Following the discussion under David's latest post about Edwards' position on carbon capture at coal plants, I thought it appropriate to point out a few things about the electric business that are critical to this debate -- but not widely appreciated.
An electric utility is a weird amalgam of lots of historic political philosophies -- most of which are in direct contradiction to modern ideas, but are difficult to repeal.
According to the modern pro-market ideal, businesses should have profit incentives in competitive markets, so that Adam Smith's invisible hand will create consumer value. But to an early 20th-century regulator (who wrote the rules under which most modern electric utilities were formed), certain public goods were so important as to mandate government intervention. (One of the best examples is Einstein, who thought that Karl Marx had some really good ideas, in large part because he saw the problems of the world so clearly that he couldn't conceive of an unregulated market rising to address them. See here.)
This is indicative of an era in which socialism was a live concept rather than historical record, when regulators and academics could debate the pros and cons of central planning without any evidence of the excesses such systems could create. It was also an era when the excesses of the mercantilist Gilded Age were becoming evident, and smart, well-intentioned folks were looking for a better way.
Why does this matter? Because regulated electric monopolies were created in this environment, and they were intended to contain the best of both political philosophies.
They got profit incentives because we "know" that the pursuit of profits enables greater efficiencies than we can ever get out of a bunch of well-intentioned government bureaucrats.
But they also got guaranteed monopolies and regulatory oversight because we "know" that really big, important societal investments can't be done effectively by an unchecked market.
Both of these pieces of "knowledge" are debatable, but the important thing is that in trying to get the best of both worlds, we got the worst.
Guaranteed monopolies removed any competitive discipline on regulated utilities (critical for Adam Smith's hand to work, since the pursuit of profits in the absence of competition is just profiteering). Meanwhile, regulatory oversight limiting prices only to a "fair return on capital" to protect against profiteering creates a perverse incentive to invest in things just because they're expensive -- precisely the opposite of how a market is supposed to work.
The consequence -- predictable in hindsight -- was a massive collapse in economic and energy efficiency. The electric sector had a fuel efficiency of 65 percent in 1910 and runs at just 33 percent today -- meaning we burn twice as much fuel as we need to, and emit twice as much carbon in the process.
Still, this is the largest industry in the world, exceeding $400 billion in annual revenues. That's a lot of money, a lot of jobs and a lot of media access. You cannot overstate the ability of an industry that size to skew public debate.
(This is not to suggest some master plan -- simply that when an industry that size has a consistent motivation, that motivation trickles into the public debate, just because everybody in the industry talks about it. For example, we don't need to imagine a male conspiracy in favor of hot women to get a media bias in favor of same.)
To understand why this matters for carbon sequestration, you need only put yourself in the shoes of a utility CEO. Carbon regulation is coming. Carbon regulation is potentially expensive. Your industry is a big emitter of carbon. Are you happy or sad? Happy, of course. Big, expensive things are how you make your money. Rising costs don't bother you because your cost recovery is guaranteed. Given the choice, you'd rather build expensive stuff than cheap stuff.
This is counterintuitive if you think that the world is shaped by functioning markets -- but it is a perfect storm for carbon sequestration. I can be environmentally responsible, make money, and still not face any threat of competition? What's not to love?
Indeed, if you look at how the power industry is talking about carbon regulation, it's primarily about whether or not they'll get to recover the costs. (Nothing like the debate in Gristmill and elsewhere about the most economically responsible way to control carbon. See here -- $ub. req'd.) They expend a tremendous amount of hot air espousing technically adventurous and expensive ways to control carbon (see: sequestration), rather than focusing on economically responsible carbon controls.
This runs a very real risk of becoming a self-fulfilling prophecy given the size of the players involved. When they talk, people listen. Politicians are going to naturally pick up this concept and repeat it, even if it is ecologically and economically irresponsible. Worse, it plays to the Bjorn Lomborgs of the world by "proving" that GHG reduction is really expensive. Not because it is really expensive, but because we've limited our vision of the future to those options that are really expensive.
We need not cave in to this line of thinking, but we do need to understand it.
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Comments
View as Flat
kayser Posted 10:54 pm
12 Sep 2007
Perhaps Gore's idea of the electranet is one of the ways to chip away at the system..
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Sean Casten Posted 12:26 am
13 Sep 2007
a) The problem is as much legal as technical, because so long as we don't change the rules, utilities can legally-accurately (but economically and environmentally disastrously) argue that any change of the existing rules is a violation of the 14th amendment of the constitution (no unlawful "takings" of property), on the basis that their monopoly is a contract with the state to provide guaranteed capital recovery and ergo - no matter how poorly considered that capital investment - they must be repaid. You don't fix this all at once, but once you shift the rules, you gradually wash this out of the system.
b) The biggest opportunities for competitive markets are at the load, where you can use opportunity fuels and recover waste heat - which means that you can be way more efficient, and have much lower capex (since you don't need those expensive wires). But that is also precisely the part of the grid that our paltry efforts at dereg have stayed away from. And so we find ourselves in a situation where the ability to really lower costs and carbon are blocked by laws designed to protect utility shareholders at the expense of utility consumers. (Thus, we need a lot more dereg.)
Ultimately, the key is to make a decision: do we think that the electric system is inherently impossible to deregulate, in which case we ought to get rid of the profit burden that is simply a tax on the public, or do we think that we really like markets, in which case we expose utilities to truly competitive markets (and enforce antitrust, lest we get more Enron-esque manipulation). I personally prefer the latter, but so long as we defer the choice, we suffer the consequences. (One of the ideas I liked most comes from the Galvin Institute, who has suggested that utilities ought to be grid managers - which they have historically done very well - but should not be responsible for metering or billing functions. In other words, we recognize that they have done a very good role as civil servants, but a terrible job as businesses. So let's regulate them as what they are rather than what they claim to be, and then let competitive markets address generation both upstream and downstream of utility assets without having to get into a fight with utilities about whether clean, cheap energy is in the best interest of utility shareholders.
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Colin Wright Posted 4:51 am
13 Sep 2007
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Biodiversivist Posted 8:22 am
13 Sep 2007
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Sean Casten Posted 9:19 am
13 Sep 2007
The specific paper is riddled with errors and misrepresentations from the opening paragraph, so much so that it's not worth the time for a detailed response. (For example, retail rates in deregulated states have actually risen more slowly since they deregulated than in those states which did not deregulate. Claiming otherwise is simply false. Check the DOE/EIA website and do the math yourself. Yes, the overall rates are higher on an absolute basis, but they were also higher before deregulation, so the only relevant comparison is of the relative increase, which is fairly overwhelmingly in favor of dereg.)
Notwithstanding the above though, I'd simply make the point that no one has deregulated - we've simply restructured. This is perhaps a subject for a longer post, but claiming that we've learned anything about dereg based on our slapdash efforts to reorganize a couple players is like saying you know something about fine wine because your cousin once ran a moonshine still. If Slocum and his ilk don't want to drink moonshine, that's their business. But that experience doesn't give them any ability to tell us that a nice Bordeaux doesn't taste good.
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Sean Casten Posted 11:57 pm
13 Sep 2007
Have a look at this for a much more analytically rigorous take on the restructuring debate. It is one of the better pieces I have seen on the subject.
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TysonSlocum Posted 5:45 am
14 Sep 2007
I just left a phone message for Sean at his comapny (as I prefer to talk about these things over the phone or in person), but in the meantime I'll post a couple of polite reponses to his attacks on me:
1. Sean writes, "The specific paper is riddled with errors and misrepresentations from the opening paragraph, so much so that it's not worth the time for a detailed response. (For example, retail rates in deregulated states have actually risen more slowly since they deregulated than in those states which did not deregulate. Claiming otherwise is simply false. Check the DOE/EIA website and do the math yourself."
Well, I wish that Sean would take the time to read the whole paper, which is avaiable here
http://www.citizen.org/documents/USdereg.pdf
Because, if he did, he would see that on page 6 I list a chart, detailing how rates in deregulated states are indeed rising faster than those in regulated ones. Now, Sean says that this is "false", and urges folks to "check the DOE/EIA website and do the math yourself." Well, as you can see on my chart on page 6, I provide the source of my math: the DOE/EIA, and provide their link: http://www.eia.doe.gov/cneaf/electricity/page/sales_revenue.xls
So please, I agree with Sean, and urge everyone to go the EIA web site, and do the math, and you'll get the same results I do: rates in deregulated states have been rising faster than those in regulated states.
And the New York Times agrees with me. On Sept 4, David Cay Johnston wrote "A New Push To Regulate Power Costs" (avaiable to subscribers at
http://select.nytimes.com/search/restricted/article?res=F ...)
where he cites research showing that "customers in competitive states paid an extra $48 billion for their power, compared with what they would have paid under rates in regulated states." The Times' Johnston even cites the anti-government Cato Institute in concluding that deregualtion has failed.
Who does Mr. Casten cite in his defense? A lawyer writing on behalf of the Electric Power Supply Association, which counted Enron among its members. Mr. Casten, if you can come up with some better, less self-serving sources for your claims, I'd appreciate it!
Now, on to the larger point that Mr. Casten makes: that my criticsm of deregualtion means that I love big old monopoly utilities. Wrong! Public Citizen supports a decentralized grid led by home-based solar systems. That is what I fight for every day here at public citizen. Every day the energy lobbyists at EPSA, the Edison Electric Institute, etc come to Congress and say, "we need billions of dollars to build coal power plants." Every day big utilities like Exelon come to Congress and say "we need billions of dollars to build nuclear power plants".
Public Citizen, in contrast, goes to congress and says: "Repeal all subsidies to the coal, nuclear and oil comapnies and instead invest those billions of dollars in grants avaiable to families so they can afford to install home-based solar systems, and so they can afford to make eco-friendly renovations to save energy." That is our position. Public Citizen does battle every day againt all big, polluting energy companies, whether they are deregualted power plants, monopoly utilities like Southern Company or oil companies like ExxonMobil. Remember, electricity deregulation was sold to environmentalists as a way to cripple the old utilities and promote green power. It hasn't done that. Now, people are promoting markets yet again (this time through cap and trade), convinced that the power of profit will again save the environment. this too, will fail. Forcing companies to adhere to strong environmental protections, and funnelling some of the record profits that coal, nuclear and oil companies are currently earning and instead invest that money to help American families produce our clean energy future.
Best,
Tyson Slocum
Public Citizen
http://www.citizen.org
(JavaScript must be enabled to view this email address)
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