May 19, 2001

Just Say "No" to the Energy Plan

by Jerry Taylor

So the great energy fight of '01 is on. Conservatives are doggedly rallying around the newly released Bush energy plan while liberals are attacking it with relish. Unfortunately, the fight is nine parts political theater to one part policy -- and that "one part" of policy is so pregnant with economic mischief and counterproductive rhetoric that it's beyond me why conservatives are so determined to play the role the administration is casting for them.

First of all, why are free-market types cheering the introduction of a "comprehensive national energy strategy"? After all, conservatives didn't cheer a "comprehensive national Internet strategy" when one was proposed by Al Gore, a "comprehensive national industrial strategy" when one was proposed by Clinton Labor Secretary Robert Reich, or a "comprehensive national health-care strategy" when one was proposed by Hillary Clinton. Conservatives as a general matter believe that the government ought to leave markets alone and that "comprehensive national economic strategies" are things that old Soviet commissars and young French socialists are in the business of promoting, not free-market American presidents.

"Energy's different," they say. Excessive regulation and environmental opposition have shut down energy production and delivered us into a mess that only a "comprehensive national energy strategy" can sort out. Really?

Without the guidance of a "comprehensive national energy strategy," investors are currently pouring billions into the energy sector. For instance, we're currently in the midst of a power-plant construction boom, with some 90,000 megawatts of new electricity capacity scheduled to come on line by 2002 and a staggering 150,000-200,000 megawatts by 2004. This will not only burst the electricity-price bubble but will probably produce an electricity glut in the near future. Similarly, so many billions are flooding into the natural-gas market today that futures contracts are being made at half the price of today's wholesale spot price. And high gasoline profit margins are inducing foreign refineries to enter the American market for the first time in decades and bringing new investment in domestic refining capacity as well. Barring some unforeseen supply disruption in the refining sector, gasoline prices will actually begin to decline slowly but steadily as the summer wears on.

What about all those "Not-In-My-Back-Yard" activists supposedly blocking the new wires and pipelines necessary to get energy from producers to consumers? You can certainly make an argument that the real problems in the energy sector are delivery problems, not production problems, but it's unclear whether NIMBY is at the root of it.

Incumbent utilities have little incentive to build new transmission lines that would make it easier for ratepayers to buy cheaper power from competitors in neighboring service territories. Nor do utilities have an incentive to invest in new power lines when the profits allowed them by the Federal Energy Regulatory Commission are too low to make those investments particularly worthwhile. And with transmission rules still up in the air and unsettled at both the federal and state level, regulatory uncertainty is likewise dampening investment.

Similarly, there is little evidence that investors have been inhibited from increasing pipeline capacity when profit opportunities present themselves. The Energy Information Administration notes that pipeline capacity "has grown with end-use demand, and as new supplies have developed, new pipelines have been built to bring this gas to markets." The Gas Research Institute likewise concludes that "growth in pipeline capacity is not a constraint on growth in gas supply. If supply is available, history has demonstrated that the pipelines will be built as needed. It is simply an investment and engineering issue."

If government's not in the way, why then did energy prices shoot up in the first place? Well, energy markets, like most commodity markets, are subject to boom and bust cycles. Energy prices after adjusting for inflation have been plummeting more or less for 15 years. Investors took money out of production and exploration budgets because profits were hard to come by. The bust suddenly ended last year, catching almost everyone by surprise, and the boom is now on. Investors are scrambling to expand supply, but capital investments take time. Let me make this simple: High prices = high profits = increased investment = price declines. It might take some time to get from here to there, but government's record in speeding up the process is abysmal.

Regardless of President Bush's gloomy rhetoric, this isn't the beginning of America's descent into the long dark economic night unless the feds can somehow come to the rescue. There's plenty of energy around for suppliers to get their hands on and plenty of reason for people to conserve in the face of high prices. Rather, we're experiencing the economic equivalent of a low-pressure front that will soon pass (indeed, already is passing) as long as government doesn't do anything foolish in the meantime.

So how does the administration's plan rank on that front? While there are literally about a hundred proposals that call for the government to "consider" this, "examine" that, and "investigate the possibility" of the other thing, the concrete proposals within the plan's 170 pages are few and far between. Let's look at the highlights:

Drilling on Federal Lands. Even if you're happy digging up the tundra, there's little reason to think that drilling in ANWR will do much to bring down energy prices. Industry's best estimate is that ANWR could produce about 1 million barrels of oil per day at its peak. That's a 1.25 percent increase in global production that, all things being equal, would reduce world oil prices by about 10 percent, from $25 per barrel to $22.50. While that's nice, it wouldn't do much of anything to deliver America from the power of the OPEC cartel, particularly since OPEC's likely reaction would be to cut its own production to maintain world crude prices at today's levels.

The administration would also like to increase industry access to various fields on federal lands in the lower-48 and in the Gulf of Mexico, primarily to get at natural gas deposits. That's fine, but again, it's not as if, without those new fields, existing gas wells would run dry.

None of this is to say that the federal government shouldn't be a more reasonable economic steward of public lands. But it is to say that the administration is overselling the benefits that those policies will deliver to energy consumers.

Federal Eminent Domain Power For Electricity Transmission. As noted above, there are lots of reasons why utilities aren't investing much in new transmission. NIMBY is only one of those reasons -- and perhaps not even the most important. Having the feds step in and force private property owners to cut deals they don't want to make with power companies seems antithetical to an administration that likes to talk about its commitment to private property rights.

The administration's energy plan calls for the feds to adopt incentive-based rate making for transmission investments in lieu of the present rate-of-return regulatory regime. This ought to help some, but a better idea is to remove rate caps on transmission charges entirely. Still, let's wait to pull out the federal guns on private landowners at least until we know they're absolutely needed.

Tax Incentives for New Energy Production. If you've got an energy lobbyist in Washington, has Dick Cheney got a sack of money for you! Everyone's a winner: oil; gas; hydrogen; hybrid and fuel-cell vehicles; superconductors; landfill methane; coal (make that "clean" coal, the adjective that is de rigueur whenever the word "coal" is used by this administration); ethanol; nuclear fission; nuclear fusion; solar; wind; bus, truck and automobile engine manufacturing; fuel cells; biomass; industrial cogeneration plants; and producers of energy efficient this and that. With this blizzard of new federal research and development initiatives, accelerated depreciation allowances, production tax credits, consumption tax credits, and subsidies for energy businesses competing in foreign markets, don't expect the tax code to get any more comprehensible or your tax burden to get any lighter anytime soon.

It's unclear why we need to bribe investors with tax money to take advantage of profit opportunities, and government's track record at turning dubious ideas that don't attract private investment into wonderful new economic toys is pretty bad (remember synfuels?). But hey, corporate welfare is what makes the political world go around.

Energy Welfare. If you're poor, might soon be poor, or live in the Northeast, the Bush administration feels you pain. More tax money to the notoriously wasteful Low Income Energy Assistance Program; more tax money for the Weatherization Assistance Program; and more money for the Northeast Heating Oil Reserve. For this we elect Republicans?

Regulatory Fine-Tuning. This is a story of the good, the bad and the ugly. The good: repeal of the antiquated Public Utilities Holding Company Act (PUHCA), which dictates both the organizational structure and permissible service territories of electric power companies; and expedited renewal of permits for construction of the Trans-Alaskan natural gas pipeline. The bad: rumblings about increasing Corporate Average Fuel Efficiency (CAFÉ) standards for automobiles, standards which are simply back-door taxes on big cars, SUVs and mini-vans; further federal prohibitions on energy "inefficient" (read "cheap") appliances; and a directive to federal agencies to pursue international agreements to address global climate change (haven't we had enough of that for a while?). The ugly: tighter regulation of power plant emissions of sulfur dioxide, nitrogen oxide and mercury. Is more environmental regulation of power plants really necessary or really helpful at the moment?

So what exactly have we got here? The political equivalent of a sugar pill. The Bush energy plan won't do much good, but it won't do too much harm either. And that's pretty good for government work.

On balance, we'd be better off if the administration had not opened this can of political worms. Had the administration simply focused on tinkering with regulations where necessary and revising federal land-use rules where politically possible, we would not need to put up with so much chaff for so little wheat. Instead, we're now in the midst of an empty but still white-hot argument about whether we should more heavily subsidize this rather than that. We're also subjected to a bizarre debate about whether "the nation" (as if we have some command-and-control, Soviet-style economy) should invest more heavily in supply or whether "the nation" should invest more heavily in conservation.

And to make its case, the administration is finding it useful to dredge up ludicrous arguments, such as the horrific implications of importing oil or the apocalyptic consequences of having investors go about their business without some detailed, comprehensive federal energy planning document to guide them.

Free-market types have no business in this intellectual ghetto. Nor do they have any business promoting most of this interventionist, corporate-welfare agenda.

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