A way out of the power crisis: teamwork

The bad news is that we are in the middle of a very serious power crisis and things seem to be getting worse every day, not better. But the good news is that there is a simple way available to us to solve this crisis. It involves four key elements: a vision, a deadline, trust, and teamwork.

As I write this, we are in the midst of a rolling power blackout in San Jose: there are no lights, and no working computer and phone systems. It is difficult for any company to operate without energy. It is impossible for software companies such as ours to operate without electricity. My employees might as well go home, assuming they could get there safely given that traffic lights aren’t working and 911-Emergency is overloaded by calls.

To understand where we are in solving this crisis, I’ve spoken with knowledgeable insiders at very high levels in the legislature, at power companies, and at industry trade groups. I was not encouraged by what I learned. We have:

  • no short-term plan to save the utilities from bankruptcy
  • no agreement on a long-term direction regarding whether we are trying to move back to regulation or continue with deregulation
  • no cohesive working group consisting of representatives of each constituency that is empowered to solve the overall problem
  • a large special committee consisting of state legislators, with little or no prior experience dealing with this problem, tasked to figure out what went wrong and craft a solution before the utilities go out of business
  • industry groups who are trying to do their best to help out with suggestions
  • consumers and Public Utilities Commission who are unrealistic about the financial ramifications of the status quo
  • a reactive deadline that is driving a piecemeal solution rather than a coherent plan

In short, I don’t see a process in place today that is likely to solve our problems other than to provide a number of short-term band-aids that may in the long term create further problems. Basically, we don’t have the key people who have to “buy in” to a solution working together as a team to come up with a solution. This is the major problem that we must fix first.

While I can’t claim to be an expert on economics or power, as a CEO of four successful high tech companies, I’ve faced my share of difficult problems. And the process for solving them is, by and large, the same: you get a small, carefully selected team of people who together have the requisite skills, knowledge, understanding, perspectives, and common interest necessary to get to a solution and you give them a clear goal that is attainable. You also make sure you have a leader who can facilitate everyone working together as one team and a deadline on each major issue to help achieve closure.

In the current situation, the time for data collection, analysis, and re-analysis is over. It is time to try a new approach. We need to make some tough decisions and make them fast. You can’t do that in a large group. If we want to solve this quickly and responsibly, we need a group of at most five people:

  • an experienced CEO and problem solver with no ties to the power industry who can act as the leader of the group and also represent the interest of large businesses affected by the power crisis
  • a CEO from one of the power generators
  • a CEO from one of the utilities
  • a representative from state government who truly understands power issues and who can also represent the interests of individuals and small businesses
  • an independent consultant who has expertise in the areas of utilities and the effects of deregulation. Ideally, this is someone extremely knowledgeable from a state where this has worked, e.g., Massachusetts.

All of these team members have a vested interest in solving this crisis. And together, they have, or can solicit, the necessary knowledge, perspectives, and expertise to get the job done. We have to trust that such a group will be able to work together and arrive at a single best solution, or a set of equally viable solutions by a set deadline.

Equally important is that we must also carefully choose each individual member to ensure that they have the people skills to enable them to contribute constructively and productively in a team setting.

The first step of such a team would be to decide, based on the currently available data, what the long-term vision for California power should be: 1) turn back the clock to a regulated market; 2) attempt to keep the current semi-regulated market; or 3) accelerate the move to a truly deregulated market. It is time to weigh these options and pick one. Then the team should determine which measures should be taken in the near term and over the short term to achieve that vision without bankrupting the utilities and with minimal consumer impact. These recommendations should then be evaluated and acted upon by the Governor and the Legislature.

Confidence in our elected leadership is fading fast, as each day brings word of rolling blackouts and lost business. Because it can be done in parallel with existing efforts (including other committees also tasked with the same problem), there is no reason to delay in appointing an appropriate team to solve this problem within a set timeframe. In the absence of decisive action from the State Capitol, we are headed down a road with no map, no lights and no end in sight.

Steve Kirsch is CEO of Propel, a supplier of e-commerce software and a consumer of electrical power located in San Jose.

Addendum

Deregulation has been working just fine in Massachusetts and in 22 other states. They have no shortage of power. Prices haven't changed. Here's what other states did:

  • allowed the market price to float 
  • streamlined the process for approving new power plants
  • encouraged utilities to enter into long-term purchase agreements
  • didn't force utilities to sell off their plants (in Pennsylvania and New Jersey)

One insider close to the governor and legislature told me (on Jan 18) that “the governor is utterly without a plan.” This was after rolling blackouts, and after a state of emergency was declared.

As far as I can tell, Davis has been successful with a problem solving approach of gathering data and then making a decision. This works fine for relatively easy decisions. But for more difficult decisions, a different decision making technique is required: team problem solving. Davis hasn’t had to face a situation this tough before. His tried and true problem solving method won’t work here, even though he keeps trying it. He needs to apply a small team problem solving approach and engaging people in working constructively with him to solve the problem. But his style is not collaborative and he is not and has not been willing to try something new even though there are no downsides. It is just not his style. This is truly unfortunate for California that Davis is not open to more effective approaches to problem solving and doesn't trust people. This LA Times article about how Davis has handled the energy crisis is dead on, according to those who know Davis.

In summary, we have:

  • unrealistic constraints: 5.5 cents today is unrealistic. So, if we have a solution at this price, it just means we're financing it in the short term and eating it in the long term. 
  • no vision: regulated or deregulated? which is it? It hasn't been articulated by the Governor who has been reluctant to use the word "deregulation."
  • no plan: for keeping the utilities solvent and getting to the long term vision. We are left in the dark about a solution.
  • no trust: that a team approach will work (even though there is no risk)
  • no communication: my suggestions, and the suggestions of the other affected parties fall on deaf ears
  • no teamwork: there is no appointed team as described above empowered to make a decision or even a recommendation
  • no deadlines or timetable (the governor has not committed to a deadline)
  • a six month wait for new electrical service caused by the cash crunch forcing utilities to layoff key workers
  • little hope that this will be solved satisfactorily anytime soon. I'm not very optimistic.

Who is to blame? Almost everyone to varying degrees, but primarily the PUC.

I've suggested a simple technique of getting the key players to work together to develop solutions. That is the first thing you try when confronted with solving a major problem. It's management 101. It's not guaranteed, but it's the first thing you try. The suggestion has fallen on deaf ears so far.

There is no reason they (Hertzberg or Gov Davis) couldn't appoint such a committee. If they want a big committee for political reasons they can also create a huge committee of 20 people to solve the problem where members are appointed to appease all constituencies. Then they can compare the results from both committees (now wouldn't that be interesting!). 

  • Davis is going to be reluctant to appoint a committee because he sees this as a test of his leadership and will be reluctant to share the stage with anyone else, even a Blue Ribbon Commission.  He wants to be the hero and defender of taxpayers. 
  • Hertzberg is going to be reluctant to appoint a committee because he's totally convinced that it's his job and that he's solved it. Therefore, validation is an unnecessary waste of time. If the committee validates his plan as he expects, he believes he gains nothing (he actually gains incredible credibility that an independent panel of experts agrees he's solved it correctly). But if that panel doesn't validate his plan, it makes him look bad. So why take the risk? Keeley is much more open minded and supportive of this approach. There is a great profile of Keeley in the LA Times.

I'm angry and I'm frustrated. We have politicians who won't listen to tried and true problem solving approaches who are trying to become instant experts and solve this themselves using technique appropriate for solving simple problems. That's non-productive. 

Suppose the Governor has come up with a great plan for keeping the utilities solvent. The problem is:

  • Nobody in the Assembly (or anywhere else for that matter) has seen it. 
  • We don't know what process was used to come up with it. 
  • We have no process for validating it in a responsible manner (yes, we're smart, but having us validate a power crisis plan is like you asking Governor Davis to validate a business plan in your own company)

It's clear to me now what the long-term vision should be: minimize government involvement. They've proven in their handling of the power crisis that they can't deal effectively with issues like this. We should move to a system like what is working in Massachusetts. You regulate only that part that is a monopoly (the charge for the "wires" to the house). Other than that, government doesn't get involved. 

Jan 19 update: Will the Hertzberg plan work?

A number of plans submitted by the utilities for solving the crisis have been submitted months ago, but we've never heard why the state rejected the plans.

The Assembly is frustrated with the Governor. Basically, Davis needs to either lead, follow, or get out of the way. And to date, he's done none of these.

Assembly Speaker Hertzberg has developed a plan whereby the state buys power and contracts directly to consumers with the utilities providing delivery. Under the plan, the state would also seize the hydro plants of the utilities to provide cash to keep the utilities afloat. If the Governor still has no plan on Monday, it is rumored that Hertzberg will move ahead with his plan. 

It is claimed that Hertzberg's plan has the backing of all constituencies. This is clearly not the case since some are leery of the plan, and one Assemblyman was quoted in the SF Chronicle calling the plan a "nonstarter."

It certainly doesn't appear that this is the case since the utilities and generators have made no public comment on the plan. If they thought putting government in the power business was a good idea, why didn't they issue a public comment in support of the plan? And if the plan was developed in cooperation with the utilities and generators, this certainly would have been mentioned when it was announced. Plus having the utilities give to the state, for nothing, their most prized assets (hydro plants), is unlikely to be something the utilities would be excited about.

Few people in the Assembly knows the process that was done to create the plan nor who was involved in crafting it. It's clear it wasn't the cooperative team process described in the oped above. Hertzberg and others have been working insanely long hours 7 days a week and have met with a huge number of groups and put something together. While this is far more collaborative than what Davis has done, it is far from sufficient for a problem of this importance. If he ran it by the utilities and generators and got their "support" it might have been only because they were faced with "it's this plan or no plan." That's not the way to get buy in or develop a workable plan.

Without crafting a plan with the appropriate participation working together as a team (instead of just being "consulted"), you have a dangerous plan. Having the affected players not endorse the final result (and find out about it at the last minute) makes it even more dangerous. And, finally, no matter how it was developed, not having an independent review committee evaluate the plan is irresponsible. Nothing like this has ever been done before anywhere. It puts the government in the loop of providing a key service and owning power plants. And it puts the utilities in danger of going out of business or failing to provide service due to insufficient revenue. And we all know how well that works from the current crisis where decisions are made in an untimely fashion for political reasons. The plan, if adopted, is dangerous and may worsen the problem. There are many unanswered questions. It may potentially put the financial health of our state at risk. 

The right plan to fix the problem would have the backing and support of all major constituencies involved. And it would hold up under scrutiny (such as the committee we propose). And it would hold up in comparison to other plans that have been submitted (such as the plans from the utilities).

Unfortunately for us, the Speaker now sees no reason to appoint such a committee as described above since in his mind the problem is "solved" by his plan which is a 3 to 10 year plan.

This is insane. We have working deregulation in other states. It was done in Massachusetts and most people there don't know when it happened and their rates have not increased. It was done in other states without the government seizing assets, borrowing money, and getting involved in selling electricity to the public. So why is it necessary in California to once again enter uncharted territory with a hastily drafted plan that has no precedence anywhere? Do we know something 23 other states with deregulation don't know? We should adopt what works (with appropriate adjustments if, and only if, required) and minimize government involvement.

Why were the 3 plans submitted by the utilities rejected? Does anyone know?

Why don't we just reverse the bad decisions that got us in this in the first place? This will move us closer to models that have worked in other states. In other words, move to what is proven to work, rather than "innovate" with a hastily crafted solution.

Why don't we allow the utilities to enter into long term agreements themselves and just use the state to guarantee payment? Note that the legislature said it is not to blame for this since it is a PUC ruling and the legislature doesn't control the PUC and the legislature said it can't do this because the utilities could go bankrupt other ways beyond the buying/selling of power but there may be a way to carve this out, e.g., a separate entity within the utilities. Why can't we allow prices to rise to cover costs? Consumers are going to get hit with the cost sooner or later. In fact, the price under the Assembly plan would be the same as the utilities would charge if the PUC allowed them to cover their costs.

The 35 million people of California deserve a workable plan that is well crafted by a responsibly and carefully put together team. If we are to stop this, we must be unified in our request for such a committee to examine the current plan and investigate and recommend alternatives.

Team proposal suggestions

Requirements for the team

  • Five people maximum. This is both necessary and sufficient to solve the problem. Adding more people will slow things down rather than speed things up. If you want a committee of more people, form additional committees, but keep this one small.
  • Members must be team players, i.e., easy to work with, good listeners, open to ideas and compromise, thoughtful, constructive, non-political. The dynamic of the team should work smoothly, i.e., no personality clashes, etc.
  • The leader of the team should be chosen by the team or selected by the Governor from among the five. It is critical that the leader not have an association with the current Assembly plan being evaluated as this would make it difficult for the group to come up with any conclusion that might be counter to the current plan. 

Composition of the team

  • Business CEO: Should have a distinguished track record as the CEO of a major firm. Should be expert at running efficient meetings and keeping people on track. Examples: Craig Barrett, Joe Costello, Jim Barksdale, Carly Fiorina, Scott McNealy, John Chambers, Ned Barnholt, Lew Platt, Ellen Hancock, Bill Krause, Jimmy Carter
  • Representative from state government: Should understand power issues. Can effectively represent the interests of individuals and small businesses. Must be open-minded to considering the possibility of solutions other than the Assembly solution. Example: Fred Keeley
  • Independent consultant:  Expertise in the areas of utilities and the effects of deregulation. Practical experience from a state where this has worked. Example: Paul Joskow (MIT economist who specializes in deregulation)
  • Utility CEO or Chairman. Examples: Gordon Smith (CEO of PG&E), John Bryson (chair of SCE)
  • Generator CEO or Chairman. Examples: CEO of Duke, Southern, or Dynergy Power.

Goal of the committee

  • Examine the Assembly plan: will it work? Are there any major problems? Are there any improvements? Are there better alternatives that should be considered?
  • Develop recommendations for consideration by the Governor and Legislature on the key strategic issues related to plans for solving the power crisis. 
  • The goals is move California as quickly as prudently possible  into a position that is at least comparable to, if not better than, other states who have successfully deregulated regarding power availability and cost, i.e., power is both reliable and available at reasonable prices.
  • Come up with key recommendations in 5 days for the outstanding issues and a full report within 30 days.
  • Focus on high level strategic goals, rather than individual tactics.

Key issues

  • Is deregulation the proper long term goal with minimal involvement by the state?
  • Is there inherent reason that California's move to deregulation cannot be successful?
  • What are the risks in the current Assembly plan? What changes, if any, would you recommend?
  • Are there any other plans that should be considered in addition to, or in lieu of, the current plan? 
  • Should any of the plans submitted by the utilities be considered? Why were these rejected?
  • Are there any other key issues that should be considered by the committee?

Specific questions

  • If the state enters into 3 to 10 year long term agreements with power suppliers and the price of electricity drops in 1 year, who will pay the cost difference?
  • How will we keep the utilities from going bankrupt?
  • What if the utilities don't willingly agree to just hand over the keys to their hydro plants for nothing?
  • How will the utilities make money so that they can afford to re-hire the workers whose layoffs mean 6 month delays for new service? How can we ensure that the utilities can financially afford to provide excellent service?
  • How can we ensure that alternative sources of energy are incentivized and developed? Is nuclear power worth re-visiting?
  • When will we allow the market price to float? Will the price of transmission be the only price regulated by the PUC?
  • Are the existing proposals for streamlining the process for approving new power plants adequate? Which should we push?
  • Shall we encourage utilities to enter into long term purchase agreements or just remove all regulations? Will the state guarantee payment on long-term contracts?
  • Can utilities own power plants (as in Pennsylvania and New Jersey)? Build new power plants?
  • Should taxpayers receive "assets" (such as hydro plants) from the utilities? If so, then at what point does this end, if ever? Or does the state just seize assets of the utilities whenever necessary to pay for mistakes caused by government regulation and/or intervention?

Team proposal supported by:

  • Steve Kirsch, CEO Propel
  • Ben Horowitz, CEO Loudcloud
  • Bill Krause, former CEO 3Com
  • Peter Hero, CEO, Community Foundation Silicon Valley

Selected comments on this editorial (which ran in the Sac Bee)

Steve, I work as an energy analyst in SF and agree with your assessment of the current situation and the parties involved. Although I believe the legislature will move to slowly relative to the financial reality, there are some technically proficient people among the Senate staff.

Based upon the work our research team has done, it appears there are three key factors to solve this crisis: 1) the current rate hike must be extended beyond 90 days to create headroom to recover past purchased power (otherwise write-offs destroy the balance sheets of the utilities); 2) bilateral contracts must be signed to remove the short position in power - not only is $0.055 uneconomic it shows that Gov Davis has received extremely poor advice from people who either want bankruptcy or can't run a calculator. Contracts in the range of $0.075-0.085 are possible and may not increase rates beyond the initial 10%; and 3) QF - qualifying facility contracts need to be forced back under contracts that reflect an adequate return on capital.

Obviously many other factors need to be considered and altered, but a solution can be crafted if politics and egos get out of the way. Unfortunately time is short and legislative bodies by their very nature move slowly.

----------------

Steve, great article!

"Put a leader in charge who can keep the group working together toward deadlines on each major issue and you're on the way."

You're nominated or better yet, recruited. See you at the Capital today at 10:00 am! What do you think of the Assembly member's plan to take the hydro plans they announced today. Story in www.latimes.com

I did energy conservation studies for 3 years until "deregulation" hit in '96. Then they said, "We don't need to do energy conservation anymore because the cost of energy will get so cheap due to deregulation." Then I had to do something else. I designed and built nacho cheese heaters for a rich man for the next 3 years all the time wondering why I wasn't doing energy conservation anymore.

------------------

Steve, just finished your comments in the Bee. One of the most rational statements regarding "our" energy problems that I have seen to date. Let us hope that some of the state powers also "read and heed" ! - Dave Hoppe, professor, CSU, Chico

 

 
  Poll      Notifications OffNotifications Off 
Which plan would you support? (Select only one)
  Chart of the current poll results.  You must be online to view the chart.    
Choice Votes %
      Assembly only
Vote
1 25.0%
      Alternate only
Vote
3 75.0%
      Either one is fine
Vote
0 0.0%
Total: 4 100.0%
 
 
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Comments per page:
Name [ Sort ] Date / Time [ Sort ] Vote [ Sort / Current ]
1-4 of 4
R Diridon 1/24/01 12:02 PM PST    
The crissis had been provoked primaily by the fuel providers and power generators jacking up their prices to the power distributors. If the power plants are allowed to continue to be private, the price gouging will continue. Therefore the Assembly plan, either as a real legilative action or a bargaining ploy, is prefered if power rates are to be affordable to commercial as well as residential users in California.
DuBose Montgomery 1/24/01 11:43 AM PST    
Why force the utilities to "donate" their hydro plants? The state will do a terrible job running them. The surcharge increases the price of electricity which should have been done earlier. The free market can solve this problem if California politicians will let it be free.
a grove 1/24/01 10:19 AM PST    
Much more straightforward than assembly plan. Transfer of assets involve valuation process that would be longer than the current permiting process!
Vinod Khosla 1/24/01 10:19 AM PST    
Fundamentally we need to increase teh price of power to its fair market value over the long term; a surcharge does that. We also need the higher price to encourage invetsmnet in new plants and even new technologies. Nuclear technology development was shut down over the last thirty years. if we had allowed it to continue (as we did in computers) todays power woudl be cheaper and mroe eco-friendly than the coal and fuel powered plants we have today. It is as if we had blocked cars from developing because they were not as safe as horse carriages in the early days.
 

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