October 31, 2004 - From the October, 2004 issue

Avoiding California's Next Energy Crisis: Woody Clark's Agile Recommendations

This month, MIR is pleased to present an interview with Dr. Woodrow ("Woody") Clark, II, former deputy director and senior policy advisor to the Governor's Office of Planning and Research, and now a fellow at the Milken Institute . In this interview, Dr. Clark, author of Agile Energy Systems: Global Lessons From The California Energy Crisis, offers insight on how to create better policies in California.


Woody Clark

You just published Agile Energy Systems: Global Lessons From The California Energy Crisis in which you assert the time has come to proclaim the failure of deregulation, privatization, or liberalization and to propose a new agile energy system. For our readers, briefly elaborate on this thesis?

The thesis is that we have, in the political arena, become victims of dual ideologies. We've had a one-hundred year history of public monopoly where the government regulates utility, energy, water and waste infrastructure systems. And on the other extreme, we've had an neo-classic ideology that's come in the last fifteen to twenty years that had said "Let's deregulate, let's privatize, let's liberalize." This ideology is used in Europe and other parts of the world, and here in California we likewise exchange public monopolies for private monopolies. And this created problems around 2000 and 2001 involving State government and the Governor's office.

Well, you lived these issues, as you said, as the former Deputy Director and Senior Policy Advisor for Energy Reliability to Governor Davis' Office of Planning and Research from 2000 to 2003. What lessons did you learned tracking the energy challenges that hit California during your public service?

Well, the basic lesson was that the issue of energy had not really come up on the politicians' radar screens prior to the energy crisis itself. It had been dealt with under the Deukmejian and Wilson administrations in the context of deregulation, and then put into place through the support from both political parties in 1996. Initially, everything was going fine. Companies were buying and selling power generation both in and out of the State. Everything seemed to be okay. Prices dropped slightly and service was uninterrupted. Yet some companies realized that they could manipulate electricity coming to California for their own profitable advantage. And that's where trouble started. However, the de-regulation mechanisms were biased and flawed from the beginning as it was assumed that competition would yield lower prices, which would be good for consumers. Instead, it resulted in fewer and fewer energy suppliers. So, for example, those companies left in the market could randomly shutdown different power plants, foster and promote the now infamous Enron energy "traders", and manipulate the natural resources from water shortages from dams in and out of state.

Comment more on this "Perfect Storm" and the particular factors that created it.

In my book, I allude to a series of "precipitating factors" that led to what some economists refer to the "Perfect Storm" – that is, the energy crisis in California. In truth, the California energy crisis was "man-made", not a natural storm. The natural forces came from lack of rain, which was only a small part of the crisis. If there was a storm, it was the hordes of lobbyists and special interests descending on Sacramento to argue their own "perfect" business case. It is for this reason that civic markets need to be part of a future State energy plan. In the end, the lesson from the California energy crisis was that there must always be government oversight and involvement in the energy sector as with other sectors like water, waste along with others that are important to our environment and its citizens.

Expand on the five precipitating factors that led to the deregulation debacle in California.

The first factor is the regulatory scheme and the politics that supported it. The second, of course, consists of technological advances in both energy production as well as the distribution and transmission of energy. But in regards to the advances in energy technologies in many of the areas throughout California, these didn't have the support of the Government and private sector for implementation in California. An example of this would be innovative fuel cells and storage devices that were out in the marketplace, but were never implemented.

The third factor is, of course, the whole economic development of community resources . Even if you look at California, we have different parts of the State dependent on different kinds of power systems. For example, some parts of State live off geothermal power and its capabilities. Other parts of the State are much more reliant on solar power. And those power systems can often be in conflict with one another, if they are provided through a central group plan, which is the tendency we've had over the years in California. What we argue in the book is for an agile energy plan that is more reasonably located throughout the state.

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A fourth factor, obviously, is the issue of economics of power and energy. And one thing that is important to realize is that with fewer power carriers, there is less and less competition. With power generation that is dependent upon a central grid we have fewer and fewer companies that are providing power to the transmission lines to our homes and businesses. The consequence of that is that many of these companies can manipulate their control over the power generation and therefore manipulate prices. And we saw a lot of that late year 2000 and early 2001, and in fact that was the cause of some of the rolling blackouts that we had throughout the state at that time.

And then finally I think that initial lack of planning is a contributing factor. There really had been no planning in the state, and as of today we do not have energy policy or plans for the State, which is a real tragedy. There was an attempt by the state legislature to pass a piece of legislation providing for an energy plan for California, and that was then subsequently vetoed by Governor Schwarzenegger. There is a very desperate need for that and it needs to be done sooner than later. It's long overdue.

In the book you introduce the term civic markets– an interesting term. What does it mean?

Specifically, a civic market requires working together to solve the problems or tensions between ideological extremes. The idea is for public and private partnerships to be formed in other to solve a problem like how the energy market should operate to everyone's mutual benefit. "Civic" is in reference to public government, and linked with "market", which refers to the private business sector. There is a need for these two groups to get together and discuss in earnest what it is they need to do about supplying energy to the state of California. Then it's important for the civic market to say, "What are the parameters – or what are at least the protocols and standards we'd like to see in California?" I think most Californians would like to see a strong push for renewable or green energy, lessening our dependence on fossil fuels or nuclear power for energy sources. There seems to be a rather strong consensus in this area, not just among politicians, but among the public. This has to be discussed in earnest in terms of what can be done for the private sector to encourage business operations and encourage business investment in the state. There are a number of things that can be done that way.

There are examples of civic markets that exist in California today. One of the most successful examples, is the California Fuel Partnership in West Sacramento, which is a public/private civic market, a collaboration between the auto industry and State government to figure out how to promote zero or low emission vehicles in the State of California. Another one that I helped form when I was in state government is the California Stationary Fuel Cell Collaborative. That entity is concerned with how we can get fuel cells in operation and dispersed throughout the state. It encourages business development, and there are now 120 companies and public sector agencies involved in this collaborative.

Woody, let's close with your take on the Governor's vetoed of Assembly Speaker Nunez' AB-2006, a bill that aimed to restructure the electric markets of post-crisis California. The reasoning was we must have some long run certainty re the customer base, investors need to make sure that the deals made today will be honored tomorrow by future commissioners, and that those selling retail would be responsible for the physical resources needed to serve their customers. What is your view of the Nunez bill's merits?

The Speaker's bill will pass the legislature in Sacramento the next time. The plan was to figure out how to have slightly more regulated energy generation throughout the state. And in fact, a number of people were contributing to that piece of legislation in a very bipartisan way. I think the argument that Governor Schwarzenegger used against it was that he felt the bill might have been moving more towards a regulatory scheme for energy throughout the state, and he felt that that would immediately either close off or cause problems for the private sector in this market.

I think that the answer to that is very similar to what we've argued in the book, which is to have agile energy systems created through civic markets. By agile, again, it's a combination of central – large, if you will – corporate entities that have control over the power generation and regional and local public sector elements. But along with regional or local systems there can be, from local communities, commercial buildings, or even malls, to apartments and complexes, facilities that allow for onsite generation of power for customers on the local level. That would create more business and business opportunities as well. There has to be a balance there, and I think that that's hopefully what will happen when they get to discuss this issue again and try to resolve it. I don't believe that either extreme – either the Governor's extreme or going back to a regulatory extreme – are the answers. I think there has to be this kind of collaborative, if you will, partnership approach to solving this problem.

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