The Failure of U.S. Politicians to Open Electricity and Other Energy Markets
The following guest post was written by Mike Holly, who is the Chairman of Sorgo Fuels in Crosslake, Minnesota. Sorgo is a company involved in the production of energy from sweet sorghum, and Mike can be contacted at smikeholly “at” gmail.com. In his article, Mike touches upon a theme that I have complained about in the past: That U.S. energy policy favors specific technologies to such an extent that it effectively bars some promising technologies from competing.
My standard disclaimer applies: Publication of a guest post does not imply endorsement. Rather it indicates that I think the subject matter is worthy of debate and discussion.
THE FAILURE OF U.S. POLITICIANS TO OPEN ELECTRICITY AND OTHER ENERGY MARKETS
By Mike Holly
Chairman, Sorgo Fuels
Over the last century, U.S. politicians have formulated policies favoring monopolies and their affiliates and friends, while picking winners and losers, often favoring higher-cost technologies, causing consumer and taxpayer rip-offs, increasing debt and pollution, and decreasing innovation, competitiveness, opportunities and growth.
FREE MARKETS (1879-1907)
Like most successful industries, energy started with free markets, competition, and innovation. Before 1900, oil men like John D. Rockefeller built refineries, Thomas Edison and other developers built electric lighting, transmission lines and co-generation plants, and Henry Ford built cars that ran on both gasoline and ethanol.
Competition forced electricity producers to use efficient cogeneration plants producing both heat and power simultaneously. Plants were fueled by wood, cleaner anthracite coals and oil. They also used some hydropower. More expensive natural gas, produced at coal mines, was used for heating, but not much power.
REGULATED MONOPOLIZATION (1907-1932)
In 1907, urban politicians started awarding territorial monopolies to investor-owned distribution, transmission and generation companies, and also natural gas companies. They successfully lobbied politicians for protection from competition, even though the Supreme Court ruled that Rockefeller was in violation of the Sherman Antitrust Act in 1911.
Samuel Insull led the way in the power industry by buying a utility monopoly for the Chicago territory after contributing heavily to the Republican Party. The government regulates these so-called public electric and natural gas utilities on a cost-plus-profit basis, routinely allowing them to charge captive ratepayers higher service fees by overvaluing purchases.
Regulated utility monopolies, with help from US politicians, illegally block competition by:
- outlawing competing transmission and distribution grids and pipelines,
- not allowing other lower-cost suppliers to use their grids and pipelines,
- opposing independent utility transmission and distribution providers that could buy power from all suppliers, and
- using predatory price cuts and cost shifting to undercut competition, including self co-generation
The politics is also encouraged by payoffs. For example, our company lobbied for years the chair of the Minnesota House energy committee, who was later sent to prison after the electricity and natural gas utility Xcel invested in his company.
COMMUNAL NATIONALIZATION (1933-1965)
Public backlash against the role of investor-owned utility monopolies in help causing the Great Depression allowed mostly Democrat politicians, led by President Franklin D Roosevelt, to pursue national regulation favoring federal, municipal and rural cooperative public electricity and natural gas utility monopolies.
Government and community power has taken over almost a quarter of the electricity industry. Public Power is also blocking competition by:
- creating government monopolies with little incentive for cost control, low-cost power purchases or innovation
- access to subsidized federal power and financing (especially hydro until 1950),
- exemptions from federal income taxes, and
- territorial battles (including litigation and elections) financed with taxpayer money against investor-owned power financed by ratepayers in a political battle independents can’t win.
Public officials have demanded kickbacks, through middle men, from independent suppliers seeking to sell them power.
CRISES REGULATION (1965-1992)
After 1907, monopolization and nationalization caused centralization of the industry. Investor- and publicly-owned public electric utility monopolies built mostly large power plants fueled by fossil fuels, hydropower, nuclear and recently utility-scale wind power, which required longer distance transmission.
Fossil fuels, especially coal has always been significant for base loads, along with oil for other loads until it was replaced recently by natural gas. Hydropower became dominant in the early 1900s until suitable large sites ran low around 1950. Nuclear grew rapidly from the late 1960s until the Three Mile Island radiation leaks in 1979.
Excessive transmission led to higher costs, greater line losses, and brownouts starting in 1965. Larger power plants brought dirtier fuels and pollution (especially from coal), the depletion of oil and later natural gas (by not using efficient cogeneration and biomass), and higher costs for ratepayers starting in 1973.
In 1973, at about the same time the nation started to need new cleaner energy sources, the Supreme Court ruled that, under the Sherman Antitrust Act, utility monopolies must share transmission lines.
Finally, politicians started opening some electricity markets, albeit briefly. A 1978 Federal Act called PURPA required utilities to buy power priced at the utility’s (avoided) costs from independent power producers using renewable energy and cogeneration.
PURPA finally took effect in 1984, and for a short period between the late 1980s and early 1990s, new capacity additions by non-utilities actually exceeded those of utilities. Non-utilities built about 80% low-cost cogeneration, fueled mostly by wood and natural gas, and also some renewable energy.
In some highly-populated states, regulators appear to have overestimated needs causing overcapacity. The three regions around California, the Northeast and Texas built the most cogeneration, mainly by the influential petrochemical and paper industries. .
But in most states, regulators allowed utilities to block non-utilities by calculating low needs and avoided costs. The Federal Energy Regulatory Commission (FERC) made no effort to standardize procedures for more accurate calculation of avoided costs in all states.
During the 1990s, politicians, including Democrat President Bill Clinton, and regulators began a period of re-monopolization with policies favoring utility monopolies in regulated and later deregulated states, and ending the independent power industry before it hardly had a chance to develop.
State regulators reformed PURPA by ordering the setting of avoided costs through competitive bidding (as they had already used with natural gas). But bidding is time-consuming and expensive, and even worse, utilities are allowed to rig bids in favor of higher-cost bids offered by themselves, affiliates and friends by:
- skipping the bidding process whenever they want and just building their own plants,
- bidding for any technology they or the politicians want (e.g., wind power), and
- using preferential and subjective bidding criteria favoring their projects.
Bid rigging caused the addition of cogeneration to slow during the 1990s and accumulated cogeneration actually fell after 2000. After 1992, the growth of wood and other biomass fuels also stalled. Forestry industries are forced to send waste wood to landfills at high cost.
Utility monopolies like Xcel even select the worst biomass power projects to kill the industry. Moreover, there is no incentive to develop new economic technologies in the U.S. because utilities can take them whenever they want.
DEREGULATED MONOPOLIZATION (1992-2002)
Politicians, including President Clinton, promised both power and natural gas suppliers would be able to compete in free markets. But Clinton’s federal strategy was weak and corrupt, and relegated much to the states, where it was also corrupt, allowing utilities to write much of the rules. Deregulation was rigged to fail and the result was deregulated monopolies, not competition.
Retail natural gas markets were poorly deregulated and in only a few states. The Energy Policy Act of 1992 gave FERC authority over wholesale power markets, while some states tried consumer choice of electricity in retail markets.
For deregulation of wholesale power markets, FERC wanted a national grid, but states and utilities strung out reform by forcing the following weak compromises, even as non-utilities kept accusing utility transmission operators of discrimination:
- in 1992, FERC failed to get utilities to file fair open access tariffs by offering access to lucrative market-rate contracts,
- in 1996, FERC failed with Independent System Operators as nine states even filed a failed lawsuit to try to stop them,
- in 1999, FERC failed with larger regional transmission organizations, and
- in 2002, FERC failed to even get independent transmission providers and Standard Market Design and in 2003 was forced to quit the effort after many states lobbied Congress against them.
During deregulation of retail markets, the US and states favored old coal and nuclear plants, often spun off from regulated utility monopolies, with:
- “grandfather” exemptions from meeting costly environmental, safety and siting laws imposed on new power plants.
- stranded cost subsidies from consumers to cover losses and pay off their capital costs (when gas prices were low), but were not required to pay back stranded benefits to ratepayers that financed their plants when gaining windfall profits (from later high gas prices).
- the selling many old plants to few buyers creating market power, while also failing to enforce antitrust laws.
- the continuing of a preferential T&D grid with regulations blocking the siting of power lines to many potential, especially out-of-state, competitors, and
- the dumping of surplus power by regulated utility monopolies in neighboring states, preventing both wholesale and retail competition.
Many independent power producers, that made the mistake of trying to compete as FERC-approved merchant plants in limited wholesale markets governed by rigged deregulation and regulation, went bankrupt as wholesale power prices fell 90 percent with overcapacity from 1999 to 2002. Skyrocketing natural gas prices also hurt.
Federal agencies like FERC and state departments like the Illinois Department of Commerce failed to document market favoritism even when required by law.
Retail deregulation of power markets failed to produce significant competition, and instead resulted in massive consumer and taxpayer rip offs, in all 14 states that implemented it. So the 10 other states that were also deregulating went back to regulation, which also failed to control costs in all 36 states.
FASCIST NATIONALIZATION (2002-)
Since 2002, U.S. politicians have responded to policy failures by partnering with favored industries to maintain the electricity and natural gas monopoly status quo, while trying to relieve recent energy crises caused by monopolization by picking of winners and losers with favoritism based on politics (not even planning or societal benefit).
In 2001, Republican President George W. Bush created The Energy Task Force. The chair of the task force, Vice President Dick Cheney, held secret meetings with energy industry representatives and Bush donors.
The former “oil and gas man” Bush led the favoring of the U.S. oil and gas industry with war, environmental exemptions, and subsidies that resulted in costly messes. He also mandated, while massively subsidizing, mainly uncompetitive renewable energies.
Bush led the invasion of Iraq to increase oil production, according to Federal Reserve Chairman Alan Greenspan. Bush also founded Homeland Security, which was caught in September of 2010 spying on groups in Pennsylvania protesting environmental exemptions for oil and gas drilling.
Bush exempted deep water oil drilling in the Gulf of Mexico from environmental damages, leading to the Gulf oil spill. His government also increased the production of natural gas supply by exempting shale gas production from the Safe Drinking Water Act, allowing the poisoning of people’s drinking water.
As President, Bush required that most new ethanol vehicle fuel capacity must process cellulose, which is difficult and expensive to process. He was lobbied by venture capitalists, who have a history of creating and profiting from bubbles while leaving the country holding the bag.
Cellulosic ethanol technologies require significant breakthroughs that have not been realized despite large investments and even heavier subsidies than corn ethanol. Big Oil and corn ethanol don’t appear threatened by the technology.
The government rationalized the cellulose mandate was needed because the corn ethanol industry was deemed unsustainable. Over the previous three decades, the government, lobbied by the conglomerate Archer Daniels Midland, created a high cost and energy-inefficient corn ethanol industry through crop and fuel subsidies and other favoritism.
As Governor of Texas, Bush had led states mandating wind power, which also receives heavy subsidies. Mandates grew throughout his Presidency and by 2008, wind power and also natural gas each accounted for over 45% of new nameplate generation capacity. The US has recently spent over $10 billion per year on wind power without cost-benefit analyses.
Government and environmental groups have misled the country about the true costs of adding more than just a few percent of supply of wind power. Utilities have been strangely ambivalent, perhaps because the wind industry poses no real competition.
The “Minnesota Wind Integration Study” misrepresents the cost of integration into the grid at 25% of total generation in Minnesota by assuming the power is spread throughout the entire Midwest grid (which is actually only about 2% integration).
The “U.S. Large-Scale Integration Studies” calculates the costs and benefits of using 20% wind power from the difference in operating, but not capital, costs compared to natural gas generation, while also assuming inflated gas costs and carbon taxes.
Meanwhile, a private study by Energy Ventures Analysis Inc. warns that because wind power is intermittent, it must be backed up by natural gas inefficiently without combined cycle. Although more analysis is likely required, they estimate wind power increases generation costs by more than twice, while reducing greenhouse gases by a mere 11 percent.
Government studies actually inflate the costs of cogeneration by neglecting to recognize the economic benefits of heating. Cogeneration is the most-efficient and lowest-cost generation, even compared to the most efficient natural gas combined cycle plants used today by utilities.
Obama and the Democrats have done virtually nothing to improve Bush energy policies that support monopolies and favored industries (except when forced to by the Gulf Oil Spill). Both political parties still refuse to allow free markets, and perhaps pollution taxes, to foster the lowest-cost environmentally-benign energy solutions.
In the future, Republicans seek to subsidize high-cost and unproven “advanced” nuclear and coal (with carbon capture) for power monopolies, while Democrats want to continue subsidizing even higher-cost and unreliable wind and solar (and also conservation) by monopolies under government control.
Yet, the U.S. Energy Information Administration of the Department of Energy projects only biomass will gain electricity market share from 2013 to 2030. But again, politicians are risking failure of both electricity and vehicle fuel markets by mandating and heavily subsidizing ethanol made from cellulose, along with electricity fueled by the lignin by-product.
Politicians even block proven and cost-competitive renewable energy. For example, the European Union and United Nations have concluded cogeneration, not transport fuels, is the cheapest and best option for using cellulose to reduce greenhouse gases.
Brazil has used sugar cane to produce ethanol from the sugar and electricity from the cellulose at costs competitive with fossil fuels. The nation is expected to co-generate 15 percent of its electricity from the cellulosic waste by 2015 (even with low feed-in tariffs set at hydropower costs).
Our company, Sorgo Fuels, has developed technology for a similar high-yielding sugar and cellulose crop called sweet sorghum which can be grown with low inputs on nonfood land, even in the northern US. But the technology must be commercialized overseas because US politicians violate free markets by promoting monopolies, subsidies and mandates favoring other companies, crops and technologies.
Over 45 countries, including 20 in Europe, have adopted feed-in tariffs to provide fair prices to all independents using renewable energies and sometimes cogeneration. Unfortunately, Europe can’t be relied upon for competition and innovation because the tariffs are often awarded to proven technologies at whatever price they need and EU countries have largely government-controlled financial systems with favoritism and risk aversion.
Meanwhile, U.S. politicians relegated the setting of feed-in tariffs to the states, where only five have been attempted and all have been failures (according to the Paul Gipe report), because they were limited by:
- allowable capacities for total generation, technology types and individual projects,
- qualifying technologies to only high-cost renewable energies (e.g., solar), and
- payment only when utilities claim they need new capacity (e.g., using avoided costs)
U.S. politicians support free trade markets for other countries of the world, but won’t even allow all Americans to compete in free domestic markets. Instead, Republicans foster monopolization while Democrats appear to also encourage monopolization but as a path to nationalization. Both pick winners and losers in exchange for campaign contributions.
U.S. politicians have practiced corruption in most industries, not just electricity, including vehicle fuels and natural gas, as well as agriculture, health care, chemicals, materials, automobiles, computers, communications, housing, financials and labor.
The U.S. has two choices for the future. The status quo will surely continue to result in high costs, crises, shortages, low growth, wage disparity, loss of industries, debt, poverty, depression, pollution, climate change and war, especially in the Middle East. War has actually been America’s main economic savior in the past century.
The better choice is free markets, or other favoritism-free policies like fair feed-in tariffs set at the market rate, for entrepreneurs, which will likely bring innovation, new technologies and energy sources, low costs, competitiveness, opportunity, prosperity, a clean and stable environment and world peace.