A new way out of the power crisis

Just regulate the PUC through Governor's request, then legislation, so that they stop over-regulating the utilities

By Steve Kirsch (January 28, 2001)

Executive Summary of the Proposal

• Legislature passes a simple bill that amends AB1890 to require that the PUC must allow utilities to enter into long term purchase agreements that meet certain guidelines. This legislation is necessary since even though the PUC started allowing this on August 3, they haven't approved any contracts, nor even issued guidelines for the contracts they would approve. The PUC is essentially acting like a deer caught in headlights: frozen.
• Gov. Davis asks the PUC to accept the audit results from the PUC-chosen independent auditors (KPMG). These results show that the stranded costs have been recovered which means the utilities are entitled to recover around $12B (the precise amount depends on who you ask) and that they can also raise their rates to cover their costs. This makes them instantly credit-worthy again. Davis also asks the PUC to strike a deal with the utilities (and promises to get legislation to confirm) to allow rates to remain the same today (for at least low- and fixed-income households) in return for the unbreakable commitment that rates will be set higher than costs later  (either by virtue of lower costs or higher rates or both) to allow the utilities to recover the shortfall. This is exactly the same requirement with the PUC as AB18X has (only in this case, the agreement is with the utilities, rather than that the State as with AB18X). Of course, any other creative solution for consumer pricing to protect certain classes of consumers could be accommodated as well and instituted by the PUC. The key requirement is that the PUC agrees that if they require utilities to into debt, that they also permit a way for the utilities to recover that debt. That enables the utilities to finance any retail price constraints the PUC may wish to impose, either now or later. 
• Davis also asks the PUC to allow the utilities to keep some portion of any rate savings that can be negotiated (say 10%). This, for the first time ever, gives the utilities a financial incentive to negotiate the best possible rates for consumers (i.e., better long-term rates than State government would have the expertise to negotiate).
• If the PUC doesn't accept the Governor's suggestion, the Legislature just codifies all this as a bill and passes it and forces the PUC to act in a manner consistent with PUC's in other states with deregulation (long term contracts, covering costs, etc.). This just delays implementation time (costing the State hundreds of millions of dollars in unnecessary expenses), but the process is the same. It's important to formalize this in legislation in any event. 
• Key benefits: This can be implemented almost immediately by the PUC saving hundreds of millions of dollars, Governor and Legislature are heroes, consumers get lower rates than AB18X, utilities are financially solvent and would come out ahead financially more than AB18X, consumer rates would remain flat (if it is possible to negotiate favorable long-term rates for the required amount of power; otherwise it's no worse than AB18X), and government stays out of the power purchasing business.
• Important political note: Because the KPMG audit was just released, it gives our politicians a perfect excuse to implement this plan today since they can't be criticized for waiting so long because they can rightly claim that didn't have this audit data on the stranded costs before now.

On January 24, I was briefed on the Assembly plan to solve the power crisis. I've spoken with many of the key Assemblymembers working on solving the crisis.

While I don't believe that any person without extensive knowledge of the power industry can really understand what the best way out of this situation, I have created this document in the hope that it may be useful to those empowered to put in place a solution.

In this document, I will cover the following six topics:

• Why it happened
• What the Assembly leadership is proposing to fix the problem (AB18X)
• An alternate plan that I developed (the "Market Price" plan) [significantly revised on Jan 27]
• What you can do to help
• What people are saying about these two options

Why did this crisis happen
Essentially, the crisis happened because California did not do its homework. Pennsylvania did. They deregulated around the same time we did and are viewed as a model of how to do it right. We made many mistakes that Pennsylvania did not. Unlike other states, we over-regulated our deregulation. Here's how:

• We did not allow the market price to cover costs (Penn. had rate caps that covered costs)
• We made it difficult for any major new power plants to be built (and we didn't make it easier)
• We did not allow utilities to enter into long-term power purchase agreements and forced them into an inefficient spot-market bidding process
• We did not allow utilities to keep their power plants
• We did not take it seriously when the utilities complained more than 6 months ago

Here's why we are in a pickle:

• Demand > Supply. We haven't built a large power plant in California in over a decade. We made it hard to get a permit and nobody seems to want a power plant in their backyard (NIBY).
• We forced the utilities to sell at a fixed sell price to consumers, we forced utilities to shed their power plants, and we forced the utilities to buy electricity on the spot market. The PUC also forbade utilities to enter into long term purchase agreements and forbade the retail price to rise to match costs, forcing the utilities into near bankruptcy.

Who is to blame? Just about everyone:

• the utilities discouraged construction of new power plants six years ago, as reported in the San Jose Mercury News on Feb 4, 2001
• the PUC over-regulated the utilities (and continue to do so)
• the Legislature passed a deregulation plan that was not well thought out
• the Governor failed to act quickly to avert a crisis as reported in a story in the SF Chronicle and a story in the LA Times

In short, we are in this mess because of government micro-management. Other states have planned better and are not in the crisis we are in. Deregulation is working fine in 23 other states. You don't see newspaper headlines about blackouts or power shortages in other states. Today, we are already paying almost 10 times more for power than Pennsylvania is! Plus, we have to import 25% of our power from outside the state.

We are in an extremely dangerous situation today. There is nothing to keep the utilities from being forced into bankruptcy right now other than requests by the Governor to the generators.  Three creditors can cause this. If the utilities are forced into bankruptcy, you may not have any electrical service at all. It could happen tomorrow.

So bankruptcy is very very ugly. Fortunately, the Assembly leadership fully understands this.

What is the current proposed solution from the Assembly leadership
The current 21 page Assembly plan (AB18X) calls for the state buying the electricity that the utilities don't already have in hand or under contract (called the "net short"). The state would be free to enter into long term purchase agreements to buy the remaining power and sell this power to consumers. The PUC would continue to regulate rates. If the state incurs debt because the PUC price is unrealistically low (as has been the case recently, causing the utilities to incur billions in losses) , the state can sell an as yet undetermined dollar amount of  bonds to finance the debt. The bonds could be repaid later either when supply costs decrease, or the amount of debt forces the PUC to face market reality and establish a consumer rate increase to above the supply cost. In return for the state "helping" the utilities out of this crisis, the State would get certain assets (such as stock options, power plants, etc). In essence, the state is going to borrow money so electric rates will not go up in the short term, and will repay those funds in the future when consumers will be forced to pay "higher than market rates." There is no "magic" here. We are just borrowing money now in order to subsidize "below market" electrical rates today. We will pay for it later. Essentially, we are using borrowing to "smooth" out peaks and valleys in the pricing to keep electricity, which is essential to all of us, affordable to all. There is nothing wrong with that. For either AB18x or my plan, this is equally possible to do, both for short term rate fluctuations as well as smoothing out the long term. In either case, the PUC must allow for recovery of the difference.

AB18X was crafted to achieve two goals:

• avoid bankrupting the utilities 
• avoid raising consumer rates (this is an artificial political constraint; politicians believe that Californians are entitled to fixed electric prices)

AB18X appears to satisfy these constraints (though some details are still missing). I commend Assembly Speaker Robert Hertzberg and Assembly Speaker Pro Tem Fred Keeley for a job well done. They worked their butts off (putting in 20 hours a day, 7 days a week), and they appear to me to have achieved those goals. They did it in record time.

However, there are a number of problems with this approach to solving the problem to satisfy those two constraints:

• It may not work without a rate increase almost immediately because California will not be able to buy enough power at the price they want to buy to satisfy the "net short" without going deeply into debt fast. So if you can't do it without a rate increase, there are better solutions and simpler solutions such as the one I propose below. The LA Times, reported that the State had received bids for power at a weighted average of 6.9 cents per kwh on a "night and day" basis. While this sounds like good news, it's quite possible that (a) not much power was offered, and (b) bids were structured with low prices during nighttime off peak hours and $.10-$.12 per kwh during the day, when people actually plan to use it, yielding a weighted average of the 6.9 cents. This is unrealistic since power is not used at the same rate over 24 hours.  On NPR a couple of days ago, Freeman mentioned that a Kwh that Davis wants to buy at 5.5 cents has 10 cents worth of natural gas cost, before running it through the power plant! A lot of people are forgetting that we're still trying to figure out how to get wholesale power at an acceptable rate. Everyone is vilifying PG&E and SCE, but they'll still expect to be paid for transporting the power, maintaining the distribution system, and billing. 
• It ignores market supply/demand reality. Because the consumer price is kept constant, independent of demand, there is no financial incentive to conserve, potentially leading to regular rolling blackouts, which could last for years until supply catches up with demand or until the PUC wakes up to financial reality. The cost of a single 3 hour blackout for my company was about $200 per employee in lost productivity . So even though my electric bill didn't go up, I paid for it out of another pocket. So this one blackout for my business was equivalent to an electric "rate" increase of 50% for 1 year. So there is a facade here that rates haven't gone up, but the real costs of not increasing rates are huge because of the lost productivity costs on each blackout. I'll take the rate increase any day. It's cheaper!
• Because the state needs to lock in a very low rate to try to achieve 5.5 cent per kwH, this will mean the state's contracts will be very long, e.g., 5 to 10 years. That means our prices will be fixed for a long time. So if the cost of electricity goes down later, we'll be forced into paying higher rates than market. We will have no choice. And there will be no price competition because all the supply will have already been pre-purchased. So where is the incentive?
• For the foreseeable future, the PUC will continue to set our rates, rather than a free market. I thought the whole idea was to move to deregulation to save money and provide lots of pricing options. Pennsylvania consumers have saved billions as a result of their deregulation.
• It's complicated. The bill draft I received is 21 pages long. There are lots of things still to be determined. There are unknown downsides. This plan was not put together by a team of the affected players working as a team together to solve the problem. Nor has this plan been reviewed by such a qualified group. No matter how it was developed, not having an independent review committee (such as the team I have suggested in an earlier oped) formally evaluate the plan and issue a written analysis is irresponsible. Nothing like this has ever been done before anywhere. Rather than adopting a deregulation plan from a state that works, or even moving towards a deregulated environment, we are continuing to move away from proven approaches and deeper and deeper into untested waters.

The Market Price plan (Jan 28 revision)
My plan is very simple:

• Regulate the PUC so that it doesn't continue to over-regulate the utilities, but still provides reasonable rate caps and price-relief for those unable to pay higher rates. This can be done today via Governor request to the PUC, and subsequently formalized in legislation. This simple act will remove the possibility of the utilities going bankrupt. It will enable utilities to enter in long term purchase agreements, raise rates to cover costs (if re-negotiated cost targets can't be met) but only for the vast majority of people who can afford it, allow them to borrow money to subsidize lower rates today (just like the state was planning to do), etc.
• If and only if the government subsequently determines that  it can do a better job buying power than the newly deregulated utilities, then the government may choose to compete in the market just like Green Mountain Energy does. It will offer these  lower-priced government rates to anyone (until there is no more supply), but first signup preference will be to people with low- or fixed-incomes. Signups can be through a special program run by the utilities on behalf of the state government.

That's it. It is no more complicated than that. Below I'll describe the details of why doing something so simple will completely solve the current financial crisis of the utilities as well as keeping rates low. I'll also describe the benefits of this approach relative to AB18X.

We should move to deregulate the market just like Pennsylvania. We must get rid of the government micro-management PUC rules that caused this crisis in the first place by allowing the utilities to compete like any other business in the state (with the exception of regulating the transmission costs which are still a monopoly). We can use still use PUC mandated maximum price as a way to keep the utilities "competitive," until other competitors emerge. Relaxing these PUC governance rules and recognizing the utilties were unfairly (and it appears unlawfully) put in a cash squeeze and are entitled to recovery of billions of debt, will allow utilities to make money and become financially viable again. After trying this for a while, if the government is concerned that rates are too high, the government can enter the business of buying power with a preference of serving low- and fixed-income customers. This would also provide competition to the utilities to keep prices low, as would just the "threat" of "if prices don't come down enough, we'll be forced to enter the market and compete with you." Once other competition is established, government can get out of the picture. 

There are details:

• Legislation would mandate that utilities must be allowed by the PUC to procure electricity from any source and enter into long term purchase contracts. There are allowed to build and own power plants if they choose. Within a realistic (not less than costs) price cap set by the PUC, utilities can set their own consumer prices and be creative at doing so. For example, consumers could be offered pricing plans like cell phone plans: "market rate" plans where the rates can go up/down each month, 6 month "rate lock" plans, 12 month "rate lock" plans, special low "below baseline" rates, volume discounts, etc. We'd also acknowledge that the utilities have recovered their stranded costs and shouldn't have been subject to the rate squeeze they were forced into (because the PUC forbade them to enter into long term contracts).
• Government can do the same thing as the utilities if it wants. This will keep the utilities "honest" as far as the prices being charge. When lots of competition develops, the government can step out of the picture. The government isn't allowed to borrow money to subsidize consumer rates below market and try to squeeze out competitors (or cause an over demand situation leading to blackouts). However, they may borrow a limited amount of capital to smooth out temporary price fluctuations as utilities would do in the normal course of business.
• If the utilities can purchase power for less than the state had been able to do, the PUC should allow the utilities to  keep part of that differential and pass the rest on to consumers in the form of lower rates. This gives the utilities a strong incentive to reduce consumer prices and means that consumer prices will be less than or equal to the prices under AB18X.
• Since electrical transmission is still a monopoly, the price utilities can charge for transmission will continue to be set by the PUC based on reasonable rate of return pricing as is done today. So this part is no change from how we do it today.
• Because we have a supply shortage that will take some time to fix, for the next 3 years (to allow supply to catch up), we require the following:
  • If utilities have power available to sell, and consumers who wish to purchase that power, the utilities must sell that power. This prevents power supply hoarding which can drive up the price in a supply-limited market. So if you have more new customers than supply, you can either a) buy the supply from a competitor or b) tell the customer to buy directly from the competitor.
  • If supply is less than demand, the utilities must give first preference to customers within California

There are two underlying principles here:

• You must have flexibility to allow rates to rise so supply can match demand (no more rates below costs) or I guarantee that you will continue to have rolling blackouts that are, in effect, much more expensive (and inconvenient if you are stuck in traffic or an elevator) than a small rate increase. I've spoken with a number of prominent CEOs and they all say the same thing:

"Market pricing is an imperative to solve this problem. Current plan is for a subsidy (from someone) which promotes inaction."

• You must minimize restraints. If we want to keep the utilities honest in the short term until more competition develops, have the PUC set a realistic rate cap and allow government to compete on a fair basis with the utilities. Allow everyone to purchase electricity using long term contracts.  Everyone wins because the highest rate that people will pay will be the low "government" set rate. 

Advantages of the Jan 28 Market Price plan:

• It can be implemented immediately: The Governor can ask the PUC to allow the utilities to enter into long-term agreements immediately. He can also direct the PUC to allow a rate increase while allowing a rate freeze for those unable to afford a rate increase. So all the benefits of this plan accrue immediately. The legislation, which can come later, just formalizes this.
• Simple to understand: We're just forcing the PUC to act more reasonably (act like in other states where deregulation works) in its regulation of the utilities. Government, if it chooses to enter the market at all, is just like Green Mountain Energy, i.e., another player in the market. 
• Faster and easier to implement: We don't have to implement the government piece immediately or at all. The utilities will get relief as soon as the legislation passes since they will no longer forced to sell below cost. And the utilities can move much faster on purchasing long term contracts than the government could.
• It requires minimal legislation: The only legislation that is required is legislation to regulate the PUC so that it no longer over-regulates the utilities. The PUC must allow the utilities to enter into long-term contracts and pass on actual costs incurred onto consumers. It should allow utilities freedom to offer multiple pricing plans.  
• It provides a "pathway to creditworthiness" for the utilities: As part of this, the PUC acknowledges that the cost recovery period ended in May 2000 and that the utilities are entitled to recover the over $12B in debt that they incurred. This is about to happen in Federal court anyway (Edison has already won the first round). This, combined with the PUC not being able to set prices less than costs should make the utilities as credit worthy as the state.
• It does not require a delicate negotiation with the utilities: This solution is straight-forward. It doesn't require negotiating anything with the utilities to make work. It can be done completely unilaterally.
• More choices for the consumer: rate plans, choice of supplier, etc. since there would be much more latitude of pricing by the PUC.
• Increases competition: Because rates aren't locked in for years, new suppliers and sources can compete for our business every year. Consumers can pick their lock-in period.
• Acknowledges market realities: Nobody is forced to sell below cost. Rolling blackouts will end because prices can adjust so that demand does not exceed supply. If the government wants to protect poor people from rate increases, they can give those people a tax credit.
• Provides the best possible rate for the consumer: Under the new rules, the utilities should be virtually as credit worthy as the state, and probably more skilled at purchasing power. So under this plan, we'll probably see a lower cost of supply than what the government could do, even under its superior credit rating. And the maximum price to consumers is set by the PUC cap, or government competition. By letting the utilities keep part of the better pricing they negotiate, they now have an incentive to beat the price down as low as possible. Such an incentive doesn't exist if you are forced to sell at the price you buy.
• Minimal rules and rule changes: The whole point of this plan is to minimize regulation. It was government micro-management (especially in the PUC) that got us into this mess in the first place. This plan minimizes the number of rules and rule changes (making it easier to write), while still protecting consumers.
• It doesn't require government to enter into the power business ever: The government may be able to leverage the "threat" of entry to "encourage" utilities to keep the retail prices down. Or even easier, they can just "threaten" to do (or actually do) have the PUC institute a lower rate cap (as long as the PUC is prohibited against capping rates at less than actual costs incurred)! So it is not necessary for the government to enter the power purchasing business at all. This greatly simplifies the amount of legislation and effort that would be required to implement the government's entree into the power business because if the utilities keep prices reasonable (as guaranteed by the PUC), there is no need to draft or implement the legislation required to put the government in the power business. Nor is there any need to hire or staff this power purchase and management operation.
• It fixes what is broken without creating new problems: We need to address the fundamental problems of putting supply and demand in sync and allowing utilities reasonable latitude as in other deregulated states. This proposal fixes those problems without introducing new ones.
• It allows utilities to borrow to smooth out very short-term supply cost fluctuations as well as longer-term supply cost fluctuations: If the PUC is ordered to allow it, there is no reason that the utilities can't finance cost of supply problems exactly like the State proposes in AB18x.
• Fixed and low-income consumers can be addressed by other means: In both plans, there will be rate increases but it need not be for everyone. We can institute special "discount" rates up to a certain baseline usage for qualifying households. This keeps electricity affordable for those who cannot pay. Or have the lower-priced government rates (assuming the government can even get lower prices than the utilities) available first to low- and fixed-income consumers. Or, even better, would be to have the government raise rates slightly for everyone else and use this to finance the existing low rate only for those who are financially unable to pay a rate increase. Or any combination.

So it's really this simple. We need just these things:

• Legislation to reduce PUC over-regulation of the utilities to something more rational and more in line with other deregulated states (allowing long term contracts, setting a rate cap based on market realities, and always allowing utilities to pass on actual costs)
• Force the utilities pass on cost decreases (though rate caps) but allow them to keep part of those decreases to incentivize them to work on reducing the cost of supply.
• Agree that the utilities have past the asset cost recover point (as appears to have been already proven in federal court).
• The PUC orders special rate plans for those unable to afford a rate increase.

Once we have that, the utilities can take it from there completely on their own without government "help."

Next steps
Of course, this is only the first step on the path towards fixing the problems. There are many other things we must do including, but not limited to, the following:

• Streamline the permit process for new power plants
• Discuss the role of nuclear power in light of the success, and unblemished track record, in other countries such as France and Japan. Plants built to today's standards are extremely safe and waste product is dangerous only for a few hundred years.
• Provide incentives to invest in wind power (this is now economical)
• Look into local, distributed generation a.k.a. co-generation (such as illustrated in Time in their cover story on the Calif energy crisis)
• Beef up transmission grids, e.g., between Northern and Southern California

What you can do about it
If you like AB18X, you need not do anything since it is on its way to becoming law. If you don't, you can express your opinion to your Assemblymember or 

Governor Gray Davis
State Capitol Building
Sacramento, CA 95814
Fax: 916-445-4633
[email protected]

http://www.skirsch.com/politics/power_proposal.htm

What are other people saying about this plan?
I developed this plan on January 26 and modified it significantly on Jan 27, and added slight changes since then (see modification history below). Over 300 people have seen it and virtually every comment I've received have been positive. Nobody has pointed out any holes in this plan. Nor has anyone told me that AB18X is preferable. I've also run it by a variety of knowledgeable people and it appears to be a viable approach. 

First, here are the objections that have been raised and my response:

You can't do this without amending AB1890 which doesn't allow long-term contracts.
Not true since the PUC allowed the utilities to do this on August 3 subject to contract approval by the PUC. As you might have guessed, the PUC hasn't approved any long-term contracts since that time, nor have they issued any final guidelines for what such contracts must look like to be approved.

The train is all on AB18x. Your plan doesn't have a chance.
The KPMG audit result just announced on Jan 30 gives the politicians a perfect opportunity to get the PUC to do the right thing. In addition, Senate leadership calls AB18x a "non-starter." So AB18X isn't a slam dunk. It's been tied up in committee a lot longer than people expected. This plan here is much simpler and can be accomplished by the Governor acting alone (it should be later formalized by the legislature, but that need not happen immediately).

It's not that simple. If it were, it would be done already.
I truly believe it really is this simple and I would welcome discussing this with someone who is knowledgeable and who has an open mind who will take the time to read and understand it. So far, the few experts who have read it like it. Of course it doesn't matter if everyone likes it if the politicians don't take it seriously. To be fair, this plan (and any other potentially viable approaches) should be evaluated by a team of people who together have the necessary skills and perspectives to comment on it. Unfortunately, that's not how politicians evaluate ideas: they tend to give it to a single person to make a go/no go decision. This doesn't work in this case because even very knowledgeable Assemblymembers who worked on this bill have misunderstandings about various issues that are necessary for evaluating proposed solutions.

There is no political support for increasing rates
The rates under this plan would could go up the same or even less than AB18x!!!! There is NO reason that this cannot be the case since the rates are still regulated by the PUC! This is because the power companies would have a big incentive  (since they'll be permitted to keep part of the savings) to buy power for less cost than what the State can prove it can buy at. And the power companies are far more expert in buying power than the state. With acknowledgement of the stranded costs by the State (see below), utilities can issue revenue bonds just like the State. Thus, unities themselves could do exactly what the State wants to do under AB18x.  The utilities would be subject to exactly the same requirement that the State itself would face under AB18x, i.e.,  that the PUC agrees to allow them to recover their costs later (through a rate increase or cost decrease).

This won't work. Even if the PUC did all this, S&P won't raise their credit rating for 2 years.
The State could guarantee that the generators would be paid. It's essentially doing this anyway under AB18X. The utilities can be required to set up a mechanism whereby the power portion of a customer's bill is put in a special pass-through account that is audited by the State and the State guarantees payment to the generators in the event of a default.

The public thinks the utilities are the bad guys. It would be hard to reverse this.
Harder things have been accomplished before.

The problems with deregulation go far beyond the PUC and extend to the ISO and Power Exchange. 
The ISO and PX are not addressed because the PX is now defunct and the ISO really isn't a cause or a solution. 

The utilities are in no position credit-wise to buy under long term contracts
The financial condition of the utilities is instantly reversed by the PUC saying two things: that utilities 1) have recovered their stranded costs already and 2) they shall no longer be forced to buy on the spot market and sell for less than cost. In fact, at that point, the utilities may be more creditworthy than the State since the State would be saying they are suddenly due over $12.7B in cash (estimates vary). This is only the fair thing to do since that was the agreement entered into 4 years ago and it appears that the utilities are winning their argument in Federal Court and are already on their way to recovering the $12.7B that the State owes them. I have not heard any arguments whatsoever that the State will win this lawsuit from anyone in State government. The KPMG audit validates the utilities position.

The PUC doesn't have to listen to the Governor. They are an independent body.
Absolutely true. But the Governor and legislative leadership can try to explain it to them that this is really a better way out for everyone than AB18x. Since they are a very experienced, rational, and intelligent body, they should quickly grasp the logic and importance of passing such a rule change.

Your conclusion of government micro-management is unfair. Other states regulate the utilities. We just made some bad calls, in hindsight.
The mistakes that caused this were all forced on the utilities by the PUC. Other states studied the problem and came to different conclusions we did. They have regulations that, had those regulations been in force in California, would not have caused the crisis we have today.

Given the public’s lack of confidence in the whole bloody mess, any solution cannot be experimental. Your idea of having the government jump in and out of the purchasing business will fuel cynicism.
My basic plan is to set the rules on the PUC to mimic other states. That's moving towards a proven solution. The option to purchase power is the same as being contemplated under AB18X. That part is unproven and untested. It's totally optional in my plan, but required in the Assembly plan. So based on your argument, AB18X is a non-starter.

You may discount too much the public’s distrust of the utility companies and power generators.
The public needs better education that the utilities were forced into the cash squeeze they are in, and in fact, unfairly forced, since they recovered their stranded costs. People understand being forced to buy high and sell low is untenable.

Your suggestion that the Governor act unilaterally is not consistent with your call for teamwork and the benefits of getting a high profile, credible, independent group into the mix.
They are not mutually exclusive. I advocated using a team to develop and evaluate any proposed solution, including this plan and AB18X. The Governor can implement the plan unilaterally. The plan should still be analyzed and validated using an independent, credible group working as a team.

There's no time to evaluate or think about your approach.
The basics of the approach can be done quickly and easily (agree on being able to recover current and past costs) and the details supplied later. The real problem here seems to be that there is no one in the chain of power that "has time" to evaluate an alternative, even if that alternative can save time and millions of dollars. Any individual assigned to evaluate will typically not have the complement of knowledge necessary to evaluate whether this plan is viable, so there is a great likelihood that this plan will be rejected out of hand.

Here are a few comments I've received from different prominent individuals:

John sent me a copy of your Jan. 28 plan. You are so thoughtful. The plan reads as one based in reality and practicality. I hope the Governor reads it before finalizing his own plan, which I know he's working on around the clock. I will try to get this to him tomorrow. Karen

Steve, I read it quickly. I agree with the basic thrust of your recommendations. However, I do not think that your references to other states are completely accurate. There are not really 24 states that have much experience with deregulation. This number includes states that have passed laws, but have not yet actually done anything. The only states with significant experience (e.g. at least 2 years) so far are Mass, RI, NY, Maine, NJ, PA, and IL. They have all had some problems, though not as severe as CA. I also do not think that the CPUC can be reformed. The CPUC is at the root of many of the problems. The staff is bad, the current President is terrible, and it has a long history of hostility to the utilities and real deregulation. It should be destroyed and a new organization created with a new staff and new leadership. Regulators in other states have played a more cooperative and constructive role during the difficult 6 month period that we have just been through. Paul.

Governor Davis, Is there any imaginable reason not to embrace this plan quickly? If there is a better or quicker means to solve the problem, I haven't heard of it. Let's get on with it! David.

Steve: I like your plan. It appears to be simple and effective. I have send an E-mail to Governor Davis expressing my opinion on this matter as well. I believe the proposed bond is to pay for a failed public policy rather than to bail out the utilities, since the state agencies are responsible for most of the utility deficits. Firstly, the state agencies did not plan for or procure more generation after they took over the generation sector from the utilities. Secondly, after the shortage appeared, they did not take effective action to mitigate the problems. In my opinion, much of the deficit may be avoidable if the CPUC allowed bilateral contracts when the utilities requested them. The bilateral contracts would have allowed the utilities to avoid paying the high PX spot market prices for most of the power purchases. Chase.

While I don't have a lot to add to this discussion, I just wanted to thank you for taking the time to pick up on this matter and lend some rationality to an important issue. It's understandable but unfortunate that our elected officials don't really have the experience and knowledge to deal with a situation like this effectively... Jerry

Steve - your thinking reeks of common sense to this hitherto relatively uninformed reader. What I ask myself is: how is the informed reader reacting? I certainly will be among those sending your piece on to Gray Davis with the suggestion that he must pay attention to this. And I will now follow the issue more closely myself. Again, thanks for being there. Norman.

I concur. It's the only short term fix, and it's market based. Ray.

Steve, I think the your plan is the soundest approach. I would avoid at all costs having the state run the power plants. Deregulation has to either be complete on the cost and pricing sides of the equation, or we should return to a mixed, heavily regulated environment with State encouragement for both conservation and the construction of adequate generating capacity--in California. Thanks for asking and for participating in this. Peter

Steve, Because I can not imagine the state running power plants with any efficiency (or at all as a matter of fact) I think the Assembly plan is not workable.. Of the two I prefer the second. However, It seems to me that the consumer is going to have to bear some of the cost (why would the power companies stay in business if they can not make any money?) and that usage affect the amount one pays to rebalance the situation. Ann

Someone has finally made some sense of this mess. Thank you for clear explanation and plan.

This may just be a way for the California state government to take over the utility business. First, you force the utilities to go bankrupt, by implementing laws that cause an anti-business environment. People scared by a crisis will always get lulled into the "quick-fix" solution without learning the details. Having moved to California 2 years ago, I was shocked by the high cost of utility rates-before the crisis! I also have a home in the Midwest, and received a notice from the utilities in AUGUST-that despite rising energy costs, my bills will not go up for the following 3 years due to long term purchase contracts. It's called being PROACTIVE versus REACTIONARY. This reactionary aura is prevalent in the whole California culture, and it may end up destroying its economy.

Good job! Glad you have been able and are willing to spend the time helping add logic to this political process. And thanks also for helping me and others to understand some of the intricacies of this complex issue. Rod

You are the third person in the last few days who has asked me to endorse a plan. I haven't had time to study your plan closely, but my first reaction is generally positive. I don't think the intro is entirely accurate though: Pennsylvania does have a retail rate cap. Also, the reason that new power plants didn't get built is much more owing to the uncertainty about the rules of the dereg market and the view that there was excess capacity than to siting constraints. Basically, PJM made most of the same mistakes we made and have also had very high spot prices at times. The difference is that (a) the utilities keep most of their generation so are small net buyers and (b) they got lucky and had more of excess capacity at most times. Anyway, I will try to look over your plan more closely in the next few days, but I have a lot of demands on my time right now due to the electricity crisis. I agree with a lot of what I see from a quick look (though I would emphasize real-time pricing to a much greater extent). Also, I don't think my endorsement would carry much weight on this subject. This is going to be decided much more by politics than economics. 

Here is a letter I sent in response to the editorial in Feb 18 San Jose Mercury News:

I loved your editorial on the power crisis Sunday. However, I'd like to add to your conclusion that owning the transmission lines may be the best of the few options left at this point.

There is still a much better solution available, but it makes too much common sense, and is much too straightforward a solution to actually stand a chance of being seriously considered.

The Governor could pay the utilities the $12B or so that the utilities are legally due (and it appears will probably recover most of in court anyway), the PUC could act reasonably and issue firm guidelines for allowing utilities to enter into long term contracts, the PUC could negotiate with the utilities a more reasonable way to recover that $12B that the utilities are owed so it is paid over time, and finally, the PUC could stop forcing utilities to sell for less than their cost.

We should also align the interests of the PUC, utilities and consumers. For example, the PUC could set a rate cap and, if the utilities were able to negotiate rates under than cap, they should allow utilities to keep a portion of savings, and pass the rest on to consumers. That way, everyone's interest is aligned in saving consumers money.

Comments: Vote on which plan you like and also add your comments.
Editorial: An immediate way to solve the power crisis
Letter to Gov. Davis: How to instantly fix the power crisis
Other articles: Steve Kirsch Political Home Page

Other papers on the power crisis by other authors
Article on the CA problem and solutions
Op-ed argues for use of time-varying electricity prices
Article written in Feb 2000 on electricity market problems
Op-ed from Aug 2000 on the CA problems last summer

MANIFESTO ON THE CALIFORNIA ELECTRICITY CRISIS

Economist.com A state of gloom

FEED Science - Thirteen Ways of Looking at a Blackout

Other related papers

Chronology of events (from SCE)

Modification history: 

• Added Executive Summary (rev 11)
• Added KPMG audit results gives politicians a way to justify this now. Added more objections and answers (rev 10)
• Added clarifications about over-regulation cause, that utilities can borrow for short or long term, just like in AB18X (rev 9)
• Added objections and response (rev 8)
• Added reader comments (rev 6,7)
• Added "Next steps" section (rev 5)
• Added "doesn't require delicate negotiations with utilities" reason (rev 5)
• Added incentive for utilities to negotiate better pricing so that utilities and consumer's interests are aligned
• Added various mechanisms for rate caps for those who cannot afford it
• Added ability for utilities to borrow to smooth very short term rate fluctuations

Last updated: Jan 31, 7pm. Rev 11