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The leaky bucket

Apr 12th 2001 | SAN FRANCISCO AND WASHINGTON, DC From The Economist print edition

It is hard to tell who currently has the least coherent energy policy: Gray Davis or George Bush

Balance of power needed THE United States is stuck in the middle of two very different “energy crises”. The first, much hyped by the Bush administration, is a national affair, stretching across many different fuels, where the country as a whole is direly in need of a comprehensive energy policy. The second is a largely Californian, purely electric affair, centred around rate hikes, black-outs and the perilous condition of the state’s two main electric utilities. Both crises stumbled forward this week—though to what end is not clear.

California’s problems stem from a flawed attempt to “deregulate” its electricity market five years ago. Its two main utilities, Pacific Gas & Electric (PG&E) and Southern California Edison, buy power in (the pricey) wholesale spot market but sell it at a much lower fixed rate to consumers. To bail them out, California’s governor, Gray Davis, has committed the state to underwrite their electricity purchases, whilst condemning the out-of-state power providers for making profits.

Two weeks ago, the state’s Public Utilities Commission raised rates by more than 40% (mainly for business customers). On April 5th, Mr Davis admitted that consumers would be hurt too. He had tried to deflect the increases away from voters (he is up for re-election next year). The next day, PG&E, the state’s largest utility, serving its northern half, filed for Chapter 11 of America’s bankruptcy law (see article).

Mr Davis, who had been negotiating with PG&E and Edison to buy their transmission lines (as a way of injecting some cash into the firms in return for keeping rates down), promptly lambasted PG&E. But he redoubled his efforts with Edison: on April 9th, it agreed to sell its part of the transmission grid to the state for $2.8 billion, to use its generators to provide cheap power to the state for ten years and to drop a lawsuit trying to force an increase in the rates.

Mr Davis’s position looks increasingly unhealthy. Less than half a grid hardly gives him the control he sought. Some of his fellow Democrats want him to follow up his own rhetoric by simply commandeering some of the independent power stations around the state. Mr Davis’s own favourite option seems to centre on persuading the federal government to support “temporary” price caps in the wholesale market.

That looks unlikely. Curtis Hébert, the head of the Federal Energy Regulatory Commission, is an avid free marketeer who rejects the notion of price caps on the wholesale market. George Bush has little interest in helping Mr Davis (who would like to run against the president in 2004). The president has made it clear that he believes that California’s problems are best solved by Californians themselves.

All very statesmanlike and economically liberal. In fact, in an eerie re-run of Mr Davis’s initial grandstanding, the president is trying to skew the Californian mess to his own advantage. The fault, he implies, is not because of any of the above causes, but because America is in the grip of an energy crisis. To that end, Dick Cheney, the vice-president, is in charge of a cabinet task-force that has been beavering away for weeks developing a “comprehensive energy policy” that will be presented to Mr Bush in May.

The main themes of this review are already clear. America supposedly has a massive shortage of electricity, natural gas and oil. The answer is not just more energy, but more American energy. To help the country toward energy “independence”, Mr Bush is pushing for oil and gas exploration in the pristine wilds of Alaska and other protected areas. Recently, Mr Cheney said that he intends to encourage new nuclear plants to help the nation out of its supposed crisis.

The premise that America has an energy crisis makes no more sense than the Californian Democrats’ railings against the free market. Just last week, the government’s own Energy Information Administration issued a report suggesting that summer gasoline prices will fall from last year’s levels, that oil refinery output is set to rise, that natural gas prices have moderated and confirming that heating oil stocks are 11% higher than last year at this time. There is no embargo by a hostile cartel, no war or revolution disrupting supplies and plenty of supplies of oil and natural gas for the moment.

A more truthful verdict would be that America does have an energy-infrastructure problem. Red tape, environmental laws and hostile home-owners all make it difficult to build new refineries, pipelines, power plants or any other essential bit of the energy network. Partly as a result, reserve capacity in such sectors as electricity, natural gas and gasoline are low by historical measures. The Cheney task-force has hinted that it will look into ways to make building or expanding such infrastructure easier.

But that still leaves the question of which industries should get which incentives. The suspicion is that Mr Bush will automatically favour Big Oil. Last month, Spencer Abraham, the energy secretary, gave a surprising speech in which he sought to debunk all the talk of favouritism to fossil-fuel lobbies. Instead, insisted Mr Abraham, his energy policy would be market-based.

Mr Cheney’s nuclear option hardly bolstered this idea. America has not built any nuclear plants in two decades. Left to its own devices, the market would not build one today either. A new nuclear programme would require massive subsidies.

Mr Bush’s budget, released this week, also makes a mockery of Mr Abraham’s claims. It calls for the Energy Department’s core solar, wind and other renewable energy programmes to be cut by more than half to $186m. The department’s efficiency-research programmes would also be cut—with the sharpest cuts falling on efforts to help industry reduce its use of power. Energy efficiency standards are also being suspended. Such rules are hated by industry, but Bill Richardson, Mr Clinton’s energy secretary, reckons that more efficient air conditioners, washing machines, refrigerators and so on could save $27 billion over the next 30 years.

Big Oil, big mess

Perhaps most predictably of all, overall spending on fossil fuels is to rise slightly. Incredibly, Mr Abraham’s budget calls for adding a hefty $150m in funding to research into so-called “clean coal”—an oxymoron by any measure. The General Accounting Office recently condemned the Clean Coal programme for wasting taxpayers’ money.

Mr Abraham defended the cuts by arguing that conservation and efficiency programmes are wasteful, and have not yielded results that can be applied in the marketplace. As evidence that the administration is not “pro-oil”, he cites its willingness to get rid of Petroleum Vision, a small research programme. His officials also point out that some $1.2 billion could flow to alternative energy plans as part of a package to open up the Alaskan wilderness to drilling for oil. But even some Republicans are backtracking on this proposal.

So will the Cheney task-force be bound by Mr Abraham’s pious pronouncements of market discipline? Will the team really stick to his principle of not lavishing subsidies or tax breaks on industries big enough to afford to finance themselves? The chances are about as likely as the idea of California avoiding black-outs this summer.

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-- Martin Thompson (mthom1927@aol.com), April 22, 2001