Davis has some great ideas, but still lacks a clear vision for solving power crisis

By Steve Kirsch

On Monday, Governor Gray Davis announced a series of innovative short-term and long-term ideas for solving the power crisis in California. However, to be effective, his ideas need to be evaluated and implemented in the context of a consistent long-term vision for how we are going to extricate ourselves from this situation. Unfortunately, if Davis has such a vision, he has not articulated it clearly.

Davis has known about the power shortage in California for more than six months. Uncontrolled supply costs coupled with fixed demand pricing is a formula for guaranteed economic disaster. There have been no new power plants in Silicon Valley for 28 years and none in California for the past 13 years. We also have a shortage of available power in the western United States. So there's no easy way out.

At this point, it doesn't matter who caused the problem (for the record, it was a unanimous vote of our state Legislature four years ago). What matters is how we fix it. The energy issue is now a major crisis for California that is quickly becoming a major disaster.

In the short term, Davis still leaves us wondering what financial magic will happen to keep our utilities from going bankrupt. He outlined eight specific steps to help ease the power crunch, but none of these steps are guaranteed to keep the utilities solvent. The relatively pain-free short-term solutions seem speculative at best: the federal government has refused to intercede, a billion dollars of state funds might only buy us a few months more power, and the impact of conservation attempts without sufficient financial incentives (such as higher consumer prices above baseline usage) is uncertain. Davis is thus left with three short-term options: (a) use eminent domain and buy back the power plants, (b) tell the PUC to allow rates to rise for the foreseeable future so that the utilities can cover their costs or (c) issue unlimited bonds and/or provide loan guarantees to the utilities. Any of these solutions will likely work, alone or in combination.

Although Davis described many different long-term ideas in his speech, we are still left wondering what his vision is for the long term. Without a clear vision, it is very difficult to know which short term solutions are best to implement. Here are three dramatically different long-term visions that are consistent with his speech. Do you know which one Davis is advocating?

• Fix the current semi-regulated market. We can repeal the law that allows the utilities to sell their remaining generating facilities. We can streamline the power bidding process. We can allow utilities to buy power under long-term contracts and protect them from after-the-fact penalties for "imprudence" if rates subsequently decline. In addition, the government could either provide huge incentives to cause new power plants to be built or get into the power plant ownership business to help ensure that supply always exceeds demand. This should force prices down and eliminate windfall profits. This approach has three big problems: it would take longer than we have (unless we invoke eminent domain), it does not guarantee that this situation will not happen again, and it puts government in the business of running power plants.
• Return to a regulated market. We can try to reset the rules back to the way they were before deregulation. Power companies would purchase back their old plants with help from the government (invoking eminent domain if necessary) and be encouraged to build new generating facilities. Some third party generators might still exist, but they would be forced to be price competitive or go out of business. This seems like the safest and most proven approach, and it could be done relatively quickly.
• Really deregulate the market. We could allow power generators to set their own rates and allow consumers to choose from whom they buy power. The only fee that would be regulated is the fee that the utilities charge for delivering the power. This is similar to today's local vs. long- distance phone service. Anyone could sell power, even the government. We would reduce the government regulation and red-tape and possibly provide incentives for building new power plants. The downside of this approach is that in the over-demand situation that we have now, electricity rates could still in theory rise to arbitrarily high levels, but this is much less likely to happen since normal market price increases should spur additional supply, while causing a reduction in demand.

The time for analysis and talk is over. It is time to decide on a clear vision for the long term and then a plan for the short term that is consistent with that long-term vision. Davis must develop that vision in collaboration with the CEOs of the utilities and independent experts. It cannot be a unilateral surprise announcement as we had on Monday. Governor Davis must then decide, with the advice of that group, the short-term solutions consistent with that vision, and then decide on how best to implement those solutions to keep our utilities financially viable. If he can't decide, a coin flip will do. I'd be happy to supply the coin.

Steve Kirsch is CEO of Propel, a supplier of e-commerce software and a consumer of electrical power located in San Jose.