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MATTHEW HOLDEN

Professor Emeritus of Politics, University of Virginia
“Energy, Policy and Politics”
February 20, 2004

The national discussion on energy is in need of serious review from all of us and all points of view. I do not mean that policy itself is in need of serious review. That would involve judgments that this morning I do not intend to make. It may be true or it may not, but the way we think about it and the way we permit public officials to talk about it and the way indeed that we insist public officials talk about it may need some serious review because we tend to think that we must talk about comprehensive and unified national policy. It would be almost unacceptable to speak in any other terms. We are the twelfth year since there was a last major bill on energy policy.

The major bill is called the Energy Policy Act of 1992. It consists of thirty titles dealing with a wide variety of subjects and there is no real coherence to it except that it contains on page after page the word energy and deals with a wide variety of subjects having some relationship to energy. It was the bill that Phil Sharp, who was then its sponsor in the house, could get a coalition together to sponsor. I say that because I want to say to you as well that we have pending what may yet come back although it is highly unlikely something called the Energy Policy Act of 2003 which I have not read and I have not tried to read. I have not even tried to print it out on my computer because the bill I am told contains nine hundred pages. I have seen other versions that are eleven hundred pages but that just depends on the font that you are using.

That means that a great many important things are in it. But, I will say as a part of what I think that no human being could possibly hold in his or her mind nine hundred pages. There is no one that could do that. No sponsor, no staff member, no anyone, no one could master nine hundred pages and know what it all means.

Energy policy has to do with petroleum, with natural gas, with coal and with uranium in one form or another. There are many other things, but one must think in some terms about those at some point and in many ways oil becomes the key and the reference fuel. That is lesson one. Lesson two, energy policy involves as both oil and uranium show a permanent intersection, at least for major governments and this is a major government, between energy policies and military policy. Lesson three, a coherent, overriding energy policy that will attain independence, energy independence, one of the national icons that we have come to worship is not attainable in an economy as dedicated to the free market as is ours. Lesson four, energy policy is necessarily involved with the interest conflict between producer interests and consumer interests, self-evident but often neglected. Lesson five, the very concept of regulation that is an important part of ones subset of energy has been under the most serious challenge for about the past ten or fifteen years. So serious is this challenge intellectually that the agency responsible on the electric side, the Federal Energy Regulatory Commission where I once had some responsibility has been involved basically in turning the regulated electric power utility industry into a competitive electric power industry. It is in fact not succeeding at that, but that is a serious effort.
Lesson number six, pure political science in accord with basic interest group theory and if there is anybody to whom I would defer on this subject and I will mention a name out loud that most of you may well not have known is that of Truman. Not Harry, a great man, but one David B. Truman. David Truman died very recently and David Truman’s language runs through everybody’s everyday conversation without their knowing it. He framed all this in a book some fifty years ago called “The Governmental Process.” Outdated, yes, but the basic interest group concept is that interest groups in energy as well as in other American policy drive the action. That leads to my lesson number seven.
Lesson number seven, the indispensability of politics in the process, the idea of achieving some policy independent of politics is not a workable idea.

In thinking about energy policy, it is always important to think about the supply objective. That is what we see, an adequate supply and that requires a number of decisions about the four basic fuels. I say that in order to say that thinking about the legislation that is recently presented and most recent legislation is very hard except on very speculative terms to get an idea of what the supply situation is supposed to be if the legislation could be adopted and implemented in some reasonable terms. The second thing, a matter of great controversy is the other side of that. There is always in this country an environmental protection objective. Every significant energy decision involves some waste matter and what to do with the waste matter raises some environmental protection objective. It produces an increased cost to consumers, to producers or sometimes to both.

There is another objective that gets involved in energy policy discussions sometimes no less and I call it simply a social protection objective. There are two versions of that. There is the protection against sudden disruptive changes that we all heard advertised two years ago in California where bills suddenly were incredible. They were not going to stay that way, but they were indeed very disruptive for the moment. The other question that I had something to do with a long time ago has something to do with long term protection for people who just haven’t got any money. That is a different issue that creeps in, creeps out and so on.

Having said that, there is another set of conflicts that we should take account of. They are present here. They are interest conflicts. Let us begin with customers, but not with you and me as household customers. Some of you have been on another side of this and you may be on another side of it now. Let’s begin with industrial customers in all sectors and notably in electricity. For example, there is a complicated issue coming up involving whether the state of Virginia can do something that the Federal Regulatory Commission says that it cannot and I will describe that a little bit. But the strongest backer I could find, and I went to look for the legal briefs on the Federal side was my friend John Anderson who is the executive director of something called ELCON, the electricity consumers resource council. That is to say this is the prime electricity think tank for large industrial customers and wherever there are issues to be presented, you will find John Anderson there making a case rather effectively. And what they seek? This is what they believe will be of some potential use to them. Other kinds of interest conflicts just to name them obviously producer and buyer, which overlaps with the former. Regional interests extraordinarily state from Northeast to South to Southwest wherein on the electric side today, the highest electric prices are in the Northeast. It is not by any surprise that the state governments state governments that advocate the most vigorous federal action to equalize prices for them are the state governments in the Northeast. I had an interesting illustration of this about many months ago now when I was attending the meeting of one of these advisory commissions. I had the pleasure to be on something called the Electricity Advisory Board. How I got appointed to the Board is indeed a great mystery to me, but they did not ask any inconvenient political questions and I did not ask any inconvenient political questions in return. So I get to participate in the technical discussion and then a big issue arose about whether or not state governments should have any authority to interfere with existing contracts. The state commissioners around the table were strongly advocating their right as commissioners to interfere with the existing contracts. This has to do with a California problem. Lo and behold, a commissioner from Massachusetts spoke up with great elegance and great force making the precisely opposite argument. That is to say something was at stake other than state interest in some theoretical sets. That is another set of interests.

Another set of interests that you are very much aware of, but we should keep all of these in our minds at the same time, is the interests that are associated in Congressional politics. There is a Senate politics, a House politics, and a committee politics. There may be others, but those all are present at the same time. We are talking about all of the players in the arena somewhere. I use that to turn to the Congressional front because the Congressional front involves the problem to which I earlier referred, the problem of massive legislation. My great suspicion by now, that I earlier did not expect to come to was that we simply have the necessity of putting together a winning coalition or a sustainable coalition. The need to put together legislation is too big. It involves things that are not essential for the purpose but have some relationship. It means one more vote or ten more votes whatever the number may be. I referred then to the Energy Policy Act of 1992 when on the one hand and the Energy Policy Act of 2003 on the other. As of the 1992 act, it has three titles. They deal with such things as nuclear licensing. They deal with the creation of the US enrichment corporation. They deal with giving the Federal Energy Regulation Commission where I used to be some authority to make certain interventions in the electric sector that the investor owned utilities have always opposed. The cooperatives, the municipal owned utilities have always advocated. Republicans have tended to oppose. Democrats had split and on this bill in 1992, Phil Sharp was able to get together a coalition that put in that. That, by the way, is the foundation for much else that is happening now. But, there are many other things in the legislation that stands there, but does not have any coherence to it from that point of view.

We come then to the Energy Policy Act of 2003. That proposed act passed the House, did not pass the Senate. It did not pass the Senate because the Senate was unable to muster enough votes to break the filibuster. Basically, the Democrats were on one side with a few Republicans on the other. Basically, the Republicans were on the side of the bill. The bill came out of a conference committee and the bill essentially had taken a position that had been founded on the House side and the House was not disposed to recede at all. Now, what you are talking about there is what one calls eyeball-to-eyeball strategy. You remember the story attributed, whether it is true or not, no one really knew if it was correct at the time of the Cuban Missile Crisis at a certain point. Dean Rusk said to the President or someone, these are the Soviets. We are eyeball to eyeball and someone just blinked. One has a great deal of eyeball-to-eyeball politics where you have rather specially positioned strategic interests that someone has decided cannot go away.

The House, for example, had included some legislation having to do with an additive that apparently makes great sense to people in the oil business. But, it has produced some litigation in New Hampshire and New Hampshire had taken a position and the way this worked out you had two New Hampshire senators who were unexpectedly opposing the bill. That is, two rather conservative New Hampshire Republican senators who would make the difference. That is, it is arguable that from the point of your supply, even if the provision made technical sense and in another sense from another point of view made plenty of increase in supply, it did not make much difference. But, the commitment having been made, the commitment had to be adhered to or so somebody thought and it stood there. You had then a process that went on for a very long time with a conference report that was not going to pass and the conference report did not pass. Now, may I observe at this moment that the situation theoretically could change because the majority leader reserved himself the right to bring it up again in this session. I suspect that is a theoretical reservation in the sense that it probably could not be done. Although it is interesting, the Chairman of the Energy Committee of the House Mr. Tauzin from Louisiana who had been around for many years, a very able person that everyone regards and knows Billy Tauzin as a person of great capability. Mr. Tauzin says he is going to leave. That opens up the seat to a Mr. Barton of Texas to become the chair of the committee. Observe I made the comment that there are regional interests. Texas is always a big regional interest in energy matters. What would you of course expect from the largest oil producing state? It always has been. It always will be. Whatever views one may have of the particular positions they wish to take are to be expected. Mr. Barton may or may not be in a position where he will seek to get his House colleagues to recede from any portion of the legislation that they adopted before in order to have a bill this year although he said as I would expect him to that his objective is that there should be an energy bill.

Well, if there is to be an energy bill, then the House will to some degree have to yield because this Senate will not change very much. There may be another Senate that will change a good deal, but this one will not. The Congressional Front is there, but then there is another front. In thinking about the whys and wherefores of politics of energy at this moment, there is a lesser front. It is less only in the sense that it has less authority. I refer to the regulatory front. Most of you really have no reason to immerse yourself in those details, but I said earlier that somewhere around 1994, the Federal Energy Regulatory Commission made a decision from which it cannot now retreat. It made a decision as you look on its actions that it would retreat from regulation step by step or use its regulatory capacity to move the electric power industry. It was only that part. It had nothing to do with the rest of it. It was going to make it into a competitive system. They did not have to do what they did except as a matter of its own analytical judgment. It was not legally compelled to do so although it maintained it had the legal authority to do so and thus far the courts have agreed that it had the authority to do what it did. In doing so, it has set out clearly by now. There is no mistake in the articulation to produce competition in the sale of electric power and ultimately there has to be competition in the sale to retail customers. Now, the legal jurisdiction then becomes fuzzy.

That then brings me to something that is parallel to it. If there is Federal regulation, then there is also State regulation. There are after all, in all of the states, regulatory entities of one kind or another except in one state. There is only one place in the country where the state owns the electric power system. That happens to be Nebraska. Everywhere else, the electric power system is the one that you know and that system now faces an enormous challenge and this is producing something at that level that I think will be very interesting. It is a reliability issue. It is not a money issue. It is a reliability issue. Let me describe it in a few words. This old system long ago where electric power companies got together and formed voluntary associations that they called pools. They had various degrees of contracts with some even being word of mouth. You help us out. We will help you out. That is to say our generation will serve your need. Your generation will serve our need and so on. That is too simple a translation, but that will have to stand for the moment.

Once the Federal Energy Regulatory Commission began to get into the level of detail that it did, it got into the business of requiring electric power companies to let their transmission lines to be used by their adversaries. Once you got into that, you ended questions about how you operate the system as to guarantee reliability. We have had in the last thirty-nine years four major blackouts in the United States. We had one in New York in 1965 that covered the whole Northeast. We had one in New York in 1977 that was serious, but covered a lesser area. We had one in 1996 in the Northwest that ran from the Province of Alberta, DC I believe, Washington State, Idaho, the northern part of California, and something else that I am not sure what. I was appointed to the committee after that occurred. That is where I got my schooling on that portion. You know what happened? Basically some electric power lines hit some trees and the follow up procedures for shutting off simply could not be implemented fast enough. This stuff moves very fast. Now the evidence of the Lake Erie blackout, which is my name for the blackout that happened last August, because it happened in that region, the evidence tells us similarly that this is serious business. Observe something. We are all electrified. You can’t do your bank account, you can’t lock your store, you can’t make your computer function, you can’t do anything because the four basic fuels have been used in a variety of ways to generate power. With a generation system, when the transmission system does not work, you are dead in the water for that moment. If you ever wanted to see a conflict of nature and culture, you can go down to the Barracks Road parking lot while that was still out last August and observe that nature had overrun culture. McDonalds was not open. There were no lights. I am serious here. The reliability question is not a trivial question. I must say there is a great deal of discussion about it now. It is a discussion about who will have the power to make what rules? Rather the question is whether there is a level of knowledge, which will tell us how to reduce the likelihood of the incidents occurring.

When I work through all these matters, I return to my lessons and I return particularly to my lesson number six. That is to say that I return to the proposition that there are interests at stake all the time. All the time and that getting the policies made that make sense or policies made rather they make sense or not involves reconciling some balance of interests.

I return to my lesson number seven and my lesson number seven says that some level of political judgment is indispensable to achieve a result. Now, let me recite here. We have the problem of a supply objective. In the dealing with the supply issue, all of the other issues are also present.

Let me conclude by saying it this way. That politics is not and please do not misunderstand me, all that there is to it. I emphasize it because it is so seriously underemphasized or thought of so casually as if well, if he just had a different chairman of the committee that would be smarter or if somebody knew how to arrange the votes better or something of that sort. Those things have their place. But, I do not wish to overplay it because the kinds of changes that can be made are all tied up with science and technology and those are all tied up with the economics and the politics.
I was concerned some years ago when we began to move seriously toward basically deregulation of the electric power sector that we were going to upset the finances of that large concentration of capital. I was right. My view is that no one ever thought of electric utilities in those days as filet mignon from an investment point of view. In those days, everyone could recognize it as good hamburger.

In those days, no one heard bankruptcy. In those days, no one heard credit downgrades for major companies. One does now. Now it may be that it is the right and proper thing to do if you are a pure neo-classical economist or if you are at least one judge on the federal court whose opinions I read. He said, “Oh, that is just the market. You take your lumps. As the values go down, so what because it will all work out in the nature of economics.” If you are focused on those aspects of the industry, that is not necessarily so true.

All of this is to say something else. At seven I began. My own view is that we may be in a position where we are caught up in two things. First, we are caught up in the belief that the insistence on our parts, the people in this room, and anybody that talks public policy must talk big policy and have a big view that encompasses everything. It would be very hard for any president to say energy is so hard that I don’t think that I want to invest a whole lot in purporting to reform or remake the whole system now. Any president of course will have many more commitments at a lower level. Any president will have interests that he/she, still he, will have to sustain. Although there will be a fight about that and very often the large bill to a certain extent becomes a cover for that and that arguably can be so.

But, it may be that we are demanding too much. It may be that we need to pull back and ask what are the things that we can break this down to and do something useful with? The other part of it on the reliability side is crucial. I have not heard yet a good sharp argument on the question of what we can do to reduce the likelihood of serious damage. That is one where all sorts of things are at stake. My thread here is that we may be trying far too much. We may have far too many interests in play. It may be that is just the way that the United States is and thus I am seeking what cannot be attained. If I say that we may not need massive legislation which each time it is implemented leads someplace that is not particularly foreseen, but which contains in it the things which are necessary to secure a legislative success at the most.

Maintained by Gloria Smith
Last Modified: Friday, 26-Mar-2004 14:51:45 EST
Copyright 2003 by the Rector and Visitors of the University of Virginia