Tuesday, August 02, 2005

Good Energy Bill, Bad Energy Bill

The 1,724 page energy bill overwhelmingly passed the Senate yesterday. It's a mixed deal, with a fair number of good points, and more than a fair share of pork barrel spending and subsidies.

The good points:
  • Repeal of the Public Utility Holding Company Act of 1935 - this act prevented non-contiguous mergers, so a utility could not merge with another utility whose geographical area was not adjacent. With its repeal, the barriers to merging with a distant company will be from the market rather than an arbitrary ruling from 1935. (Editor's note: PUHCA not only prohibits the non-contiguous mergers, but also prohibits non-utility companies from owning utilities, or utility companies from owning other unrelated businesses. For example, a large coal company would not have been allowed to own an electric utility, although that would allow the benefits that might come from such vertical integration.)
  • Elimination of some minor regulations that have caused an artificial increase in the price of certain sources of energy.

The bad points:

  • Subsidies, subsidies, and more subsidies! It was easy to hide a lot of taxpayer dollars in those 1,724 pages with enough going to varying special interests to ensure its passage. The things the subsidies encourage are generally good; however, if they were economically feasible on their own, you wouldn't need a government subsidy to make them happen. If we truly are facing an "energy shortage," the market price would rise sufficiently high to warrant finding alternate sources of power. Where are the subsidies going? Some will go to support exploration, some to encourage nuclear power, and some to cleaner burning coal technology. A better thing to do would have been to remove some of the government-created barriers to nuclear power development. The permitting process for a nuclear plant represents the greatest risk (cost) to nuclear power, not to mention the cost the entrepreneur might face as a result of future legislation. Again, reduced emissions resulting from clean coal and nuclear power sounds like a great idea, but it has to be considered in light of the costs and by those who bear them. To alter this cost structure reduces the accuracy of the price signals that indicate scarcity in the energy market.
  • The bill is estimated to cost $12.3 billion, conservatively. The estimate does not take into account the regulatory costs or the costs of the heightened demand for subsidies that will ensue. Additionally, tax breaks are purported to amount to $14.5 billion.
  • Provisions in the bill allow for the federal government to approve sites and to override opposition by local governments. Presumably, if the federal government has the ability to override local opposition, it has the ability to voice opposition of its own to local approval.

What was left out:

  • The provision for drilling in the Arctic National Wildlife Refuge was taken out of the bill prior to its approval. It would have allowed for exploration affecting approximately 2,000 acres of an area the size of South Carolina (approx. 19 million acres). More than 90% would remain intact and would yield billions of barrels of oil. If the goal of the energy bill is to find alternate sources of energy, reduce dependency on foreign oil, and reduce prices, this was the way to go. The removal of this provision is a big disappointment.

My overall analysis: the energy bill is expensive and unnecessary, although off to a good start with the repeal of the Public Utility Holding Company Act. It increases government interference in some regards and decreases it in others. But, like the politicians we vote for, it's a bundled deal and unfortunately we couldn't pick the good points and filter out the bad.

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