JUICE: Delusions of Grandeur

By Published On: April 25, 2008

We thrive on forensic reporting. J. A. Savage used to cover the “fed”–short for “Federal Reserve Bank” for Dow Jones. It was like following a mystery novel. You had to catch the subtle body language, or the tiny slips off the scripted tongue for signs of what was to come, which could send Wall Street up or down. Elizabeth McCarthy covered the European Union developments, from the euro to the expanded market. At the big annual meeting of EU ministers where key decisions were made–what wasn’t said often revealed far more than what was articulated. One thing is clear is that it takes hubris to create a new union and/or play in the market big time–to take risks on making money or sending the economy into the doldrums and stripping people of jobs and roofs over their heads. We watch in amazement, and at times horror, the over confidence of those trying to create markets under pressure cooker conditions. The stakes are huge–both economically and environmentally. Players push their weight around to ensure their interests are protected. California’s plan for a cap-and-trade market in global warming gases, and the wholesale electricity market that the California Independent System Operator has been redesigning for the last couple years, are ballsy. Both are huge undertakings. We wish them well, but hope we get far more than pricey support undergarments. If malformed or incomplete, these uncertain markets could send the economy reeling even more. Regulators must consider the less risky and quicker route to the end–command and control. That includes a mandatory carbon cap to achieve real and significant greenhouse gas emission reductions in place of wasting precious time setting up a complex commodities market that may create wealth for some and increased carbon pollution for all. “Command and control” became a nasty slogan for regulators during electricity deregulation. Utilities hated it because it could crimp future profits. Traders and generators hated it because it would keep them from maximizing their deft efforts to make the best money off the system. “Command and control” was like the 1996 version of The Scarlet Letter “A.” Since the 2000-01 energy crisis, we have one functioning power market that is trying to rehab itself–the grid operator’s wholesale electricity market. Now it processes about 5 percent of power trades. In its nascent heyday, at the time of the energy crisis, it processed about 35 percent of trades. The market redesign, now set for operation this fall, is supposed to make it a more seamless market that works for its stakeholders. It has been a long drive with no shortage of person-hours tucked into a lot of boring meetings. But, yea for the lack of secrecy! With deregulation, much was arranged in private meetings with consensus forced at the legislative level. Also commanding a huge amount of resources is the much higher stakes greenhouse gas reduction market, which could play a far bigger role in the state’s economy. Regulators understand that they have to get a carbon cap-and-trade market “right” before putting it in place. But they are also under a statutory (and climate) deadline to get it in place to enforce AB 32, the state’s global warming amelioration law. Like oil and water–they don’t mix. On April 21 and 22, a workshop sponsored by both the California Public Utilities Commission and California Energy Commission underscored the problem on a most basic level: how to address foundational components to ensure real greenhouse gas emission reductions occur. Specifically, the underlying issue is how to avoid giving the nuts and bolts issues short shrift and creating market vulnerabilities, or conversely, getting bogged down in details and making the market so unwieldy that it never floats. The workshop highlighted some of the key sticking points. Those include that stakeholders have problems with confidentiality of their generation sources, the lack of standardization in reporting so the state can make reliable forecasts, and a division over whether carbon credits should be auctioned (in which the state would receive funds for them) or allocated (given away). At least two investor-owned utilities, Southern California Edison and Pacific Gas & Electric, threw their weight to an auction-based plan. The first morning of the joint energy agency workshop also aired assumptions about how the market will work so the state can forecast its impacts. It is called the “carbon calculator.” Changes to the expected level of renewables, energy efficiency, demand response, and estimates of new gas fired plants through 2020 are required to better assess the cost and rate impacts of the agencies’ “first deliverer” regulatory proposal. The “first deliverer” plan came out swinging in March when the CPUC and CEC urged the California Air Resources Board to implement an emissions regulatory regime that targets not the utility but the power generating facility to help the state meet its 25 percent carbon reduction law by 2020. The model is expected to be used by the CPUC and CEC to understand the cost impacts of implementing this angle of AB 32. The first model results, which are to look only at the regulatory measure’s impacts, are set for release May 6. Subsequently, the cost impact of the market mechanisms, including the allocation of carbon emissions, are expected to be plugged in and evaluated. A weakness of the model developed by San Francisco-based Energy and Environmental Economics is that the data plugged into it are limited to what’s publicly available. Investor-owned utilities hold confidential information far more detailed for asserted competitive purposes. The Energy Commission has fought with them for years to release more data to enable the agency to better forecast energy supply and demand. Limiting data access for the carbon calculator raises questions about the likely quality of the results. As that old saw about modeling goes: “Garbage in, garbage out.” Given how critical it is to have accurate estimates of the cost impacts of climate change regulations and market mechanisms, you’d think the best and most complete data would be accessible and plugged into this foundational model. Regulators danced around these difficult issues. “We have not decided anything although everyone thinks they know where we are headed,” said CEC member Jeff Byron. Good line, Jeff. The market in carbon, and electricity, is not pork bellies. Fledging bacon is a real commodity. Pigs can be weighed, measured, smelled, and shipped. Although emissions can be weighed, a carbon market is all predicated on assumptions. If everyone agrees on the assumptions, great, but then again, everyone agreed on deregulation. Furthermore, as we know it’s what is not said that is key. In particular, who wins and loses. Regulators are putting off releasing their decision on the allocation of carbon emissions until August. That also happens to be the month of little news and when most reporters take a summer break. The Western Climate Initiative is also slated to release its final plan for a regional cap-and-trade market that month, ensuring that the few working reporters, many less experienced, are overwhelmed. And as anyone involved with the grid operator’s market redesign will tell you, it gets real messy and real complicated. It’s not bacon or straight electricity–its congestion rights, ancillary services, and a dozen other markets converging. The stakes are huge–the future of this state and planet. Making everyone’s job much easier would be to take the shorter and more direct route to AB 32’s goals via regulation instead of the long and winding road to a straight market for carbon trading. We won’t, however, be holding our breath. In the meantime, we will keep our eyes on those twitches and our ears tuned to those pauses.

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