NARUC Winter Meetings: A Confab to Distort Energy Markets

I attended the National Association of Regulatory Utility Commissioners (NARUC), the trade association of public officials and staff that regulated utilities, from Sunday, February 3 to Wednesday, February 6.  It was quite a depressing experience.

I was part of a team in the 1980s and 90s that promoted a transition in natural gas policy from a statist orientation to one of greater reliance on market forces. Needless to say, that transition has been phenomenally successful. (I might also note that such a transition in telecommunications was also very successful.) Yet, I doubt I heard the word competition, deregulation, or reliance on market forces five times at the conference. Rather, nearly every panel and discussion centered around policies and programs that promoted a statist approach to regulation. Even allowing for the legitimacy of intervention into utility markets to address externalities and monopoly problems, there was precious little enthusiasm for using market mechanisms to address these problems.

Most depressing of all was the sheer number of nonprofit organizations who had a vested interest in distorting energy markets and the complete lack of organizations whose goal was to promote efficient operation of energy markets. Industry trade associations can sometimes be counted on to promote policies that would rely on markets but they do so largely from a self-interest perspective not from the perspective of what is most efficient for society.

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Pickens Takes a Step in the Right Direction

I am not a big T. Boone Pickens fan.  He has shown a propensity to promote public policies that are both unsound and self-interested.  Lately, he is a fan of HR 1380 (, which gives tax credits for every form of use of natural gas except iPods (and that can’t be far behind.)

One of Pickens’ hobby horses is to use less natural gas for electric generation and more for natural gas vehicles, using the cudgel of government to achieve that end. He’s especially enamored of using natural gas for long-haul trucking.

Recently, a company in which he is a major investor, Clean Energy Fuels Corp, entered into an agreement with General Electric (another company enamored with responding to government subsidies and mandates) to build liquefied natural gas facilities for fueling stations that would cater to long-haul truckers. “General Electric Co (GE.N) reached a deal to sell equipment to Clean Energy Fuels Corp (CLNE.O), which is building out a series of liquefied natural gas fueling stations for U.S. truckers.” Reuters Article

In reading the Reuters article, I can find no instance in which this deal relies on government subsidies or mandates. While I may have my doubts about the long-term viability of natural gas as a transportation fuel (liquid fuels – diesel and gasoline – seem to have characteristics that make it a superior choice for mobile uses), I am the last one to judge where entrepreneurs put their money especially when they are uninfluenced by government subsidies or mandates.

Thus, I applaud Mr. Pickens reliance on market forces to try to change the direction of the use of energy in the US, especially given the new-found abundance of natural gas as a result of fracking technology. Let’s hope that this is not a momentary lapse in Mr. Pickens penchant for using and abusing public policy to achieve dubious energy policy goals. But rather is recognition that market forces should be the driving feature of change and innovation in energy markets.

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President Obama Reintroduces Climate Change into the Debate

It’s Baaack!  Just when you thought it was passé, President Obama has given new life to the climate change debate.  In his victory speech he said: “We want our children to live in an America … that isn’t threatened by the destructive power of a warming planet.” Link to Transcript

caem! accepts that carbon emissions may be causing some global warming.  caem! recognizes, however, that: there are as yet significant uncertainties; that policy must be rigorously market-oriented; and that polices must be effective, not wishful thinking.  caem! largely adopts the positions of Bjorn Lomborg in his books Cool It (2007) and Climate Solutions (2010) that monies proposed for climate change policies must be measured against other positive things for which that money could be used.  When such a rigorous calculation is made, immediate radical carbon mitigation is a very poor investment and harmful to economic growth and third world aspirations.

That doesn’t mean we should do nothing. Clearly Lomborg’s suggestion about an aggressive research and development program that focuses on the lease cost method of addressing climate change is a solid first step. But it does mean we need to be very judicious in the actions that we take to make sure that we are not wasting money and that there is a reasonable chance that our actions will result in successfully addressing the problem. For example, the Regional Greenhouse Gas Initiative (RGGI) has been adopted by 10 states (now nine since New Jersey has suspended its participation) in the Northeast.

RGGI is a cap and trade program to reduce carbon emissions. If done successfully, this will raise the price of electricity to consumers in the Northeast. Question however, whether 9 states reducing carbon emissions will have any demonstrable effect on global warming in the year 2100. Possibly as an indication of leadership and symbolism RGGI may make some sense. But in light of the other challenges that exist both for the Northeast and the nation, RGGI seems misguided.

But clearly the reelection of Pres. Obama has given new life to the debate over climate change, a debate that had been moribund for the last several years. So we need to gear up and address questions not only related to energy policy but now must also address questions related to climate change.

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Neither Candidate has a Plan for Electric Infrastructure

Electric transmission is the elephant in the old Indian parable where the blind men feel a part of the elephant and describe it:  the leg is a tree, the tail a whip, the trunk a snake, the ears a fan.  Different states and the federal government govern different parts of the transmission system and it is not surprising they have different policies and views on how to treat transmission.

Transmission is in need of a dramatic transformation.

  • It is old and creaky.
  • Electricity demands are increasing in the digital age.
  • Some think cars should run on electricity.
  • Mandatory renewables has to get from where the wind blows to where people flick light switches.
  • The current transmission system was simply not designed for modern expectations of use.

Electricity is becoming increasingly the central nervous system of the nation as seen recently what happens when we lose it for even a short time.  Hurricane Sandy teaches us yet again the importance of resilient, adaptive, robust electric infrastructure.  Certainly nothing could have withstood the violence of Sandy in NY and NJ.  But methinks we might have survived a bit better with a massive overhaul in our policies for electric infrastructure.

We have revolutionized the policy and operation of other network industries in the last 30 years;

  • Telecom (1982 decision, implemented 1984);
  • Railroads (1980);
  • Trucks (1978 interstate, 1994 intrastate);
  • Airlines (1978);
  • Natural gas (1983 to 1992);
  • Cable (1996).

All have been successful and provided enormous benefits to consumers.

So what do we need to do:

  • Electricity is interstate commerce.  The federal Government must preempt states from policies relating to transmission (every other network industry did).
  • The federal government must then set an aggressive policy.
  1. Force the sale of the pieces to three entities that will operate transmission under FERC Regulation, similar to natural gas pipelines.
  2. Force distribution companies to divest of generation and then deregulate generation. Government should sell all its generation.
  3. Force distribution companies to get out of the customer business.  Let marketers market to consumers just like gasoline customers.
  4. Transmission and distribution should be considered the equivalent of privately owned highways: open access with tolls.

I am not late to this party.  Attached are some links going all the way back to 2002 when I was raising a red flag about the creaky transmission system.  Not much has changed.  It is NOT a utility problem; it is a political leadership problem.  We need a radical shift in policy to let/tell the utilities/states what to do.  I am a market conservative so arguing for more federal government control is not my usual motif.  Yet this is a clear instance of the need to exercise the interstate commerce clause to fix the problem (much as we did in other network industry reforms).

Nation’s Energy Leaders Asleep at the Switch; CAEM Vindicated in 2002 Prediction of Blackout

Tragically, neither candidate has addressed this in their energy plans.  Crisis and Energy Markets has issued report cards and both candidates ignored these issues.  See the REP Index on  

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The Folly of Energy Independence: Case Study Close to Home

DAVID KESTENBAUM has a very short but to the point blog post on Canada’s energy (gasoline/oil) independence.  They are energy independent and it makes absolutely no difference.  Their prices fluctuate with world oil prices and are no cheaper than in the US.

So let’s stop the silliness of predicating every bad ecoviergy policy idea on a desire for energy independence.

See Kestenbaum:

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CRISIS & energy markets! issues REP Index Report Cards: Romney barely passes, Obama Fails

As of 8 am today (October 24), CRISIS & energy markets! issues the Responsible Ecoviergy Policy Index (REP Index).  The first two victims are the Romney Plan (passed with a 75 or a C) and the Obama Plan (failed with a 55 or an F).  To learn more about the REP Index and get the REP Report Cards, go to

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Obama Issues Plans for 2nd Term: REP Index Comments

President Obama issued a document that lays out his plans for a second term  Below is a quick REP Index ( reaction to the energy component of the plan.

Obama Recommendation: Developing homegrown energy: We’ll cut our oil imports in half, produce more American-made energy—like oil, clean coal, natural gas, and new resources like wind, solar and biofuels—and create hundreds of thousands of jobs in the natural gas industry while doubling the fuel efficiency of our cars and trucks.

REP Index comment: “Homegrown energy” is not a legitimate economic goal.  “Efficient energy” is the right focus.  See blog posts below on Oil Imports and Energy Independence.  Natural gas vehicles should be a function of market forces not government encouragement or mandate.

Obama Recommendation Cut net oil imports in half by 2020. President Obama is raising the bar on his previous goal of cutting imports by a third, or 3.7 million barrels a day, by 2025.

REP Index comment: Cutting oil imports is not an efficient goal if it means denying ourselves cheaper energy. See earlier posts on oil imports in energy independence.

Obama Recommendation To reach this goal, he will pursue an all-of-the-above energy strategy.

REP Index comment: An “all–of–the–above” energy strategy is like having an all-of-the-above music listening strategy in which the government continues to support 8 track tapes (most reading this will not even know what an 8 track tape is) in order to make sure they get their fair market share. Apparently the government would think it dangerous that DVDs are cornering the market on video replays over VHS. The market will determine whether it values diversity. If gasoline for transportation and fossil fuel for electric generation are the market choice after externalities have been internalized than that should be supported even if it means less renewables and less reliance on natural gas in the transportation sector.

Obama Recommendation Opening up millions of acres for exploration and development, including more than 75 percent of recoverable oil and gas resources in the Gulf of Mexico and the Arctic.

REP Index comment: Excellent recommendation, but why not 100%.

Obama Recommendation Expanding domestic oil production by reducing the review period for drilling permits by as much as two-thirds while implementing important safety measures to help prevent another environmental disaster.

REP Index comment: Excellent recommendation, as long as safety measures do not become an excuse for government intervention in which costs far outweigh the benefits.

Obama Recommendation Doubling fuel economy standards, an essential step toward energy independence that will save 2.2 million barrels of oil a day by 2025 while effectively halving many families’ gasoline bills.

REP Index comment: Again see earlier posts on oil imports in energy independence. CAFÉ standards are grossly inefficient and dangerous. If market prices for gasoline drive consumers to more efficient automobiles then so be it. But for the government to mandate technology standards to achieve higher levels of vehicle efficiency is the very antithesis of good public policy. Friedrich Hayek declared that such standards suffer from fatal conceit. Suppose it turns out that the Middle East achieves some degree of political stability and we are thus saved from paying a substantial premium for oil.  Gas prices plummet and consumers decide they want cheaper cars with lower mpg.  Why should government deny consumers that option?

Obama Recommendation Expanding the use of ethanol and other biofuels, including implementing a renewable fuel standard that will save over 300 million barrels of oil by 2022.

REP Index comment: There is no way to conceive of achieving this other than with government mandates and subsidies and putting government in a position to pick losers and losers.  As such, this will lead to increasingly dysfunctional ecoviergy markets.

Obama Recommendation Promoting advanced vehicles, including natural gas, electric, and hybrid electric vehicles, while investing in clean domestic energy sources including wind, solar, clean coal, nuclear, and biofuels.

REP Index comment: There is no way to conceive of achieving this other than with government mandates and subsidies and putting government in a position to pick losers and losers.  As such, this will lead to increasingly dysfunctional ecoviergy markets,

Obama Recommendation Support 600,000 natural gas jobs by the end of the decade. To safely develop natural gas—an abundant source of American energy—and support more than 600,000 jobs.

REP Index comment: Perfect example of Frederic Bastiat’s theory of the broken window fallacy.  We can increase jobs for glaziers by throwing rocks through windows.  But what is not seen is the number of jobs lost by having to pay for the new windows.  Spain lost roughly 2.5 jobs for every green job created and the green jobs are disappearing as subsidies and mandates are removed because of high energy prices and high unemployment in Spain (25%).

Obama Recommendation Streamlining the oversight of natural gas drilling while taking steps to protect the quality of our air and water and requiring the disclosure of chemicals used in hydraulic fracturing on public lands.

REP Index comment: Beware enviros and natural gas fracking.  Gas fracking means a hundred years of abundant natural gas and thus squeezes out renewables.  Enviros must attack fracking to make renewables viable.  President Obama’s recommendation is what the attack will look like.

Obama Recommendation Improving access to natural gas fuels along heavily-trafficked trucking routes, helping convert municipal bus and truck fleets to run on natural gas, and creating a new tax incentive for medium-and heavy-duty trucks that run on natural gas or other alternative fuels.

REP Index comment:  See comments above about fatal conceit and the broken window fallacy.  Efficiently functioning markets must drive such changes if they are needed.  Forcing them into the market just promotes further dysfunction in ecoviergy markets.

Obama Recommendation Supporting research and development into new ways to convert and store natural gas.

REP Index comment: This is a private market function.  Government involvement will only crowd out private sector efforts and delay innovation.

All in all, typical progressive recommendations that portend ill for efficient ecoviergy markets.


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Energy Independence is Fool’s Gold

Mitt Romney has lately taken to grounding his energy policy in “energy independence”. This is rather unfortunate since earlier he had avoided the demagoguery implied in energy independence.

As is evident from yesterday’s post on oil imports, it should be obvious that the concept of energy independence is bankrupt. What do you think is meant by energy independence? Ordinarily, one might suppose that it means that the United States (or as Mr. Romney sometimes refers to North American energy independence) is self-sufficient with regard to the supply and consumption of energy.  If this is what is meant, then it is a silly idea. As pointed out in Prof. Nordhaus’ brilliant article on the integrated global oil market, oil markets are like a bathtub. The only thing that matters is how much oil is in the bathtub. It doesn’t matter where it goes in or where it comes out. The price of oil will depend on how much oil is in the tub and how much oil is removed from the tub. Thus any country that pretends to disengage itself from global oil markets will pay a heavy price by such disengagement.

It is possible that something else is meant by the term energy independence. While ambiguous, what is probably meant is that America should fully exploit its abundant natural resources and that such reliance would put the United States in a better energy position than it currently finds itself. Secondarily, what might be also meant is that the United States should regain its position as the global technological and business leader in energy. Energy resources are plentiful but they are not infinite. As the globe consumes easy-to-reach energy resources, increasingly sophisticated technological means will be necessary to access more difficult-to-find energy resources. The development of fracking technology in the US is a good example of how the US can lead both the technological and business sphere.

caem believes we need a new and better word to describe this concept.  The words we have been using is Energy Exceptionalism, a homage to American Exceptionalism.  In contrast to Autarkism/Securitism (national self-sufficiency or energy independence), Envirocentrism, and Laissez-faire (complete reliance on free markets), caem pioneers Energy Exceptionalism, an actionable philosophical framework based on principles that would solve the Nation’s energy problems, achieve global sustainability, and restore American global leadership in energy. Energy Exceptionalism relies on economic principles that recognize:

  • the benefits of robust, level playing field competition in energy markets;
  • the critical role of innovation, technology, and adaptivity in meeting energy challenges;
  • dysfunction in energy markets caused by market failures (monopoly and environmental externalities) and government failures (subsidies, mandates, and overkill);
  • the wisdom of cautionary government intervention disciplined by the lessons of energy policy history; and
  • the necessity of US global leadership in the energy sector.

Is there anything that Governor Romney would disagree with in Energy Exceptionalism?

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Oil Imports are Good for America!

Campaigns are certainly the silly season when it comes to oil imports.  Every politician points to oil imports to justify any policy idea that they support.  Frankly, it is not popular to stand up and defend oil imports but I am going to.  OIL IMPORTS ARE GOOD FOR AMERICA!  There I said it.

But I am in good company it seems.  Professor William Norhaus of Yale University agrees with me.  See his brilliant article “The Economics of an Integrated World Oil Market” at

Economists argue in favor of a doctrine called comparative advantage.  It simply means that you should buy goods and services from anyone who can do it cheaper than you can.  You do not build your own car because Honda can do it cheaper.  This applies especially to international trade.  We don’t make our own coffee and we buy plenty of goods from Wal-Mart made in China.  Each of us sells our unique services to the highest bidder and then we buy goods made by others.

The fact is that the US has used up most of its cheap oil.  Whereas, the Middle East still has a lot of cheap oil.  They need our technology and nearly everything else in their economies must be imported.  In return, we buy their oil.  (Actually, Canada and Mexico are our main suppliers of imported oil.)

Oil prices are the same in the UK (which imports virtually no oil, relying instead on the North Sea), Japan (which imports all its oil, having virtually no indigenous natural energy resources) and the US (which imports about 50% of our oil).

Now that doesn’t mean we are importing the optimal amount of oil.  If we put up barriers to the development of domestic oil, we will import relatively more oil.  But that’s not the fault of oil imports.  Frankly, we should thank them for filling in the gap.

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Fox News Special on President Obama’s Green Agenda

Fox News has tackled one of the most complex ecoviergy issues—climate change and what should be done about it.  The REP Index recognizes that carbon emissions may be causing some global warming.  It recognizes, however, that: there are as yet significant uncertainties; that policy must be rigorously market-oriented; and that polices must be effective, not wishful thinking.  caem! largely adopts the positions of Bjorn Lomborg in his books Cool It (2007) and Climate Solutions (2010) that monies proposed for climate change policies must be measured against other positive things for which that money could be used.  When such a rigorous calculation is made, immediate radical carbon mitigation is a very poor investment and harmful to economic growth and third world aspirations.

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