I recently interviewed a guy who explained his approach to long-term contracting to me as follows: “always structure your contracts to ensure that your counter-party makes money, and you’ll never have a bad contract negotiation.” It’s a great point, too often lost by those who are convinced that all negotiations are zero-sum games.

Lest one think that hard-nosed, selfish negotiating is limited to greedy financial types, I bring you this story from South Carolina, where a change in utility regulation to incentivize energy efficiency was blocked by environmentalists and consumer advocates on the grounds that it would give too much money to utilities. It seems to me that they have made a big mistake.

Regulated utilities have no incentive to invest in energy conservation or generation efficiency. Moreover, they have no incentive to encourage their customers to make investments that would save them money, since the standard guaranteed-return + cost-pass-through pricing model doesn’t let them keep the gain.

This doesn’t make utility managers bad guys; it just means that they are responding to a bad set of signals. If your parents give your big brother a cookie every time he punches you, your big brother is not entirely to blame for the welts on your arm.

Jim Rogers knows this, and proposed his Save-A-Watt program to give his company, Duke Energy, a financial incentive to encourage their customers to conserve. Consumer advocates and environmentalists opposed, broadly on the basis that we shouldn’t pay utilities to do things they’re supposed to do anyway. The South Carolina utility commission agreed:

… they objected specifically to the heart of the plan: Duke’s request to get a financial return for power plants it doesn’t have to build.

To be quite clear, Duke has many flaws. They like expensive coal plants. They’ve tried to do some things that look an awful lot like gaming carbon markets. And they are a card-carrying, dues-paying member of the BS-machine that is ACCCE.

But that doesn’t mean we can’t give them credit for trying to reform the rules, so that they can sever (however partially) the disconnect between the interests of their shareholders and their customers (not to mention the environment). It seems a shame to me that those efforts were blocked in the name of the environment and consumer.

Ultimately, this issue is much bigger than Save-a-Watt, Duke, and South Carolina. Our regulatory system desperately needs reform, and effective reform will necessarily create massive wealth transfers away from those who benefit from the status quo. It was ever thus, and is why vested interests are always so conservative. Those who seek reform therefore have four choices:

  1. Give up. It’s simply too hard to change the status quo, they’re too powerful, so quit.
  2. Bribe. Buy off enough people to get diluted reform passed. Pay some people to do the wrong thing, others do to the right thing and tell yourself that you’re net better off if it helps you sleep at night. (See: grandfathering, allocation of CO2 emissions permits.)
  3. Get naive. Insist on intellectual purity, and pretend you’re politically strong enough to get it done on your own. You’re either with us or against us. Gonna get me some evil-doers. No more coal. Che Guevara kicks ass.
  4. Change the rules so that everyone makes money from doing the right thing.

When it comes to carbon policy, most legislative bodies seem to favor option No. 2, in part because ideological purists on both sides of the aisle can’t find middle ground in option No. 3. But real, lasting reform inevitably comes out of that fourth approach, finding ways not to penalize those who benefited from the old status quo, but rather to give everyone an incentive in a better future. (Think Mandela.)

To be sure, the Save-A-Watt program doesn’t really deserve to be mentioned in the same breath with Nelson Mandela. But it is cut from the same cloth, fixing a lousy rule to give everyone a profit in a better future. And it seems awfully tragic that it was killed by ideologues whose success will come at the expense of the very interests they claim to represent.