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A Low-Voltage Energy Bill

While a few provisions are worth embracing, most of its 1,724 pages represent a waste of good timber.

Fortnightly Magazine - October 2005

the states which have yet to undergo state regulatory restructuring), the benefits are capitalized into the market value of existing assets and stock prices. This will make existing asset holders richer, but won't help new entrants to the market. If entry barriers do not exist (which is generally the case in states that have undergone regulatory restructuring), the subsidies will induce entry and dissipate any initial positive wealth effects. The net result would be too much investment in the subsidized activities but no extra returns to shareholders or employees.

One can't help but wonder why subsidies for inframarginal electricity sources are necessary. After all, with natural gas prices double what they were only a few years ago, there are already plenty of profits, and thus plenty of incentives, for investors to consider alternatives to natural gas-fired electricity-with or without the energy bill.

A possible answer is that the most important test for the economical viability of coal and nuclear facilities is not the price of natural gas today but the price of natural gas over the operational life of the coal, nuclear, and renewable energy facilities that Congress hopes will be built as a result of this bill. The price of natural gas in North America is higher than the world price because of the limited ability to ship liquefied natural gas (LNG) into the United States. Most analysts believe that new LNG terminal construction, which will integrate the U.S. natural gas market more completely into world markets, will lower domestic natural gas prices. In fact, LNG is commercially viable at prices that are half their current North American level. That would suggest that the market opportunity for nuclear and "clean" coal power might well be gone by the time any new facility were to come on line.

If that scenario comes to pass, the investments in "clean" coal, nuclear, and renewable energy plants induced by the energy bill will represent a net waste of capital. Accordingly, the subsidies offered by the legislation are either unnecessary (duplicating incentives already in place) or wasteful (inducing investments that don't have economic merit on their own).

Electricity Regulation Nitty-Gritty

Two words-"markets" and "deregulation"-summarize electricity policy over the past 15 years. But the California meltdown and the Northeast blackout drastically have reduced politicians' appetite for electricity regulatory reform. For legislators and voters, change from the old, vertically integrated, rate-regulated regime is associated with bad outcomes. That's because the states that introduced the most wide-ranging regulatory changes also experienced the most problems over the last several years.

A close reading of the bill gives contradictory signals about whether the legislation supports regulatory restructuring (characterized by mandatory open access to transmission lines, small merchant natural gas-fired electricity generation, vertical de-integration, and competitive wholesale markets) or the older, more traditional regulatory regime (characterized by vertically integrated organizational structures and large-station coal and nuclear power generation). That should not come as a surprise. Congress does not like zero-sum games. It prefers to distribute resources and positive political signals to as many groups as possible.

Some provisions suggest that Congress supports