ENERGY

GARY GARDNER, Director of Research, Worldwatch Institute, January 10, 2003
CZIKOWSKY: What are the prospects of increased use of renewable energy sources around the world? Is there encouraging news anywhere?
GARDNER: YES! Wind and solar energy generating capacity have grown at better than 30 percent annually in the last five years, compared with 1-2% for fossil fuels. They are starting from a far smaller base, of course, but at these rates of growth, the future of renewables is very bright!

TYSON SLOCUM, Research Director, Critical Mass Energy and Environment Program, September 3, 2003
CZIKOWSKY: I never understood the deregulation issue. It was sold as a means to lower prices to consumers by introducing greater competition. Yet, if deregulation means removing caps on prices, the companies are going to realize they can charge as much as the market will bear. Isn’t that what happened in California? I fear that will happen next in Pennsylvania when, in a few years, the price caps will be lifted.
SLOCUM: You (unfortunately) have reason to worry. Consumers were lied to when we were promised that deregulation would lower prices and improve reliability.
Wholesale prices have increased in every deregulated market.
In New England’s deregulated wholesale market, prices have increased as much as 400 percent since 1994. As a result of these higher wholesale prices, states like Connecticut have had to increase retail rates for consumers. In June 2003, Connecticut Gov. John Rowland signed Public Act 03-135, which increases electricity rates for nearly all of the state’s residential consumers. Forced to admit that wholesale prices have actually increased during deregulation, Rowland now claims that retail prices have to increase in the hope that the higher prices entice “competition” to enter the uncompetitive Connecticut market.
Even the most mature deregulated market—Pennsylvania-Jersey-Maryland (PJM) ---experienced a price increase of 40 percent from 1998 to 2002, when the average annual wholesale price for a megawatt of electricity jumped from $22.52 to $31.58. But monthly peak prices have seen far more dramatic increases. For example, prices in the peak month of August increased 250 percent, from $21.85 a megawatt hour in 1997 to $76.93 in 2003.
As a result of the inefficient use of existing transmission infrastructure and uncompetitive wholesale markets, retail deregulation has been a total failure. Ten states over the last two years have repealed or significantly delayed their deregulation laws, and more are slated to raise rates. And all the while, America’s household consumers have no access to competitive suppliers. Of the 40.7 million households in deregulated states, nearly 96% have no ability to choose an alternative, or competitive, supplier. As a result nearly all consumers continue to receive electricity from their original utility at retail prices that are heavily regulated by states (and not subject to market forces).
CZIKOWSKY: The problem with electricity is it is a public good provided by private companies. This is fine, yet if they are run with a profit incentive, there is less incentive to make costly investments that would improve service and upgrade the network as a whole. Have you any data on the changes in infrastructure investments between regulated and deregulated electric companies?
SLOCUM: Since deregulation was ushered in via the Energy Policy Act of 1992, the ability of states to order utilities to reinvest their profits back into the transmission system has been undermined. In 1990, utilities spent $3.3 billion (in today’s dollars) to upgrade and maintain the nation’s transmission system. In 2000, utilities spent less ($3 billion) at a time when more power was moving through the grid. In addition, deregulation forced the firing of thousands of utility workers, hindering the ability of utilities to adequately staff maintenance and operation.

JERRY TAYLOR, Natural Resources Director, Cato Institute
CZIKOWSKY: What are your thoughts on the deregulation of the electric industry? Should government have maintained regulations that would have required industry investments in maintaining its infrastructure and in keeping rates lower? After all, if the goal of increased competition was to provide consumers lower rates, shouldn’t consumers have been provided assurances that rates would be kept down and not used by the industry to take advantage of the lack of regulations by then increasing rates?
TAYLOR: This is a big question. In brief, the “old system” of vertically integrated power companies (that is, companies that owned the power plants, transmission lines, neighborhood wires, and residential meters) arose not because such an organization structure took advantage of economies of scale but because it was the best way to manage the highly complicated matter of moving electrons around on wire. Unfortunately, vertically integrated companies have a lot of market power, so what you gain in operational efficiency you perhaps lose in that you are living with what many people think is a natural monopoly.
Restructuring was aimed at killing vertical integration. Economists discovered that technological advances rendered the business of generating electricity quite competitive. They argued that the industry should be broken up: utilities forced to sell-off their competitive assets (the power plants) and be confined to the heavily regulated business of moving electrons from independent generators to consumers.
What was overlooked, I think, is that it is extremely difficult to manage power lines in such a world with any modicum of efficiency. The problem is that this form of deregulation turns the transmission grid into an incredibly complex public commons, and one thing we know about “the public commons” in any industrial sector is that its natural tendency is to deteriorate. That’s what we’re seeing today in the electricity sector.
My own take is that it’s unclear whether vertical integration is or is not the most efficient way to organize the industry. It’s also unclear whether the “best” system is one which relies on a relatively few power plants and lots of wires to hook everyone up to them (sort of like computer mainframes, which I’ll call the Harvard model) or a lot of smaller power plants with relatively less wires necessary (sort of like desktop PCs which I’ll call the “Green” model since lots of enviros like this a lot).
The only way we’ll learn the answers to these and other questions is to turn market agents lose to discover them via trial and error. That’s the greatest asset provided by free markets—they’re wonderful engines of discovering how best to efficiently do things. If we could know a priori how best to efficiently manage our economic transactions absent market information, then socialism would be a viable economic model. But we can’t so it isn’t.
DARREN McKINNEY, National Association of Manufacturers Media Relations Director, November 18, 2003
CZIKOWSKY: The energy bill has tax breaks for energy companies. Yet, do we have any idea how much of the tax breaks will go towards keeping energy costs down for businesses and households, how much will go towards reinvestment that will create more jobs, and how much will go towards shareholders? My question: if manufacturers had been offered similar tax breaks. Would you have been able to create more jobs and save consumers more costs? Are you a generally more efficient industry than the energy sector?
McKINNEY: The U.S. manufacturing sector is the most efficient economic sector in the history of human beings and, thankfully, Congress and the Bush Administration have seen fit to pass significant tax relief in the last two years that has benefited manufacturers and other businesses.
With respect to knowing precisely how energy companies will use the tax relief they’ll get with this energy bill, I can’t possibly know for sure. But considering they—like all businesses—make more profits when their products are more affordable, I thinks it’s a reasonably safe bet that both residential and business consumers will enjoy some of the energy cost stability once this bill becomes law.

STEPHEN LEEB, President, Leeb Capital Management, April 7, 2004
CZIKOWSKY: What is the elasticity of demand for gasoline? Presumably industry economists have been studying this at length. What is the consensus of thought on this, or is there one? I am certain executives are wondering what price maximizes their profitability, and a slow, gradual rise in price might lull a public into paying higher prices. We know Europeans will pay it. Will Americans also pay such high prices, or will they cut their travel and lower demand enough to cut into profitability when gas prices reach certain levels?
LEEB: I doubt that energy insiders have been studying this. Recall-Wall Street still expects energy prices to decline. Hopefully, the price gains will be gradual, but gradual or not consumers will pay them and also cut their travel. I can’t stress enough that this crises is going to turn the economy and the investment arena on its head. Everything is going to change in the next five years.

GUY CARUSO, Energy Information Administration Administrator, May 27, 2004
CZIKOWSKY: How would you describe the structure of gas price setting? Is it primarily a cartel that sets prices according to their perception of what demand will be? To what degree are prices influenced by factors other than demand?
CARUSO: Gasoline prices are not regulated, but are determined by the economic forces of supply and demand. The largest component behind gasoline prices is the price of crude oil, which typically represents over 40% of the retail price of gasoline. Federal, state, and local taxes make up about another 20% or more of the retail price. The remaining amount is distributed along the rest of the supply chain, from refiners through retailers. In addition, imports are playing an increasingly larger role in the supply of gasoline here in the U.S., especially during the peak summer driving season. As U.S. gasoline prices increase, imports from other countries are drawn here and tends to help balance supply and demand.

BRADLEY C. PROCTOR, GasPriceWatch.com Founder, May 28, 2004
CZIKOWSKY: It was stated that oil prices are set by supply and demand and not by a cartel. Then what is OPEC and what influence do they have on prices?
PROCTOR: Everything we have seen has shown it is a supply and demand issue-with a little bit of environmental regulation put on top- to create those boutique blends of gasoline. OPEC is 11 nations that have banded together to set a price for their oil production. They represent a large portion of the world oil supply but in many cases have not stayed the course on production levels they have set: the most recent was the April 1, 2004 reduction in production that was agreed to but was never adhered to.

JOANNA D. UNDERWOOD, INFORM President, January 12, 2005
CZIKOWSKY: How more open, or closed, are you finding people in China and in India towards accepting the use of alternative fuels?
UNDERWOOD: The Chinese and Indians have chosen natural gas as their primary alternative fuel and they are pursuing this option with great enthusiasm for environmental, health, and fuel security reasons.

LOWELL UNGAR, Alliance to Save Energy Senior Policy Analyst, March 28, 2006
CZIKOWSKY: Which tax credits save the most energy? Is it more effective, if we have limited amounts of tax credits, to use them for purchasers of hybrid vehicles, or for the conversion of large commercial buildings into more energy efficiency, or for conversion of homes into greater energy efficiency, or for utility companies to make the power grid more energy efficient?
UNGAR: That’s a question we constantly ask ourselves. The effectiveness of a tax credit depends on the energy saving potential, whether the tax credit is enough to change behavior, and whether it is just a give-away to people who will make the efficiency improvements anyway. There is a tremendous potential for saving energy in all areas you mention and more—new homes, existing homes, appliances, commercial buildings, cars and other vehicles, industry, etc. The most effective credits are those that spur a lasting change, creating a market for energy-efficient products even after the credit has ended: We’ll have to see which of the new credits has the most impact.

STEVEN PEARLSTEIN, Washington Post columnist, May 24, 2006
CZIKOWSKY: I get my information on ethanol the same place where millions of Americans got their information: from an episode of “West Wing”. The debate on ethanol on the program left me with the impression that ethanol subsidies are a waste of money that help special interests in farming states like Iowa with an early Presidential caucus. Yet, I also believe that there has to be a way to find a more efficient fuel and less polluting method to run cars that uses food waste of a more recent, recycled nature rather than using food waste that has been compressed into petroleum. So: what is the truth? Are subsidies to the ethanol industry a boondoggle, or are they sincere attempts at finding a solution to our energy and environmental problems?
PEARLSTEIN: If ethanol was viable as a gasoline alternative on its own, there would be no need for subsidies. That was the case until recently. The farm lobby pushed the subsidies because it was good for farmers, using environmental and energy security arguments since they couldn’t sell it to Congress just by saying “it’s good for us.” But the situation has now shifted with the big spike in gasoline prices. They don’t need an actual subsidy. What they need is a guarantee that the market will be there over the long term at prices above $2 a gallon. That will make investors comfortable about investing in the crops, in the processing and in the distribution network, including the pumps. And my point today was that this is where the government can help, by priming the pump and creating a floor under the demand. It can do that with rules about much ethanol must be in gasoline, and having all new cars being dual fuel, and making sure all fueling stations that sell gas also sell ethanol alongside the gasoline.

ROBERT BRYCE, Energy Tribune Managing Editor, April 24, 2008
CZIKOWSKY: What are some of the lessons we should learn from the demise of Enron? Do you see other companies responding to these lessons and taking appropriate actions?
BRYCE: I’ve been thinking a lot about Enron lately. The hardest lesson—and also the biggest challenge—is that financial engineers seem to always seem two or three steps ahead of the regulators. That’s the issue at hand with the subprime mess. The bankers/financial engineers created such incredible complicated systems that no one could really understand them. The same thing happened to Enron. The issue now for regulators is: how do we properly regulate the financial markets without killing them. When I wrote “Pipe Dreams”, I wondered if the repeal of Glass-Steagall Act was a mistake. In hindsight, it may have been.
CZIKOWSKY: How much energy does it take to develop biofuels, and how much different is this than the energy it takes to develop oil and gas? I ask because isnt’ one part of the problem that biofuels are not the quick solution that some think there is to our energy demand because they forget that it also takes energy to develop biofuels, so there is more of a marginal saving than the “face value” saving of switching form one source to another?
BRYCE: The energy return on energy invested with regard to biofuels is a complicated issue. According to the USDA, the return is slightly better than 1 to 1. That is, for each Btu invested, you get about 1.34 Bts back. But much of the accounting depends on the credits they take for counting byproducts (mainly DDG) that are produced during the ethanol production process. Without that credit, the return falls dramatically, so that for each Btu invested yields just 1.09 Bts. I’ve written a great deal on this issue. And while it’s important, I think the bigger issue these days is the deleterious effect biofuels are having on the food markets.
CZIKOWSKY: How much control does the oil industry have over possible competing energy sources? Is it true that much of competing sources have been purchased by the oil industry who in turn have been slow to develop these new industries?
BRYCE: I don’t necessarily agree. I know the conspiracy theorists like to blame the oil companies for killing the electric car, or whatever, but these companies are in business to make money.
Exxon Mobil just introduced a new battery. Why? They are interested in profit. BP and Shall are investing in solar.
Chevron, I believe, is the biggest producer of geothermal power in the U.S.

BRENDAN KOERNER, Slate writer, July 10, 2008
CZIKOWSKY: What is some of the progress being made in biofuels besides ethanol? Why aren’t we looking more at things like cane sugar and algae?
KOERNER: Corn based ethanol is a real hot potato issue nowadays, especially in light of recent claims that it’s a net energy waster when everything is factored in. (Plus there was a recent study asserting that current biofuels production—most of it from corn is responsible for a lot of the recent run-up in global food prices). Corn is obviously a huge crop in the U.S., far bigger than either cane sugar or algae, so there are a lot of political considerations mixed in. Other countries—notably Brazil—are doing some promising things with sugar-based ethanol, but frankly I need to see more data believe I believe that such biofuels are viable at present.

RICHARD NORTH PATTERSON, novelist, January 6, 2009
CZIKOWSKY: There have been some historical arguments that the oil industry had significant involvement in the early decades of the 20th century in promoting the rise of gas-powered vehicles over electric vehicles. Many don’t realize that about one third of all cars were once electric. To what degree do you believe there has been direct and indirect, if any, collaborations between the oil and auto industries since then?
PATTERSON: That is certainly consistent with more recent history, in which the oil and auto industries have promoted vehicles and opposed regulation in a matter calculated to promote their economic interests. The result is a growing economic, environmental, and---I would argue---moral crises. Oil dependency is not only bad for us in terms of sheer self-interest, our dependence on oil autocrats diminishes our standing on human rights.