On the Politicization of Electricity (intervention breeding intervention)

“Government-orchestrated retail competition in electricity largely failed. With that failure came the return of regulatory-mandated, utility-administered wasteful energy efficiency programs. This time the programs carried the added justification of countering global warming.”

Prior to the oil shocks of the 1970s, energy was just another input in the management of capital, labor and other operating costs. Tradeoffs were made between energy costs and capital spent to increase efficiency. During the natural turnover of capital equipment, energy efficiency improved along with productivity, quality and waste reduction. Effective energy use was a technical matter where efficiency had to make economic sense.

Oil  and  gas  shortages in  the  1970s  were caused  by  government  price controls, but the news media hyped the concept of “running out” of resources. This brought politics into the use of energy, an example of how the problems from government intervention can breed more intervention.

With the stated goal of being “energy independent,” a variety of federal government boondoggles were initiated, including synthetic fuels subsidies to the Strategic Petroleum Reserve. The electric utility industry faced restrictions on the use of natural gas for generation, which encouraged new coal-fired capacity.

Nuclear generation appeared to the best option given questions about fossil fuels. A significant part of the utility industry exhibited a lemming-like propensity for doing the wrong thing in mass. State utility regulators played a part in  encouraging  the  proliferation of what turned out to be very expensive  investments.

Management of energy became a formalized separate management responsibility among end users. The price shocks from the oil  market and, later, the power market made energy efficiency measures 
attractive. The market poured forth new devices and improvements in energy-using equipment that greatly reduced the energy intensity of the U.S.  economy. The managers of enterprises faced an array of new energy control products that continues increasing to this day.

Along with the market response to high energy prices, new laws were complicating the use of energy. Natural  gas  use  was  discouraged in industrial as well as utility boilers. Gas supplies were perceived by policy makers as a soon-to-be-exhausted resource. Some industrial processes were switched to electricity. In such cases overall efficiency was taking a back seat to conserving natural gas. Tax credits influenced energy investments. Saving energy had patriotic implications. Building codes now included energy standards.

The shock from cost overruns on nuclear generating plants caused a loss of confidence by the upper managements of electric utilities. During this moment of weakness the concept of having a public policy on energy use came to the fore among utility regulators. The idea was that if the utilities invested in energy efficiency, then they would not need to build so many power plants. In regulatory circles the new buzz words were “least-cost planning” and “demand-side management.”

The utilities had the good sense to be suspicious of the grandiose claim that efficiency improvements would slow the overall demand for energy. But they were soon bought off with promises of guaranteed profits on approved but expensive efficiency programs. During the late 1980s and early 1990s, a number of sound economists pointed out the flaws of asking a provider of services to reduce his own sales. Further, with amazing accuracy, these economists predicted failure.

Billions of dollars were spent by the nation’s utilities on demand-side programs with little to show for it but inflated claims. The money, of course, came from utility customers. Those who had already invested in energy efficiencies were taxed to pay for the same improvements in their competitors’ facilities. According to economist Franz Wirl both the utilities and customers gamed the system of giveaways for efficiency measures.

Then a wave of rationality struck the electricity industry. Competition for end users was instituted in many  states  and  planned  in  still  more. Customer  choice  akin  to  that  in  telecommunications  was  seen  as  the  wave  of  the  future. The  regulated  utilities  began  the  wholesale  dumping  of  their  wasteful  customer  efficiency  programs. In  the  industry  this  was  known  as  “getting  trash  off  the  books.”

The regulated suppliers rightly feared unregulated competitors who would not add frivolous costs to their services. End users enjoyed a period of stable and even declining rates as the utilities were forced to make rational decisions in a quasi market environment. But the retail market concept was flawed.  Rather than evolving through  the  market  process,  political dictates  prevailed  in  designing  the  structure.

The result was a Frankenstein’s monster. It looked like the real thing but lacked the essential features necessary for a real market. Entrepreneurs were not allowed to develop alternative delivery systems. The scheme  could be called mandatory access with guaranteed return on overvalued assets.

However, on  the  wholesale  level  time-sensitive  pricing  became  the  norm  and  made electricity a commodity that is exchanged like other commodities using marginal cost pricing. This rationality spread to some sectors of the retail market and brought much-needed customer feedback to utilities.

Government-orchestrated retail competition in electricity largely failed. With that failure came the return of regulatory-mandated, utility-administered wasteful efficiency programs. This time the programs carried the added justification of countering global warming. In a typical utility program $6 is collected for giving away low-energy light  bulbs  that  a  consumer  can  buy  for less than $1.50, and  the  utilities  are  asking  to  recover  hundreds of millions of dollars without verifying they achieved any energy savings.

The bad news for consumers has not ended with the rebirth of these demand-side management programs. Another round of high-cost nuclear plants is underway.  The lesson that should have been learned from the last round of nuclear plant building is that the utilities need to be subjected to market conditions and their attendant risks.  Instead, we see the utilities going to their state regulators and general assemblies and getting guaranteed recovery on investments with no upper cap!   Green  energy purchase mandates  are  driving  up  the  cost  of  electricity  already,  and  will  certainly get worse.

End users are trying to be politically correct and are adopting high-sounding green goals. The end-user energy management  function now includes issuing press releases filled with platitudes. One-size-fits-all energy measures are being promoted to obtain certification of an enterprise’s commitment to saving the earth.  The overhead surrounding energy saving programs has increased.

Dubious  environmental  effects  are  included  along  with  hard  energy  saving  numbers to justify politically correct investments and practices. Utility rates, which have always included cross-subsidies for politically favored groups, are being distorted even further from market results with additional features encouraging certain green behavior.

Conclusion

The zigs  and  zags  of  state  and  federal  energy  policies  have  caused  massive  mal-investment by both  energy  suppliers  and  users.   The best energy policy is no energy policy. Market forces should replace regulation; supply and demand with unfettered competition should determine energy prices. Proper  energy  prices  will  lead  to  wise  customer  investments  and  practices.  Energy efficiency is its own reward and needs no encouragement from governments.

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Jim Clarkson is founder and head of Resource Supply Management (RSM), an energy procurement and management company based in South Carolina. He is also a director of the Institute for Energy Research and its advocacy arm, The American Energy Alliance.