Bending the Vermont Cost-of-Stay Trend-Line Down?

by Martin Harris

A pair of recent private-sector actions has had some (admittedly marginal) positive impact on Vermont’s unsubsidized middle class, and the economic basis of that pair is so nationally widespread that it was the subject of a study by the Mercator Energy Group, which is a Colorado-based business offering research, brokerage, and consulting services in the natural-gas sector. That first element is the recent nearly-6% rate cut for consumer users of natural gas by Vermont Gas Systems, and the second is a future-bills credit from 1997-2012 earnings of the Vermont Electric Co-Op. as a rebate to members/rate-payers. The source of both retail-consumer energy-cost cuts has been the shrinking cost of domestic natural gas, from $7.20 per million BTU-equivalent which was the average prevalent price before “fracking” technology was adopted, starting in 2008, to an average of $2.80 today, that cost reduction coming entirely from new technology (placed in use where not prevented, nation-wide, by concerted Federal government and environmentalist opposition) increasing well-head supply and, eventually, reducing rate-payer costs for gas used directly (industry and residential) and indirectly (electric-power generation) for the same sets of end-users. “Fracking” is short for hydraulic-fracturing, a new oil-and-gas drilling procedure using highly-pressurized water and granular aggregates to open deeply-buried and-compacted shale layers and keep them open for gas and oil to accumulate and then be pumped out.

Whether those two private-sector cost-cuts balance out with a public-sector cost-increase (Montpelier raised the gasoline tax by about 6 cents per gallon in April) depends on how much you drive versus how large and well-heated your house or business may be, so the overall effect may not be visible, but they illustrate a basic policy strategy in Montpelier: broad-based taxes of primarily middle-class impact with the result (objective? you decide) of raising cost-of-stay for that socio-economic sector. And greatly out-weighed by a just-proposed new payroll tax of either 15 or 18% to fund the single-payer health plan. Seen in that context, these two, admittedly minor, cost-of-stay reductions in the energy sector run counter to Montpelier’s (unspoken) policy, but because it can’t be openly espoused (think “the love that dares not speak its name”, an 1894 phrase often attributed to Oscar Wilde but apparently more creditable to English Lord Alfred Douglas) you’ll not hear any criticism of the actions of Vermont Gas or Vermont Electric from any official source. As present tax and other cost levels show in nation-wide comparisons, Vermont is indeed a pricey place: A Census Bureau 2010 tabulation shows Vermont with a score of 119.9 (100 is the national average) exceeded only by Alaska, California, Connecticut, Hawaii, Maryland, Massachusetts, New Jersey, and New York. And, of course, Vermont has become a pricey place by governance action: in land use, business climate, taxation, public services, transfer payments, and all the other usual suspects, all of which underlie the middle-class out-migration which has been taking place, in response to economic pressures not particularly painful to the independently wealthy in the top income and wealth cohorts or the subsidized underclass in the bottom cohorts.

We have Census Bureau 2010 Gini Coefficient –the mathematical measure of income inequality– numbers by State, and they range from a .42 for Utah ( most income-equal State) to .53 for the District of Columbia (by far the highest-income jurisdiction, with recently-reported 23% income gains to the $63,000 level (US average has been stagnant to declining in the $50,000 range) and Vermont came in at .44, a number just better than Kansas and just worse than Maryland. Like the low unemployment numbers for Vermont, the income-inequality numbers are distorted by middle-class shrinkage: fewer job-seekers, for example, and fewer in the middle-income sectors, which increases the Lorenz Curve in the Gini formula and moves its center further from the straight 45-degree line of perfect income distribution-equality.

Any discussion of cost-of-living gains or pains swiftly shifts to the disparate impact on various income cohorts and that’s what has happened with the remarkable cost cuts for energy users based on the recent natural gas supply increases, with such researchers as Mercator pointing out that reductions in retail NG prices disproportionately affect the poor, who spend more of their smaller incomes on necessities than middle- or upper-income cohorts. A cited report from the Federal Low Income Home Energy Assistance Program (LIHEAP) uses these data: 10.4% of low-income spending goes for energy, versus 2.6% for non-poor) and that argument has been used to argue that the “poor” have benefitted most from fracking. Mercator reports that the NG cost reduction from nation-wide supplier competition (don’t think Vermont Gas Systems in this respect, because it has no in-State competition) was $32.5 billion in 2012 (the $4.40 well-head price drop, times the 7.4 billion BTU’s used by poor households) while the LIHEAP subsidy to that same cohort was “only” $3.5 billion to some 9 million households. In a recent editorial, the Wall Street Journal used these data to argue that “the natural gas boom may be America’s best anti-poverty program”. It should have referenced 18th century economist Adam Smith’s highly relevant observation in “Wealth of Nations”, that, because of free-enterprise competition leading to ever-higher productivity,, private-sector goods and services inevitably decline in real cost over time, while governance costs do just the opposite. And it might have referenced as well, consistent enviro opposition to reduced energy costs, on the grounds that only when cheaper traditional fuels can be made to cost more will new fuels –wind, solar, bio-, seem more attractive to users even though their cost templates are unavoidably higher, a pattern well illustrated by newly-green (no-nuke policy) Germany’s new average rate-payer cost per kilowatt-hour of $.38, compared to a US average of $.12. Will the Vermont Yankee closure produce a similar result? That would please Montpelier by bending the Vermont cost-of-stay curve back up.