Monday, January 31, 2011

Energy Needs And The Collapse Of Connecticut

Energy is that stuff used to drive commerce. It is costly here in Connecticut, so we are told by suddenly cost conscious legislators. There are three ways to bring down the cost of energy: 1) the supply may be increased; 2) the demand may be reduced; 3) the attorney general may put pressure on the relevant regulatory agency to disallow price increases. The second is insufficient; the third is disruptive and laughable.

In 2000, it was thought deregulation would reduce the price of energy in Connecticut by expanding the number of suppliers offering energy to the state. To this end, a bill was produced facilitating deregulation. The two major energy producers in Connecticut, Connecticut Light & Power and United Illuminating, were asked how much the deregulation effort would cost. The cost was pegged at about $1.7 billion, and the legislature set about raising the funds to pay for deregulation. The General Assembly decided to pay the cost by issuing bonds, the bonds being securitized by a self elapsing fee attached to energy bills. The legislature also told the two Connecticut energy companies they would no longer be energy producers. Under the new arrangement, they were to become energy distributors. The bill also provided that the companies were to reduce the cost charged to their customers by 10%.

It all went swimmingly for about a year and a half. It was then discovered that the 10% decrease in the price of energy could not be sustained; that provision was adjusted to allow a 10% increase in price. Deregulation didn’t work in Connecticut, among other reasons, because the measures taken by the legislature did not significantly reduce regulations – which is what deregulation should entail. The fee the legislature attached to energy bills as surety for the bonds – really, a hidden tax – far from disappearing on schedule, was extended by the legislature, provoking Sen. Joe Markley to issue a suit to snuff the hidden tax.

Shortly thereafter, the economic house of cards came tumbling down. Nationally, former President George Bush and later current President Barack Obama decided to buy their way out of a deepening recession. Washington went into debt. The current national debt is about $15 trillion. The states went into debt. Connecticut’s budget deficit is about $3.5 billion per annum.

Connecticut quickly became number one in the nation in per capita debt. Its unfunded pension liability ballooned to between $51 to $81 billion, according to estimates provided by the Yankee Institute. The state began to use bonding to reduce its budget deficit. The bond rating agencies frowned upon the practice and lowered the state’s bond rating. Attorney General Richard Blumenthal, now Sen. Dick Blumenthal, sued the bonding agencies, and his suit had the same effect on bond rates as did Xerxes whip on the rising tide. Investors are now fleeing municipal bonds. In a new report issued by Moody’s Investor Service that combines tax supported debt and pension liability figures, four states, Connecticut among them, rate highest in debt and pension funding needs

The ability of Connecticut and its hard pressed taxpayers to pay for the rising price of energy is decreasing in direct proportion to a decrease in the supply of energy. High energy costs can no longer be recouped by what has been called energy conservation. To put it in plain terms, the price of energy will not be driven down any time soon through a reduction in the use of energy – the desideratum of most conservationists, including suit happy attorneys general.

Conservationists, generally, are untroubled by higher energy prices because they perceive high prices as a means of forcing states to develop what has been called clean energy sources. When the price of a commodity increases, the high price itself forces the free market to search for and develop alternative sources such as wind power. When the price and use of a gas guzzling car exceeds the price and use of a more ecologically acceptable battery powered car, consumers will make rational choices and buy the more ecologically acceptable vehicle. High taxes at the gas pump are good, according to this view, because they nudge consumers in a less destructive direction, and the gas pump tax is a means of tipping the cost scale in the direction of green energy. Taxes, in a command economy, are used to destroy products considered harmful by political directors and construct out of whole cloth replacement industries considered beneficial.

The downside to this Eden is that governmental directors, who make economic decisions chiefly for political reason, quickly change. Unpredictable change causes flutter in free markets. Sometimes politicians quickly change their minds. Before he left office, then attorney general Richard Blumenthal changed his mind on wind turbines in Connecticut. When clean energy producer BNE Energy, Inc., recently sought to build to build two wind turbines in State Representative Vicki Nardello’s district, the Democratic co--chairwoman of the legislature’s energy committee, a clean energy enthusiast, underwent a reverse conversion and began to protest that turbines produce “flutter,” sharp disturbing slaps on the retina of light and shadow.

Indeed, “flutter” might be an appropriate word to use in connection with command economy decisions made by politicians that, in their absence, would be more efficiently and rationally made by a vigorous and competitive free market. When the “invisible hand” of the free market is replaced by such as Mr. Blumenthal and Ms. Nardello, the consequences are nearly always irrational, indeterminate, costly and ruinous to everyone but politicians and their pet industries.
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