Policy fixes to unleash clean energy, part 3
In Part 1, I outlined the five questions that we ought to answer before we can have any informed debate on energy policy reform. In Part 2, I provided my answer to the first of those questions: namely, what are the key existing regulatory barriers to clean energy deployment (Answer: utility regulation, environmental regulation and out-dated regulation). Now let’s move onto the next question: What are the primary political challenges to policy reform?
It is critical to separate politics from policy. To be sure, setting policy independent of politics is naïve – but setting policy only based on political constraints is rudderless political hackery. Progress ultimately depends upon our ability and willingness to tack into the wind.
That said, the only reason that bad policy survives is because of political opposition to reform. It constrains how we can act, even if it (hopefully) doesn’t constrain our ultimate goals. U.S. energy and environmental policy does neither particularly well – and hurts the economy to boot. On its face, that presents a great opportunity for win/win reforms. But the preservation of bad policies is ultimately political – so before discussing what could be, we need to understand why it isn’t.
1. Because all policy change is hard.
There is much rhetorical confusion in American politics. The party we call “conservative” talks in revolutionary language that is anything but conservative (“starve the beast,” “I’m from the government and I’m here to help,” etc.) Meanwhile, the party we call “liberal” is hardly the free-market, small-government supporter implied by that term.
The British tend to be more precise with their political labels, but the truth is that all politicians are innately conservative, because they want to stay in power. Revolutionaries in politics and elsewhere never come from within – and this is true no matter what policy is being preserved. If we had laws on the books mandating the wanton slaughter of cute little puppies, any effort to remove that law would be opposed by the Better Bichon Butchers Bureau, Michael Vick’s Kanine Kasinos, and everyone else with a vested interest in the preservation of that law. There’s a tendency to view this as something we’ve outgrown – “our forefathers were foolish but we know better.” The reality is that every generation finds reform hard, and every generation finds it hard for the same reasons. As the D.C. aphorism goes, “losers cry louder than winners cheer.”
2. Because we have 100 years of history supporting regulated monopolies.
State-sanctioned monopolies for electric power distribution date back to 1935 at the federal level with the creation of the Public Utility Holding Company Act (PUHCA), and in a lesser degree to 1920 with that year’s Federal Power Act. At state and city levels, electricity monopolies were first sanctioned several decades prior. Over the ensuing 100 years, we have evolved a host of laws, court cases, and regulatory agencies that reinforce the regulated-monopoly paradigm. Compare: In 1861, we had to fight a civil war to undo 76 years of laws related to slavery (and needless to say, the civil war alone was not sufficient to correct the historic record.) While the consequences of monopoly utility regulation are less morally-inspiring than the equal treatment of all under the law, a case can be made that the former faces a greater challenge to reform.
This history manifests itself in a host of ways. Legally, there are huge issues raised by contract law. When two private entities enter into a contract with each other, the contract is understood to be severed in the event of a change of law. (e.g., I can only be bound by a contract to kill your puppies so long as government regulations allow me to do so.) However, when a private entity enters into a contract with the government, changes in government law have been successfully challenged as a violation of the 14th amendment to the Constitution (“the State shall not deprive any person of life, liberty, or property without due process of law” – property in this case being the rights under contract). When a state sets a price for power that is formulaically calculated to ensure capital recovery, any move to expose the utility to market forces that do not guarantee capital recovery is an explicit revocation of the contract. Thus we have had situations (like in California) where “deregulation” is coupled with a provision for exit fees that compensate utilities for any revenue loss due to competition. Deregulation, it ain’t – but it highlights the challenges associated with injecting fiscal discipline into the utility sector.
However, just as the Emancipation Proclamation did not eliminate racism, the consequences of 100 years of monopoly-supporting laws are not simply legal. In my experience, most utility executives do not trust their regulator to think outside of the cost-recovery box. Thus, to even discuss a change to the status quo is to put shareholder wealth at risk. As one utility executive told me “all my experience is that if I tell the regulator I know how to save $100 million, I’ll wake up the next day and see a $100 million rate cut on the cover of the newspaper.” Decades of zero-sum negotiations have cemented mutually destructive, “give ‘em an inch and they’ll take a yard” behavior in place, which makes both sides reluctant to engage in any truly collaborative dialogues.
Finally, there are a host of organizations whose very survival depends upon the maintenance of the system. Utility regulatory agencies have mandates to ensure low-cost, reliable power for electricity customers, but are never going to recommend a path that would increase reliability and lower cost if it put their jobs in jeopardy (as exposing utilities to market discipline rather than regulator rate-setting decidedly does). Consumer organizations who advocate for the ratepayer in utility rate proceedings also do not have a purpose if those proceedings go away either (who gets public money to advocate for cheaper iPods?). These organizations, while well-intentioned, often end up promulgating some of the least intellectually coherent arguments in support of the regulated enterprise as a result. For example, consider all the claims that we should oppose the introduction of competition into electricity markets because it would raise electricity prices. I’ve yet to meet a CEO, in any industry (electricity included) who is trying to make their market more competitive so that they can raise their prices. It’s a nonsense argument – but it’s ubiquity shows how those habits of mind stand in the way of progress.
3. Because the Clean Air Act is not amenable to minor tweaks.
The best description I’ve ever heard of the Clean Air Act was provided by an EPA official who told me “It’s a Rube Goldberg machine. The only way to know what happens if you push this lever is to push this lever.” The Clean Air Act is the second largest piece of legislation in the federal register, trumped only by the U.S. Tax Code. It’s got lots of moving parts, lots of little patches that were taped on over time and as a result lots of things that – in hindsight – are kind of dumb. On one level, so be it. Such is the nature of complex systems.
The political challenge that arises is that constructive reform to such complex organisms never takes the form of (yet another) little patch. Your appendix is useless and imposes a metabolic cost on your body, but that doesn’t mean you ought to go under the knife for an otherwise-unnecessary appendectomy. We need holistic reform.
Unfortunately, democracy doesn’t do holistic reforms of existing regulation all that well. Congress could open the tent to reform, but they can’t control who comes inside. And it’s safe to say that some of the guests would be a mite brutish – coming to bury, not to praise. This distrust is sadly, and recursively, caused by the Act itself. By crafting a structure in which environmental responsibility is always done at the expense of profitability, the Clean Air Act has made “business-friendly” synonymous with “environmentally irresponsible,” and vice versa. It did not have to be that way – but as with utility regulation, the cementing of those positions will only be unwound with the most delicate diplomacy.
So there you have it. But for a few hundred years of bad policy, massively complex politics and the innate challenges facing any political reform, we would have a good energy policy. It’s all rather depressing.
But so what? Leprosy is depressing too if that’s all you ever think about. Politics needs to be understood not as an obstacle to progress but simply as the boundaries of the field on which we play. It constrains how we can modernize policy, but does not preclude modernization. Our task, should we wish to play the game is simply to decide how we want to play within those constraints. What principles ought to govern our actions on this field, however imperfect it may be? My thoughts on that, coming up in part 4…