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Green Quagmire

The black art of pricing social costs.

Fortnightly Magazine - January 2010

the public-funding pie. The invisible hand of the market is remotely controlled by politicians and their most vocal and generous constituencies.

This might seem like a damning indictment of both the industry and its lawmakers, but arguably it’s a reasonable price to pay for an electric grid that has been the envy of the world for decades. Our utilities are investment-grade companies with ready access to low-cost capital, which benefits the customers who ultimately pay for infrastructure investments. Over time, we’ve tapped a variety of fuel sources to create a highly reliable system, and on the whole, rates are reasonably low. America wouldn’t have the world’s most powerful economy today if it weren’t for the regulated—and subsidized—utility industry.

But because the industry operates under so many layers of subsidy, regulators can’t just set environmental standards and expect markets to work. Prices never will be transparent within the industry’s tangled mess of government grants, guarantees and tax incentives. And the quagmire is getting deeper as lawmakers attempt to internalize social costs in market transactions. This is happening at the legislative level, through carbon cap-and-trade, renewable portfolio standards (RPS) and markets for renewable energy credits (REC), and also in such regulatory arenas as FERC’s demand response and transmission pricing proceedings.

As Publisher Bruce Radford observes in this month’s Commission Watch column (“Wellinghoff’s War ”), “green-grid proponents want FERC to consider factors such as … greater fuel diversity, improved resource adequacy, lower and more stable rates, and access to new generation technologies.” But as ongoing policy battles show, appraising and apportioning the costs of such factors is a black art at best. “There should be no non-quantified costs or benefits,” Radford quotes the Ohio PUC. “Everyone should be charged in relation to the amount [of energy] they inject or withdraw. Failing this, any attempt to quantify is purely speculation.”

Unwinding the Mire

Unfortunately, in the process of crafting America’s energy strategy, lawmakers have little choice but to engage in the black art of quantifying social costs. And the product of this black art usually turns out to be some kind of subsidy.

This stands to reason, because from a political perspective, subsidies appear to be highly effective policy tools. They seem to reward precisely the behavior (and the constituencies) that policy makers want to reward. By contrast, such straightforward regulatory constraints as emissions standards are only punitive. They can be very effective at driving private investment dollars toward clean energy infrastructure, but the politicians who enact them make more enemies than friends among the regulated community. Moreover, environmental standards aren’t well suited to dealing with other policy concerns, like import dependence and price volatility. And direct intervention in those areas—vis-à-vis import tariffs and price controls—poses even larger barriers to free market competition.

America’s energy markets are evolving to achieve a demanding set of requirements, including maintaining reliability and affordability while also internalizing an array of external costs. In the midst of the industry’s subsidy morass, perhaps the best we can hope for is an honest and accountable approach to shaping these new market