The Entrepreneurial View #450
Energy Policy Going Awry in States Too
by Raymond J. Keating
To be overly generous, energy policy is not exactly pointed in a productive direction in Congress. And it can be just as bad - if not worse - in the states.
Congress is kicking around policies like tax increases on energy producers, renewable portfolio mandates on electric utilities, mandated gasoline substitutes, doling out taxpayer subsidies for green pork, and hiking regulatory requirements on automakers (such as CAFE mandates and E-85 requirements).
If all of these become law, what would result? Costs will rise for consumers and taxpayers, businesses will become less competitive, and the economy and jobs will suffer.
Unfortunately, similar ideas are being considered in the states as well. Consider Ohio.
In late August, Governor Ted Strickland announced his "Energy, Jobs and Progress" plan. The two main points deal with electricity pricing regulation and a portfolio mandate for electric utilities.
On electricity pricing, the state theoretically took a step toward electricity deregulation in 1999. However, since electricity prices were frozen, this was not exactly deregulation, and it's not exactly a big surprise that competition didn't flourish. Now, rate stabilization plans - i.e., price controls - are scheduled to expire for much of the state at the end of 2008, with the rest going at the end of 2009.
The Governor is worried how the market will initially react once price controls are lifted. So, Strickland countered with his proposal: "If an efficient and competitive market emerges, with service territories open to competitors on a reasonable basis, then utilities should be allowed to charge market rates. However, until such an efficient, open, and competitive market exists, rates should be set under an electricity security plan. Rates will be determined in part by the cost of generating and delivering electricity. Rate decisions will also be determined by considering the long term sustainability of energy by allowing utilities to recoup costs of environmental innovations and new power plants. And while utilities are certainly entitled to fair returns, electricity rates will also factor in the significant investment Ohio ratepayers have already made in the capital assets of those utilities."
Again, that provides little or no incentives for competitors to step into the marketplace. True competition has not been given a chance in Ohio, nor would it get a chance under Strickland's plan.
As for the portfolio mandate, the Governor said: "Under my plan, by 2025, a minimum of 25 percent of the electricity sold in Ohio must be generated from advanced energy technology. No less than half of that energy will come from renewable sources, including biomass, wind, solar, anaerobic digesters, geothermal, and hydro power. And no less than half of that advanced energy must be created in Ohio."
Strickland spoke of such a mandate creating "thousands of new Ohio jobs." Gee, it's amazing what government can do by merely waving its magic mandates wand. In reality, of course, forcing electric utilities to move from making energy decisions based on economics to making decisions according to political mandates inevitably means higher costs for customers - both residents and businesses. That will translate into the loss of thousands of jobs, not job gains.
Keep in mind that Ohio is not in a competitive position when it comes to business costs. The 2006 edition of the "Small Business Survival Index," which rates the states according to their public policy climates for entrepreneurship, ranked Ohio a rather sad 38th in the nation. More regulations and mandates will only serve to further diminish the state's competitiveness.
In the end, policymakers either understand the interaction of consumers and businesses in the marketplace, or mistakenly believe that government would better run the economy. Consider what Governor Strickland said in his August 29th remarks on Ohio energy policy: "We need to realize that competing and colliding self interests will not advance a more sensible and secure energy policy. But our collective interest in the health of our economy, the health of our environment, and the health of our future will move us forward."
The "collective interest" versus "competing and colliding self interests"? That's an astounding declaration by the governor of a state in the early 21st century.
As history and common sense economics make clear, it is exactly "competing and colliding self interest" at work in the competitive marketplace that make sure consumers get the goods and services they want and need, and that entrepreneurs and businesses produce, invent and innovate - certainly not the "collective interest," i.e., the government. The collective interest might look appealing at first glance to some, but it quickly becomes clear that even the policymaker with the best of intentions cannot possess the necessary incentives, knowledge or foresight to run all of, or even a chunk of the economy, including energy.
The collective interest always comes up woefully short when compared to the market system of private investment and ownership, competition, and consumer decision-making.
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
This article may be reprinted with appropriate citation and credit.
