Jacob Dreizin's  Instablog

As many Seeking Alpha readers already know, the U.S. House of Representatives has just narrowly passed H.R. 2454, the American Clean Energy and Security Act of 2009.

Neither most Congressmen—including those who voted for it—nor their staff had a chance to so much as hold the encyclopedic final bill in their hands, let alone read it.  In fact, hardly anyone knows for sure what is even in the bill.  At the time of this writing, the most recent version available on the Library of Congress’ bill-tracking “Thomas” website was missing a reported 300 pages that were inserted at 3:00 AM on the day of the vote.

The legislation will now heat up in the Senate, where its fate is anyone’s guess.

Several other writers on this site have already gone into the details of “cap-and-trade” and other aspects of the bill.  Their excellent articles have focused more on the theoretical model of cap-and-trade than on the direct impact on U.S. electrical utilities.  The below analysis will focus on the latter.

Without making any political judgments, this writer—as someone who has composed his fair share of both Federal and state legislation—can vouch that the bill is a behemoth.  It is without doubt the single most complex and far-reaching regulatory project in U.S. history.  Moreover, the speed with which it was rammed through a confused House of Representatives hearkens back to legislation from the revolutionary first months of the Roosevelt administration.  In fact, that is how far back you have to go to find anything even remotely similar in terms of scope and ambition.

Again without going into the politics or environmental merits of the bill, the American Clean Energy and Security Act, if passed in a similar form by the Senate, would complicate business and produce mountains of unintended consequences.

First, simply to understand the legislation, let alone comply with it, would require each and every U.S. electric utility to substantially boost its complement of regulatory experts, lawyers, and other government affairs personnel—not to mention the actual “traders” who would buy or sell the emission allowances established under the bill.

As with other well-meaning boondoggles such as Sarbanes-Oxley, this would ultimately necessitate thousands of high-paying but fundamentally non-productive desk jobs at a cost of hundreds of millions—and possibly billions—of dollars per year and a massive headache for management.  It is perhaps this consideration that led the Congressional Budget Office to estimate a trickle-down additional energy cost to each American household of $175 per annum.

Second, again based on this writer’s experience in Congress, he can vouch that the bill’s system of government-issued pollution credits would quickly become highly politicized.  Committee heads and other powerful legislators would routinely pressure the bureaucracy to go easy on power plants in their own states or districts by distributing additional credits in a preferential manner, looking the other way as some companies go over their quota, or simply writing new legislation to exempt their own constituents from the effects of the earlier bill.  In fact, a Dallas-based electric company called Luminant was already given preferential treatment within the text of the bill, in order to secure the vote of Democratic congresswoman Eddie Bernice Johnson.

It is not hard to imagine this system being abused by the party in power, to the detriment of states and districts represented by the other party.  Lobbyists and back-room check-writers would have a field day as a whole new domain of corrupt endeavor is opened to them.  Utilities managers would have to become full-time politicians, much like Wall Street bankers and financiers are today.  All of this would essentially render the bill meaningless even as industry must nonetheless pay to comply with it.

Third, no one seems to have given much thought to what happens when the bill’s mind-boggling renewable energy and “efficiencies” target of 20 percent for each electricity retailer is not met by 2020.  Even an industrial collapse resulting from a Second Great Depression would not see us there, because the target for each supplier is based on a proportion of its production in any given year, as high or low as that may be.

Additionally, each supplier’s target is ultimately linked to a diminishing aggregate non-offset tonnage allowance for national carbon emissions, which falls an astounding 36 percent by as early as 2012 relative to a 2005 baseline.  (Yours truly was able to deliver this figure to you despite the obvious arithmetical mistakes in Part C Sec.721.(e)(2)(B)(ii)-(iv) on pages 557-8 of the most recent available version of the bill.  So much for quality government).

In other words, the bill’s accelerated emissions reduction schedule ensures that within just a few years, there will be too many “caps” and too few “trades” available.  There simply will not be enough emissions credits on the market to ensure that everyone can stay within their assigned limits, and—despite the enormous sunk costs of industry compliance—the system will ultimately collapse on itself.

If this bill makes it into law, expect more lobbying, more hearings, and more legislation down the road to “fix” the above problem just like Congress tried to “fix” Sarbanes-Oxley when they finally understood what a boondoggle it was. 

You gotta love Washington.

Disclosure: no positions relevant to this article.