A way out of the power crisis: teamwork
The bad news is that we are in the middle of a very serious power crisis and things seem to be getting worse every day, not better. But the good news is that there is a simple way available to us to solve this crisis. It involves four key elements: a vision, a deadline, trust, and teamwork.
As I write this, we are in the midst of a rolling power blackout in San Jose: there are no lights, and no working computer and phone systems. It is difficult for any company to operate without energy. It is impossible for software companies such as ours to operate without electricity. My employees might as well go home, assuming they could get there safely given that traffic lights arent working and 911-Emergency is overloaded by calls.
To understand where we are in solving this crisis, Ive spoken with knowledgeable insiders at very high levels in the legislature, at power companies, and at industry trade groups. I was not encouraged by what I learned. We have:
In short, I dont see a process in place today that is likely to solve our problems other than to provide a number of short-term band-aids that may in the long term create further problems. Basically, we dont have the key people who have to buy in to a solution working together as a team to come up with a solution. This is the major problem that we must fix first.
While I cant claim to be an expert on economics or power, as a CEO of four successful high tech companies, Ive faced my share of difficult problems. And the process for solving them is, by and large, the same: you get a small, carefully selected team of people who together have the requisite skills, knowledge, understanding, perspectives, and common interest necessary to get to a solution and you give them a clear goal that is attainable. You also make sure you have a leader who can facilitate everyone working together as one team and a deadline on each major issue to help achieve closure.
In the current situation, the time for data collection, analysis, and re-analysis is over. It is time to try a new approach. We need to make some tough decisions and make them fast. You cant do that in a large group. If we want to solve this quickly and responsibly, we need a group of at most five people:
All of these team members have a vested interest in solving this crisis. And together, they have, or can solicit, the necessary knowledge, perspectives, and expertise to get the job done. We have to trust that such a group will be able to work together and arrive at a single best solution, or a set of equally viable solutions by a set deadline.
Equally important is that we must also carefully choose each individual member to ensure that they have the people skills to enable them to contribute constructively and productively in a team setting.
The first step of such a team would be to decide, based on the currently available data, what the long-term vision for California power should be: 1) turn back the clock to a regulated market; 2) attempt to keep the current semi-regulated market; or 3) accelerate the move to a truly deregulated market. It is time to weigh these options and pick one. Then the team should determine which measures should be taken in the near term and over the short term to achieve that vision without bankrupting the utilities and with minimal consumer impact. These recommendations should then be evaluated and acted upon by the Governor and the Legislature.
Confidence in our elected leadership is fading fast, as each day brings word of rolling blackouts and lost business. Because it can be done in parallel with existing efforts (including other committees also tasked with the same problem), there is no reason to delay in appointing an appropriate team to solve this problem within a set timeframe. In the absence of decisive action from the State Capitol, we are headed down a road with no map, no lights and no end in sight.
Steve Kirsch is CEO of Propel, a supplier of e-commerce software and a consumer of electrical power located in San Jose.
Deregulation has been working just fine in Massachusetts and in 22 other states. They have no shortage of power. Prices haven't changed. Here's what other states did:
One insider close to the governor and legislature told me (on Jan 18) that the governor is utterly without a plan. This was after rolling blackouts, and after a state of emergency was declared.
As far as I can tell, Davis has been successful with a problem solving approach of gathering data and then making a decision. This works fine for relatively easy decisions. But for more difficult decisions, a different decision making technique is required: team problem solving. Davis hasnt had to face a situation this tough before. His tried and true problem solving method wont work here, even though he keeps trying it. He needs to apply a small team problem solving approach and engaging people in working constructively with him to solve the problem. But his style is not collaborative and he is not and has not been willing to try something new even though there are no downsides. It is just not his style. This is truly unfortunate for California that Davis is not open to more effective approaches to problem solving and doesn't trust people. This LA Times article about how Davis has handled the energy crisis is dead on, according to those who know Davis.
In summary, we have:
Who is to blame? Almost everyone to varying degrees, but primarily the PUC.
I've suggested a simple technique of getting the key players to work together to develop solutions. That is the first thing you try when confronted with solving a major problem. It's management 101. It's not guaranteed, but it's the first thing you try. The suggestion has fallen on deaf ears so far.
There is no reason they (Hertzberg or Gov Davis) couldn't appoint such a committee. If they want a big committee for political reasons they can also create a huge committee of 20 people to solve the problem where members are appointed to appease all constituencies. Then they can compare the results from both committees (now wouldn't that be interesting!).
I'm angry and I'm frustrated. We have politicians who won't listen to tried and true problem solving approaches who are trying to become instant experts and solve this themselves using technique appropriate for solving simple problems. That's non-productive.
Suppose the Governor has come up with a great plan for keeping the utilities solvent. The problem is:
It's clear to me now what the long-term vision should be: minimize government involvement. They've proven in their handling of the power crisis that they can't deal effectively with issues like this. We should move to a system like what is working in Massachusetts. You regulate only that part that is a monopoly (the charge for the "wires" to the house). Other than that, government doesn't get involved.
Jan 19 update: Will the Hertzberg plan work?
A number of plans submitted by the utilities for solving the crisis have been submitted months ago, but we've never heard why the state rejected the plans.
The Assembly is frustrated with the Governor. Basically, Davis needs to either lead, follow, or get out of the way. And to date, he's done none of these.
Assembly Speaker Hertzberg has developed a plan whereby the state buys power and contracts directly to consumers with the utilities providing delivery. Under the plan, the state would also seize the hydro plants of the utilities to provide cash to keep the utilities afloat. If the Governor still has no plan on Monday, it is rumored that Hertzberg will move ahead with his plan.
It is claimed that Hertzberg's plan has the backing of all constituencies. This is clearly not the case since some are leery of the plan, and one Assemblyman was quoted in the SF Chronicle calling the plan a "nonstarter."
It certainly doesn't appear that this is the case since the utilities and generators have made no public comment on the plan. If they thought putting government in the power business was a good idea, why didn't they issue a public comment in support of the plan? And if the plan was developed in cooperation with the utilities and generators, this certainly would have been mentioned when it was announced. Plus having the utilities give to the state, for nothing, their most prized assets (hydro plants), is unlikely to be something the utilities would be excited about.
Few people in the Assembly knows the process that was done to create the plan nor who was involved in crafting it. It's clear it wasn't the cooperative team process described in the oped above. Hertzberg and others have been working insanely long hours 7 days a week and have met with a huge number of groups and put something together. While this is far more collaborative than what Davis has done, it is far from sufficient for a problem of this importance. If he ran it by the utilities and generators and got their "support" it might have been only because they were faced with "it's this plan or no plan." That's not the way to get buy in or develop a workable plan.
Without crafting a plan with the appropriate participation working together as a team (instead of just being "consulted"), you have a dangerous plan. Having the affected players not endorse the final result (and find out about it at the last minute) makes it even more dangerous. And, finally, no matter how it was developed, not having an independent review committee evaluate the plan is irresponsible. Nothing like this has ever been done before anywhere. It puts the government in the loop of providing a key service and owning power plants. And it puts the utilities in danger of going out of business or failing to provide service due to insufficient revenue. And we all know how well that works from the current crisis where decisions are made in an untimely fashion for political reasons. The plan, if adopted, is dangerous and may worsen the problem. There are many unanswered questions. It may potentially put the financial health of our state at risk.
The right plan to fix the problem would have the backing and support of all major constituencies involved. And it would hold up under scrutiny (such as the committee we propose). And it would hold up in comparison to other plans that have been submitted (such as the plans from the utilities).
Unfortunately for us, the Speaker now sees no reason to appoint such a committee as described above since in his mind the problem is "solved" by his plan which is a 3 to 10 year plan.
This is insane. We have working deregulation in other states. It was done in Massachusetts and most people there don't know when it happened and their rates have not increased. It was done in other states without the government seizing assets, borrowing money, and getting involved in selling electricity to the public. So why is it necessary in California to once again enter uncharted territory with a hastily drafted plan that has no precedence anywhere? Do we know something 23 other states with deregulation don't know? We should adopt what works (with appropriate adjustments if, and only if, required) and minimize government involvement.
Why were the 3 plans submitted by the utilities rejected? Does anyone know?
Why don't we just reverse the bad decisions that got us in this in the first place? This will move us closer to models that have worked in other states. In other words, move to what is proven to work, rather than "innovate" with a hastily crafted solution.
Why don't we allow the utilities to enter into long term agreements themselves and just use the state to guarantee payment? Note that the legislature said it is not to blame for this since it is a PUC ruling and the legislature doesn't control the PUC and the legislature said it can't do this because the utilities could go bankrupt other ways beyond the buying/selling of power but there may be a way to carve this out, e.g., a separate entity within the utilities. Why can't we allow prices to rise to cover costs? Consumers are going to get hit with the cost sooner or later. In fact, the price under the Assembly plan would be the same as the utilities would charge if the PUC allowed them to cover their costs.
The 35 million people of California deserve a workable plan that is well crafted by a responsibly and carefully put together team. If we are to stop this, we must be unified in our request for such a committee to examine the current plan and investigate and recommend alternatives.
Team proposal suggestions
Requirements for the team
Composition of the team
Goal of the committee
Team proposal supported by:
Selected comments on this editorial (which ran in the Sac Bee)
Steve, I work as an energy analyst in SF and agree with your assessment of the current situation and the parties involved. Although I believe the legislature will move to slowly relative to the financial reality, there are some technically proficient people among the Senate staff.
Based upon the work our research team has done, it appears there are three key factors to solve this crisis: 1) the current rate hike must be extended beyond 90 days to create headroom to recover past purchased power (otherwise write-offs destroy the balance sheets of the utilities); 2) bilateral contracts must be signed to remove the short position in power - not only is $0.055 uneconomic it shows that Gov Davis has received extremely poor advice from people who either want bankruptcy or can't run a calculator. Contracts in the range of $0.075-0.085 are possible and may not increase rates beyond the initial 10%; and 3) QF - qualifying facility contracts need to be forced back under contracts that reflect an adequate return on capital.
Obviously many other factors need to be considered and altered, but a solution can be crafted if politics and egos get out of the way. Unfortunately time is short and legislative bodies by their very nature move slowly.
Steve, great article!
"Put a leader in charge who can keep the group working together toward deadlines on each major issue and you're on the way."
You're nominated or better yet, recruited. See you at the Capital today at 10:00 am! What do you think of the Assembly member's plan to take the hydro plans they announced today. Story in www.latimes.com
I did energy conservation studies for 3 years until "deregulation" hit in '96. Then they said, "We don't need to do energy conservation anymore because the cost of energy will get so cheap due to deregulation." Then I had to do something else. I designed and built nacho cheese heaters for a rich man for the next 3 years all the time wondering why I wasn't doing energy conservation anymore.
Steve, just finished your comments in the Bee. One of the most rational statements regarding "our" energy problems that I have seen to date. Let us hope that some of the state powers also "read and heed" ! - Dave Hoppe, professor, CSU, Chico