Wsj Energy Bill Article

Wednesday’s Wall Street Journal had an interesting little article on Congressional progress on the energy bill (subscription required). Not surprisingly, ethanol is playing a large role in the horse trading:

The big winner in last-minute wrangling over the 800-page measure, which is estimated to cost taxpayers about $18 billion in tax incentives, appears to be the ethanol industry. It has pushed in the final hours of negotiating to increase the federal mandate for the largely corn-produced gasoline additive.

According to those close to the deliberations, which have been among Republican leaders and behind closed doors, the ethanol lobby has won a “conceptually cleared” agreement to raise the starting point of the mandate from 2.6 billion gallons of the additive to nearly three billion, starting in 2005.

The mandate would require oil companies to use five billion gallons by 2012. It is regarded as the “political driver” of the bill because of ethanol’s broad appeal to farm state lawmakers, particularly the Senate’s Democratic leader, Tom Daschle of South Dakota.

One final sticking point for Republican negotiators is the price. Currently, Congress provides a 5.2 cents a gallon exemption from federal excise taxes for ethanol blends, which costs the Highway Trust Fund about $2 billion a year. Under the agreement being negotiated, the trust fund would be reimbursed by general tax funds, putting the ethanol burden on all taxpayers.

Ethanol would largely replace methyl tertiary butyl ether or MBTE, an additive made from natural gas. Under the final agreement being negotiated, Congress would leave it up to the states to decide whether to ban use of MBTE, which has tainted some drinking water supplies.

Very few people realize that ethanol production is already subsidized, through exemption from federal fuel excise taxes. This bill, as the article notes, would ensure that all taxpayers bear the burden of subsidizing ethanol, even though its energy efficiency and environmental benefits are either negligible or negative, depending on whose scientific results you believe. It’s a beautiful, painful lesson in Mancur Olson’s Logic of Collective Action — concentrated benefits and diffuse costs work to the advantage of special interests, who will work hard to gain those benefits.

The other sticking point in the negotiations has been electricity, with Southern representatives firmly adhering to stands that support the intransigent, backward-looking, regulatorily co-dependent interests of a large constituent: Southern Company.

In the bill’s most complex section, the electricity section, lobbyists for Southern utilities appear to have won agreement for a measure that would let them decide what outside wholesale generation companies might have to pay to use their transmission lines.

The way that sentence is worded obscures the real issue, which is participant funding of transmission construction. This Dow Jones article from Wednesday (subscription required) at least in part summarizes the issue, but it also illustrates how Trent Lott is trying to wrap rent-seeking regional protectionism in free-market rhetoric.

The dispute over how to share transmission system costs between entrenched utilities that own the high-voltage lines and independent companies that use them to sell competing power has snarled closed-door discussions in Congress over a massive energy bill .

“It’s a matter of fairness,” said Sen. Trent Lott, R-Miss. “The people that provide the power or get the power should pay the cost.”

He said it was wrong for Mississippi electricity users to pay for line improvements “that other people are using and other people are benefiting from.”

The issue has held up progress on an energy bill because of Lott’s demand that utilities owning the lines be given a greater say over who pays for improvements. He also wanted to curtail the ability of the Federal Energy Regulatory Commission to impose cost-sharing agreements.

Two politically powerful utilities – New Orleans-based Entergy (ETR) and Atlanta-based Southern Co. (SO) – which own thousands of miles of transmission lines across the South, have pushed Congress to impose a cost-sharing system that gives them more control over who pays for transmission upgrades.

Yes, having users face the actual costs of their network use is important for leading to optimal network investment. But giving large, government-protected incumbent monopolies gatekeeper status in a highly prescriptive way is not going to lead to users facing the actual cost of their network use! It is much more likely to result in users facing monopoly prices for network access.

A far more efficient, fair, and market-oriented approach would be to unbundle wires and energy, and remove the incumbent utility’s monopoly by allowing entry for competitors to the grid, both from alternate wires and from distributed generation. Another good approach would be to allow co-tenancy, or joint share ownership of the wires, with use rights accruing to owners in proportion to their ownership shares. They can then either use those shares themselves, or sell transmission rights to other energy commodity companies.

Such an approach is more likely to result in optimal network investment. But really, is that what Southern Company and their Congressional representatives truly want? Or do they want the persistence of the status quo in the face of dynamic economic and technological change? If the latter, they are simply delaying the inevitable.

One thought on “Wsj Energy Bill Article

  1. What is the actual net energy impact of ethanol? If the use of this substance were to go up 10X, how much additional energy would be used in growing, harvesting, transporting, etc? Has anyone done any credible (ie, not totally dominated by special pleading) studies on this matter?

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