Disputes Arise over Energy's Hidden Costs Nevada Utilities Must Consider Both Environmental and Economic Impact of New Plants Series: POWERING THE US INTO THE 21st CENTURY. Part 4 of a 5-Part Series. Second of Two Articles Appearing Today

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NOW I used to think that I was cool drivin' around on fossil fuel, but then I saw what I was doin' was drivin' down the road to ruin.

- James Taylor

Energy consumers in the United States are hard-pressed to know which road they're on.

Example: Between 1962 and 1986, on-site household energy consumption shrank by a third.

The apparent savings came from new, higher-efficiency homes and appliances, a population shift to the Sun Belt, and people who weatherized their homes and adjusted thermostats a few degrees discomfortward.

Yet primary energy demand attributable to households actually increased. The on-site efficiency gain was wiped out by a trend toward electric space and water heating, which merely moved primary fuel consumption for those purposes out of the house and down to the local power plant. There it occurred far less efficiently because of generating and transmission losses. (The light company devours twice as much fuel to power a 96 percent-efficient electric water heater as is consumed by a gas model with only a 65 percent efficiency rating.)

Was a mistake made? Or was there a compensation to going electric?

Answering such questions requires calculating what economists call externalities - transaction costs not borne by the transacting parties.

Consider a utility's decision in former times to build a coal-fired power plant. Customers paid only for the electricity. People living downwind, sometimes even in other states or Canada, bore the cost of emissions-related health and environmental damage.

Often externalities are hard to value, such as the loss of a scenic valley to a hydroelectric dam. The people who bear external costs may be nowhere in sight, like a fisherman halfway around the world whose waters are fouled by a spill from a US-bound tanker. Future generations will be the ones to cope with radioactive waste produced by today's nuclear-powered generating plants.

Hard as it may be to add the cost of externalities to the price tag of a resource or technology, there's growing interest in trying. Otherwise, resources that aren't as cheap as they look will be overconsumed. And money will mistakenly be invested in technologies that only seem to be more cost-efficient than alternatives, says Richard Heebe, a senior research associate at the Rocky Mountain Institute.

Mr. Heebe argues that some portion of the military's cost should be reflected in the price of imported oil.

If that happened, "the price of imported oil per barrel would increase anywhere from $50 to $100," says Nicholas Lenssen, a research associate with the Worldwatch Institute. "It would definitely decrease the perception that oil is cheap."

It would also spur conservation. (Efficiency is the term Heebe prefers "because it doesn't give the image of freezing in the dark.")

Of course, no one really expects that Patriot missiles someday will be paid for at the gas pump. "The number is simply too huge to be manageable," says a Department of Energy (DOE) economist. "Nobody's going to listen to you if you go down that path."

"It's hard for the public to support internalizing subsidies and externalities," Heebe admits.

"Obviously, oil companies would resist it very heavily," adds Mr. Lenssen. "So would the Pentagon and their supporters. They don't want to be seen only as protectors of oil fields."

The DOE economist adds that attempting to internalize costs at a time when US competitiveness is lagging "may not be the swiftest thing we could do. And that's the level of issue you come down to.

"How well do we know the economic system? Can we actually predict what will happen?" he asks. "There's a real argument in favor of a very incremental approach to some of these decisions. Nobody wants to walk off a cliff."

However, "if we never internalize any of these costs, from the perspective of informed governance we should still know what they are," the economist says. …