The Public Policy / An Imminent Electric Orgy

...They "concluded that under this "least-cost" strategy the market share of electricity would have dropped from an actual 30 percent to 17 percent, that of oil from 36 percent to 26 percent, that of natural gas and coal (excluding coal burned to generate electricity) would have remained about the same, and that of energy services due to technological improvements would have jumped from 10 percent to 32 percent...

...Like Lovins, Sant begins with the point that we do not need "nuclear-generated electricity" or "coalgenerated electricity," any more than we need "hand-cranked electricity...

...Johnson, authors of "Behavior of the Firm Under Regulatory R e s t r a i n t , " American Economtc Review, December, 1962...

...t t l n "The Least-Cost Energy Strategy: Minimizing Consumer Costs Through Competition," The Energy Productivity Center, Arlington, Virginia, 1979...

...This waste is reflected in its price...

...More important, however, we should emphasize removing unnecessary barriers to increased competition among any firms that want to supply the services we need--heat, light, transportation, etc.--without regard to how they go about it...

...What Lovins, the Harvard Business School analysts, and Sant have in comrrfon is a stubborn insistence on comparing apples only to apples-specifically, the cost of a quad of new energy over and above our present level of production from any source in 1980 (or any given year in the future) with the cost of the same quad from any other source in the same year...

...As many careful readers deduced, the Times had been given an advance copy of the Washington Quarterly, which was the starting point for the Times article...

...In this regard, the nuclear power industry is similar to a good many other regulated industries that have a love-hate relationship with the federal and state agencies that harass them but simultaneously shelter them from potential competitors...

...Among these bad habits is that of acting as if any story printed in the Times is its own...

...On one occasion, the Times quoted an entire paragraph from the Quarterly without attribution, and on another it failed to mention that the conference at which Henry Kissinger delivered his famous speech on the strategic balance was organized by the Center for Strategic and International Studies...

...The largest shifts would be away from oil and electricity--the energy forms that respectively cause our most severe foreign and domestic problems...

...The current "authoritative" estimates for total energy consumption by the year 2000 tend to be in the 95- to 120-quad range, mostly toward the lower end of that still rather wide spread...

...The message is subliminal A-J: Pipes and tubes and wires are in the rate base...

...This is a 50-page pamphlet supported by a longer technical appendix...

...This spring, while strolling past toads and cockles, and while listening for Swainton's thrush, pause to consider the AverchJohnson effect...

...The "supposedly" is necessary because utilities have not been allowed returns that look attractive at recent interest rates nor do they always earn even as much as they are allowed, which is why some utility stocks are selling below book value...

...What has the A-J effect to do with nuclear power...

...The Avercb-Jobnson effect, A-J for short, refers to a tendency in a regulated industry to over-invest in whatever factor of production determines its rate base.* It's about as startling an observation as Engel's law: that poor people spend proportionately more of their money on food than do rich people...

...If it is not so large, we have many more options, and we should choose the most cost-effective...

...Like the goldbugs, many of the strongest anti-nuclear critics arrived at their position because they disbelieved that OPEC nations would sell us cheap oil indefinitely and assumed that consumers would respond to price signals...

...their business, as will be discussed later...

...We may be grateful for the latter, of course...

...Sant and the staff of the Energy Productivity Center of the Mellon Institute, of which he is now director, have done a particularly interesting analysis in this regard...

...The actual rate was 0.6 percent...

...and when by paying more for a more efficient motor or a better-insulated building, we would have invested in conservation...

...The electric power industry is a regulated industry, treated as if it were a monopoly, and its investors are supposedly permitted to earn a return on their capital investment, up to some designated percentage, which varies from state to state...

...Am anti-nuclear critic who relies heavily on free-market arguments is Amory Lovins, whose essay, "Energy Strategy: The Road Not Taken" (Foreign Affairs, October, 1976), and subsequent writings have been immensely influential...

...More precisely, you will have a strong incentive to make the ratio of capital to operating costs as high as possible in favor of capital...

...Examples of those who have arrived at an effectively anti-nuclear position on economic grounds are the analysts for the Harvard Business School Energy Project, who published in 1979 under the title Energy Future,"" and Roger Sant, formerly the Ford administration's top energy conservation official, who has advocated something he calls the "least-cost" approach.tt For the latter class of "critics, the point is not whether we should build more nuclear plants but on what basis those decisions should be made...

...For such critics, the issue is not whether we should shut down nuclear plants but whether we should continue to subsidize them...

...If it were possible to reduce or eliminate the A-J effect in generating electricity, critics of nuclear energy would be deprived of some arguments, but large parts of the public might conclude that the critics had been right all along...

...In the case of electricity, consumption in the 1960s had risen at a rate of 7 percent a year (that is, doubling every decade), but the rate of increase has averaged only 3 percent a year since 1973 (2.8 percent in 1979...

...They also heard that H u y s e r ' s mission had followed a recommendation from National Security Advisor Zbigniew Brzezinski that James Schlesinger be sent to Teheran to encourage the Shah to defend himself...

...I suppose the conclusion is, read Jack Anderson for the d a t a - - v e r y high quality ore--but swallow slowly the packaged product...

...If you do, you may reflect that the anti-nuclear people aren't all crazies...

...Utility executives would make speeches about the importance to the economy of direct job creation, and suggest that electricity, like homemade ice cream, would be better if cranked out by hand...

...Energy Future: Report of the Energy Project at the Harvard Business School, edited by Robert Stobaugh and Daniel Yergin, New York~ Random House, 1979...

...They asked how current American energy consumption would look in 1978 if optimum investments had been made since 1973...

...As one would expect, the estimates have differed dramatically in recent years, depending on the assumptions made by various estimators...

...The final story made it appear that virtually all the information had been dug out by the Times...

...At the current national average price, electric resistance heating is appreciably more expensive than oil, even allowing for the inefficiencies of oil-burning furnaces...

...Something like $250,000 must be invested for every job created...

...An electric utility today is a natural monopoly with respect to distribution of electricity, just as a natural gas pipeline company is, but electricity itself is no more inherently monopolistic as an energy source than is gas, oil, or coal...

...Similarly, utilities should be free to compete in the building weatherization market (by financing insulation, for example), a development Congress discouraged in 1978, partly because of pressure from another regulated group, the bank and financial community...

...we need what it can do for us, that is, provide heat, light, and the power to run machinery...

...Nevertheless, it owes its present prominence in America's energy economy to a long history of federal subsidies and a regulatory structure that hampers the entry of new competition into the energy services field...

...Of course, not all anti-nuclear critics are free-market enthusiasts...

...The electric power industry complains, and fairly so, that its capacity to build new plants has been crippled by environmental and safety regulations, and that the costs of the regulatory process may bear little relation to the public benefits involved...

...In 1978 the Battelle Institute estimated the magnitude of federal subsidies to various energy sources, using "subsidy" to include research and development, preferential tax treatment, investment credits, marketing assistance, and so on...

...You may think this is small potatoes, but in reality it reflects a smallmindedness and lack of professionalism on the part of the Times that ill-befits the "newspaper of record...

...More generally, a study.sponsored by the American Gas Association concluded that 78 percent of the 1980 federal research and development budget for energy is related to electricity...

...A number of things would have to happen for this to occur, such as making stronger efforts to reduce waste in heating and cooling buildings and adopting a price structure for fossil fuels that more closely approximates replacement costs...

...Ironically, the reason is much the same in both cases...

...I am given to understand that the original version properly credited the Quarterly with the original breakthrough and also indicated those areas in which Burt and Taubman had done their own work...

...Because of his use of the phrase "soft path" to characterize a diverse mix of technologies and policies he regards as desirable, his critics have tried to characterize him as a mystic...

...If the unused 15 quads were being used in the form of electricity, we would now need more than 350 more power plants than we currently have...

...Re-reading recent energy projections makes one feel the way one feels on re-reading old investment advisory newsletters, knowing that one listened to the solid folks who touted blue-chip stocks and high-grade bonds and disregarded the crazies who were saying one should buy gold...

...It excluded weapons-related nuclear r e s e a r c h , the stabilization (primarily for military reasons) of the domestic uranium mining industry, and the passage of the Price-Anderson Act in 1957, which limited the liability of nuclear plant owners in the case of a catastrophic accident...

...Although the rationale for regulation is that electric utilities are monopolies, this may arise from a misdefinition of "The A-J effect takes its name from two e c o n o m i s t s , Harvey Averch and L.L...

...Conservation" is used to mean improved efficiency, not doing without...

...plants, whether coal-fired or electric, to be built in the future...

...For those who read the whole story, it emerged around paragraph nine (on the inside of the paper) that there was also an article on the same subject in the spring issue of the Washington Quarterly, written by me and Professor William Lewis of George Washington University...

...Industry sources gave varying estimates for 1979:4 percent (Edison Electric Institute), 5.4 percent (E/ectrica/World), and 7 percent (National Electric Reliability Council...

...More important, the average cost of electricity produced from existing plants is much lower than the cost of that which can be produced from any new ~:Lovins expanded his article into a book called Soft Energy Paths, published jointly by Friends of the Earth and Ballinger in 1977...

...Optimum" does not mean a crash program to save energy for its own sake but getting the same level of "energy services" we now get at least cost...

...In dollar terms, the analysts missed this year's requirements by an amount approximately the size of the national defense budget...

...Is it all sloppiness, or is there an unwillingness at the Times to give proper credit to an institution'it may not admire ? [] AN IMMINENT ELECTRIC ORGY N a t u r a l i s t s bestow their names on out-of-the-way flora and fauna, giving us Fowler's toad and Nuttall's cockle...

...The latter benefit to the industry cannot be quantified to anyone's satisfaction, but whenever the l e g i s l a t i o n has been challenged industry spokesmen have suggested that the industry would collapse without it...

...Under their model, when that could have been done by buying oil, we would have bought oil...

...A good many respectable estimates are lower still, in the 80- to 95-quad range, and some utopiansounding analysts put the total much lower than that...

...The point, of course, is that the Navy is being cruelly and dangerously reduced...

...Perhaps more important than total use is the increase in peak-load demand, for this really determines the need for new plant capacity...

...In 1979, the United States consumed roughly 80 quads of energy, the primary sources of which were oil (about 45 percent), natural gas (about 25 percent), coal (about 20 percent), and hydropower and nuclear (about 5 percent each).t Of the 80-quad total, roughly 27 quads, or about 35 percent, went to generation and distribution of electricity, of which about eight quads actually reached homeowners, businesses, and factories in the form of electricity...

...when by building a new nuclear plant, we would have built the plant...

...This sum consisted mainly of research and development and the operation of uranium enrichment plants, which are necessary to the nuclear fuel cycle...

...The current evidence suggests that the most effective competitors will be those who first show us how to use energy efficiently, and that should render moot a good many of the arguments about how we generate that which we do need...

...caused by regulations until they are given a name, because they are as common as toads...

...26 THE AMERICAN SPECTATOR JUNE 1980...

...As Joseph Shattan observed in a March American Spectator article ("The No-Nuke Wind Ensemble"), many of them are just the reverse...

...by F r e d D. Baldwin A large power plant, whether coal-fired or nuclear, is one of the most capital-intensive forms of investment in our economy...

...Averch and Johnson stated, and what others have attempted to document, is that you will almost certainly go further in this direction than if you were forced to optimize your investments based on market competition...

...That utility executives instead make speeches on the virtues of nuclear power does not mean they are wrong, of course...

...Not at all incidentally, electricity is a form of energy almost ideally suited for the latter two tasks, providing light and mechanical power, and badly wasted on providing heat...

...It is sometimes called the A-J-W effect because of a subsequent article by S.H Wellisz...

...What happened was that as prices shot up Americans used energy more prudently, not all at once, as if conservation were the moral equivalent of war, but fairly steadily, as if it were the exact equivalent of saving money...

...If the amount were as large as the industry has claimed, the case would be strong that we could only get it through nuclear power...

...On the one hand, he has some of the best information in the country...

...A quad or so of polemical heat has been generated over projections about what our total consumption will be in the future, the year 2000 being a favorite cutoff date...

...Others consider the economic arguments secondary to what they believe are the health and safety risks of nuclear plants, a position that may be mistaken but is not silly...

...Economists seek a duller immortality by lending names to things that are under our noses, for example, that there is a trade-off between employment and inflation (Phillip's curve...

...Similar losses occur in other processes, such as refining oil into gasoline, though not so dramatically...

...One thing that can be said with some confidence is tBecause of my rough roundings, and some problems associated with accounting for sources that cannot be metered, I have omitted solar, wood, and other renewable s o u r c e s , an omission t h a t is extremely serious for many analytic purposes, but not so here...

...Because the country as a whole uses prodigious amounts of energy, the unit of discussion for long-range planning purposes is usually the "quad," short for "quadrillions of BTU's," that is, a million billion BTU's or a "one" followed by 15 zeroes...

...The remarks here refer most obviously to investor-owned utilities, which account for about 80 percent of the nation's electric generating capacity, but they apply in some cases to publicly-owned utilities as well...

...Moreover, what Messrs...

...Friends of the Earth has also collected the attacks of his major critics, and his rejoinders, in a single volume called The Energy Controversy, edited by Hugh Nash, 1977...

...that, based on the recent past ("recent" here meaning since 1970), the estimates coming from what one would normally consider the "authoritative" sources--that is, the federal government and the electric utility industry--have been so bad that the analysts responsible would have better been employed in studying the nesting patterns of Bewick's w r e n . I n the early part of the decade the most frequently quoted estimate was a 1972 Department of Interior study projecting about 95 quads by 1980 and 192 quads by 2000...

...On the other, he rarely spends the time necessary to digest and analyze it thoroughly...

...To do the economists justice, however, we often overlook the economic distortions Fred D. Baldwin is a consultant on pub/ic program management living in Carlisle, Pennsylvania...

...A typical advertisement for nuclear power shows a single engineer in a bright yellow hard hat gazing out over acres of shiny plumbing, or a white-coated technician facing a bank of computers...

...Projected to 1990 they estimate that we could get the equivalent of 117 quads in "energy services" for approximately the same 80 quads we are using now, the difference being made up by improved efficiencies...

...For on several other occasions in the past, the Times has refused to give the Quarterly (and t h e C e n t e r for Strategic and International Studies that publishes it) proper credit...

...s The News T h a t ' s Fit To Print" Department: The New York Times has some bad habits it would do well to scrap...

...Starting from our analysis of Carter administration policy during the Iranian crisis, Richard Burt and Phil Taubman (who himself had been working on the story for months, but with the understanding that he would publish nothing until the hostage crisis had been resolved) gathered additional information and developed their own story...

...As elementary as this principle sounds, it is violated every time a reporter compares the costs and benefits of solar collectors with the current cost of artificially priced natural gas or when an electric utility spokesman quotes an average price with the lower costs of older plants "rolled in...

...Quite a bit, as it turns ont...

...employees aren't...

...For the electric industry, however, the most dramatic change might be a reconsideration of its monopoly status where the production of electricity is concerned...

...The 15-quad overestimate of current consumption is equivalent to roughly 7.5 million barrels of oil a day, an amount that can be put in perspective by considering that the current physical production capability of Saudi Arabia is on the order of 11 million barrels a day...

...These debates are important, but it may be possible to move them off center stage...

...Putting the matter in these terms sidesteps debates over the relative safety of nuclear energy and coal...

...It is, however, important to keep their economic 24 THE AMERICAN SPECTATOR dUNE 1980 situation in mind, not only as a possible source of bias, but as a clue to what might be done to take some of the irrationality out of the nuclearpower debate...

...Thus, readers of the Sunday, April 20 Times saw a front-page story dealing with the mission of General Robert Huyser to Iran in the final days of the Shah's rule...

...In it, readers heard that the American government was contemplating a military coup d'&at in Iran in late January and early February, 1979...

...Now if you are allowed to earn, say, 8 percent profit on whatever is in your rate base and, at best, will only be allowed to recapture costs outside of your rate base, you will try to shove as much into your rate base as possible...

...You will have an incentive to reduce labor and other operating costs, which is a good thing for your customers, but you will have little incentive to reduce capital investments, which may or may not be a good thing for them...

...Much of the debate hinges on how much electricity the country is going to need in the future--next year, ten years from now, or by the year 2000...

...It needs to be understood, however, that some anti-nuclear critics rely on the Wall Street Journal both for their numbers and for their frame of reference, and many others, who would not define themselves as anti-nuclear in principle, regard it as a dubious investment...

...The only reason for mentioning the latter group is that it consists of people who have been more nearly right so far than the establishment analysts...

...Even where such expenditures are not nuclearspecific, they tend to benefit the industry just as highway expenTHE AMERICAN SPECTATOR JUNE 1980 25 ditures benefit trucks over trains...

...If utilities were permitted to base their profits on their payrolls, their ads would show plants swarming with smiling workers...

...It estimated the cumulative subsidy to nuclear energy at from $15 to $17 billion, second only to oil...

...This was sent to the editors in New York, who re-worked the article, producing the final product...

...It's hard to know what to make of Jack Anderson...

...And, as the Wall Street Journal (followed a bit later by the New York Times) discovered in early April, the President is now fudging the figures on the defense budget: cutting this year's in order to make next year's little budget look like a 3 percent increase...

...Strictly speaking, we do not even need electricity...

...To the extent that we subsidize, we ought to be subsidizing (through research and development) the renewable energy technologies, like solar, wind, and biomass, that can reduce our dependence on fossil fuels...

...In fact, all these sources do compete against each other, both for residential heating and industrial process uses...

...Yet industries that are using temperatures of thousands of degrees Fahrenheit in manufacturing processes are forbidden under many state regulations from using their "waste" heat to make steam to generate their own electricity or to sell the surplus electricity back into power grids, a process called co-generation...

...The loss occurs because it is possible to get only about 30 percent of the energy in a barrel of oil or ton of "coal distributed as electricity...