Emphasize telecom, not energy

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The Bush Administration claims its "long-term" national energy plan will raise the "American standard of living," but that is achieved more by fiber-optic infrastructure than energy production.

BY STEPHEN N. BROWN

Economic growth always entails rising productivity and declining prices at the same time. Growth is a sign that declining-cost technologies dominate the economy, enhancing its production of goods, services, and wealth. An industry-specific example of a declining-cost technology is "Moore's Law," attributed to Intel founder Gordon Moore: Microprocessors double in power and their prices drop 50% every 18 months. With an increasing-cost technology, productivity declines and prices rise, thus stifling economic growth. The rational economic response to an increasing-cost technology is to abandon it or minimize it as an input to the economy.

The Bush Administration's national energy plan is suspect, because its goal is to intensify the nation's use of an increasing-cost technology-energy production. Energy policy is controlled by Vice President Cheney, the head of the National Energy Policy Development Group (NEPDG) populated by high-level officials such as the Secretaries of State, Treasury, and Commerce. The NEPDG has publicized its opinion that "energy is fundamental to economic growth," thus self-justifying its "develop[ment of] a national energy policy designed to help the private sector...promote dependable, affordable, and environmentally sound [energy] production...." Centralized planning is uncharacteristic of Republican regimes and often subordinates economic thinking to planning that benefits a favored industry. The NEPDG is playing favorites because it ignores the first priority of economic growth: exploit declining-cost technologies first, then move to increasing-cost technologies.

Telecommunications is a declining-cost technology-the motivation for the telecom service providers' successful campaign in the mid-1990s to deregulate profits in return for price-cap regulation, which limits prices or lets them rise according to prescribed formulas but does not limit the companies' profit. Every state regulatory commission and the Federal Communications Commission use price caps to regulate telecom service providers. Not one provider wants to abandon price caps, which means the telecom industry expects declining costs to continue. Federal Reserve chairman Alan Greenspan recognized the telecom sector's contribution to economic growth when he spoke to the Business Council in 1999: "the Internet...is most timely...The veritable avalanche of real-time data has facilitated a marked reduction in the hours of work required per unit of output...a major acceleration in productivity and...a marked increase in the standards of living for the average American household."

Greenspan's comments confirm one of the telecom sector's specific contributions to economic growth: improving productivity by providing real-time data to businesses and customers. Just like the rest of the economy, the energy sector should provide real-time data to its customers. Unfortunately, there is no evidence that the NEPDG has paid the slightest attention to Greenspan, because the 179-page energy plan has just two references to "telecommuting" and three references to "communications." The national energy plan should promote telecom networks that manage energy consumption in real-time. Examples include a communications system implementing real-time pricing of electricity so businesses and consumers get price relief if they shift their consumption from on-peak to off-peak periods; a communications system coordinating control of traffic lights and highway entry ramps to reduce congestion and fuel use; and a system that allows widespread telecommuting. The absence of such proposals implies that the NEPDG is more interested in the growth of one sector that in the economy's growth as a whole.

The NEPDG claims hundreds of new electric power plants are required: "Over the next 20 years...[we] will need 1,300 to 1,900 new power plants, which is the equivalent of 60 to 90 new power plants a year." However, there is ample proof that electric power production is an increasing-cost technology, and the best proof lies in the electric utilities' behavior: They want nothing to do with price caps because they limit profit.

Price caps are bad for an industry when its main path to profit is a higher price for the customer, the situation facing the electric industry because of its power-production technology. Technology and Transformation in the American Electric Utility Industry, authored by Richard Hirsh and published in 1989, recounts the industry's success stories from the 1900s to a turning point in the 1970s, when power plants no longer improved the rate at which raw energy is converted to electricity and when power plants reached a design size where costs no longer declined as the plant size increased. MIT economist Paul Joskow makes the same points in Deregulation and Regulatory Reform in the U.S. Electric Power Sector: "[R]eal prices for electricity increased sharply from the mid-1970s until the mid-1980s...Both scale economies and thermal efficiency improvements in generating technology appear to have been exhausted by about 1970."

Even utility executives acknowledge that power-plant technology is stagnant. Last August, GPU, a large holding company for Pennsylvania and New Jersey power companies, merged with FirstEnergy of Akron, OH, to form one country's larger power companies. The merger's purpose was to find operational ways to reduce costs because no savings were available in power-production technology itself. GPU's CEO explained: "For decades, this was a declining-cost industry. Each new power plant produced electricity at a lower cost than the one that preceded it. This is no longer the case-and it hasn't been for some time." But Joskow thinks there is an exception: "Cheap natural gas and aero-derivative combined-cycle generating technology (CCGT) have...reduced the minimum efficient scale of new generating facilities..., [are] more thermally efficient, and produce less pollution...reducing the long-run marginal cost of generating electricity."

In April 1994, the California Public Utility Commission issued rulemaking R94-04-031, the state's utility-deregulation blueprint, which acknowledged fiber optics as fundamental to deregulation: "Telecommunications promises to advance direct access [to generation suppliers] and retail competition...fiber optics...provides the consumer with information to manage energy use directly and effectively. But distribution-level fiber networks are still waiting to be built, which hampers effective electric deregulation, according to Joskow: "If there is a regulatory problem slowing down innovation...it would be traced to the absence of retail meters and tariffs that track rapid movements in wholesale prices...manufacturers will not develop new energy using equipment that can exploit opportunities for energy conservation in response to price volatility if...consumers...do not see these price signals."

Fiber optics is the best way to convey real-time price signals because fiber is the telecom sector's premier declining-cost technology. The more fiber deployed, the better the economy. For the NEPDG to support the construction of nearly 2,000 power plants that embody increasing-cost technology, without giving the nation a way to manage energy consumption, is a major economic error. The NEPDG should correct its mistake by supporting the deployment of a national door-to-door fiber network as a part of any energy policy.


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Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at policywork@aol.com or telephone: (615) 399-1239.

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