Washington, D.C. (not Houston where I continue to work). And most importantly, I was a quite arguably public-policy whistleblower against “green” energy inside the company.

And after the collapse (I was part of the mass layoff of December 2001), I began working on a trilogy about the rise and fall of the company to get the Left (such as the above authors) to see Enron for what it really was–a rent-seeking, political capitalism company, not a free-market company.

And to set the record straight, I created a website around the book series and Enron, www.politicalcapitalism.org. At this site, I have a special section, Rob Bradley at Enron, with the following content:

I worked at Enron for sixteen years, almost as long as Ken Lay himself. I joined the company in September 1985 and was part of the mass layoff of December 3, 2001.

In my last seven years at Enron, my title was corporate director, public policy analysis. In this capacity, I worked on natural gas, electricity, and environmental issues, as well as prepared speeches for Enron’s CEO Ken Lay. (I only occasionally worked on speeches for Jeff Skilling–he generally prepared his own presentations.)

In this period, I grew very disenchanted with the corporation’s positions on renewable energy and climate change. Fortunately, I had my own 501(c)(3) nonprofit, the Institute for Energy Research (IER), to allow me an independent voice to speak and write against climate alarmism and corporate welfare. My outside views caused controversy within Enron, and I was not shy about expressing my opposition within Enron either.

The memos below are some examples of my principled opposition to Enron’s rent-seeking activities relating to “sustainable” energy. If Enron had been more free-market-oriented, I believe that the company would be a going concern today.

 Internal Enron Renewable Energy Controversies

Selected Quotes: 

• Invitation to Rob Bradley to Speak at NEMS/DOE Conference
  • Memo: Department of Energy to Rob Bradley (1/7/98)
  • Memo: Rob Bradley to Ken Lay (1/15/98)
  • Memo: Ken Karas (Enron Wind) to Rob Bradley (1/30/98)
• Enron Wind Corp Complaints Against Rob Bradley: February/March 1998
  • Memo: Ken Karas to Bob Kelly (Enron Renewables) (7/15/97)
  • Memo: Ken Karas to Rob Bradley (1/9/98)
  • Memo: Tom White (Enron Renewables) to Ken Lay (3/9/98)
• Enron Wind Corp Complaints Against Rob Bradley: June/July 1998
  • Memo: Tom White to Ken Lay (with attachments) (6/8/98)
  • Rob Bradley to Ken Lay (6/22/98)
  • Ken Karas to Ken Lay (and forwarded to Rob Bradley)span> (7/17/98)
• Other Enron Windpower Memos
  • Ken Lay to Gov. George W. Bush
    (August 10,1998)
    page 1
    page2
• Energy Law Institute Talk: June 1999
• Enron’s Global Climate Change Statement
• Enron’s Kyoto Memo (John Palmisano; 12/12/97)
• Letter from Tom Wigley (NCAR) to Ken Lay (August 30, 1999)
• Response to Wigley (September 14 & 15, 1999)

Ken Karas to Hap Boyd (7-15-1997): “Rob’t Bradley is still at it!  This guy works for Enron?”

Ken Karas to Tom White (3-7-1998): “Does Bradley still work for Enron?  If so, I believe he should be terminated.  This article ["Are the Merits of Windpower Overblown?"] is pure yellow journalism…. ”

Tom White to Ken Lay (3-9-1998): “I am sorry to bother you with a matter that I thought was closed.  I am not sure whether this article was written before or after you issued orders [to Bradley to stop], but in any case, it does damage to our wind business and seems to violate our business conduct policy.”

Ken Karas to Tom White (6-3-1998): “Our buddy Bradley strikes again! … Bradley has some really clear views on the world that don’t comport with what we are trying to accomplish and seems unable to muzzle himself.”

Tom White to Ken Lay (6-8-1998): “Sorry to bother you with this…. Rob is obviously not a fan of renewables or the global warming issue.  Unfortunately, he works for a company that is.”

Ken Karas to Ken Lay (7-17-1998): “I find it amazing that even in a memo to you he cannot help but take wither ignorant or misleading shots at us.  I have seen nothing from him on wind that is objective, unbiased, or balanced.”

Note:

• Hap T. Boyd was director of government affairs for Enron Wind Corp.
• Ken C. Karas was chairman & CEO of Enron Wind Corp.
• Thomas E. White was chairman & CEO of Enron Renewables Energy Corp.
• Kenneth L. Lay was chairman & CEO of Enron Corp.

I rest my case.

Can ‘green’ energy proponents own up to the fact that Enron was their darling company before it imploded (Joe Romm included)? Can they see Enron and ‘green’ energy for what they really are?

Mid-course correction needed!

———————

Robert L. Bradley Jr. is founder and CEO of the Institute for Energy Research. His latest book, Edison to Enron: Energy Markets and Political Strategies, was just published by John Wiley & Sons and Scrivener Publishing.

The Chamber, in fact, was waxed and waned for and against the free-and-neutral market for virtually its whole existence. Such is life in political capitalism where special government favor is sought and received by business.

John T. Flynn’s 1928 essay, “Business and the Government”   (Harper’s Monthly Magazine), criticized the Chamber motto More Business in Government and Less Government in Business as ”sloganeering.”

Flynn noted that new laws were coming far less from the imaginations of legislators as from “the legislative program committees of trade associations or from the special counsel of trade groups … backed often by resolutions from trade conventions and chambers of commerce.”

The Chamber, complained Flynn, was falsely selling a view of business “as a huge giant, gagged and shackled like a moving-picture galley slave to his oar,” to which Flynn forwarded his own ideal for the Chamber: Less business interference in government and more statesmanship in business. (Quoted in Bradley, Capitalism at Work, chapter 6, pp. 172–74.)

Flynn, early on, captured the essence of free-market capitalism and Principled Entrepreneurship™.

The September 5th Letter

The September 5^th letter from the Chamber of Commerce to the U.S. Congress and President Obama, reprinted below, is noteworthy for its free market flavor. With government running on empty, and the public mood against Big Government in most areas, the Chamber has come a long way from its disappointing cap-and-trade position on carbon dioxide (CO2) emissions and its watered down energy White Paper.

The six point jobs plan was singed by Thomas Donohue, president and CEO of the Chamber.

———————————————-

The most immediate priority facing our nation is to create jobs for the 25 million Americans who are unemployed, underemployed, or have simply given up looking for work.

To create jobs, we must enact policies that promote and sustain stronger economic growth. We must also address extraordinary fiscal and competitive challenges that are smothering growth and driving away jobs. At the same time, there are specific steps Congress and the administration can take right now to spur faster job growth in America’s private sector without adding to the deficit.

We are seeking your action in the following areas:

1. EXPAND TRADE AND GLOBAL COMMERCE

You have the tools in your hands to quickly open new markets for American businesses and create new jobs for American workers. Please use them!

• Pass the three pending free trade agreements (FTAs).

Implementing FTAs with Colombia, South Korea, and Panama would prevent the loss of 380,000 jobs to our foreign competitors and create hundreds of thousands of new jobs in the United States. The U.S.-South Korea FTA alone has the potential to create as many as 280,000 new jobs.

• Complete export control reforms. The administration can enact nearly all of its proposed export control changes without legislation. Complete this task now, and U.S. businesses can expand exports and create good-paying jobs without jeopardizing national security. One study found that modernizing U.S. export controls could create as many as 340,000 new jobs.
• Spur American exports to Asia and Europe. Swiftly complete a Trans-Pacific Partnership agreement to expand U.S. exports to rapidly growing Asian economies. Initiate talks with the European Union to eliminate all tariffs on goods trade as a first step toward a broader free trade pact with our largest commercial partner.
• Protect intellectual property. IP-intensive industries support 19 million American jobs. Congress can take immediate steps to safeguard these jobs and create new ones by passing a patent reform bill as well as legislation to shut down foreign rogue websites. These websites are stealing sales from American companies by violating trademarks and copyrights.

2. PRODUCE MORE AMERICAN ENERGY

Let American energy workers and businesses responsibly develop all sources of domestic energy immediately. This will not only create jobs but will generate new government revenues, protect our energy security, and release us from the grip of some unfriendly governments.

• Open offshore resources. Almost 190,000 new jobs could be created by 2013 if permitting in the Gulf of Mexico for offshore development returned to pre-moratorium levels. In Alaska, opening up energy production off the coast would create 54,700 jobs.
• Expand access on federal lands. By expanding oil and gas exploration on federal lands, we could create 530,000 jobs, reduce imports by 44% by 2025, and increase government revenues by $206 billion.
• Promote development of natural gas. Expanding the development of the nation’s massive shale gas deposits would create hundreds of thousands of jobs and help bring manufacturing back to the United States, especially in the chemicals and steel industries.

By 2020, natural gas production in Western Pennsylvania alone could create 116,000 new jobs, generate more than $2 billion in government revenues, and add $20 billion to the region’s economy.

• Approve the Keystone XL pipeline. Construction of the Keystone XL oil pipeline connecting Canada to U.S. refineries in Texas would support 250,000 jobs, boost investment in the United States by $20 billion, and generate government revenues totaling $585 million.

3. SPEED UP INFRASTRUCTURE PROJECTS

Government at all levels is standing in the way of badly needed improvements in the nation’s infrastructure. Hundreds of clean and traditional energy projects have been held up by Not In My Backyard (NIMBY) delays. We can strengthen our economy, clean the air, and save lives while putting hundreds of thousands of Americans to work.

• Pass core transportation bills. Reauthorizing the surface transportation, aviation, and water resources programs—using, in part, revenues already coming in from user fees—would enable states and communities to plan projects, hire employees, and prevent devastating layoffs of existing workers. Reauthorizing the FAA alone would help keep 70,000 workers on the job.

• Remove documented obstacles to 351 green and traditional energy projects. The U.S. Chamber has identified 351 energy projects, including many renewable projects, which have been sidetracked by government regulations, zoning restrictions, antigrowth advocates, and lawsuits. (For a complete list, visit www.ProjectNoProject.com.) Completing all of these projects could create 1.9 million jobs annually over seven years of construction and boost our national economy over time by $1.1 trillion. Working with state and local governments, Congress and the administration should lead a nationwide effort to remove the obstacles that are blocking these needed projects.

• Remove impediments to private capital. By removing regulatory roadblocks and embracing innovative financing approaches, we can unlock an estimated $250 billion in global capital which, if welcomed and invested here in the United States and leveraged with government investment, could create up to 1.9 million jobs over 10 years.

• Fully implement the Energy Savings Performance Contracts (ESPC) Program. Under ESPC, the private sector finances projects that make federal buildings more energy efficient. Participating firms are paid back out of the energy savings over the life of the contract—at no net cost to the government. The president should issue an executive order requiring the Department of Energy to make this program a priority. Full and faster implementation could create 35,000 jobs a year, save energy, and reduce government costs.

4. WELCOME TOURISTS AND BUSINESS VISITORS TO THE

UNITED STATES

Travel and tourism is a small business-centered sector that already accounts for $700 billion in revenues and 7.4 million American jobs. Spending by foreign tourists counts as U.S. exports and helps our balance of trade. When business visitors come here for conferences, training, and trade shows and to buy our products, they strengthen America’s role as the center of innovation and global commerce. We have an opportunity to create new jobs, spur consumer spending, and generate more revenues for government at all levels.

• Remove the hassle factor. Now is the time to make travel to the United States more convenient and welcoming. We must expand the visa waiver program and reform and streamline the visa application process to ensure a consistent, predictable, fair, and timely process without compromising security. We should implement trusted travelers programs that speed through low-risk travelers who submit to a comprehensive screening and pay a fee. Wait times at customs should not exceed 30 minutes.
• Promote American destinations. Congress and the administration should work aggressively to achieve the full potential of the Travel Promotion Act—a private-public partnership requiring no U.S. taxpayer funds—to promote America as a travel destination abroad.

We can create 1.3 million American jobs by 2020 just by restoring the U.S. share of the travel market to its 2000 level. The United States is the greatest destination in the world, but the world needs to know that.

5. SPEED UP PERMITS AND PROVIDE REGULATORY CERTAINTY AND RELIEF

Small and large businesses alike have cited regulatory burdens, the excessive litigation that regulations spawn, and fears about what government regulators will do to them next as among the most significant obstacles to new hiring. Immediate regulatory relief is required in order to begin moving $1 trillion–$2 trillion in accumulated private capital off of the sidelines and into business expansion.

• Streamline and expedite the permitting process. The administration should limit environmental reviews to 6 months; forgo reviews when no significant environmental impact is expected; prevent duplicative reviews by the state and federal governments;
• and, when multiple agencies are involved, appoint a lead agency to coordinate actions and move things along. Accelerating the permitting process would quickly mobilize economic activity, construction, and hiring from one end of our country to the other.
• Provide regulatory relief and reform. The president should issue an executive order directing agencies not to issue any discretionary regulations that would have a substantial economic impact—until our rates of GDP and employment growth have substantially improved.
• This would not impact regulations mandated by Congress or delay permits. It would, instead, provide more certainty to a business community that is hesitant to invest and hire. Furthermore, the White House should insist that agencies fully and faithfully implement existing requirements, such as cost-benefit analyses, sound science, and quality data.

Congress has responsibilities as well—to invoke the Congressional Review Act when necessary; pass legislation requiring an up-or-down vote before new major rules can take effect; and mandate a higher standard of proof to justify regulations with a major impact on economic growth and jobs.

6. PASS TAX INCENTIVES THAT CREATE JOBS WHILE

INCREASING REVENUES

Comprehensive pro-growth tax reform must be a key deliverable of the Joint Select Committee on Deficit Reduction. Lawmakers and the administration can begin delivering now by swiftly enacting tax measures that stimulate business expansion and jobs without adding to the deficit.

• Implement a repatriation holiday. By reducing the tax rate for a specified period of time on profits earned and accumulated overseas, U.S. multinationals could be encouraged to bring as much as $1.2 trillion back to the American economy. A new study suggests that such a move could help create 2.9 million jobs over the course of eight quarters of implementation.
• Create a corporate capital gains tax window. Congress should temporarily reduce the tax rate that companies pay on the sale of capital assets, such as property and stock. A reduced rate would increase economic efficiency, free up capital for investment and jobs, and generate revenue for the government that it might not otherwise collect.

* * *

Your timely action on these and other ideas would significantly ease uncertainty, get existing capital off the sidelines, spur business and consumer activity, and create American jobs.

These proposals do not diminish the need to act on an array of other critical challenges to our economy. For example, we must restore the health of our housing market by allowing the foreclosure process to proceed. The sooner we allow the market to take its corrective course, the faster this key sector will recover and start building and hiring once again.

We must address, without further delay, the need to substantially reform our education, immigration, health care, capital markets, and legal systems. And as the Chamber wrote in our recent letter to members of the Joint Select Committee on Deficit Reduction, it is imperative that Congress and the administration agree on a bold plan to rein in government deficits and debt by reforming entitlement programs, overhauling the tax code, and controlling runaway federal spending.

Time and time again, Americans have heard Congress and the administration declare that creating jobs must be the nation’s highest priority. If you are serious, then we ask you to enact policies aimed at growing the private sector, not at growing the government. Millions of American entrepreneurs and businesses large and small are ready to act if you act. Give them the freedom to do what they do best and the certainty that their hard work and responsible efforts will be rewarded and not punished. Then, you will see the American business community achieve extraordinary things for this great country.

To spur action, the Chamber is strongly promoting our job creation ideas to state and local chambers, industry associations, the 3 million businesses that comprise the Chamber federation, and to the American people. We are urging them to tell you directly about economic conditions in their communities and how these proposals and others could help create jobs for the citizens you represent.

We stand ready to work with both parties in Congress, with the administration, and with all economic stakeholders to revitalize the American Dream by putting Americans back to work.

Sincerely, THOMAS DONOHUE

[Editor Note: With T. Boone Pickens (et al.) trying to get natural gas vehicles off the ground with a $80,000 per vehicle special tax break, it is worth examining the origins of the political means versus the economic means to business (profit/loss) success. All roads lead to Franz Oppenheimer (1864–1943), a German sociologist/political scientist who saw capitalism's business leaders at work.]

“I propose in the following discussion to call one’s own labor, and the equivalent exchange of one’s own labor for the labor of others, the ‘economic means’ for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the ‘political means’.”

- Franz Oppenheimer, The State. New York: Free Life Editions, 1908 (1975), pp. 24-25 (full quotation at end of blog).

MasterResource sharply distinguishes between enterprise that is motivated by and dependent upon consumer demand in a free market, and profit-seeking that is abetted by special government favor (SGF). SGF can be a special provision in the tax code, a check from the U.S. Treasury, or a regulation that benefits a company or whole industry at the expense of consumers or taxpayers.

The useful terms economic means and political means were introduced by Franz Oppenheimer in 1908 (see above) and have become part of libertarian political economy as explained at Wikipedia:

Albert Jay Nock introduced these concepts to American readers in his own book “Our Enemy the State.” His market and political ideas, especially about economic and political means, influenced Murray Rothbard‘s thesis through Nock and Frank Chodorov….

Ludwig Erhard studied economics with Franz Oppenheimer and was strongly influenced by Oppenheimer’s ideas of “liberal socialist” economic policy that attempted to steer a middle path between state socialism and liberalism. Albert Jay Nock, although a libertarian and minarchist, as well as vocal critic of state-socialism, was deeply influenced by Oppenheimer’s analysis of the fundamental nature of the state.

The Economic Means, a Modern Restatement

A challenge and opportunity for the growing free-market populist movement, as represented by the Tea Parties and libertarian wing of the Republican Party, as well as Left groups in opposition to corporate welfare, is to reorient the amorphous concept of “social corporate responsibility” along the lines of Principled Entrepreneurship™.

Principled Entrepreneurship™ has been defined by libertarian entrepreneur Charles Koch in his book The Science of Success as follows:

Principled Entrepreneurship™ is defined as “maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity.” Such value creation can only be measured in a free market where consumers have choices, and where profits (and losses) are meaningful measures of business performance.

Principled entrepreneurship eschews political profiteering, which redistributes and destroys wealth rather than creates it. Thus political capitalism is discouraged in favor of free-market capitalism by the company practicing principled entrepreneurship.

In practice, principled entrepreneurs spend their time anticipating and meeting consumer demand rather than seeking non-market political favors such as a special tax provision, a cash subsidy, or a restriction placed on a competitor.

More quotations and discussion of principled entrepreneurship™, the economic versus political means, and political capitalism is theory and practice can be found on my website, www.PoliticalCapitalism.org and specifically here: http://www.politicalcapitalism.org/what/.

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Other blogs on political capitalism at MasterResource include:

Wisdom from T. Boone against Rent-Seeking Pickens (remember when you said ….?)

Dear U.S. Chamber of Commerce: Why Attempt to Resuscitate a Brain Dead Climate Bill?

Political Capitalism: Understanding the Beast that Broke the Cage (Part I: what is political capitalism?)

Origins of the Gasoline Tax (Part II of “Political Capitalism: Understanding the Beast that Broke the Cage”)

“[Nuclear] Fortunes in Cap-and-Trade” (Part III of “Political Capitalism: Understanding the Beast that Broke the Cage”)

Appendix: Oppenheimer’s Vital Distinction

“There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one’s own labor and the forcible appropriation of the labor of others. Robbery! Forcible appropriation! These words convey to us ideas of crime and the penitentiary, since we are the contemporaries of a developed civilization, specifically based on the inviolability of property.

And this tang is not lost when we are convinced that land and sea robbery is the primitive relation of life, just as the warrior’s trade – which also for a long time is only organized mass robbery – constitutes the most respected of occupations. Both because of this, and also on account of the need of having, in the further development of this study, terse, clear, sharply opposing terms for these very important contrasts, I propose in the following discussion to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.” (pp. 24-25)

Franz Oppenheimer’s The State can be read online.

“The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.”

- Milton Friedman. “Which Way for Capitalism?” Reason, May 1977, p. 21.

Special government favor. A little something for nothing at the other’s expense…. Sure, a particular business or industry can gain in the short run. But when everyone is getting the booty, almost all lose.

Just look where government is today. The chronic, gargantuan federal budget deficit is testament to the Enrons then, GEs now  receiving government subsidies from either the U.S. Treasury or the tax code. The rest of us pay (or will pay) what the rent-seekers are getting and not paying for (outside of their lobbying costs).

Business has been a force for regulation. In the twentieth century, the energy industry was behind the large majority of major government intervention with oil, natural gas, and coal. As I concluded in Oil, Gas, and Government: The U.S. Experience:

As a rule, the free market was the “default” situation into which government intervention was introduced to achieve business objectives. In the great majority of cases, identifiable industry coalitions led the way. The history of regulation of the oil and gas industry is the story of how compromise and pragmatism, in the absence of principle, created interventionist pressure at every turn. When it was costless, the industry proclaimed its support for the free market in principle. But this philosophical leaning meant little when more was at stake. (1)

The same is true with electricity, a story that my forthcoming book, Edison to Enron: Energy Markets and Political Strategies, will detail through the rise and fall of the father of the modern power industry, Samuel Insull.

And so it is with 21th-century energy interventionism. Whether Enron saving the domestic wind industry or Pickens trying to politically wedge natural gas in the transportation market by T. Boone Pickens, political capitalists are expanding the government side of the mixed economy.

T. Boone Pickens circa 1987, 2000

Guess what? The pre-Pickens Plan T. Boone gave ample warning against the very behavior that characterizes him today.

If I were a congressman questioning Pickens under oath, I would read him the following quotations and ask him for comment–and then get to the sour economics of whatever he is pushing for the government to push on consumers.

Four quotations (with references) follow:

“I am a conservative…. I believe the greatest opportunity lies in a free marketplace. There are powerful forces afoot trying to restrict that freedom in the interests of the vested and already wealthy.  I am talking about a relatively small collection of corporate executives who would use the engine of American commerce for their own narrow ends.”

- T. Boone Pickens, Jr., Boone. Boston: Houghton Mifflin Company, 1987, pp. xi–xii; The Luckiest Guy in the World. Washington, D.C.: BeardBooks, 2000, pp. xi–xii.

“We must reduce the influence of big business in Washington…. The way to do that is to kill the protectionist game.”

- T. Boone Pickens, Jr. Boone. Boston: Houghton Mifflin Company, 1987, p. 287;  The Luckiest Guy in the World, p. 287.

“Senator Bob Packwood said in the spring of 1986: ‘Boone Pickens is the only businessman I know that if Congress would leave him alone he would never come to Washington.’”

- T. Boone Pickens, Jr. Boone. Boston: Houghton Mifflin Company, 1987, p. 287; – T. Boone Pickens, Jr. The Luckiest Guy in the World. Washington, D.C.: BeardBooks, 2000, p. 287.

“The government doesn’t step up and say, ‘Now, how much do you need for giving it a try, fella?’ That’s why America is so far superior to the rest of the world’s economies.”

- T. Boone Pickens, Jr. The Luckiest Guy in the World. Washington, D.C.: BeardBooks, 2000, p. 297.

T. Boone Pickens circa 2007

These-type quotations were not to be found in T. Boone’s latest biography, The First Billion Is the Hardest: Reflections on a Life of Comebacks and America’s Energy Future (Random House: 2007).

I reviewed the book in the Wall Street Journal. Some excerpts follow:

Now Mr. Pickens has new dreams — and he is lobbying Washington to make them come alive.

In particular, Mr. Pickens wants the federal government — through a mix of tax incentives, mandates and subsidies — to override the market and redirect the uses of natural gas. At the moment, natural gas produces about a fifth of the nation’s electricity; Mr. Pickens thinks wind power should do that work, with natural gas fueling cars and trucks.

To push his program, Mr. Pickens has all but put Al Gore in the shade with a $58-million public-relations campaign. “When it comes to energy, we are at war,” he explains. “Sleepwalking” America — if it is to dodge $200 per barrel oil — must employ a “George Patton” to “lead us to victory no matter the obstacles.” And, he says, “we have to make the transition in less than ten years.”

The First Billion argues for this plan, along with recounting Mr. Pickens’s business ups and downs. The book is often entertaining, featuring the usual “Boone-isms”: e.g., “Show me a good loser, and I’ll show you a loser.” But readers unfamiliar with Mr. Pickens’s earlier memoirs may not realize that the new one represents a kind of bait-and-switch. Mr. Pickens’s standing to pronounce on energy matters was earned as a free-market producer. He is now using that standing to defy the market itself.

His arguments for a government-led remake of the nation’s energy use are sketchy at best, dangerous at worst. Despite his grand claims, generating wind power is uneconomic, and transmitting it is even more so (windy places are far from electricity markets). Wind is unreliable, requiring constant backup from natural-gas-fired plants in particular. Wind takes summer days off. In Boone-speak, wind is all hat and no cattle.

As for natural gas: Mr. Pickens scarcely mentions the manifold problems with natural-gas vehicles, from the price premium for a new car (around $6,000) to the cost of fuel conversion (averaging around $12,000 per car). Converted vehicles must sacrifice trunk space to accommodate a heavy natural-gas cylinder. The task of retrofitting service stations, let alone cars, puts the cost of the Pickens Plan north of a trillion dollars. And what happens if oil prices fall and natural-gas prices spike?

Why is Mr. Pickens pushing this energy plan so hard, aside from the supposed good of the nation? The most obvious reason is that his Clean Energy Fuels Corp. — invested heavily in natural-gas dispensing stations — would be a big winner. Mr. Pickens also has on the drawing board a $10-billion wind-power project — “the biggest deal of my career.” Another reason, one suspects, is a desire to reclaim the kind of folk-hero status that Mr. Pickens lost after Mesa’s fall. He might become the “greenest” energy man since Ken Lay was at Enron and Lord John Browne rebranded the “BP” of British Petroleum to mean “beyond petroleum.”

A third reason is less obvious. Mr. Pickens refers to Big Oil as “the monster.” Why such an animus toward an industry that has been at the forefront of the American dream? As it turns out, both Mr. Pickens and his father (a failed independent) spent unhappy years at Phillips Petroleum. During the takeover battles with Big Oil, Boone was professionally and personally smeared and was ultimately denied his dream job: running an integrated major. He also links Mesa’s fall to overdrilling by the cash-flush majors.

A man is entitled to his vendettas, of course. But surely the government shouldn’t help fuel them. One hopes that Mr. Pickens can reinvent himself one more time, remembering — how did he put it? — that “the greatest opportunity lies in a free marketplace.”

Has my review from September 2008 stood the test of time–so far?

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(1) Bradley, Robert. Oil, Gas, and Government: The U.S. Experience. Lanham, Md: Rowman & Littlefield, 1996, pp. 1843–44.

And with this two-part scheme, games are played. Wind generators can bid a low price into the pool only to receive a higher FIT, which gives them an incentive to underbid. This might reduce the pool price but not overall cost to Germans for electricity.

Investing in New Generation: What Makes Sense?

If a generation resource is a good investment for its developers then it must return a profit to them.  In a normal electricity market this profit comes from supplying a segment of the demand (peak, intermediate/cycling, baseload) from a plant that is efficient technically and financially.

For existing plants and determinations of electricity costs in the here and now we can figure out the average cost of supplying electricity by calculating the weighted average cost of supply for each time period in the market every day.  If the addition of one generation source raises this weighted average without improving service quality or reliability, then it is not economical and would generally not be chosen in a well-functioning market.

But what about the future?  Electricity suppliers must invest large sums in new generation plants with the expectation that these plants will meet demand at the least cost.  This cannot be known with certainty, and mistakes are made all the time, especially when government policy and rent-seeking drive investment choices.

Transmission network operators – those in charge of the “natural monopoly” part of the power business – try to reduce the risk attendant to future supply by figuring out the least costly way to supply power and energy to their customers in the future, including the wires to transmit the electricity.  They have to take account of a long list of considerations: investment cost, fuel supply, emissions and licensing regulation, proximity to existing load centers and transmission nodes, transmission congestion – you get the idea.

The transmission system operator also has to pay attention to public policy – renewable energy mandates (“portfolio standards”), federal tax incentives (producer tax credits for wind and solar), feed-in tariffs, powerful politicians who do not want their vistas impaired – in a host of ways that directly impact their views of an optimal future generating system.

What Does the Wise Transmission Operator Do?

A wise investor in generation will first figure out what is economic to build? what are the physical constraints on the system? and finally, what limitations will public policy put on otherwise least cost generation choices?

A Case Study of “Germania”[i]

Let us imagine that we have a rather large and wealthy country to play with, one that currently has about 129 GW of installed generation capacity.  Further, we can imagine that this wealthy country, responding to its powerful environmental movement, has decided to

(i) phase out nuclear power;

(ii) limit future coal power-plant operations;

(iii) build a lot (a lot!) of wind generation plants; and

(iv) bring in most of its gas supply from Russia at prices linked directly to refined oil products and crude (i.e., high and volatile).

Such a country would have a great deal of baseload generation capacity – coal + lignite + nuclear – perhaps half of total generation capacity (US has coal + nuclear capacity of about 40%).  Suppose further that green thinking had created incentives (FIT) that pushed wind up to about 20% of total nameplate capacity.  Most of the country’s hydro generation and imports are soaked up by wind mirroring and shadowing.

With all of that generation capacity essentially independent of fuel price trends it is no accident that the cost of generating electricity in Germania is (i) high; and (ii) not responsive to changes in oil and gas prices.  At current world oil prices the average cost of electricity generation in Germania is about 6.7¢/kWh (7.8¢/kWh if crude reaches $110/bbl).

Germania’s Least-Cost Generation System

With natural gas still expensive – kind of like burning oil but more efficiently – what does a least cost generating system for Germania look like in 2020, about the time the initial wave of early “teens” investments go on line?

The first thing you do is throw out the phase outs – keep the existing nuclear and efficient coal plants in operation until you have a more cost-effective substitute;

Second, phase out your highest cost oil plants – heavy fuel oil and old combustion turbines (2.6 GW)

Third, build some new, more efficient coal plants (1.6 GW) and CCGT units (4.5 GW), and nuclear (4 GW), reduce emissions per kWh by more than 30% in the new coal plants;

Fourth, operate existing wind (28 GW) but do not build new generation from that source.

Total annual cost in 2020: $48 billion at 6.7¢/kWh for average supply cost and 6.6¢/kWh for new supply.

Back to Our Previously Scheduled Programming

Everyone in Germany’s power sector knows that this least cost system is simply some renegade economist’s fantasy.  Back in the Real World of Energy Policy, there are several important considerations that must be accommodated:

Stay clean – phase out at least 25% of older coal and lignite plants, make permitting of new coal plants difficult;

Stay green – stay the course on wind energy; and

No nukes – continue to phase out nuclear power.  Build only enough new nukes to keep the Gauls happy.

So what does Germania get for its $53 billion annual outlay for electricity (at 7.6¢/kWh average supply cost and 7.8¢/kWh for new supply)?

Less coal and lignite – existing units fall to 45 GW from 58 GW, new coal rises to 3.1 GW to make up for some of the lost legacy capacity;

Less nuclear power – existing nuclear capacity falls to 15 GW (from 19 GW), new nuclear capacity falls to 2.7 GW from 4 GW in the least cost case;

More gas – 6.5 GW of new CCGT, up from 4.5 GW in least cost case;

More wind – another 17.5 GW, for a total of 35.5 GW of wind, 25% of total nameplate capacity; and

More imports – enlarged interconnection with Benelux and Denmark/Norway is only cost effective way to shadow additional wind and meet peak demand.

And if the price of oil rises to $110/bbl by 2020, then this system will cost Germania $62 billion annually at 8.8¢/kWh.

The True Green Scenario – phase out 50% of coal and nukes, double wind installations, increase imports – costs about 7.9¢/kWh on average, 8.3¢/kWh for new supplies and carries annual costs of $56 billion.  This option requires 15.6 GW of new CCGT, 2.1 GW of new combustion units, 10.6 GW of import capacity and operates existing HFO units at 100% of capacity (!), even building a couple of new HFO plants to meet demand – not green, not cheap and not feasible (it only solves inside the box).  And by the way, higher oil prices for this beauty will cost $66 billion/y at 9.3¢/kWh.

Does ‘Green’ Always Have to Hurt?

Easing off the green pedal a bit creates enough breathing room in Germania to generate a lot of clean electricity at a much lower cost.  A more moderate program, even with 10 GW of new wind, can be done at a far lower cost with just a few adjustments:

Slow the phase out of existing coal and nuclear plants – keep 85% of existing coal and nuclear plants in operation in 2020;

Build new coal and nuclear plants – reduce emissions per kWh and burn less coal overall, and improve the efficiency and security of the nuclear fuel cycle;

Import more – let more medium term supply come from lower cost Benelux and Scandinavian suppliers to mirror/shadow wind and follow load.

A more moderate program of this sort could supply Germania for about $49 billion annually at an average cost of 6.9¢/kWh.  Even higher oil prices do not hurt as much as in the more aggressive scenario, with $110/bbl crude oil increasing total annual costs to $56 billion at 8.0¢/kWh.[ii]

As a Great Philosopher Once Said, “A man’s got to know his limitations”

In a world of unlimited wealth, where electricity can be stored and plants can be built instantaneously on a whim, a complete remake of a large power system seems feasible and even desirable to some.  Back in the real world, where everything takes time, costs money and different sources of electric power are not perfect substitutes for one another, such ambitions are difficult to realize.

Germania set up too many targets on too short a time frame.  The result was a series of conflicting mandates and constraints – close it down; no, we need it, keep it open; will the Jutes cooperate on supply? What happens to our gas supply when “bad weather” rolls in from the East (as it eventually does in Germania)?

A cleaner, greener power supply system is possible over a longer period of time at a far lower cost than a crash program.  Orderly replacement of older coal plants with more efficient and cleaner new ones makes sense given the country’s resources, geography and demand patterns.  As in the US a crash program to overhaul the system will ultimately force increased reliance on older, less efficient coal plants; it ignores microeconomic rationality for chimerical goals and wastes a lot of money and energy in the process.  Or to paraphrase that revered Soviet philosopher, “you may not be interested in markets, but markets are interested in you.”  Germania ignores market forces at its own peril.

[ii] The cost of new supply is below the average cost of supply by about 7% for this moderate scenario, while the “Green” future shows new supply above average cost by about 2-3%.

Although the draft legislation and hearing documents address serious problems brought to light by the Committee’s ongoing investigations, the Blowout Prevention Act would throw the baby out with the bath water.

To restate the obvious, although oil spills are bad, oil is good. Without oil, there would be no modern commerce and no mechanized agriculture. Life for most people would be “nasty, brutish, and short,” and many of us would not even be alive. Another obvious point — British Petroleum (BP) is to blame for the worst environmental disaster in U.S. history, not the oil industry as a collective entity.

Yet the draft legislation that Chairmen Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) will promote at today’s hearing could shut down all offshore drilling in the United States.

The draft text says the federal government “shall not issue a permit to drill for a high-risk well unless the applicant for such permit demonstrates . . . and the appropriate federal official determines that . . . the applicant has an oil spill response plan that ensures that the applicant has the capacity to promptly stop a blowout in the event the blowout preventer and other well control measures fail.”

Sounds innocent enough. However, the bill defines as “high-risk” any “offshore oil or gas exploration or production well,” not just ultra-deepwater rigs. In addition, at both the June 17 Oversight and Investigations Subcommittee hearing and the June 15 Energy and Environment Subcommittee hearing, Chairmen Waxman, Markey, and Bart Stupak (D-Mich.) emphasized that none of  the major oil companies, individually or in combination, could have stopped the spill after the blowout preventer failed:

• “BP failed miserably when confronted with a real leak, and ExxonMobil and the other companies would do no better.” — Chairman Waxman, June 15
• “It could be said that BP is the one bad apple in the bunch. But unfortunately, they appear to have plenty of company. Exxon and the other oil companies are just as unprepared to respond to a major oil spill in the Gulf as BP.” – Chairman Stupak, June 15
• “Yet when you’re asked can you stop the massive quantities of oil that are now ruining the beaches and marshland, killing the wildlife, and devasting the economy, you [BP, ExxonMobil, Chevron, Shell, ConocoPhillips] say no. You say you’re not well equipped to deal with it, and these catastrophic impacts are simply unavoidable.” — Chairman Markey (hearing transcript, pp. 220-221), June 15

The implication is obvious: The federal government ”shall not” issue any more permits for offshore drilling, because nobody knows how to “promptly stop a blowout in the event that the blowout preventer and other well control measures fail.” Rep. G.K. Butterfield (D-N.C.) put it this way: “BP ignored a very simple rule. If you can’t plug the hole, don’t drill the well.” But, as the BP disaster shows, some holes cannot be plugged, at least not in time to prevent gigantic spills. Logically, the bill implies that no permits to drill should be granted and that existing permits should be revoked.

How might Chairmen Waxman, Markey, and Stupak reply to this criticism?

Maybe they would claim that they just want Big Oil to invest more in spill response. For example, Markey asserted that the industry has “invested zero time and money into developing safety and response efforts.” He continued: “The oil companies before us today amassed nearly $289 billion in profits over the last 3 years. They spent $39 billion to explore for new oil and gas. Yet the average investment in research and development for safety, accident prevention, and spill response was a paltry $20 million per year, less than one-tenth of 1 percent of their profits” (June 15 hearing transcript, p. 4). These numbers seem to speak volumes. In fact, they are highly misleading.

Oil companies are not like pharmaceutical companies, which test and develop their products in laboratories. Most of the information relevant to the safety of offshore wells is acquired in the field, in the process of drilling for gas and oil. Safety information obtained via discrete investments in R&D is supplemental to information generated in the course of producing hydrocarbons. The most important safety ‘R&D program’ is the multi-billion dollar annual investment the industry makes to find and produce new fields of oil and gas. It has been very successful. It is the reason that, until the BP disaster, there had not been a blowout in the Gulf of Mexico since the 1979 Ixtoc 1 oil spill, more than 30 years ago. It is the reason, notes ExxonMobil CEO Rex Tillerson, that nothing like the BP disaster occurred “at the 14,000 other deepwater wells that have been successfully drilled around the world.”

As the Committee’s investigations make clear, disaster struck not because the oil industry is stingy with R&D, but because BP repeatedly cut corners in the design and testing of the Macondo well. BP flouted industry best practices and acted with reckless disregard for employee safety, environmental protection, and the region’s economy. That is hardly surprising given BP’s atrocious record of “willful and egregious” safety violations in the refining end of its business.

The irony here is that BP’s dreadful safety and environmental record may well be related to its lobbying for the Waxman-Markey cap-and-trade bill and multi-million dollar re-branding as “Beyond Petroleum.” Cynicism and the pursuit of excellence don’t mix. There is hardly anything more cynical than lobbying for market-rigging rules in the name of saving the planet. Also, an oil company that starts to believe its own PR about being “beyond petroleum” is bound to become sloppy about its core competence.  

One thing is clear — no amount of additional R&D spending would have enabled BP, or any of its rivals individually or working in concert, to stop the spill after the blowout preventer failed. At the June 15 hearing, Chairman Stupak engaged Mr. Tillerson in colloquy on this very point. Consider these excerpts:

Stupak: “So when these things happen, these worst-case scenarios, we can’t handle them, correct?”

Tillerson: “We are not well equipped to handle them. There will be impacts as we are seeing. . . .That’s why the emphasis is always on preventing these things from occurring, because when they happen, we’re not very well equipped to deal with them.”

Stupak: “. . . so no matter which one of the oil companies here before us had the blowout, the resources are not enough to prevent what we’re seeing day after day in the gulf, not only the loss of 11 people, but we’re on, what, day 56 or 57 of oil washing up on shores. There is no other plan. There is no way to stop what’s happening until we finally cap this well, correct?”

Tillerson: “That is correct. . . . There is no response capability that will guarantee you will never have an impact. It does not exist and it will probably never exist.”

In short, the Blowout Prevention Act sets a standard no oil company can meet. No applicant for a permit to drill can “demonstrate” that it has “the capacity to promptly stop a blowout after the blowout preventer and other well control methods fail.” Chairman Stupak surely knows this, having belabored the point at the June 15 hearing.

Maybe the Blowout Prevention Act is simply a product of sloppy drafting. But maybe not. As written, the bill would revive and expand the federal ban on offshore drilling. Indeed, it would cripple U.S. domestic petroleum production. Do the sponsors not know that banning offshore drilling would increase consumers’ pain at the pump, destroy high-paying American jobs, and make the United States more dependent on OPEC oil? Or do they just not care?