EnergyEnergyEnding the Never-Ending Ending the Never-Ending

CrisisCrisis

ThesisThesis

““The purpose of this book is to challenge The purpose of this book is to challenge the intellectual premises and rationales for the intellectual premises and rationales for energy market regulation.” Ballonoff energy market regulation.” Ballonoff

Misconceptions about energy.Misconceptions about energy.

Resources are in short supply.Resources are in short supply. Energy production and distribution Energy production and distribution

companies are always monopolies and companies are always monopolies and therefore must be regulated heavily.therefore must be regulated heavily.

Petroleum, Natural Gas, and Energy markets do Petroleum, Natural Gas, and Energy markets do not need to be regulated.not need to be regulated.

Electric and natural gas utilities do not need to Electric and natural gas utilities do not need to be regulated.be regulated.

Energy market regulation does not always Energy market regulation does not always produce the intended outcome.produce the intended outcome.

Regulation is not necessarily Constituional.Regulation is not necessarily Constituional. Regulation, in its present state, should be Regulation, in its present state, should be

removed.removed.

Petroleum, Natural Gas, Petroleum, Natural Gas, and Energy markets do and Energy markets do

not need to be not need to be regulated.regulated.

Petroleum is a technological Petroleum is a technological product, not a finite resource.product, not a finite resource.• • As technology progresses the cost of As technology progresses the cost of

production falls. production falls. ““The production capacity of an industry is The production capacity of an industry is

not an inherent, permanent limit on total not an inherent, permanent limit on total capacity.”capacity.”

The life of wells today can be extended The life of wells today can be extended with new technology as well as new forms with new technology as well as new forms of energy.of energy.

Computerization has opened the door for Computerization has opened the door for more efficient exploration of oil.more efficient exploration of oil.

Computer Simulations tell us where to drill Computer Simulations tell us where to drill for oil with a higher rate of success.for oil with a higher rate of success.

Technology and Efficiency Technology and Efficiency lower costs.lower costs.

Automation of many production processes Automation of many production processes drives down costs.drives down costs.

Improved drill bits allow for greater Improved drill bits allow for greater efficiency in a number of ways.efficiency in a number of ways.

Advances in technology allow for a Advances in technology allow for a decrease in “proven” reserves and decrease in “proven” reserves and exploration drilling.exploration drilling.

Regulations inhibit Regulations inhibit technological innovation.technological innovation.

••Regulated markets prevent the competition Regulated markets prevent the competition necessary to allow technology to flourish.necessary to allow technology to flourish.

••Nuclear fusion is limited in private capital Nuclear fusion is limited in private capital not because it is without promise, but not because it is without promise, but because of existing governmental controls because of existing governmental controls stifle investment.stifle investment.

Do we really have a choice?Do we really have a choice?

Petroleum markets are competitive and Petroleum markets are competitive and innovative.innovative.

This innovation provides for lower cost for This innovation provides for lower cost for the consumer and higher profits to the the consumer and higher profits to the most innovative companiesmost innovative companies

Electric and natural gas Electric and natural gas utilities do not need to utilities do not need to

be regulated.be regulated.

Energy Utilities Are Not Energy Utilities Are Not Natural Monopolies.Natural Monopolies.

In a natural monopoly marginal cost decreases In a natural monopoly marginal cost decreases as output increases.as output increases.

One company is able to supply the market at a One company is able to supply the market at a lower cost than multiple companies.lower cost than multiple companies.

The relationship between average cost and the The relationship between average cost and the number of customers serviced by utility number of customers serviced by utility companies is insignificant.companies is insignificant.

Evidence shows that consumers can be served Evidence shows that consumers can be served better by two or more transmission grids.better by two or more transmission grids.

Utility Regulation Originated Utility Regulation Originated to Stifle Competitionto Stifle Competition

Former head of the Chicago Edison Former head of the Chicago Edison Company, Samuel Insull lobbied for the Company, Samuel Insull lobbied for the creation of a regulatory commission that creation of a regulatory commission that would guarantee protection from would guarantee protection from competition, arguing the threat of utility competition, arguing the threat of utility companies, such as his own, becoming companies, such as his own, becoming natural monopolies.natural monopolies.

This was not done out of benevolence for This was not done out of benevolence for the consumer.the consumer.

Regulation Does Not Help the Regulation Does Not Help the EnvironmentEnvironment

In recent years, the regulators’ role has evolved In recent years, the regulators’ role has evolved to include integrated resource planning, a to include integrated resource planning, a practice used to evaluate costs to the practice used to evaluate costs to the environment imposed by fossil fuels.environment imposed by fossil fuels.

Government forecasts of fuel prices in the future Government forecasts of fuel prices in the future do not reflect realistic equilibrium prices, therefore do not reflect realistic equilibrium prices, therefore resource planning prevents the market from resource planning prevents the market from allocating energy resources most efficiently. allocating energy resources most efficiently.

Without regulation, companies would still be held Without regulation, companies would still be held responsible for their environmental damage responsible for their environmental damage through existing environmental regulations.through existing environmental regulations.

Energy market Energy market regulation does not regulation does not always produce the always produce the intended outcome.intended outcome.

Regulation of MonopoliesRegulation of Monopolies

Regulation of Monopolies result in higher Regulation of Monopolies result in higher energy prices than might otherwise be energy prices than might otherwise be charged by an unregulated monopolist charged by an unregulated monopolist whose territory is not protected against whose territory is not protected against entry.entry.

The Averch-Johnson EffectThe Averch-Johnson Effect

Regulatory Commissions limit the price at which Regulatory Commissions limit the price at which a perceived monopoly can provide goods and a perceived monopoly can provide goods and services beyond the cost of production so as to services beyond the cost of production so as to reflect the rates earned by unregulated, reflect the rates earned by unregulated, competitive markets.competitive markets.

In the absence of competition production costs In the absence of competition production costs are of little consequence, therefore earnings are of little consequence, therefore earnings beyond the regulatory level are simply beyond the regulatory level are simply reinvested in the company and added into the reinvested in the company and added into the cost of production. (Company cars, jets, cost of production. (Company cars, jets, employee benefits and perquisites.)employee benefits and perquisites.)

A-V E ContinuedA-V E Continued

Since costs are passed on to consumers Since costs are passed on to consumers under regulation, Electric and gas under regulation, Electric and gas companies have little incentive to bargain companies have little incentive to bargain with suppliers. As unregulated suppliers with suppliers. As unregulated suppliers raise prices, they absorb much of the raise prices, they absorb much of the benefit denied to the regulated distributor.benefit denied to the regulated distributor.

Electric Cars- Healthier Than Electric Cars- Healthier Than Gas Powered?Gas Powered?

Switching from petroleum-powered cars to Switching from petroleum-powered cars to electric ones simply moves the point of electric ones simply moves the point of primary fuel consumption from the vehicle primary fuel consumption from the vehicle to the electricity generation unit (coal fired to the electricity generation unit (coal fired power).power).

The fuel efficiency of the electric energy is The fuel efficiency of the electric energy is only about 30-40% of the energy only about 30-40% of the energy contained in the initial fuel.contained in the initial fuel.

Electric Cars once more.Electric Cars once more.

Therefore, electric cars merely shift energy Therefore, electric cars merely shift energy production from petroleum to other harmful production from petroleum to other harmful fuels, such as coal, so that it can be turned fuels, such as coal, so that it can be turned into electricity through an inefficient and into electricity through an inefficient and wasteful process so that “Johnny wasteful process so that “Johnny Environmentalist” can feel like he’s doing Environmentalist” can feel like he’s doing his part for the environment.his part for the environment.

Regulation is not Regulation is not necessarily necessarily

Constitutional.Constitutional.

The General Welfare Clause-a The General Welfare Clause-a Blank Check?Blank Check?

Located in the Preamble the General Located in the Preamble the General Welfare Clause states that the purpose of Welfare Clause states that the purpose of the Constitution is “To promote the the Constitution is “To promote the General Welfare” of the country.General Welfare” of the country.

Some have used this to assume that Some have used this to assume that regulating energy is the role of the Federal regulating energy is the role of the Federal Government.Government.

The Clause is not a Blank The Clause is not a Blank Check.Check.

The Constitution gives Congress a set of The Constitution gives Congress a set of enumerated powers.enumerated powers.

Madison, in the Federalist papers, Madison, in the Federalist papers, suggests that this is not his intention.suggests that this is not his intention.

Intent of the Framers was not to allow Intent of the Framers was not to allow unlimited power by the Federal unlimited power by the Federal Government.Government.

The Commerce Clause does not provide explicit laws on energy.

Energy is not specifically mentioned Energy is not specifically mentioned anywhere in the Constitution.anywhere in the Constitution.

Congress has the power “To regulate Congress has the power “To regulate commerce with foreign nations, and commerce with foreign nations, and among the several States, and with the among the several States, and with the Indian tribes.”Indian tribes.”

Does this make Federal energy policies Does this make Federal energy policies unconstitutional?unconstitutional?

Tenth Amendment/Power to the StatesTenth Amendment/Power to the States

Case law has precedents Case law has precedents against more regulation.against more regulation.

Munn v. IllinoisMunn v. Illinois, 1877, 1877 No enumerated Federal power exists to No enumerated Federal power exists to

regulate business because it “affected with regulate business because it “affected with a Public Interest.”a Public Interest.”

Gibbons v. OgdenGibbons v. Ogden, 1824, 1824 The Federal Government upholds the The Federal Government upholds the

Commerce Clause against States closing Commerce Clause against States closing markets. markets.

Model for Federal Anti-Trust laws.Model for Federal Anti-Trust laws.

Utility Commissions are a tool Utility Commissions are a tool of the Legislatureof the Legislature

Setting prices was very difficult for a Setting prices was very difficult for a legislature, so a commission was created.legislature, so a commission was created.

Commissions are special committees Commissions are special committees created by the legislature, to which it created by the legislature, to which it delegates difficult, if not impossible tasks.delegates difficult, if not impossible tasks.

Powers- find facts, hold hearings, set Powers- find facts, hold hearings, set prices, and carry out other assumed prices, and carry out other assumed duties.duties.

Utility Commissions have Utility Commissions have several problems.several problems.

They often act outside the parameters of They often act outside the parameters of their duties.their duties.

The “consensus” that our law making The “consensus” that our law making process requires is often abandoned. Not process requires is often abandoned. Not a true cross section of the nation.a true cross section of the nation.

Lacks the checks and balances that Lacks the checks and balances that Congress itself has.Congress itself has.

Regulation is not Regulation is not necessarily necessarily

Constitutional.Constitutional.

Regulated MonopolyRegulated Monopoly

Offers rate that will always reach the Offers rate that will always reach the regulated maximum.regulated maximum.

Protected from the treats of competition. Protected from the treats of competition. Less incentives to lower cost, create new Less incentives to lower cost, create new technologies, and to increase efficiency. technologies, and to increase efficiency.

Subject to the costly, ever changing and Subject to the costly, ever changing and inefficient regulation laws.inefficient regulation laws.

Unregulated MonopolyUnregulated Monopoly

Faces threat of competition, even if the Faces threat of competition, even if the threat isn’t immediate.threat isn’t immediate.

More incentive to be on the cutting edge of More incentive to be on the cutting edge of technology and efficiency.technology and efficiency.

Market incentive to keep costs down.Market incentive to keep costs down. Money saved by eliminating bureaucracy Money saved by eliminating bureaucracy

is passed on to consumers and is passed on to consumers and employees.employees.

Going Cold Turkey with Going Cold Turkey with Regulations is an answer.Regulations is an answer.

Repeal all Federal and State laws on Repeal all Federal and State laws on energy regulation.energy regulation.

The only role of the Federal Government The only role of the Federal Government would to open any market closed by the would to open any market closed by the states.states.

Acting for the “public good” is not sufficient Acting for the “public good” is not sufficient Constitutional basis.Constitutional basis.

Reform will not be as effective Reform will not be as effective as a Cold Turkey approach.as a Cold Turkey approach.

Many of these laws may already be Many of these laws may already be unconstitutional.unconstitutional.

Political restructuring is VERY drawn out Political restructuring is VERY drawn out and inefficient. Many problems that and inefficient. Many problems that currently exist may be retained.currently exist may be retained.

Regulatory reform often becomes more Regulatory reform often becomes more work than ever before.work than ever before.

Commissions will unlikely voluntarily Commissions will unlikely voluntarily surrender their authority.surrender their authority.

The Anti-Trust Option is the The Anti-Trust Option is the next best thing.next best thing.

A more logical scenario, the next best A more logical scenario, the next best agenda.agenda.

Make the existing commissions anti-trust Make the existing commissions anti-trust courts.courts.

Anti-Trust laws should used to eliminate Anti-Trust laws should used to eliminate practices that are not market friendly.practices that are not market friendly.

Attempt to make the energy market more Attempt to make the energy market more like any other market.like any other market.

ConclusionConclusion

The twin fears of rising prices and The twin fears of rising prices and dwindling resources do not need to be our dwindling resources do not need to be our motivating factors.motivating factors.

The economics of energy should be based The economics of energy should be based on discovery, invention, and natural on discovery, invention, and natural progress.progress.

The ordinary forces of competition can The ordinary forces of competition can eliminate the need for excessive eliminate the need for excessive regulation.regulation.