The Golden State’s struggle to keep the lights on in winter 2000-01 produced a political crisis for Gov. Gray Davis. His response was signing a long-term deal in March 2001 with out-of-state suppliers that committed the state to spend $43 billion for power at the rate of 8 cents per kilowatt hour. Economists instantly criticized the deal as unnecessarily costly and lengthy — an overreaction to unusual circumstances. This ended up proving conventional wisdom and was a contributing factor to the public anger with Davis that led to his October 2003 recall election.

In a few years time, will the conventional wisdom about another bold state energy policy — the huge long-term commitment to massive alternative-energy plants — be similarly negative? Given how rapidly the solar-energy picture is changing, it seems quite possible.

‘Obsolence’ for traditional electric utilities?

The world’s largest solar-power plant, the 550-megawatt Desert Sunlight project, opened in February near Joshua Tree National Park. Three even bigger projects have won approval from state regulators and are progressing toward completion, as well as several smaller plants.

But these industrial solar projects might not even be needed if the “distributed solar” boom, in which homes and businesses generate power with their own panels, continues. As the cost of photovoltaic panels comes down — they’re now 60 percent cheaper than in 2010 — reliance on utilities for electricity keeps dropping. And if Tesla’s promised breakthrough on home batteries to store surplus energy comes to pass, the basics of electricity will change in much of America. Utilities would face enormous problems paying off their long-term sunken costs.

Most of the coverage of utilities’ opposition to distributed solar has focused on their criticism of requirements that they buy surplus power from individual homes or businesses at favorable rates that don’t help utilities pay for the cost of maintaining their energy transmission grids.

But in March, The Washington Post obtained and reported on a private presentation made to the nation’s utility companies in 2012 by an executive for the Edison Electric Institute, the trade association representing all investor-owner electricity generators in the U.S. It depicted the problems posed by the rise of distributed solar power in much starker fashion:

Three years ago, the nation’s top utility executives gathered at a Colorado resort to hear warnings about a grave new threat to operators of America’s electric grid: not superstorms or cyberattacks, but rooftop solar panels.

 

If demand for residential solar continued to soar, traditional utilities could soon face serious problems, from “declining retail sales” and a “loss of customers” to “potential obsolescence,” according to a presentation prepared for the group. “Industry must prepare an action plan to address the challenges,” it said.

 

The warning, delivered to a private meeting of the utility industry’s main trade association, became a call to arms for electricity providers in nearly every corner of the nation. Three years later, the industry and its fossil-fuel supporters are waging a determined campaign to stop a home-solar insurgency that is rattling the boardrooms of the country’s government-regulated electric monopolies.

CA forced utilities to make costly investments

The Post article noted that utilities were making relatively little progress in encouraging state legislatures to obstruct rooftop solar’s rise but some progress in getting utility regulators to accept their agenda of self-preservation.

In California, however, rooftop-solar advocates are so powerful that it seems extremely unlikely that the Public Utilities Commission would impose fees and surtaxes on rooftop solar, as regulators have done in Arizona and Wisconsin.

On the other hand, the PUC has shown deep concern for helping investor-owned utilities keep a healthy bottom line. The shuttering of the San Onofre nuclear power is going to cost $4.7 billion. But PUC officials secretly negotiated a deal in which San Onofre’s majority owner (Edison International) and its minority owner (San Diego Gas & Electric) must only pay $1.4 billion — with the utilities’ ratepayers picking up the remaining $3.3 billion in coming years.

This has rankled ratepayers and watchdogs alike, since a case can be made that better management at San Onofre would have identified the problems with defective Mitsubishi steam generators at the plant that led to its closure.

The PUC could in coming years face similar questions of how to divvy up the multibillion-dollar costs of the construction of giant solar plants in the state’s southeast corner — if they are no longer needed to operate at full capacity, or at all.

That could be a thornier question for the PUC than San Onofre, however. Edison, SDG&E and Pacific Gas & Electric could say they committed to the massive solar plants under legal and political pressure because of laws like AB32 and ardently green governors like Arnold Schwarzenegger and Jerry Brown.

That pressure — and how it was applied with PUC dictates — could end up being another chapter in the yet-to-be-written biography of Michael Peevey, whose 2002-2014 stint as president of the commission ended in a maze of controversies over his close ties to utilities.

By Wayne Lusvardi

The facts slowing coming out about the state’s first Cap and Trade auction seriously question whether the system is already being gamed by government, together with electric utilities.

Edison International made an announcement on Dec. 20, 2012: At California’s first Cap and Trade auction held back on Nov. 14, 2012, it offered to buy 21 times more pollution permits than allowed.

Edison’s overbidding error ended up amounting to 72 percent of all the bid offers and bailed out the Cap and Trade auction from failure. About a month later, Edison’s unregulated power-generating subsidiary company, Mission Energy, declared bankruptcy on Dec. 17, 2012.

CARB’s “Credibility called into question”

Bloomberg.com reported on Dec. 20, 2012 that Edison International “unintentionally” bid for twice as many pollution allowance permits as were offered for sale.  Edison said its error was due to submitting a bid in the wrong format.  For anyone who has ever worked in a large bureaucratic utility, Edison’s statement seems unbelievable. The number of hands it would typically take to review and sign off on any bid would have made highly suspicious any so-called bidding error resulting in 21 times the permits offered. Moreover, CARB provided training on auction procedures and held a test sale back on Aug. 30.

Bloomberg New Energy Finance analyst William Nelson said of the California Air Resources Board, “This revelation calls the agency’s credibility into question.  For So Cal Ed, it appears now to have 1.61 million allowances it never intended to buy on its hands for which it spent approximately $16 million. The irony is that Edison was ultimately rewarded for its mistake, procuring credits at a price that is ‘in the money,’ today.”

Edison bid for approximately 16,632,000 pollution permits out of the total of 23.1 million permits allowed. After CARB disqualified Edison’s excessive bid, Edison ended up buying 4.05 million pollution permits. This was still 1.61 million more permits than its allowance of permits

CARB Chair Mary Nichols declared the auction “went without a hitch” and was “vibrant and successful.” However, Nichols failed to mention at that time that, without Edison’s “error,” the auction would have been a failure. She also waited until Christmas week when the public’s attention was preoccupied to release information about Edison’s bidding error.

Nichols’ claimed CARB created a “vibrant market” for pollution permits. But the auction conducted last November was not a market auction. This was because there was no competitive bidding, even with Edison’s excess demand for permits.  Instead, bid prices for nearly all 23.1 million permits went for the minimum bid of $10 per ton of pollution, or a few cents more in some cases.  Bidders merely paid a disguised tax and went back to business without reducing any emissions.

Edison arm declares bankruptcy

Coincidentally, on Dec. 17, 2012, Edison’s subsidiary, Mission Energy, filed for bankruptcy. Mission Energy listed $5.13 billion in assets and $5.09 billion in liabilities.  Since both companies are separate legal entities, Edison International apparently did not dump the cost of its trading error onto insolvent Mission Energy.  However, the law firm of Pillsbury, Winthrop, Shaw and Pittman, LLP in New York, representing creditor Chevron, did not respond to an inquiry whether the bankruptcy judge could “puncture the corporate veil” and void Edison International’s CARB auction bid.

Mission Energy was created during the California Energy Crisis of 2000-01 in a “ring fencing” strategy to absorb financial losses of its parent company, Edison International.  Ring fencing is a way to fence off certain assets or liabilities by creating a new subsidiary.  By ring fencing a parent company can protect itself against bankruptcy.

Bid rigging and plausible collusion

This seriously calls into question whether either collusion or gaming of the bid system took place. Back on May 18, 2012, this writer warned that CARB’s auction system created perverse incentives for government to game or collude with electric utilities to generate more tax revenues for the state.  Edison’s apparent auction bidding strategy was to bid for excessive permits to prevent the auction from being declared a failure and buy up all the permit allowances.  Edison’s initial bid for 72 percent of the permits was then negotiated downward after the auction to almost exactly the same number of permits allowed.

The effect that this apparent overbidding scheme may have on the California Chamber of Commerce’s lawsuit charging CARB with profiting from Cap and Trade auctions remains to be seen.