|An Editorial Opinion from a Real Industry Observer: |
Select "Bearing Down" to get to the article, reprinted here for posterity:
[January 15 2000 / No. 963]
2001: Eminent Domain? Muddling Through May Not Be Enough
Now that I've tweaked my home life with local conservation shots (unplug the laptop at night, turn off the printer when not in use, wait until bedtime to run the dishwasher, downsize 24/7 bulbs again), it is time to turn to more global circumstances as a late New Year memoir of the ongoing Western energy market crisis. It's no news to note that there are both short- and long-term problems. My take at this point in mid-January is that if short-term problems are not dealt with soon and effectively, long-term problems will consist almost entirely of picking through the ruins left by the implosion/explosion of short-term problems.
Newswires are buzzing with energy summits and declarations. But a crisis needs something more pointed at action than at gathering and jawboning. For example, when you go to court for injunctive action, you are asking the court to order immediate maintenance of the status quo. If events are, in the belief of the petitioner, spinning out of control, a court proceeding would be beside the point unless the worsening problem is stabilized.
Governor Gray Davis is the loudest voice in all of this, and he can scarcely be blamed for the volume of his agonizing, if not always the substance. Governors Gary Locke and John Kitzhaber are concerned that their states are aboard a foundering energy boat that California has caused to ship water. Davis calls among other things for two action remedies: eminent domain seizure of deregulated California power plants and creation of a public generating resource development agency.
There are less draconian measures being recom-mended. NRDC's Ralph Cavanagh in a new report on "The Western Electricity and Natural Gas Crisis" calls for ramping up California energy efficiency/renewable efforts, involving states other than California in the problem, guarding against solutions that degrade the environment and getting more relief for low-income citizens. Governor Locke says he will ask the 2001 Washington legislature for authority to promote renew-ables investments with sales tax credits, grant utility tax incentives for low-income assistance and provide tax incentives "to aluminum companies to invest in locally sited power generating facilities, reducing companies' reliance on Bonneville power."
I saw some of this coming. There is of course nothing miraculous about being a little ahead of the curve when you work as a weekly columnist delivering yourself of a more or less serial stream of topical opinions year after year. Perhaps I'm not as accurate as a stopped clock twice a day, but the odds are still not bad. In March of 1996, I wrote: "I favor free markets and open competition, which these days is something like favoring the law of gravity, but not every aspect of a competitive environment is the beneficial result of an efficient market doing what a market does best. The history of markets is not only the history of developing efficiency, but also the history of warping market situations to unfair advantages--even trying to corner the market and get monopoly rents." [[Note: I agree with Mr. Noe in this one. The California fiasco should be a warning to all free market zealots of the destructive potential of unfetter capitalism.]]
But I went on to note that it "is not always easy to sort out genuinely appropriate market behavior from questionable strategies that seek (often unfair) advantage." My main concern in that 1996 column was the possible effect of futures contracts on the stability and efficiency of the power market; a large part of the current crisis is a failure to hedge. I cited the British experience of "a situation in which market players who have operational control of resources become invested in power deliveries at a future date certain, whether long or short."
I continued, "The British experience suggests that when such a circumstance obtains, there may well be strategic outages of generation resources, which have the effect of driving prices toward a desired future goal covered by contract." I also wondered in connection with organizing power pools how manipulations of supply would be handled. I am still wondering five years later how (to get specific) manipulation of supply relates to meeting load in the new "competitive" system operator environment.
The California deregulation experiment didn't in its formative years do anything much to relate demand to supply. Too much else was going on. The grand and rococo negotiations that preceded the unanimous passage by the legislature of the dereg measure--a festival of win-win fantasies if ever there was one--was most probably influenced by the model of "making the deal" for a blockbuster film in Hollywood. [[With an equally small dose of reality involved. <gg> ]] Money, money everywhere, real and prospective: deals and side deals and side-side-deals; perks; residuals; percentages; walking-around money; scripts; subsidiary rights; billings; foreign rights; videotape; advances; promotion; casting and cuts. It takes, one famous director said, three years to make the deal and one year to make the film.
During the run-up to the great dereg supermarket opening in April 1998, the CPUC authorized a communications coalition to tell the deregulation tale to the people of California. The budget ran to $90 million and included videotapes in 13 different languages telling Californians, in effect, that nobody really knew what was in the offing. It might be time to release those tapes again.
The California-West competitive market situation might well have been less chaotic had there been a surplus of generation pitting one sharp pencil against another. But there was no surplus; now as it turns out, the West is on the cusp of a power shortage from top to bottom except maybe in British Columbia. Moreover, the actual total electric generating resource freely available is not a firm figure in these uncertain times, even without the sudden maintenance stand-downs that have been occurring at inopportune times in the Golden State.
How can we build our way out of this situation? There isn't much choice, of course, but the first and immediate task is to work the demand side both through the DSM (Demand Side Management) Cavanagh suggests and through a variety of curtailments. Hopes for a boom in building generating resources, moreover, may not be realized unless builders are persuaded of useful returns on investments.
The net effect of the huge profits power marketers have been earning has been to attract an enormous lot of negative attention. Such profits are clearly not in the public interest, and the market that made such windfalls possible will surely be diminished one way or another.
The operative word for investors might more properly be a guaranteed rate of return, as in the old days of PUC regulation. The only way to build into power surplus may be to do so under regulatory authority that guarantees a rate of return. However, without the possibility of rate-basing, which financing occurs only in ongoing energy billing transactions, it is difficult to know how such subsidized financing might be made to happen. The call for a state-run agency (or a coalition of munis) to build resources is plausible and worth more discussion.
Governor Davis calls for California "to take control of our own energy destiny." But Davis's State of the State speech cried out that California had been damaged by carpetbaggers ("out of state profiteers") and wailed that there is something unspeakable about a situation where "on many days, 10 to 12 percent of the electricity generated in California leaves our state." The profiteering would of course be reprehensible even if done by that rare bird, the native Californian, and transmission into the state also runs out of the state. So to speak.
Ralph Cavanagh in his report says "these issues increasingly are national in character, but the impacts in California are especially grave and immediate." But that does not mean that this is California vs. the rest of the West. An adversarial viewpoint in the Northwest is based on the belief that California's egregious mistakes are being unfairly visited on her interconnected neighbors. The truth of course is that whatever gets worked out has to respect the interests of all states involved.
I see some merit in Governor Davis's using eminent domain powers because the current market situation is unstable and at risk of moving out of rational control. I have no insight as to how this legal action might work, but the intention would be to preserve the status quo. The Western power market has been corrupted against the public interest, perhaps by chance, perhaps by intention and more likely by some of both. Efficient and rational markets do not have these kinds of manic mood swings.
There may be legislative solutions that could also create a stabilized situation. But right now the Western power market system puts the stability of the interconnected electric industry infrastructure at risk. The system still had the lights on as I wrote this column a couple of days before press time, but as I edited it the next day, California had gone to Stage 3. The market is not likely to heal itself by muddling through, and the West already has seen businesses closing and utility systems on the financial brink. Action to hold the immediate line is necessary as soon as possible, before an event of severe weather that could cascade the Western system into load-shedding disaster [Cyrus Noë].
Cheers, Ray :)