Conclusions

Several conclusions from this analysis are evident.

First, past Federal policies have introduced major distortions into the energy/ energy service marketplace. Some of these policies, such as those involving mileage standards and price ceilings for gasoline, seek to achieve conflicting goals and tend to negate one another. Other policies have tended to subsidize one component of the marketplace, such as oil, by controlling its price and thereby protecting it from competition from other components. Other policies, such as mandatory industrial coal conversion have compelled consumers to take an unnecessarily high-cost path. A least-cost strategy would require the reassessment of all such past policies.

Secondly, our analysis strongly suggests that the risks and costs of curtailing competition through price controls in the energy/energy service marketplace are significantly greater than the risks and costs of permitting competition to work. Much past regulation of the marketplace has had the perverse effect of placing at a competitive disadvantage fuels and efficiency technologies that might otherwise have helped us to avert the energy problem. The most useful policy would be one that encourages the maximum number of competing elements. Thirdly, it is apparent that a number of objectives reduced imports, a cleaner environment, lower consumer costs which have been treated as conflicting in the past could be largely accomplished simultaneously through a least-cost strategy. By increasing the available options the competing technologies such a strategy would enable us to choose those which are attractive to the largest number of people.

And finally, we have become so accustomed to expecting the government to do something about the energy problem that as private citizens we have failed to react to what is a major opportunity for individual action. This has given government an undue role in energy that has led to further aggravation of the problem.

These conclusions, in turn, suggest some specific areas that should be analyzed in determining future energy policy. Among the questions that should be raised are the following:

(1) Should we allow traditional sellers of energy to become sellers of energy services?

The most natural providers of energy services are the public utilities, the fuel oil dealers and, perhaps, even the gasoline stations. If a gas utility, for instance, were allowed to be a seller of all energy services, not just a seller of natural gas, it could compete with the electric utilities or the fuel oil dealers in providing the total energy service requirements for a home. In addition to gas, the utility could

provide cost-effective building modifications, efficiency improvements in the furnace and a more efficient water heater. Structural improvements, such as insulation and storm windows, could be provided through subcontractors. The cost of such improvements could then be billed to the customer monthly over their 20year lifetime, just as gas is now billed. Electric utilities, fuel oil dealers, and independent manufacturers and contractors could provide competition, assuring the availability of least-cost service to the customer. As new technologies develop, such as gas-fired heat pumps or fuel cells, the utility could offer these additional options to the customer. Other segments of the private sector, such as insulation and furnace contractors, or manufacturers of more efficient furnaces, would compete to provide needed repairs or installations to the utility, or compete directly with the utility in providing services to the customer.

This same approach could be applicable to the industrial and commercial sectors. By focusing on consumer cost of service, the business of providing energy could be transformed from an over-regulated, somewhat monopolistic activity of selling electricity, oil or natural gas into an exciting competitive enterprise of selling energy services. It could also offer utilities a chance to maintain or increase their market share in the face of a possible decline in their traditional product.

We have seen an early example of this approach at the Portland General Electric Company. This far-sighted electric utility provides interest-free loans to residential customers for needed energy improvements in their homes. The company is allowed a return on this investment in their electricity rates to all customers during the time that the loan is outstanding, and the consumer pays the loan only when his residence is sold.

Other private companies, such as Honeywell and General Electric, are likely to offer similar packages. Within the next ten years, the selling of energy, at least in the buildings sector, may be completely replaced by the selling of complete energy services — heat, light, air conditioning and applicance functions.

(2) Should we move to deregulate all activities of the oil, gas and electric industries, except the transmission and distribution of electricity and the oil and gas pipelines?

As the data we have examined indicate, there is no reason to consider the oil, gas and electricity industries as inherently monopolistic. Competition exists in abundance among these fuels, and their continued regulation only subsidizes and protects them from each other and from new competitors. Regulation of oil and gas prices is only supportable if there is no competition, so those who are still opposing relaxation of controls must be shown that competition for oil and gas in delivering energy services to the American people does, in fact, exist.

Similarly, as the data on market shares demonstrate, there is an abundant competition in the form of industrial cogeneration, small total energy systems and gas and oil heating - for electricity generated by large central utilities. These competing technologies can be offered by private companies, gas utilities or financial institutions. That being the case, there may be no reason to regulate existing power plants as monopolies. They could compete in the energy services market along with these other technologies in supplying the lowest cost services to the consumer through distributors. The only monopolies requiring regulation and protection would be the owners of the pipelines and electrical transmission and distribution networks. However, even the owners of an electrical distribution

monopoly would have to compete with gas distribution utilities and fuel oil dealers assuring the least-cost service to the customer.

(3) Should government-sponsored research and development be directed towards different technologies?

Government subsidized research and development of promising low cost energy and energy service technologies have definite contributions to make; but they should be focused on lowering consumer service costs, not reducing imports, and include an expanded share of the budget to develop energy-efficient technologies in proportion to their consumer benefit. Care must be taken not to over-subsidize a given R&D effort, permitting it to take on a self-sustaining (and anti-competitive) life of its own if it becomes an economically dubious prospect for improved energy productivity. This may be the case, presently, with respect to electricity in general and nuclear power in particular, since, according to one recent study, approximately 78 percent of the 1980 Federal R&D energy budget is related to electricity. Again, the same doubts should dampen the current enthusiasm for massive federal support of development of commercial-size plants (rather than the testing of such plants) to produce synthetic oil and gas, which are not likely to become truly competitive for some years to come.

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In addition, our analysis indicates that tax incentives for insulation and solar installations, for example, are very expensive and distorting ways to achieve improved productivity, except as a means of offsetting existing subsidies for energy supplies. Well-focused R&D programs, including commercialization, may be relatively more cost-effective programs for the taxpayer.

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Unfortunately, much of the energy policy debate thus far has emphasized the differences among various approaches to the energy problem and concentrated on the selection of one or the other as an appropriate policy tool. As the example of the automobile mileage efficiency standard suggests, our policy options are interrelated. A mandatory efficiency or fuel-use standard that does not have a basis in consumer economics will be unnecessarily expensive and likely to be circumvented. Similarily, the benefits of providing an incentive under one option could be offset by a disincentive in another area. For example, a tax credit for insulation of a home heated by oil could be offset by maintenance of artificially low oil prices.

This kind of uncoordinated approach has characterized much of our response to the energy problem. As we search for a common thread in our deliberations, the least-cost strategy could help us improve our future record by focusing our attention on the ultimate goal: providing consumers with reliable energy services at a minimum price.

Energy prices that reflect the relative supply of and demand for new and replacement sources are required to stimulate competition and, so, to assure lower consumer costs in the long-run. The phased decontrol of oil and natural gas prices is clearly a step in the right direction. But, as importantly, the common practice of "rolling in" the higher costs of new oil, gas and electric power with the lower costs of existing production in determining prices is an unfair disguise to the consumer and a handicap to new technologies.

As suggested earlier, the overall potential for increasing energy productivity and reducing current consumer costs is substantial. The 10 percent improvement in U.S. energy productivity since 1974 is just the beginning; long-term results will be much greater. Although the least-cost strategy might not result in the 60 percent improvement in energy efficiency by 2010 that the CONAES study indicated is technically possible, or even the 32 percent that our analysis indicates is economically achievable in a much shorter period, the evidence we have provided demonstrates that there is ample competition to hold consumer costs to manageable levels for the required level of energy services. The exciting news is that energy productivity provides an expanding opportunity, not a last resort.

In an overall assessment of this material, one central question remains: improving energy productivity is still an extremely fragmented and disparate activity. Although there may be strong public support for the goal of minimizing the cost of energy services, there is as yet no unified force for the practice of achieving that result. Realization of the potential benefits of improved productivity will challenge our ability to bring about changes not changes in life style or economic expectation, but changes in the way enterprises compete in the energy service market. Traditional energy companies must broaden their view of the market. New contractors, suppliers, manufacturers and service organizations must come into existence. Manufacturers of less costly on-site energy systems must develop the strength to compete with central utility systems. Lenders must adapt their standards to new energy conditions. New technologies must be developed and commercialized.

A wave of optimism and commitment is beginning to emerge from many quarters: these changes are possible, desirable and necessary. Perspectives have and will continue to change rapidly. When coupled with ingenuity, new technology and improved management, these changes can be powerful enough to master the energy problem. In fact, seen in this perspective, the problem is transformed into an opportunity increased employment, new markets, an enhanced environment, a more secure energy future and most important, less onerous levels of energy service costs. We are definitely not stuck with our old attitudes about energy and energy conservation. Our analysis to date shows we can move to higher levels of productivity through a more competitive, consumer-oriented energy policy.

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