A centrally planned economy is defined as one in which the government controls industry, making major decisions regarding the production and distribution of goods and services.
The O’Malley administration’s wind generation legislation, the Maryland Offshore Wind Energy Act, is a case study in this economic doctrine. Eager to appear on the leading edge of developing alternative energy, the measure was crafted with no regard to the traditional American economic system of free markets. It is not only the philosophical argument that concerns Maryland Business for Responsive Government: The legislation does not address key business details and raises consumers’ utility rates to finance a political objective.
First, there is no timetable to build the Mid-Atlantic Power Pathway – a proposed 150-mile high-voltage transmission line connecting central Maryland to the proposed offshore wind generation system and other energy sources and destinations. As it stands now, wind power could benefit only residents of other mid-Atlantic states and the Eastern Shore, yet all Maryland utility consumers will pay for it.
What may explain the need for government intervention is that the O’Malley administration appears to doubt the market potential for wind power. In 2007, the Maryland Public Service Commission paid a consultant more than $2 million to report on future energy options. The report concluded that offshore wind was the most expensive form of energy among all commercially viable choices.
The legislation avoids economic reality by forcing utilities to sign long-term purchasing contracts. Forcing one party to sign a contract means it’s not a good deal for someone.
The major provision of the law forces the state’s investor-owned utilities to purchase wind power for 25 years from select firms. This would then lead to the construction of wind turbines approximately a dozen miles off the Eastern Shore. Government agencies select which firms are awarded offshore leases, set profit margins and spell out terms and conditions of contracts. Electric power consumers fund this enterprise by paying higher bills, to be determined by the Public Service Commission.
As is the case with many government-sponsored enterprises, there is less incentive for precise cost estimates. The priority is to pass the legislation and figure out the details later. The Department of Legislative Services estimates that building the turbines would cost $4.6 billion. The O’Malley administration disputes that cost, but has not offered its own projected construction costs. A private company could not expect to sell shareholders or its board on a new venture without knowing the costs.
Then there is the question of the impact on rate payers. The cost of the subsidy would be spread among all Maryland electric customers in the form of monthly surcharges, the estimates of which vary by the week and so widely as to be almost useless for anything but political purposes. The Public Service Commission estimates $1.44 a month for residential customers, but an analysis released by Department of Legislative Services is more than twice that amount, at $3.61 a month. Utility analysts project the monthly charge can be as high as $7. The governor this week proposed a $2 per month ceiling in year one as the proposal would take effect, raising questions on what the cost would be in subsequent years.
For the state’s largest industrial power users, the surcharges would add up to untold tens of thousands of dollars a month. Consumers who bear these costs are unlikely to discern that higher electric bills are driven by government policy.
Yet another consideration is the efficacy of wind generation compared to solar, bio-fuels or technologies still being developed. All of these are virtually shut out of the market when Allegheny Power, Baltimore Gas & Electric Co., Delmarva Power, and Pepco are forced into these long-term contracts. Utilities say this arrangement increases borrowing costs and would reduce further private investment in wind, solar and energy efficiency technologies.
Finally, there doesn’t appear to be a firewall between firms with political connections and the government agencies that decide who gets the contracts, leaving the legislation open to charges of crony capitalism. Press reports have documented the political influence of some firms with the current administration, which raises questions about what is driving the agenda and the sudden urgency to erect a giant wind farm off the state’s coast.
There is a way to develop alternative energy without picking winners and losers and financing it entirely on the backs of residential and commercial utility customers. Dismissing the role of free markets in alternative energy comes at a cost of stifling further innovation and amounts to a multibillion-dollar gamble that government knows best how to plan and implement energy production. There is too much promising technology that can be harnessed and better ways to incentivize its development.
The writers are co-chairpersons of Maryland Business for Responsive Government. They may be reached at firstname.lastname@example.org.
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