Tuesday, August 15, 2017 Blog · News

Infrastructure: It’s not all it’s cracked up to be. The perils of public private partnerships. Moral hazard in the energy arena. Wetlands are infrastructure, and they are free! Fortress EPA. Snakes on the beach!

by Dana Beach

The law locks up the man or woman who steals the goose from off the common. But lets the greater felon loose, who steals the common from the goose.

Anonymous

Folks,

Another week, another missed news summary.  I have no excuse.  So, I’ll try to make this one the best yet, with a laser-like focus on one big issue – infrastructure.  The word is so solid and reassuring I’ll say it again.  Infrastructure.  Who could be against it?

Not President Obama, who pledged, “I want us to be first when it comes to infrastructure around the world, because businesses are going to come where there’s good infrastructure to move businesses, move people, move services.”  And: “First-class infrastructure attracts first-class jobs.”  He even quoted President Reagan on the subject: “It was Ronald Reagan who said that rebuilding our infrastructure is ‘an investment in tomorrow that we must make today.’”

Not President Trump, who has also made infrastructure investment one of his top goals: “The American people deserve the best infrastructure anywhere in the world.”  And: “…we will not let our nation become a museum of former glory, we will build new ones for American grit – we will build because our people want to build, and we need them to build because our prosperity demands it – that is how we make America great again.”

According to Fox News, the President’s infrastructure plan will provide “$200 billion in tax breaks, which Trump said he hopes will leverage $1 trillion worth of construction over time.”  His program relies on “public-private partnerships,” and makes cutting bureaucratic red tape a central feature.  (More on both of these points shortly.)

Infrastructure is truly a bi-partisan issue – a core belief lauded by chambers of commerce, industry trade groups, labor unions and progressive activists.  But is it really such an unmitigated benefit?  And what, exactly, is “infrastructure” anyway?

This article from the Washington Post by Joel Moser entitled “Five Myths about Infrastructure” takes a refreshingly skeptical view of the subject.

Washington Post: Five Myths about Infrastructure

The author challenges basic assumptions, such as: “Infrastructure reduces unemployment.”  (It may not in an economy with record low unemployment, like this one, or where workers with the necessary skills are not available.  It could, says Mr. Moser, “cannibalize existing projects and drive up the price of construction,” and, thus, reduce, rather than enhance, private sector economic growth.)

Specifically addressing President Trump’s claim that regulations stifle infrastructure investment, Mr. Moser makes an obvious point – environmental regulations have spurred billions of dollars of investment in pollution control technology, clean energy production and other beneficial “infrastructure.”  And, along the way, they have helped restore America’s rivers and streams, curbed acid rain, delivered cleaner air to American cities, and reduced a plethora of pollution-caused health problems.  (I would like to note that the ultimate “infrastructure” is the natural environment on which human and all other life depends.  More on regulations to protect it in a minute.)

Finally, and most important, the myth, “We know what infrastructure we need.”  Says Mr. Moser:

With financing proposals on the table from the president and the Senate minority leader, among others, it seems we already know how we’d spend that capital. After all, if both parties want to drop $1 trillion on infrastructure, presumably they know where it should go.

Yet these proposals don’t mention any particular projects. So it’s worth asking: What exactly would we build if we could marshal the political will? Underground high-speed rail? World-class international airports? More roads? And where — in the growing urban centers or the declining Rust Belt? With all the talk about building something, the only specific “infrastructure” proposal that gets any national attention is a southern border wall.

Infrastructure spending is, more than anything, a public policy tool, a way to encourage or enable certain ways of life and modes of commerce. How and where will we live in the future? What kind of energy should we plan to consume? Do we accept a human role in climate change, and will we encourage patterns of commerce and life that reduce that? Should the global trend of urbanization be encouraged by investing in cities or discouraged by facilitating extreme commutes and rural lifestyles? Is potable public water a civil right or a costly service? What kind of jobs do we want for future generations of Americans?

These questions aren’t simple. They require us to bring our judgment and values to bear, and until they’re answered, it’s not clear what infrastructure we need. Before any candidate or elected official tries to sell you on an infrastructure plan, they first need to explain what kind of world they’re trying to build and what vision of the future they want to build it for. Otherwise, it’s just more empty promises.

The bottom line is that an infrastructure program that fails to answer these questions is, at best, a slush fund for well-connected politicians and businesses and, at worst, a massive diversion of public resources.  

Besides fleeting references to “new lanes of travel, commerce and discovery” and pledging that “American steel will get more and bigger,” President Trump has not addressed these issues.  But his commitment to public-private partnerships and “leverage” provides insight into, at least, how he plans to structure the program.

So, let’s contemplate what these types of public-private partnerships look like in the real world.  First, they are “huge,” involving billions of dollars.  Second, they would probably include public subsidies and regulatory advantages for the investors.  And they would likely join private companies with public agencies.

Conveniently, but unfortunately, South Carolina is suffering from buyer’s remorse for the mother of all public-private partnerships – the nuclear plant formerly under construction by SCANA and Santee Cooper.  

So much ink has been spilled on this project that I almost hesitate to wade into it (the ink).  I will try to be succinct.

SCANA is called a private corporation.  For those of us who took economics in college, this would imply that they must compete in a competitive market, and thereby subject their decisions to the discipline of potentially losing money for their shareholders.  But this is not the case.  SCANA is a “regulated monopoly.”  As such, they are guaranteed, by law, a reasonable opportunity to earn a return on “invested capital.”  This means, by law, they can’t lose money to competitors, regardless of how badly they perform.  Notably, the agency that regulates private utilities, ostensibly in the public interest, the S.C. Public Service Commission (PSC), has set that guaranteed return in rates at 10.25 percent.

That’s a big difference.  And there is more.  Ten years ago, the S.C. Legislature passed legislation – the Base Load Review Act – with virtually no opposition, (six representatives voted against it and Governor Mark Sanford refused to sign it), that allowed the company to begin billing their customers years before the plant was completed, arguing that it would save money on interest payments.  (It is worth noting that these legislators are now shocked… shocked over the way this has turned out.)

So, to reiterate:  1) SCANA rates are based on a return of 10.25 percent on whatever they invest (even if the project is never completed), and, 2) the Legislature has allowed the company to collect said rate of return years in advance of project completion (which now appears to be never).

It is exactly this type of “moral hazard” that gave rise to the 2008 financial collapse.  Banks, in that case, that were “too big to fail” made very risky investments, gambling that they would be bailed out if things went south.  And, for the most part, they were.

The “moral hazard” risk is worse with SCANA and other investor-owned utilities because, unlike the banks, the rate of return is essentially guaranteed, so there is no uncertainty about the bailout.

On the point of the 10.25 percent return, because the utility is significantly protected from losses, an investment in SCANA is more like an investment in a Treasury bill than a real private-sector corporation like, say, Westinghouse that, (painfully), can declare bankruptcy.  SCANA cannot, by law, go bankrupt unless the PSC decides that it should.  (It is possible, I suppose, the PSC could allow such exorbitant increases in rates that customers would simply stop buying electricity and start opening windows in the spring and fall, and hanging clothes on a clothes line.  But… no.)

The current return on Treasury bills is less than 3 percent.  So, the 10.25 percent return on invested capital seems unjustifiably high.  And the Base Load Review Act adds insult to injury by allowing the exorbitant return to be earned more than a decade before the plant was supposed to produce the first kilowatt-hour of electricity.

These articles make various important points about the debacle.  In the State, Cindi Scoppe writes that the cost being passed to the ratepayer is not just the wasted costs of the plant.  It is also the interest SCANA pays on funds they borrowed to build it.  And she criticizes the guaranteed return.  Says Cindi:

The law allows the company to charge us for some or all of the $4.9 billion plus the interest it has to pay on the money it borrowed plus that return on investment, currently set at 10.25 percent.

Mr. Scott, (Dukes Scott, head of the Office of Regulatory Staff), believes that both the rate of return and the amount of money to be reimbursed are subject to challenge. Even so, the guaranteed return on investment is my current nominee for the absolute worst part of the law.  [Actually, the return guarantee existed long before the Base Load Review Act.  But her point is solid.]

The State: Scoppe editorial: SCE&G law could cost you more than you imagine

This next article, also from the State, reports that throughout the ordeal of plant construction, which was obviously going poorly years ago, (although, admittedly, the impending Westinghouse bankruptcy was a surprise until recently), SCANA paid its top executives large bonuses (more than $20 million) for exceptional performance.

The State: Top SCANA executives were paid millions in bonuses for roles in failed nuclear project

Avery Wilks reports:

As a multibillion-dollar nuclear expansion project veered toward abandonment, the company in charge – SCANA – paid its executives millions in bonuses for a job well done.

The Cayce-based utility has paid its top officials almost $21.4 million in annual performance-based bonuses over the past decade, according to The State newspaper’s review of the utility’s filings with the U.S. Securities and Exchange Commission.

Steve Bailey, with the Post and Courier, blames the PSC for failing to act earlier and more decisively.  He warns that the PSC must avoid another timid “slap on the wrist” like those that have been characteristic of the agency’s past oversight.

Post and Courier: Bailey editorial: SCE&G shouldn’t count on getting a big ratepayer bailout

Says Steve:

The PSC needs to do its job and better balance those interests. The commission could give SCE&G a slap on the wrist by reducing its return on investment as it has done twice before, cutting it to 10.25 percent from 11 percent. But not until the regulators take a knife to the $2.2 billion the company is seeking from ratepayers will they start requiring shareholders to share the pain.

This subject is worthy of a PhD thesis, so I’ll rush to the punch lines. The system of energy regulation in South Carolina is broken and in need of fundamental reform. Cosmetic changes, like minimal reductions in utilities’ guaranteed rate of return, are not enough.

Here are some reforms that would help:

  1. South Carolina needs real competition in the energy market.  The solar bill that the Conservation League helped draft and pass, which allows homeowners and businesses to own their own solar facilities or lease solar facilities from “third party” companies, is a good start.  But it needs to be expanded to allow third party sales of solar energy (and other energy technologies produced by “non-utilities”). Competition would also be enhanced by allowing an independent entity, (called an “Independent System Operator” (ISO) or similarly, a “Regional Transmission Organizations” (RTO)), to run the “power grid,” (the electric lines that transmit power from the production sources to the users), encouraging competition among generators on a transparent, market basis, thus separating power production, (e.g. SCANA, Santee Cooper, Duke/Progress, solar companies, individual businesses, etc.), from transmission.  Most of the U.S. population lives in one of seven RTOs, and almost 20 states have some form of deregulation that further encourages competition by separating ownership of power plants from the retail utility business.  Short of either of these steps, the state could establish a bidding process for new energy resources that allows energy project developers and various demand-side management technologies to compete on an equivalent basis with the utility itself to meet future needs.
  1. South Carolina needs a regulatory entity that is not controlled by 170 politicians(many of whom are controlled by the utilities).  Currently, PSC members are elected by the Legislature.  With so many people involved, nobody is held accountable for poor performance.  The Governor, who is elected statewide, should appoint PSC members.
  1. The state should require that new power production be justified as the least expensive available. This sounds obvious, but it is not the case now.  The process does not require vetting of all reasonable paths forward on an equivalent basis.  Solar power and energy efficiency are considerably less expensive than coal and nuclear.  Only natural gas is similarly competitive.  (And that comparison excludes the very real, and very large, cost of putting more carbon in the atmosphere.)
  1. The Base Load Review Act should be repealed.  (This is blindingly obvious.)
  1. In this restructured energy market, Santee Cooper should be sold to a private company. In theory, a public utility should have greater latitude to advance public goals than a private company.  But this has not played out with Santee Cooper, one of the country’s largest public power companies.  You may remember that just a few years ago the agency tried to build what would have been the last new coal plant in America, on the banks of the Pee Dee River.  Like the nuclear plant, that project was abandoned, wasting “only” half a billion dollars.  The latest example of Santee Cooper’s lack of environmental concern is their recent proposal to reopen and extend the lives of old, decrepit, dirty coal plants in response to the demise of the nuclear project.

Enough about the nuclear plant!

Regarding the goose aphorism at the beginning of this email, it’s worth comparing the ease with which the Legislature enabled the multi-billion-dollar debacle with Charleston County’s painful obstructionism over a piddling $2 million-dollar bike lane across the Ashley River.  (At most, the lane represents about 0.2 percent of the amount of money already spent on the nuke plant.)

Yet, after years of delay, the County ordered another study of the lane, which, as this article from the Post and Courier reports, came to the same conclusion the earlier studies have – the automobile delays, less than one minute, would be minimal.  (The reduction in bicycling time, and the increase in safety, would be maximal, but that was not part of the study.)

Post and Courier: New study appears to doom Ashley River bridge bike lane conversion

This brings us back to Mr. Moser’s point about the questions we must answer about infrastructure:  How and where will we live in the future? What kind of energy should we plan to consume? More specifically, will we make the investments (incredibly modest ones, in this case) that accommodate walking, bicycling and other modes of travel, or will we focus our resources exclusively on the (impossible) goal of providing every citizen congestion-free travel in single-occupant automobiles?

Here is an excellent editorial from the Post and Courier on the obvious answer to that question:

Post and Courier: Editorial board: Simple choice on bike lane

Almost finally, on the importance of natural infrastructure, (aka, clean water and air), EPA Administrator Scott Pruitt held a private meeting in Orangeburg a week and a half ago to discuss wetland protection, and specifically, the rule that extends federal oversight to “headwaters and intermittent streams.”  I agree that improving the wetland regulatory program is a worthy goal, but that is not what this meeting was all about.

Here is my op-ed from the Post and Courier:

Post and Courier: Beach editorial: Industry opposition to Clean Water Rule misstates the facts

So, from the op-ed, my final thought of the day:

Here, I think, is where the benefit of the doubt stops — when government officials deliberately misrepresent the facts to pander to, and further confuse, an uninformed political constituency. And when hand-selected participants, representing important economic sectors of the state, either intentionally misstate the burdens placed on them by environmental regulations or don’t bother to spend 30 minutes understanding the facts.

Democracy is a resilient thing. It is strengthened by honest disagreement and vigorous debate. What it cannot survive is deception, political posturing and laziness, which, disturbingly, are all that were present at the July 24 meeting.

If you would like to read more about Administrator Pruitt’s environmental agenda, this article from the New York Times provides some disturbing insight.

New York Times: Scott Pruitt Is Carrying Out His E.P.A. Agenda in Secret, Critics Say

Here is an excerpt:

His (Mr. Pruitt’s) aides recently asked career employees to make major changes in a rule regulating water quality in the United States — without any records of the changes they were being ordered to make. And the E.P.A. under Mr. Pruitt has moved to curb certain public information, shutting down data collection of emissions from oil and gas companies, and taking down more than 1,900 agency webpages on topics like climate change, according to a tally by the Environmental Defense Fund, which did a Freedom of Information request on these terminated pages.

William D. Ruckelshaus, who served as E.P.A. director under two Republican presidents and once wrote a memo directing agency employees to operate “in a fishbowl,” said such secrecy is antithetical to the mission of the agency.

“Reforming the regulatory system would be a good thing if there were an honest, open process,” he said. “But it appears that what is happening now is taking a meat ax to the protections of public health and environment and then hiding it.”

The examples from the Times piece are consistent with the secretive way the Orangeburg meeting was conducted.

Finally!  Few people besides Rudy Mancke and Patrick McMillan would call a rattlesnake “infrastructure,” so I’ll divert from the theme and include this article from the Island Packet with a delightful (really) video of a beautiful diamondback on the beach at Hilton Head.  The great thing is that the couple from Virginia who filmed it seemed appropriately impressed!

Island Packet: Rattlesnakes on Hilton Head a piece of American history

If someone approaches you selling “infrastructure,” ask hard questions, and keep your hand on your wallet!  Have a great week!

Dana


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