JUICE: Honey, We Have to Talk

Instead of New Year's resolutions, I do a little navel-gazing. I check what I've been doing right and wrong. I try to look beyond the next cold month (literally and figuratively), to what I should be planting this spring so I have a garden that lasts through autumn, and assess what is needed to further nurture a business, friendships, and family. In reviewing the year, there are connections that escape the weekly news. Yet these important connections reflect a larger change in the energy industry. They exhibit changes that are being dropped in from the ether without regard to policy, and apparently without regard to market forces. When I mention "policy," it's not necessarily "public" policy. I'm defining policy as a force that has been considered - either privately or publicly - and whose consequences are either planned or partially expected. In the best of worlds, this underlying policy would be discussed in the media, among the public, and between different branches of policy makers. At minimum, it would be discussed over golf or bourbon among the elite. Either way, the implications would be discussed, and not be by default. Even before the 2000-01 energy crisis, that sort of considered policy making ceased in favor of the immediate future. Certainly policy making in which those who participated felt they were going to leave a lasting (good) impression on history ceased. I get the distinct feeling that all of those who are in the position of actually doing something about the future have been resisting long-term energy policy like a spouse who keeps rejecting the demand "Honey, we have to talk." No matter what you think of deregulation, in the mid-1990s regulators and legislators took energy policy seriously. They forged ahead on a grand scale. They forgot some basic economic physics in deregulation - like what could go down could also go up (wholesale prices). But they spent a good deal of time debating the future and how it just might benefit most. Years were spent contemplating the future at the California Public Utilities Commission. The "yellow book" and the "blue book" exhaustively vetted the options. There were months when legislators were forced to learn about energy in spite of some politicians' reluctance because of the steep learning curve. Some, such as Senator Debra Bowen, became lifelong converts to the fascinating but troubled world of energy policy. Out of that effort, policy makers invited competition into the market as a means of undercutting the prices of what they saw as gold-plated utilities. They allowed retail customers, large and small, to shop for better deals outside utilities' confines. Many energy-supplying companies looking for potential profits answered California's siren call to competition. Since then, Mirant declared bankruptcy - and just emerged this week. Dynegy tried to buy out Enron and found itself wallowing in economic insufficiency. NRG declared bankruptcy, emerged, and now is strangely buying up old California power plants (see story at page 5). Reliant slunk away to a very quiet corner. Calpine is the most recent victim of California's lack of policy and its own lack of financing. No one in the state seems to be saying, "Honey, we need to talk." No one is asking, "What happens if these competitors disappear?" The lack of policy making for almost a decade is leaving the state to lurch from spending spree to spending spree, while all the while utilities are creeping back to their old vertically integrated positions. Strong monopolies might be a good thing. They might be a bad thing. I am not sure. There has been no public debate over it. (The one splurge that has seen plenty of debate is the Million Solar plan. While that is also a spending spree, it is one that's fully vetted.) Utilities want back much of what they had in the pre-deregulation days. Southern California Edison, for instance, has been the utility most publicly against signing contracts for competitive power plants, thus ditching the future of competition. At the same time, utilities' unregulated arms are building scads of new power plants. In addition to Edison building Mountainview with an unregulated affiliate, an Edison subsidiary is also building peaking plants in California (Circuit, Dec. 18, 2005). Pacific Gas & Electric recently acquired Mirant's Contra Costa unit 8 in that competitor's bankruptcy case. Sempra's generation arm has a big plant across the Mexico border, and it is trying to build more to feed California. While Calpine might want to hold on to its California power plants in order to emerge from bankruptcy, it might have to sell those assets to pay off creditors. If so, I assume utilities will be the first in line to buy them. Utilities now have access to capital that is being reportedly denied to competitive power plant owners. Regulators appear in the mood to give utilities back vertical integration piece by piece. Regulators and legislators haven't begun to discern what the fallout might be from the rapid reascension of vertical monopolies and the demise of third-party power plant owners. What's the good, what's the bad, and for whom? If there's a niche for competition in California's future, it seems to be the assurance that utilities find renewable energy too small, and too distributed, to take over. Utilities appear interested only in the big-ticket items - the central-station gas-fueled plants, nuclear, hydro. That makes sense financially, because the more utilities invest, the more profits they make. Small-scale investments are probably too much of a hassle to be worth the time it takes to get them permitted. In other words, for the price of a permit for a $5 million plant at a return of 11.5 percent, a utility could work just as hard on a $500 million investment at the same percentage for a far larger return. Those with the power to vote for the future need to quit lurching from crisis to succor and make some decisions. They might be wrong in the long run, but at least their decisions will be considered, not made by default. Editor's note: There are other issues inextricably linked to California's energy policy, including the fate and role of direct access, the grid operator, and nuclear power. They will be addressed in a subsequent column.

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JUICE: Honey, We Have to Talk

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