Regulations stalling power plant conversion

AES Power Plant Huntington BeachDec. 14, 2012

By Wayne Lusvardi

In George Orwell’s novel “1984,” “doublespeak” meant the reversal of the meaning of words: “war is peace,” “ignorance is strength” and “freedom is slavery.”

Ever since the California Electricity Crisis of 2000-01, California has been afflicted with what might be called “powerspeak,” where “deregulation is re-regulation,” “underbuilt is overbuilt” and requiring power companies to make bids to provide backup power is called “gaming the system.”

The California ISO, which operates most of California’s power system, filed a complaint with federal energy regulators to get JP Morgan Chase Bank to agree to the conversion of two power plants in Huntington Beach owned by the AES Corporation.  The ISO’s order requires AES to convert the two plants to gas-powered steam plants.  JP Morgan Chase holds the right of approval of any financing for the ordered conversion of the power plants.

The ISO also has a running dispute with JP Morgan Chase over profits made under the bidding rules in the “day-ahead” energy market.  No mention is made in the press that the rules are intended to overpay bidders, rather than face the much bigger potential problem of lack of power leading to blackouts — as happened in 2001.

But profiting legally by regulatory design creates the appearance of wrongdoing that could embarrass politicians. In “powerspeak” terms, what is legal can also be criminalized. Under the double standard of powerspeak, only the government is allowed to gouge the public and not disclose the bid prices in its new Cap and Trade program.

Population, overbuilding may end up with WHOOPS

JP Morgan Chase apparently doesn’t want to get stuck with financing added backup power plants in a state with slowing population growth, less energy use due to economic recession, industries fleeing to other states, LEED building energy standards with rigged paybacks and redundant green power plants being overbuilt.  It has recently been announced that California lost about 100,000 citizens net last year (although immigration from other countries still slightly increased the overall population).

Understandably, AES and JP Morgan Chase have appealed to California Treasurer Bill Lockyer, who is responsible for the state’s bond ratings, to mediate the dispute over stalled power plant construction and energy bidding.

Not facing blackouts

Contrary to an erroneous report by the Sacramento Bee, California is not facing the possibility of blackouts if the Huntington Beach power plants are not converted to “synchronous condensers.”   In fact, AES and JP Morgan Chase have already responsibly re-opened the old mothballed Huntington Beach fossil fuel power plants back in May 2012 at the request of the ISO.  California is facing a glut of power plants, not a lack of construction of new power plants as occurred in 2001.

The Dec. 10 Sacramento Bee article mis-quoted Jim Bushnell, the research director of University of California institute. It had him saying, “What you have to confront is, we don’t own these power plants anymore.  If we want to re-regulate, we’d have to buy them back.”  This suggests the state should use eminent domain to nationalize the power industry in California.

He didn’t meant that. Bushnell clarified in an email to me:

“The ‘we’ is not referring to the government. The quote is from a long analogy in which I was comparing cost-of-service regulation to ‘owning’ power plants in the sense that ratepayers are obligated to pay the average cost of owning and operating the power plant (e.g., capital plus operating expenses) to a restructured regime under which ratepayers are no longer obligated to those costs but instead need to pay a market-based price for the output. Obviously the subtlety of the analogy doesn’t come through in the article.”

To add to Bushnell’s clarification, the power plants in Huntington Beach were never owned by the state. Government owned only municipal power plants and hydropower plants. But governments were not forced under energy deregulation to divest ownership in their plants in 2001, as were investor-owned utilities such as Edison, PG&E and SDG&E.

These divested power plants never were owned by the government, but were always regulated by the CPUC. The reason the state required divestment was that it feared regulated investor-owned Utilities would exercise monopoly power in the new so-called “de-regulated” market.

Power plant divestment and reverse auctions the real culprits

In fact, power plant divestment was the hidden culprit behind much of the 2000-2001 electricity crisis.  New power plant owners were not permitted to discuss anything with each other for fear of collusion. This ultimately led to the disaster, because plant operators could not discuss maintenance scheduling.  This lack of communication further led to multiple power plant units being off-line simultaneously and resulted in shortages of supply and wild price swings.

It should be clarified that California ISO is not a state agency, but is a nonprofit public benefit corporation.  So using Bushnell’s quote as inferring that the state should buy out private power plants is technically inaccurate, because the ISO has no eminent domain powers.

The original energy bidding rules were set up under deregulation with the assumption that there would be a surplus supply.  But the rules called for a “reverse Dutch auction,” where buyers competed on the basis of the lowest price, not the highest price, as is typical in a conventional auction.  Reverse Dutch auctions fail during shortages because they create a psychology to buy more cheap power than under a conventional auction, in which high prices restrain buying and conserve supply.  According to some energy experts, this led to the magnitude of the 2000-01 crisis and Enron’s highly profiled bidding abuses.

To reform the system, end doubletalk

If California is going to consider reforms and more intervention into energy markets by regulatory agencies, the first order of reforms should be to stop the overused negative cliché of “deregulation” for everything that the private energy sector does and that politicians, the public and the media do not understand.

“Deregulation” never accurately described the energy system reforms in 2000, and it doesn’t describe it in 2012.  Re-regulation is not deregulation, overbuilding is not underbuilding and providing legally-allowed mandated backup power bids is not “gaming the system.”

6 comments

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  1. jimmydeeoc
    jimmydeeoc 14 December, 2012, 09:51

    1. Wayne: Don’t make the same mistake as the dullards at places like KNBC News did a few days ago when they reported this:

    “California’s Population Is Moving Out, Census Report Shows
    More people are moving out of the state than into the state”

    http://www.nbclosangeles.com/news/local/Californias-Population-Moving-Out-182914961.html

    What they FAILED to mention, of course, is this is anything but “news”. Census Bureau data shows that in only TWO of the past TWENTY years have we NOT had net out-migration.

    2. The whole power plant conversion/funding/ISO/etc. saga does induce a fair amount of eye glazing (MEGO). I’m reminded of reading some Amory Lovins and his Rocky Mountain Institute. There’s a fair amount of hippy-dippy blather, but he does make a good point about our need to decentralize energy sources. Safer and more secure (no widespread black outs, less susceptibility to terror) plus it would make people like ISO go away. Plus he’s a real scientist – a physicist. Would you rather have your energy policy designed by a physicist, or a Mary Nichols uber-bureaucrat?

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  2. jimmydeeoc
    jimmydeeoc 14 December, 2012, 09:54

    BTW – next time someone does one of those “Worst 100 People in the World”-type book….it would be a grave error if Mary Nichols’ name doesn’t appear.

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  3. Wayne Lusvardi
    Wayne Lusvardi 14 December, 2012, 10:29

    Mr. Jimmy
    Net out migration can be offset by the number of births from those who live in California — so population can climb even when there is negative net migration. Most population forecasts now are based on 1% population growth per year. The problem is that the regulated utilities such as Edison and PG&E have to plan on buying power over a 5-year horizon. So their options for future power purchases and plans to build new plants have had to be ramped backwards because of slow growth — not necessarily population loss. California doesn’t need as many new power plants online especially when the Renewable Portfolio Standard of 33% is encroaching on conventional power plant generation. Sure conventional power plants are needed for backup when the sun doesn’t shine and the wind doesn’t blow — but that’s an oversimplification too. Wind power is mainly generated at night and solar power from mid afternoon to sundown. In other words, solar power can be used to meet peak load daily and seasonal demands but wind power most often can not. And solar power is more costly than wind power. I spoke off the record with a person who negotiates future power purchases for one of the main regulated electric companies. They told me that the number of industries leaving California is making them cutback future power contracts and delay replacement of existing power plants. But because regulated utilities still have stock holders they can not speak about this situation. It now appears that Edison no longer needs San Onofre generation and that is a big story. Faced with the humongous costs of eliminating “ocean water cooling” it is probably more feasible for Edison to just shutter the plant. But this creates stranded assets — corporate bonds and debts that no longer have a revenue stream of electricity sales to pay them off. As the article stated — WHOOPS!

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  4. jimmydeeoc
    jimmydeeoc 14 December, 2012, 11:35

    Didn’t intend to rain on the parade, Wayne. Just pointing out that KNBC presented this as “news”, when it’s really a secular trend.

    And true of course, that Birth-death + foreign immigration > domestic out-migration.

    The cumulative impact on electricity demand and financing is illuminating, as it were =).

    Reply this comment
  5. Wayne Lusvardi
    Wayne Lusvardi 14 December, 2012, 15:07

    My Jimmy
    It isn’t population loss but overbuilding that was the theme of my article.

    Thank you for your comments.

    WL

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  6. Hank
    Hank 16 December, 2012, 13:03

    I am confused, when you speak of overbuilding which production numbers are you using? Renewables usually are given as the theoretical best production, but the historical actual production is no more than 20% to a maximum of 30% of claimed production. Many countries report less than 20%.
    That is the European actual history, a complete disaster.

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