Exelon’s John Rowe and Google’s Eric Schmidt: Truth to power?

Lynne Kiesling

Here’s an interesting juxtaposition of two prominent executives performing sound public choice analyses, and I think they complement each other, at least in my work! This weekend’s Wall Street Journal featured an interview with Exelon’s John Rowe, A Life in Energy and (Therefore) Politics. Exelon is the third largest investor-owned utility/generation owner in the country, with one of the largest nuclear generation fleets outside of France. Between the growth of Exelon through mergers and the provenance of Commonwealth Edison (a substantial chunk of Exelon) as Samuel Insull’s pioneering origins of the electricity industry, Rowe has experienced many of the crucial business and policy aspects that have characterized this industry for the past century.

And for my part he pretty much nails the public choice analysis. In discussing the politics of electricity in general, and in particular Exelon’s support of active federal carbon policy:

In a visit to The Wall Street Journal’s offices recently, Mr. Rowe was eager to strip the altar of green jobs—and the many other political pieties that distort the energy industry, even a few that he says belong to the Journal editorial page.

“The utility business is a funny business and almost no one in any political authority in either party really believes in orderly markets in electricity,” Mr. Rowe says. …

The reason for this seeming contradiction—between simultaneously supporting free markets and interventions like an economy-wide CO2-reduction plan—is that “we’re always being asked to do things that are in our view bleeding crazy,” as he’ll go on to explain.

For starters, the anti-market demands made on Mr. Rowe are bipartisan.

He discusses the cost differential between, in this instance, wind power and other lower-carbon means of generation, such as natural gas, and the bipartisan political support for wind despite the reality that we get more carbon reduction “bang for the buck” from natural gas. Interestingly, in this interview he does not tout nuclear as the be-all-end-all carbon-free energy approach, given construction costs; he also dismisses clean coal.

Rowe is also an enthusiastic amateur historian, so is very well-versed in the origins of the politicization of the electricity industry:

This political economy is an artifact of the historical electricity market—which, through most of the 20th century, was not really a market at all. Until recently, almost all consumers bought electricity from a monopoly supplier at rates set by the government, with a guaranteed return for utilities. That model eroded amid deregulation in the 1980s and ’90s, and the rise of more efficient wholesale electricity markets and independent generators. Commercial and now even some residential consumers are no longer captive, but the political habits persist. …

Mr. Rowe continues that “Somebody else wants clean coal; it’s a non sequitur and it’s not economic either. Somebody else wants wind or solar, and meanwhile . . . the market says the only thing that makes sense for a decade, maybe two, is for new generation to be gas-fired. Natural gas is cheaper than everything else,” thanks to domestic shale finds via fracking and other factors. “It’s likely to stay that way for a long time—but it isn’t what politicians want.”

I encourage you to read the entire interview; I’ve omitted a very interesting discussion of the debate over the extent to which EPA rules would shut down sufficient coal-fired generation to cause reliability problems, which has been asserted in, for example, Texas (but I don’t see how that makes sense, given the loooooong portion of the generation supply stack that is natural gas).

Rowe’s public choice analysis of his industry is complementary to one offered by Eric Schmidt of Google in this Washington Post interview in early October, on the heels of his first-ever Senate testimony experience (Gordon Crovitz analyzes Schmidt’s interview in today’s WSJ, Google Speaks Truth to Power). It’s an absolute must-read in its entirety, but here’s one piece of sound public choice analysis:

Washington—having spent a lot of time there, I grew up there and have spent a lot of time there recently—is largely defined by detailed analytical views and policy choices that are not very good. You know, each policy choice has a winner and a loser, right? Somebody’s ox is getting gored. They’re complex arguments: They’re economic and political and social, and everyone has an opinion on those. Here, the arguments are, how do we make something that affects a million people? How do we change the economics of an industry?

And one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome. …

Come on. Give me a break. The press is so young, they don’t understand the history here. We’re still a small component of what a whole bunch of other companies have done, and certainly most other industries. So I reject all such charges [about the magnitude of Google’s lobbying]. And I’m very clear on that because people can’t do math. Take the numbers of the amounts of money that go into the regulated industries of all sorts—and then compare high tech, and compare Google in specific, and it’s miniscule.

And privately the politicians will say, “Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.” We, after some debate, set up a PAC, as other companies have. And it’s basically in the interest of our customers to do this, because the government can make mistakes. And for every one of these Internet-savvy senators, there’s another senator who doesn’t get it at all. And it’s not a partisan issue. It’s true in both parties.

This excerpt highlights two timely insights. First, note the “you need to participate in our system” dynamic that defines the corporatist political system. Companies like Google feel compelled to engage in lobbying to rectify what they see as ill-informed political decisions (a reasonable stance, given the lack of technological sophistication in Congress) that would impair their ability to create value for consumers and profit from doing so. Add this incentive to the more cynical and craven one of manipulating the political process and ensuing legislation to favor your company, and you have a range of high-powered and low-powered incentives that drive toward increasing corporatism in politics.

Second, note his observation that “… one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome.” This is the clearest articulation I’ve seen of a hypothesis that I’m currently working on with respect to electricity regulation (here’s the complementarity between the two analyses). Regardless of industry, regulation does specify a path to follow, and it’s a backward-looking definition. Combine Schmidt’s observation with the summary of the history of electricity regulation from the Rowe article, and you get a potent combination leading to technological inertia … which, when you’re talking about an industry that enables and is the driving force of a lot of our productivity and lifestyle, is a costly impediment to economic growth.

Combining these two interviews shows the breadth and depth, and costliness, of today’s corporatist regulatory and political environment.

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3 thoughts on “Exelon’s John Rowe and Google’s Eric Schmidt: Truth to power?

  1. Lynne,

    In the long run, no, coal retirements in ERCOT don’t threaten reliability. If Texas has another record hot, dry summer next year like the one this year, then there is a heightened reliabilty risk if any generation is derated or retired.

  2. “First, note the ‘you need to participate in our system’ dynamic.”

    And then you discover, after you’ve made initial contact (and everyone is happy you are there, yay you!), and you have a PAC (and everyone is happy you have a PAC, yay PAC!), that “our system” is a competitive one. After that first happy meeting where they toss you a few softballs, you are suddenly a little leaguer in the batter’s box leading off against a very nasty looking MLB pitcher.

    Scary, right? Fortunately, just like some video games, with enough money you can buy yourself the batting skills needed in the big leagues….

  3. “Second, … ‘one of the consequences of regulation is regulation prohibits real innovation.’ ”

    See Richard Munson’s book, “From Edison to Enron,” which illustrates this point pretty well. The book is a history of the electric power industry in the U.S. It captures much of the inventive messiness and competition of the early days – say about 1880 to 1910 – and the subsequent dullness of the 1910 to 1960s period. And the subsequent messiness of the 1970s as the regulators+regulated industry flailed around trying to keep up with a rapidly changing environment (environmentalism, inflation, energy price shocks).

    Competition was the hallmark of the earlier period, and the spread of regulated monopoly was the hallmark of the second period. This latter period is described as a “golden era” for the industry – prices were going down, markets were expanding, sales were up, costs were falling and so profits were up and practically everyone everywhere was happy with the electric power business. Munson introduces his discussion of the “golden era” with the phrase “Despite the dearth of Edison-style revolutionary developments…” (or something like that, I’m working from memory). Generators got bigger, transformers and other equipment was improved, optimization methods emerged and were applied successfully in economic dispatch, but essentially the industry of the 1960s would have been recognized by the Samuel Insull of 1910.

    The whole expensive, time-consuming and essentially unresolved battle over stranded costs shows how well regulated industry handles real innovation (and why regulation resists such kinds of innovation as much as it can). There is just no right answer within the cost-of-service regulatory world for the appropriate rate of return on money invested in innovation. Spend a lot of money and fail? Not “used and useful,” so not recoverable in rates! Spend a lot of money and succeed, essentially undermining the economic value of 1/2 your assets? Okay, cut the rate base in half!

    The only way to innovate is from the outside, but to win that battle you have to take on both the established interests and the regulators. If we take Tom Casten’s calculation that the economics of generation turned from central station to distributed generation in the early 1970s, note that it is about 10 years before PURPA is implemented and it becomes possible for anyone to do much about distributed generation, and then it is another 10-20 years before the independent power sector really emerges as a viable sector of the industry. (And yet still mostly central station power. And you still have to be a state-licenses electric utility – i.e. get permission from your regulator – if you want to generate your own power and sell a bit to your neighbor! Grrr.)

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