The New Power Rules: Marrying Action and Consequence

This speech by David Morris, Vice President, Institute for Local Self-Reliance was presented to the Environmental Grantmakers Association in Houston, Texas, on October 28, 1998.

Let me begin with what I hope is a relatively uncontroversial proposition. Rules Matter. Some of you may have a visceral reaction to the word”rules”, for it conjures up notions of meddling and government bureaucracies. But the reality is that human societies always have and always will make rules that channel scientific genius, and investment capital and entrepreneurial energy in certain directions. We make the rules, and to a large extent, the rules make us.

Until very recently the rules we developed–laws, regulations, tax policy, codes–encouraged wastefulness and pollution by developing systems in which we separated action and consequence. Indeed, separation seems to be the key design principle of modern societies. Single use zoning divides our communities into areas for work, shopping and residence. We automatically funnel tens of billions of dollars a year for the sole purpose of building high speed highways. We give utilities the governmental right to seize private property, enabling tens of thousands of miles of high voltage transmission lines.

The result of these rules is that we have separated the worker from the work place, the power plant from the customer, the oil well from the car. We separated those who make decisions from those who feel the impact of those decisions. We separated cost from benefit. We separated responsibility and authority. We geographically separated consequence and action.

Perhaps the most stark case of this is the way we introduced nuclear power. We developed rules which allowed host communities to benefit from the enormous flow of tax related revenues to local budgets while guaranteeing, by federal law, that they would never have to become responsible for their nuclear wastes.

We made choices. In 1970 the Clean Air Act tackled the problem of industrial pollution by encouraging industries to raise the height of the smokestacks. That transformed a local pollution problem into a regional acid rain problem. What if the Clean Air Act instead had required that the stacks be lowered and curved and stuck into the front window of the executive suite? I submit to you that if we had done that, if we had married action and consequence, authority and responsibility, company engineers would have begun designing zero emission factories back in the 1970s.

Today, in hundreds of cities and states and in the halls of Congress, we are writing new energy-related rules. What should these rules be? Let me briefly offer five for your consideration.

Mandate Renewable Energy

First, mandate the increasing use of renewable energy. Only through mandation will we develop sufficient renewable energy resources to make a real dent in our environmental problems.

Our greatest success in reducing pollution has come when we have legally required engineers to use their ingenuity to produce more efficient products. As a result, today’s homes use half the energy per square foot as their predecessors. Refrigerators use 75 percent less energy. Vehicles are twice as efficient. Unfortunately, 25 years ago we exempted light trucks from these efficiency standards and today about 40 percent of new vehicles are driven through that loophole, lowering vehicle efficiency levels. When California enacted regulations that required an increasing number of zero emission vehicles it spurred more corporate investment in clean vehicles in the next five years than had occurred in the previous 75 years.

We need to do for the supply side what we did on the demand side. We need a renewable energy standard. Interestingly, four years ago President Clinton proposed one, a 30 percent renewable oxygenate standard for transportation fuels.

At that time, many in the environmental community refused to support that initiative because it was perceived as an ethanol mandate. That it was, but it also was the first time in history that the federal government had established a renewable standard and the environmental community lost an opportunity to support the principle and demand that it be applied more broadly, for example, to federal purchases and generation of electricity.

Today eight states have mandated the construction of increasing amounts of renewable electricity. Two of them, Iowa and Minnesota, have done so outside of the electricity restructuring process. Minnesota has also adopted a renewable transportation fuel standard as well.

Marry Authority and Responsibility

Second, nurture energy systems that couple responsibility and authority. In more than 2500 towns and cities about 30 percent of the nation’s electricity customers currently own their electric companies. We should nurture that organizational form.

Now I can already hear murmurs in this audience from those who know that many publicly owned utilities have been anything but supportive of an environmental agenda. Yet some of the nation’s environmental pacesetters have been publicly owned utilities—Seattle, Sacramento, Eugene, Traverse City, Osage. Unlike investor owned utilities, publicly owned utilities are owned by their customers. As you will repeatedly hear at this conference, in poll after poll, the vast majority of utility customers have expressed their willingness to pay a little more for renewable energy, especially if it is locally produced. Our job is to make customer-owned electric companies more responsive to the will of their customer/owners.

In the post-deregulation era, a new type of utility is emerging, one that does not own its own power plant or power line. In the two dozen or more states that are restructuring their electricity systems, we have a historic opportunity to enact rules that encourage new utilities which, like their publicly owned brethren, marry authority and responsibility.

In an era of customer choice, a key question is, “What do we do if the customer chooses not to choose?” This is not a theoretical question because so far the vast majority of customers in states that have deregulated retail electricity, allowing the customer to choose his or her supplier, have decided not to switch to a new supplier. If the customer should decide not to decide, who then should be their default supplier?

Once upon a time the answer would have been obvious. The local utility. But that was obvious only when the utility owned both transmission lines and power plants. In the future, most utilities may no longer own power plants. They will make their money solely by distributing electricity. Thus there is no longer a compelling reason for the local utility to be the default supplier.

In one state, and one state only, Massachusetts, due to the remarkable work of Selectman Matt Patrick of Barnstable, the default supplier is the town or the city. Massachusetts allows a town or city council to formally vote to assume the role of electricity supplier for its residents and businesses. Individual customers can opt out and choose their own supplier, but if they choose to do nothing, their community represents them.

In Massachusetts local control is favored over absentee control. In Massachusetts the rules favor linking authority and responsibility.

Decentralize Capacity

Third, encourage energy systems that decentralize capacity. We began this process in the late 1970s when the federal government changed the rules to abolish the 75 year old monopoly utilities had over power generation. The 1978 law required utilities to purchase independently produced power. By 1991 a majority of all new power capacity was built by independent power companies and the size of the average new power plant had dropped by about two thirds.

Today a new generation of household and commercial building sized power plants is entering the marketplace. Indeed, the power plant of the future may well be an integral part of the building–solar cells built into the roof shingles or walls; furnaces that generate electricity as well as heat.

On-site generation brings many advantages. It wastes the least energy and saves the most money because a new power plant is built only when there is a demand for new power. By putting a power generator in the house, it encourages the building owner to maximize efficiency because the greater the efficiency, the more electricity he or she can sell.

To encourage on-site generation, twenty states have passed laws that allow the electric meter to run backwards, thereby giving the on-site generator the retail price for its electricity. Net metering may be worth about $500 a year to a household. Some communities are beginning to reexamine their building and zoning codes to enable and encourage on-site electricity generation.

Make the Price Reflect the Cost

Fourth, get the prices right. I need not convince this audience that today the price of many of our products does not reflect their true environmental cost. This is particularly true in the case of fossil fuels. Our reliance on price and not cost has led not only to an increase in pollution, but once again to a separation of action and consequence.

Today we subsidize fuels that are located unevenly around the planet, fostering a reliance on long distribution lines and creating the conditions for political instability and violence, while we penalize energy sources like wind power and sunlight that are available in every community.

A growing number of countries, Germany being the most recent, are making the price reflect the cost by imposing a carbon tax on fuels and, to make the new tax politically palatable they are using the proceeds to lower property or income or payroll taxes.

In this country, the good work of Redefining Progress and the Minnesotans for an Energy Efficient Economy has laid the groundwork for an ecological tax shift, but progress has been modest. Here again the current restructuring of the electricity system offers us a historic opportunity.

When customers can choose to buy out-of- state electricity, then in-state suppliers are adversely effected by local property taxes. In many states, utility property is taxed at a higher rate than other property. Moreover, there are franchise fees and sales taxes imposed on electricity. States that are moving toward restructuring are embracing a tax shift, a reduction or elimination in property taxes or franchise fees on utilities in return for a wire charge, that is, a fee or tax paid by the final customer on all electricity purchased, whether from inside or outside the state.

The fact that a tax shift is a key element in the restructuring debate provides us the opportunity to introduce the concept of an ecological tax as the basis for the wire charge. Why not tax electricity on the basis of its pollution impact? The easiest way to accomplish this is to impose a carbon tax on the electricity, a tax which varies depending on the fuels used to generate the electricity.

Nationwideover $15 billion a year is generated from electricity related fees and taxes. To raise the same amount of revenue would require a carbon tax of $75 per ton. This would also raise the price of coal-fired electricity by almost two cents a kilowatt hour, an amount larger than the present federal producer payment to wind. Indeed, this makes for good long term policy. Instead of begging legislatures to subsidize good fuels we should withdraw the subsidies to bad fuels by internalizing their true environmental cost in their price.

Halt the Concentration of Economic Power

Fifth, impose an immediate moratorium on further energy mergers. Concentrated economic power is antithetical to the diversity principle of ecology. It separates authority and responsibility, moving those who make the decisions further away from those who feel the impact of those decisions.

The concentration of economic might is occurring at a frighteningly rapid pace. Last year, a trillion dollars of mergers took place in this country. In the last four years more than$75 billion in mergers have taken place in the energy sector alone. Indeed, about one third of the entire asset base of private utilities has been the subject of merger activity. Today there are over 200 investor owned utilities and none control more than 3 percent of the market. Some prominent observers believe that in 10 years only a dozen or so giant firms will control the majority of our energy system.

Those who support these mergers predict they will lower costs, but the primary motivation is not efficiency but greed. Merchant banks are estimated to have initiated upwards of two thirds of all merger and acquisition activity.

To be true to our guiding objective of marrying action and consequence, responsibility and authority, we must impose a moratorium on further mergers. The national associations that represent customer owned utilities–the National Rural Electric Cooperative Association and the American Public Power Association–have already called for this. Joel Klein, antitrust chief of the Department of Justice, has supported such a moratorium.

And when we do entertain merger applications, we need to change the rules so that the burden of proof is on those who would concentrate power, not on those who would disperse power.

It is trite to talk about how we’re living through a moment of great change. So I won’t. But I will remind you of Bertrand Russell’s distinction between change and progress. Change is inevitable, he said, while progress is problematic. Change is scientific, while progress is ethical. Change will occur, whether we will it or not. But progress will occur only if we develop rules that channel entrepreneurial energy, scientific genius and investment capital toward the ends that we desire. In this case, progress means constructing an energy system where the consequences of our actions are felt by those who take those actions, where the scale of the energy system encourages and enables individuals to participate in making decisions that can benefit not only them, but future generations.

Thank you.

This speech was originally presented at a conference of the Environmental Grantmakers Association 1998 Retreat in Houston, Texas, on October 28, 1998.

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David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.