Rent Seeking, Crony Capitalism, and U.S. Energy Politics: Who Wins from the Racket?

By Donald Hertzmark -- August 5, 2009

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:

In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth. . . . rent seeking is held to be associated with efforts to cause a redistribution of wealth by, for example, shifting the government tax burden or government spending allocation.

Intervening against rent seekers on an very monied issue is like descending upon the hyenas and the carcass. From the rent seeker’s viewpoint, the rest of us exist simply to provide the pot in the middle of their poker game. And they don’t like being disturbed.

Cap-and-Trading at Our Expense

Cap-and-trade is a fertile playground for rent seeking. Most of the hundreds of billions of tax dollars devoted to Waxman-Markey will do little or nothing to reduce the simulated impacts of increased CO₂ levels, nor will these monies result in greater energy production. What happens instead is that cap-and-trade permits the trading of phony carbon reductions in order to fund the construction of new electricity plants that do not actually contribute very much to supply, and may reduce the overall wealth of society through greater regulation and suppression of investment in more productive areas.

If the big pot of (our) money is just lying on the table, waiting for the rent-seekers to scoop it up, then we should at least figure out who the potential winners are from this bonanza. There are several categories of winners in this contest:

1. Emissions permits and carbon trading profits,
2. Renewable energy revenues, and
3. “Smart” network investments.

1. Emissions Permits and Trading

In the emissions permits and trading category, the Gold Medal winners are the power generators who have convinced the Waxman-Markey writers that they should be given carbon permits, which they can then sell to others.

The big beneficiaries are the utilities that have supported the Administration’s objectives with the Waxman-Markey bill. They include Duke Energy, a strong supporter of cap-and-trade and a major coal fired generator (52% of generation), leading a coalition of other major power generators. Receiving the Silver Medal will be the emissions traders – sons and daughters of Enron now working for major investment banks and GE Greenhouse Gas Services.

To paraphrase the words of that great political theorist, former Illinois Governor Rod Blagojevich, these emissions permits are a “$%^&*#! valuable thing.” So we (the taxpayers) will give them to the major utility generators of such emissions, except for oil refiners because they are ‘bad’ and failed to play the game according to the new rules. The recipients of this largesse will turn around and sell them as “offsets” to other companies that were not granted the freebies (oil refining, most manufacturing) intermediated by the investment banks who might just be able to intercept a bit of the cash as it moves from buyer to seller.

2. Renewable Energy

In the category of best renewable energy proposal with no chance of contributing meaningfully to U.S. energy supplies, the Gold Medal winners are the wind energy project developers. Interestingly, Enron rears its ugly head once again, this time reborn as GE Wind Energy Systems, sister of TARP beneficiary, General Electric Capital.

Others sharing the Gold Medal include double winners AES, Edison Mission Energy, American Electric Power (also from the emissions trading category), as well as leading financial institutions (JP Morgan). Also sharing the medal is a representative of the Boone Pickens empire (Mesa Energy).

Extensive analyses on this site and other have demonstrated clearly that wind energy offers little firm power until it reaches a substantial multiple of the installed base of conventional power generation, at a cost that would absorb most of the country’s future energy sector investment (more than $1 trillion). Nevertheless, wind energy advocates push ever forward, with proposals to invest billions in long distance transmission, smart grids (its own category), and renewable energy mandates (called “portfolios”).

Once again, we (the taxpayers) give away the emissions permits to the well connected, they are sold through the investment banks and we are charged again with higher electricity prices, and again through the funding of production tax credits for wind generation, an incentive available only to the banks that fund wind projects.

There is no Silver Medal for this category, but the Lifetime Achievement Award goes to the ethanol industry, recipient thus far of more than $100 billion in taxpayer monies, and rising at a rate of more than $7 billion annually. So successful has been this lobby that even fellow renewable energy advocates object to the rent-seeking that, they believe, should more rightfully be theirs.

3. “Smart” Networks

And in the category of just trust us with this and pay higher electricity bills because this is far too complicated for you to understand, the winner of the Gold Medal is the Smart Grid. No one wants a dumb grid, smarter is always better, so the smart grid will wire up our houses and businesses so that we can run our dishwashers and clothes dryers in the middle of the night (will the smart grid wake us up so we can fold the clothes in the middle of the night before they wrinkle?).

Accepting the Gold Medal will be IBM (smarter planet) or maybe GE, another major player in the race for federal subsidies for smart grid technology. For most electricity users, an enlightened pricing plan–one that relates the price of electricity to the cost of supply during the day and over the course of time–would be enough to allow adults to make reasonable decisions about when to use electricity.

Unfortunately, regulators have resolutely resisted such economic pricing plans, which are the basis of electricity pricing in dirigiste France. Appropriate pricing signals are the key element in making a smart(er) grid pay for itself. Without better pricing signals the smart grid must fall back on government funding, as is indeed the case. An interactive smart grid would be appropriate for large users, those with dedicated energy management teams, but constantly changing prices are of little use to those who have a life.

The smart grid as currently envisioned will take a lot of decision-making about electricity use out of our hands and give it to the electricity supply companies, who will do the job themselves (demand management – no, you cannot dry your clothes now, we’re too busy).

The recent McKinsey Report on energy conservation (Exhibit D) noted that dishwashers, one of two household devices claimed as benefits of smart-grid technology, were one of the least significant sources of energy savings, and electric dryers were not counted at all as a conservation source.

But what is really needed is a strong grid, one that can withstand the multiple sources and destinations of electricity that characterize a functioning market system in power (and nefarious hackers), not a better, computerized version of the Soviet grid.

Conclusion

Waxman-Markey has set the stage for one of the greatest bouts of rent-seeking behavior in U.S. economic history. Once-independent companies, notably utilities and investment banks, have become addicted to government-granted favors for their major lines of business. The resuscitation of Enron business principles in its legacies, GE and investment banking, threatens to pick our pockets, distort the democratic process (NB the lack of concern with legislative process and informed decision-making in Congress) and leave good ideas, unconnected to the rent-seeking process in the closet.