Last Saturday, I spoke at the American for Prosperity’s Defending the American Dream Summit in Washington, D.C. I was one of three presenters on energy and energy/environmental issues.
Dan Simmons of the Institute for Energy Research documented the U.S.’s abundance of energy resources from two studies he helped put together: North American Energy Inventory and Hard Facts. Myron Ebell of the Competitive Enterprise Institute reviewed climate change issues and the U.S. Environmental Protection Agency’s war on coal.
I took a different tact and would like to highlight some of the points I made in this post.
Time to Reprioritize?
As tragic as Obama’s policies have been to the fossil industry, and as wasteful as his fetish over “green jobs” has been to the taxpayer, emphasizing these points of disagreement with his administration overlooks a much more serious sleeping energy giant—electric industry policy.
I wrote on some of these issues recently on Master Resource in comments on Rob Bradley’s books on political capitalism. So consider these four points:
1. Oil is a fungible commodity that trades in a reasonably efficient and competitive global market. Thus we face price risk but not supply availability risk. Opening up more U.S. reserves would improve our economy (domestic jobs and a slightly lower price of oil) and improve our balance of trade. But none of this amounts to a “crisis” in energy markets. Similar arguments could be made about improving many other sectors of the economy.
Thus, I believe a disproportionate (compared to the risk) amount of time is spent handwringing on oil issues (from an analytical point of view; I realize the political advantages of such focus). The heartbreak of psoriasis is tragic but hardly worth a national debate.
2. Radical climate change policy was a real threat from 2009 to 2011 when the Democrats had an undefeatable trifecta in DC. Due to the tireless efforts of many “realists” and a little luck, we dodged a bullet and the threat of really dumb climate policy is no longer seriously on the table, at least for the next decade. Yet we waste a lot of resources fighting the last war.
3. Relatively little attention is paid to SERIOUS reform of electric industry policy. If there is to be a “crisis” in the next decade in energy, it will be in the electric industry.
For example, not a word is said by President Obama’s official website on electric industry reform. Similarly, Romney on his site merely nibbles around the edges but does not raise fundamental reform of the electric industry as a discrete topic.
The Uber-Regulated Electric Industry
The electric industry is probably the most regulated industry in the United States, though health care has emerged as a close competitor. Every facet is subject to government rules and regulations—fuel for generation, need for generation, generation siting, generation pricing, need for transmission, transmission siting, transmission pricing, distribution pricing, environmental policies, efficiency and conservation policies, low-income policies, economic development, and probably three or four other things that I just haven’t thought of.
Complicating all this government involvement is the fact that jurisdiction is spread out over myriad levels of government in a manner that defies both logic and efficiency.
Lastly, utilities don’t act like “normal” competitors who can often be relied on to pursue the co-related interests of its customers in its advocacy. Utilities are the eunuchs to the crown princes of regulation. As long as they behave, the regulators will take good care of them with an extra half point in rate of return. But many a CEO has pleaded with me to do in public what they dare not do for fear of alienating their regulators or monopsony buyers or monopoly sellers.
This alone would qualify for opprobrium even if the industry operated flawlessly. But the fact is that the industry under current rules and regulations is unsustainable. Unlike gasoline or cell phones, if one company runs out you can take your business elsewhere. Short of self-generating, there is no alternative to being hooked up to an electric utility. Unlike caviar, I cannot live my life with unreliable electricity. There is not one product or service in the United States that is not affected by electricity policy.
In my view, a full-scale overhaul of electric policy is needed. Comprehensive radical market-based reforms revolutionized the airline, railroad, telecommunications, trucking, and natural gas industries. All of which today are contributing mightily to our economy. I just don’t hear the same level of concern that led to these radical industrial reform efforts being talked about in the electric industry. It could be that I have my head in the clouds and am merely looking for something to do.
Or it could be that it is so complicated that we will not attack the problem until we have an Indian-style catastrophe. Forgive me, but did anyone really think that the Natural Gas Policy Act of 1978 was the right answer to what ailed the gas industry.
What about Ma Bell? Did we really think that an AT&T monopoly would ensure us the kind of innovation in digital technology that we have seen in the last 25 years? But no, we had to wait until circa 1984 (prophetic year no!) for the Reagan Administration to proffer radical reforms to these industries.
How did that work out for us? Pretty good, if you ask me.
So I propose four thought experiments.
1. Let’s demote oil and climate change to secondary status as analytical issues.
2. Let’s elevate the dialogue about fundamental electric industry reform to primary status.
3. Let’s debate what is wrong with current electric industry policy.
4. Let’s identify the set of policies needed to permit the electric industry to enter the 21st Century.