Energy Bill’s Nemesis?

By Jerry Taylor
This article appeared in The Washington Times on December 24, 1991.

Although the environmental lobby is taking full credit for the defeat of President Bush’s energy bill in the Senate last month, opposition to oil exploration in the Arctic National Wildlife Refuge did not play the decisive role in the bill’s defeat.

Despite media reports to the contrary, industry analysts remain convinced that there aren’t 41 votes in the Senate to lock up ANWR indefinitely. Postmortems of the Nov. 1 vote indicate that it was opposition to reform of the Public Utility Holding Company Act (PUHCA), not ANWR exploration, that actually made the difference between victory and defeat for the president’s bill.

Charles DiBona, president of the Petroleum Institute, argues that “the success of opponents to opening up the electrical grid may have been the biggest surprise” behind the bill’s defeat. Industry insiders estimate that at least a half dozen votes opposing the Johnson-Wallop bill were motivated solely by opposition to PUHCA reform, and that for perhaps another half-dozen senators, PUHCA reform was a significant factor in their decision to vote no. While the media is mesmerized by the symbolic showdown between oil rigs and caribou, the fight over deregulation of electricity generation is quietly shedding more political blood than any other part of the president’s National Energy Strategy. The reason is that PUHCA protects electric utilities from serious competition, and a number of utility executives prefer to keep it that way. Since utility executives can’t go to the Senate and argue, “Protect our monoply,” they go to the Senate and argue, “Protect our consumers from the greedy forces of the marketplace.”

For example, Ray Snokhous, senior vice president of Houston Industries, warns darkly that allowing for competition in electricity generation would leave consumers “at the mercy of entrepreneurs who have no obligation to serve.” Like a man who hasn’t picked up a newspaper in 10 years, Mr. Snokhous argues that placing the “future in the hands of entities driven solely by profit will result in increased consumer costs and reduced reliability.”

Currently, electricity power producers who would like to operate in more than one state or be involved in more than one line of business are subject under PUHCA to a nightmarish array of corporate ownership and operating controls administered by the Securities and Exchange Commission. Proposals to reform PUHCA would exempt those businesses from the 1935 statute and free them to build, own and operate electric powerplants. Although PUHCA reforms would provide for the option of competition, it would not force utilities to procure electricity competitively. PUHCA reform would merely allow utilities the option of contracting with a wide range of third parties for baseline energy.

Most economists agree that providing for competition in electricity generation would result in lower capital costs for new generating capacity, improved generating efficiency, fewer cost overruns, accelerated research and development and lower electricity prices. Moreover, innovative alternative fuel sources and technologies would be given the opportunity to compete fairly in the marketplace. PUHCA reform could be an environmentalist’s best friend and a more critical part of U.S. energy strategy than either automobile fuel-efficiency standards or ANWR exploration.

Yet the parade of horribles trotted-out by the regulators and monopolists of the electric utility industry sound suspiciously like the cries of the Soviet nomenklatura threatened by market competition. That’s no surprise; utility executives are not businessmen - they are apparatchiks in the classic sense. An electric utility company is legally protected from market competition. Prices are set by “public commissions.” Rates of return are guaranteed, so profits have little to do with market performance or efficiency. In short, there is little functional difference between a Soviet power directorate and the average American electric utility. Elsewhere, we call this “socialism.” In the United States, we call it “the regulatory compact.”

The Electric Reliability Coalition (ERC), an alliance of utilities that oppose PUHCA reform led by Houston Industries, argues that “the same lures of easy profits, financial schemes and alleged lower costs that led to the deregulation disasters of the ’80s - S&Ls, airlines and telephones - are back.”

Really? The Council of Economic Advisers reports that airline deregulation lowered fares by 15 percent and saved American consumers $11 billion from 1978 to 1986. The Brookings Institution estimates that long-distance telephone rates have fallen 12 percent since the breakup of AT&T. Finally, S&Ls became insolvent largely because the government was solely responsible (and uniquely qualified) for defining what an S&L was, how it was to operate and what businesses it could enter. In return, the primary liabilities of the industry were guaranteed by the government. Sound familiar? It should, because of the “regulatory compact” between the electric utilities and government is based on the same disastrous model as that which governed the S&Ls.

Next, the ERC argues that opening up the wholesale market for electricity to competition “will heap $100 billion in highly leveraged debt onto the U.S. economy for projects that aren’t needed.” First of all, only the market can decide what projects are or aren’t needed. Why not let each utility decide for itself whether independently produced electricity makes sense? After all, if independent power generators are not needed, they won’t find any business. Regarding the debt question, it’s difficult to believe that shaky, fly-by-night generators of electricity would be able to generate the capital needed for operation in the first place. Nor is it likely that utilities would willingly sign contracts with risky third-party generators. In fact, the vast majority of independent power producers are major energy companies such as General Electric, Dow Chemical, Westinghouse and Bechtel.

Consumer groups also warn with alarm that “self-dealing” will result if utilities are given the opportunity to contract for electricity with their own subsidiaries. So? Isn’t the current regime of vertical integration indistinguishable in fact from “self-dealing?” And why is “self-dealing” assumed to be self-evidently bad? The Japanese system of kiretsu is virtually built on self-dealing, and consumers have benefited from quality products at affordable prices.

The ERC also complains that exempting independent power producers from PUHCA would be unfair since they would still be regulated under the act. Yet nothing would prevent existing utilities from forming subsidiaries to enter the marketplace of wholesale electricity generation. What the industry really means to say is that, while they are required to distribute and retail electricity upon demand in their service area, independent power producers are not. This is akin to arguing that it’s unfair for independent auto parts manufacturers to compete with General Motors because GM must also manufacture and sell cars.

Not all utility executives, however, follow the “monopoly forever” crowd led by Houston Industries. Given the fact that public utility commissions have made electric utilities write-off 10 percent of all capital investments ($13 billion) over the past five years, a growing number of utility executives are no longer willing to bet the company on large new base-load power plants. Experts estimate that independent power producers can supply half the industry’s new capacity needs, and many utilities are anxious to contract for their services. Why shouldn’t they be allowed to do so?

Yet the ERC and its allies fear that allowing utilities to contract with third parties for electricity would ultimately lead to deregulation of the transmission system and even the retail sale of electricity itself.

Let’s hope so. As the ERC puts it, “The issue is all about who will own and control the production and distribution of electric power in America. Will it remain vested with community-based regulated utilities, obligated to serve all customers? Or, will it be placed in the hands of ‘loopholers’ whose sole motivation is quick, unregulated profit?”

Exactly. The ultimate question is, who will control the means of production? The state or the market?

Jerry Taylor is Director of Natural Resources Studies at the Cato Institute