Turning Convergence to Strategic Advantage
As the feed-in-tariff problems of Spain and, more recently, Germany caused major ripple effects around the world for renewable energy especially solar photovoltaic technology players, the United States has become the market of choice for global players in renewable energy. The most recent evidence of that is the outpouring of capital from China being investing in establishing market share in the space.
Why?
Because these global players see the convergence of state renewable portfolio standards, Federal stimulus money, investment tax credits and loan guarantees, and America’s insatiable appetite for technology and innovation as solution to a wide range of problems including greenhouse gas emissions reduction. It is convergence and the welcoming of disruptive technology change that is part of the American genius for continually reinventing itself. While many nations criticize America, our culture, our economic freedom, or respect for the rule of law and opportunity quotient means that people around the world wants to be part of the action in America.
A New World Economic Order Taking Shape
Since World War II America has leveraged its capital and power to help nations and continents recover from the ravages of war, disaster, internal conflicts and other calamities as American treasure was used to rebuild and American power to defend against the Axis power, against Communism, and now Islamic extremism. We should celebrate the success of these achievements and wish our friends the very best in using them for their future economic growth and self interest.
Today, the results of those American efforts combined with the resourcefulness of Europe, Japan, Asia and elsewhere have brought us to a world where American military power is just as strong but America’s lessons in economic power has been multiplied in the faster growing economic miracles of Korea, the leverage of capitalism in China to raise up a great and proud nation, in Brazil and elsewhere.
I am not claiming American credit for these economic miracles, but let’s face it Communism and Socialism did not produce those results. So today in the early stages of recovery from this great recession we have faced, is it time for America to think about how to point the way for the next stage of global economic growth and renewal?
Time to Emancipate the Children!
Is it time to emancipate the kids and tell them how proud we are of their accomplishments, but now it’s time to buy your own insurance, build your own house, and take responsibility for your own future. We will help you and love you as always, but it is time for you to be independent.
This is NOT a sign of American weakness or isolation, but a symbol of strength and confidence.
Just as that idea was ruminating around in my head while reading about some of the problems in Europe, along comes an article from Rand Corp about Korea and whether the South is adequately preparing for what might happen in the North.[1] It said that South Korea has relied on American power to defend it for so long that it is failing to take the actions needed to prepare for the potential for either a North Korean attack or worse a North Korean collapse in the future. Rand says that America is not helping Korea prepare because it is not forcing Korea to accept its adult responsibilities for its own future.
In Loco parentis!
We see that same phenomenon at work in Europe, I think. I was reminded of that recently when the French were critical of American efforts to help Haiti as being inadequate. Someone quipped that the French are “always there when they need us.” It’s true isn’t it? Europe is proud and haughty but dreadfully ineffective in making decisions, acting in its strategic best interests or projecting its potential power as a global player in the world. It often acts like a teenager quick to anger but short on common sense. There always seems to be time to fire off a ‘wise-ass’ text message slamming America, but never time to do their own homework!
The best evidence of that in recent years is the incredibly stupid growth in European dependence on Russian gas when they know that Russia will shut off the gas without a second’s hesitation if doing so achieves some tactical or strategic goal. Europe dithers in admitting Turkey to the EU because of its angst over Turkey’s Muslim heritage yet many European nations having allowed Muslim immigration for years now refuse to assimilate them into the population so they can become members of the European family because they are not French-enough, German-enough.
Time to Focus on Economic Growth and Revival
America is coming out of recession and despite the rocky road to recovery ahead has great potential for growth and economic revival. It is time for America to seize its opportunities and project its strengths to achieve that great revival.
Here are some ideas to consider:
- Send Me Your Smart and Eager Yearning to Breathe Free! The greatest strategic risk in the world today is not the current economy, or security or terrorism it is demographics. In Europe, Japan, China and elsewhere the population is aging and birth rates are low. Immigration to America has produced a younger population so our aging problem is not as severe. But our immigration problem is we are restricting access to America for the very people we most want and need—the bright, educated, smart, technology saavy H1-B dreamers and inventors of tomorrow. Instead our lack of action has allowed America to be the safe haven of millions of poor seeking a better life. While the latter are a source of immense talent, we also need the former better educated professionals. Other rich and powerful countries facing a threat of population decline they cannot stop without changing demographics but their cultures prevent them from doing so. So they seek to grow fast economically today hoping for a long, graceful decline. The American tradition of multi-cultural assimilation of immigrants is one of our greatest accomplishments and one of our strategic advantages for the future. Use It! The US should open the doors to immigration targeting students and well educated professionals eager for a vibrant place to expand their knowledge, take advantage of opportunities for better lives for their families and live the American dream. If America can reinvest in its population of young, smart, talented and skilled to build a vibrant multi-cultural workforce from that melting pot it will remain the technology leader of the global economy and engine of economic growth for a long, long time. The US should make strategic immigration reform a high priority.
- Join in the Dance of Freedom and Self Discovery! The most pernicious and effective threat to tyrants around the world is the effective export of American culture, ideas, technology and example. America should celebrate its way of life by sharing it with the world through open communications, unrestricted internet access and technology investments to defeat the best hackers and thought police from blocking access to the world’s ideas. Google should be shamed into rejection of every attempt to restrict access to the world’s information by China and other countries. And if it goes along with such shameful behavior others should challenge it by redoubling their efforts to fill the gap in access to the free flow of ideas. America’s gift to the world is the spirit of freedom, the first amendment writ largely, and the welcoming of many voices. Just do it!
- Tough Love for the Emancipated Kids! I seek an America capable of projecting its ideas and its power anywhere in the world and make no apologies for that view. It is what we do to be who we are. For that reason I would say to South Korea that we expect you to step up and prepare to defend yourself and spend your own money doing so. America will be there for strategic backup, for logistics, for projection of power and deterrence, but we are not going to permit you to off-load your defense responsibilities to us. In effect, buy your own insurance! We should tell the Europeans the same thing. You can’t have it both ways, American defense and America to criticize as cover for your own weaknesses. If you fear the Russians, quit buying so dang much of their natural gas! I could rant on, but you get the point!
Looking out for America’s strategic interests
I do not want to sound like an isolationist and do not, for one moment, want to suggest that America should withdraw from the world or not face squarely the strategic challenges ahead. I simply think we should be more deliberate and less apologetic about doing so. The recovery period ahead offers America a unique opportunity to get our act together domestically and we should do so internationally as well. Our strategic interests are changing and so must our strategic priorities.
Will this make us more popular around the world? Don’t bet on it! The kids are going to be shocked that Mom & Dad are setting them free to get a job, find a place to live and buy their own insurance. Maturity is a wonderful thing for kids—and spoiled nations. Besides, the ‘old folks’ still have a lot of life left in us and we intend to make the most of it. If we do well enough, we might just leave a little of that good life capital behind for the kids after we’re gone! Our kids will do fine in this tough love environment and get stronger in the process—we’re focused on assuring the best place on earth to protect the freedom and opportunity for our grandchildren.
[1]
http://www.rand.org/commentary/2010/01/21/KH.html
Getting the Massachusetts Message Right
The press is full of ‘blood in the water’ analysis of the meaning of the Massachusetts election of Scott Brown. As a former Bay Stater I appreciate how stunning that victory was in both bad and good ways. For Democrats, accustomed to dominance it is a humbling experience. But the GOP will make the same mistakes the Democrats have made if they see Scott Brown’s election as a triumph for their version of Washington truth.
Let’s face it, at the end of the day the general public see little difference between the behavior in Washington of the Democrats and the GOP. Both parties over-reach when their power is felt to be dominant. Both parties are controlled by their fringes on the left and right. Both parties are hyper partisan. And both parties have been equal opportunity offenders of the public conscious.
“We’re mad as hell, and we’re not going to take this anymore!”
The real message of Massachusetts is that the voters are saying ‘a pox on both your houses’. The tea party movement is a genuine demonstration of disaffection for the direction the country is going and should be seen by the Democrats as ‘in your face’ evidence of over-reaching. Why don’t they see it?
The dirty little secret is they DO SEE IT, but they realize that they are likely to lose their dominance in the 2010 election (the party in power almost always loses seats in mid-term election historically). So the base of the Democrat party came to believe that Obama’s election gave them ONE SHOT at getting their agenda passed in the 2009-2010 term of Congress—and they decided to go for it. But by so fiercely focusing on the end game for their left driven political base they have ignored the public majority in the center and shut-out the GOP on the right undermining the perception of a fair process in their overreach and risking an even worse political outcome. Is this narcissism? Is it desperation?
Don’t rejoice for the Republicans
The election of Scott Brown is not necessarily good news for them either. The truth is the GOP did a terrible job in the majority when they last held it and the behaviors of the Congressional GOP leadership and right-leaning base were just as obnoxious in their time in power as the Democrats are today. Scott Brown’s election is as much a wake-up call for the GOP right as it is for the Democrat left. And reading more support for the GOP into his election is a foolish fantasy for the right wingers. The candidates who are winning in New Jersey, Virginia and now Massachusetts are NOT traditional GOP right wingers, but capable, reasonable, center of the road Main Street folks.
Change We Can Believe In
Scott Brown’s election is a savvy and, so far, successful attempt to take the Obama message of 2008 of ‘change we can believe in’ that the public signed up for and apply it to a center of the road style of governance that the public thought they would get in a President Obama. Instead, Obama campaigned as one kind of president and has governed as a very different kind. The public is feeling like he bait and switched them from a centrist agenda of positive, inspiring change to a left-wing agenda of government control over every aspect of our lives with debt that is never ending to fund it. And they are reacting negatively to it. The president remains personally popular among a general public that truly wants him to succeed, but he is at very serious risk of losing that benefit of the doubt. And there is no way to blame the mess Obama is now in on his predecessor. He did not inherit this political mess—he caused it.
Get back on the Green Line!
Like that Fidelity investments commercial that seems to run constantly these days, you know the one with the green line of “guidance” for the scared investor, Obama can still save his presidency by returning to the “guidance” of his 2008 campaign message and living it as the centrist president the people voted to elect. The election of Scott Brown gives him an opportunity to tell the left leaning base in the Democrat party they failed to deliver a product the people want and now must move to the center. It is a tough love message of ‘follow-me or get run over’ that only he can deliver. But unless he does he will have squandered his historic opportunity and ruined his legacy.
What should Scott Brown do?
Be the centrist independent the People of Massachusetts elected. He may indeed be the 41st vote against ObamaCare, cap and trade, and the political bribery of the Louisiana Purchase, Cornhusker exemption and other desperation deals which should now die a visible death. But Scott Brown must be a demonstrable change of political behavior in Washington to invest and grow the political capital he just received.
If he succumbs to being just the 41st vote for the GOP he looks like every other sleazy politician in Washington instead of living into the legend he inherited with the seat of Ted Kennedy. By being the new “lion of the Senate’ for the center of the road majority of the American people Scott Brown can give President Obama an opportunity to reclaim the captaincy of his listing ship of state and he disciplines both extremes on the left and the right with the true message from the Massachusetts election.
Now that would be change we can believe in.
Crude Reality
Chevron announced today that it planned to restructure its money losing refinery operations to bring costs in line with profitable operations. During the last quarter of 2009, Chevron’s refining business lost a staggering $600,000 per day according to Deutsche Bank. And it was not alone, other refiners are also underwater in this most difficult of the big oil sectors. Is it little wonder why we have not seen a new refinery built in the US since 1976.
Only a few months ago we were all cussing big oil for skyrocketing gasoline prices, and indeed for a while the sector made profits. But the boom and bust character of this business often seems to defy logic as supply and demand responds to market realities.
Up the road from my home in the San Francisco Bay area is Chevron’s 100 year old Richmond, California refinery. When prices were high Chevron proposed upgrading the facility to enable it to process a wider variety of crude oils from sources around the world. All the required environmental impact studies were done revealing that the upgraded plant would improve refinery efficiency and economics while adding operating flexibility to process a wider variety of crude oils.
Not so fast said, the environmental intervener EarthJustice which filed suit in state court to force Chevron to demonstrate that processing heavier crude oil types at the upgraded plant would not harm the environment. This is the legal equivalent of the “when did you stop beating your wife” question. While this lower court decision requiring more studies is more likely than not to be overturned on appeal, it had the effect to delaying any improvements at the Richmond refinery perhaps for years.
Yesterday, the economic consequences of that delay fell upon Richmond like a major oil spill. The Richmond City Council, egged on by local environmental constituencies, had urged more studies as a strategy to press for more tax revenue out of Chevron to remove its objections. The company just said “NO!”
Chevron said it is now more likely than not to sell or close the Richmond refinery eliminating 1200 well paying jobs and millions of dollars of tax revenue and income recycling throughout the East Bay area economy.
The crude reality is the fastest way to improve refinery profits today is to close excess capacity around the world at a time when demand is down and invest in facilities that can operate more flexibly in the future as demand recovers by processing crude from many sources to make products of many types.
So what?
So the customary environmental strategy of using the courts to impose delay in hope of negotiating concessions just backfired on Richmond, California. Instead of adding more good paying jobs and seeing tax revenue grow, Richmond will need to call in the redevelopment agency.
Perhaps, Chevron can unload this white elephant on the Chinese or some other investor, who knows. One thing seems certain the new owner is not likely to be as civic minded as the folks from down the road at Chevron who gave up after a 100 years. There must be a California solution to this problem—maybe Richmond can collect all the French fry oil and turn it into unleaded!
The Next Boom Got Busted in Florida
Florida is a state with great promise, a great location, but sometimes a bipolar political climate. And the ‘Ugly Florida’ is on a rampage of late pushing aside the fun and tech savvy Florida so often portrayed in its brand messaging. The latest temper tantrum by Ugly Florida was the one-two punch from the newly reconstituted Florida Public Service Commission rejecting most of the rate increase requests from Florida Power & Light and Progress Energy.
The FPSC ruling in FPL’s rate case allowed only a $75.5 million revenue increase compared to the $959 million requested this year an additional $427 million increase in 2011. Adding risk to injury, the FPSC also suspended revenue from customers for a storm repair reserve fund reducing its own staff recommendation by $50 million. FPL had sought $150 million a year for the fund that only has $215 million in it—hardly enough to pay for damage from even one tornado. Spreading the pain around like one of those Florida tornados, the Florida Commission also shut out Progress Energy (PGN) request for a $500 million rate increase saying that increasing utility bills at a time when consumers are being hurt by the recession was wrong.
What’s going on?
Politics, Fear of Backlash, and Terror in the Political Class!
The political class is running scared in Florida, and they should. Governor Charlie Crist is running for US Senator and it seems everybody else is running for Governor. Crist started the ugly Florida phase by dumping several members of the FPSC and replacing them with political storm troopers to give him more political cover and a ‘man of the people’ image. The Governor’s image is being hurt by incumbency, the impacts of the recession, Florida seniors rising fury over health care reform, and the business community worry over policies like self-insuring against hurricanes that make Florida a much riskier place to do business.
Florida’s investor owned utilities are a well run group and they are not accustomed to being woodshedded. So in response to the Commission’s order, FPL suspended investments in Florida worth about $10 billion over the next five years and called a halt to efficiency and reliability projects, as well as building new nuclear reactors and uprating its Riviera Beach and Cape Canaveral plants. This will cost Florida thousands of jobs—good jobs and is a shot across the eyebrows of politicians.
“What part of DO NOT SCREW THIS UP, don’t you understand?”
Both Standard & Poor’s and Fitch credit rating agencies put FPL on credit watch with negative implications saying that the FPSC’s lower-than-expected rate decision combined with the State’s crummy economic outlook “impede the ability of the company to achieve credit metrics that support current ratings”. These actions remind the politicians that bad decisions do have consequences and lower credit ratings for utilities raise the cost of debt just like for consumers. In this case affecting the cost of more than $11 billion of debt securities and thus are the cruelest rate increase of all because neither ratepayers, the company nor Florida get anything of value from it.
So what?
So investment in Florida’s energy infrastructure will take a little longer and cost more, maybe much more. Florida’s economy has a steeper climb out of the recession and the best stimulus of all private capital invested in real projects that create real jobs will now go elsewhere—or just go away.
Florida politicians seeking populist cover now own the problem of the Florida economy with nowhere to hide and better not wait for the Obama Administration to bail them out. Enterprise Florida will fight back quietly but ruthlessly to get these politicians on the right track by starving them of campaign contributions.
FPL’s unregulated business is one of the nation’s leaders in clean and renewable energy with plenty of places to do business these days and so its focus can be on growing shareholder earnings and value outside the Sunshine state. Progress Energy can hunker down and focus on its Carolina business. Soon, perhaps sooner that the FPSC thinks, it will be hauling these companies back to rate court and “ordering them to build” to meet an expected energy shortage when the inevitable recovery materializes.
One more thing, Florida politicians better pray for good weather because there is not enough money in the state’s “rainy day fund” for anything more than damage from spring run-off.
The Global Warming Sting: California Balances its Budget and Saves the World
The sting was revealed but the hook is not yet set by the January 11th exposure[1] of a “dispute” among the 16 member California Economic Allocation Advisory Committee (EAAC) whose purpose is to figure out how to spend the money from carbon taxes envisioned by AB32, the California Global Warming Solutions Act.
The Set Up
On January 11th the EAAC presented final allocation recommendations to the State. So this is a trial balloon to see how much angst this approach stirs among the politicians, special interest groups, and seeks to avoid enraging voters before the next election. By framing this “dispute” among members, the EAAC is setting up the potential for a sting of California consumers depending upon how the rest of the process plays out.
The timeline for the rest of this process is that a final public conference call will be held in February 2010 to adopt its economic impacts report. EAAC Chair Goulder will present both reports to the California Air Resources Board February 25th. In Fall of 2010 along with the final proposed cap and trade rules, the CARB staff is expected to recommend a final allocation approach which will purport to balance EAAC recommendations and public input. This is when the hook will be set if the political will exists to do so. There is the minor problem of the November 2010 election looming and voters in California as elsewhere are growing surly.
The committee imported a Harvard environmental economics professor, Robert Stavins, director of Harvard’s Environmental Economics program, to testify that the California approach complies with the AB 32 intent and that the proposed carbon taxes should not fall heaviest on poorer people. He opined that a cap-and-dividend approach produced fewer benefits than cutting taxes on labor and capital.
The much maligned Waxman-Markey Bill passed by the US House uses most of the proceeds from sales of emissions allowances to reduce power company costs of compliance by essentially awarding them free permits to reduce the expected spike in utility rates. This approach sidelined a number of major utilities who fatalistically decided to get the best deal they could rather than be painted as obstructionists. There is a Senate bill by Senators Boxer and Kerry which is closer to the approach being used in California, but it has gone nowhere as yet on Capitol Hill.
Placing the Hook
At its January 11th meeting, the CEAAC members endorsed a “cap-and-dividend” approach which would set prices for CO2 emission allowances as a tax on producers and then use the money raised as a “dividend” to consumers to help reduce their burden of paying all those higher prices for everything that uses energy. The discussion by staff presenting ideas to the committee suggested an annual energy “dividend” for a family of four might be about $1,000.
Sounds good, right?
Not so fast, the committee was divided on whether the best way to use this pot of gold at the end of the global warming rainbow was to give it back directly to consumers or instead use it to create “tax cuts” in state income taxes or sales taxes that will have to be raised to balance the state budget!
The timing was subtle but perfect. Waxman-Markey has stalled in Congress and COP15 turned into a food fight between developed and developing countries and resulted in egg on all their faces. So California with AB32 safely adopted has the opportunity to recapture the leadership flag and show the world how things are done in the Golden State.
Meanwhile, the State is facing another $22 billion deficit because of the recession thus the convenient convergence of the need to develop an implementation plan for AB32 and address the growing California budget deficit sets up the “the sting” that should earn the State an Oscar for best supporting actor in a political drama. Nothing tops the Federal Governments hubris for spending, taxation and income redistribution for Best Actor nominees this year.
Perfect Sting or Fatal Error?
So will California use Carbon Taxes to fill the hole in its state budget? The perfect cure it seems to state politicians. Will they save the world and save their behinds at the same time all while calling these new carbon allowance revenues “dividends” or using them to “reduce taxes” that they must raise rather than reduce spending to close the budget gap? Or will this fatal attraction and sleight of hand turn into a fatal error in the November 2010 elections. High stakes!
But I saved the best part for last, his vast income redistribution scheme would not require the Legislature to actually vote for any nasty tax increases since the California Air Resources Board would administratively each year set “carbon allowance fees” sufficient to raise the revenue needed to meet the Legislature’s spending desires and balance the budget and then the Legislature would declare a “dividend” to give a modest portion of the revenue back to consumers while taking credit for being fiscally responsible balancing the budget by keeping the lion’s share for budget spending. This has the added political benefit of reducing the hostage taking behavior over the need for a 2/3 vote to raise revenue or reduce expenditures each year in passing the state budget. The debate among the 16 members of the California Economic Allocation Advisory Committee is not really what to do but how little of the revenue must be given back to consumers.
[1]
http://www.climatechange.ca.gov/eaac/meetings/index.html
$100 Carbon Tax or Bust!
After the collapse of the COP15 treaty prospects, proponents of curbs on emissions are scrambling to find Plan B. It is not an easy thing to do. In the US the best prospect to breathe life back in the emission reduction campaign, the Waxman-Markey cap and trade bill, is dying a slow death in Congress where fears about another hit on the economy in the face of persistent 10% unemployment has sent members running to the exits.
Carbon Allowance Prices Fall
Meanwhile, in carbon markets in Europe and the US carbon credit prices are plummeting and with them hope that cap and trade will provide the incentive for significant reductions. EUA (European carbon allowance) futures ended 2009 at 12.53 euros/tonne, down 21 percent from 2008 closing prices as reported by Reuters. The Regional Greenhouse Gas Initiative covering the Northeastern states held an auction for CO2 allowances and the price came in at a little over $2.00 per tonne.
On voluntary carbon markets, where allowances are traded based upon bets about demand for them in the future prospects for passage of Waxman-Markey were not good and futures prices for allowances fell. 2010 vintage carbon futures on the Chicago Climate Exchange fell from $1.65/tonne to only $0.15/tonne in 2009. Reuters reported that 2009 volumes for voluntary carbon offsets were 40-50 percent below 2008 volumes, and demand fell substantially in December, which is usually a busy month is that market.
Going into 2010 the futures markets in allowances was horrible. European industrial firms were busy estimating their emissions output for 2010 in order to sell excess EUAs early while prices were higher than forecast for later in 2010. Not a good sign for the allowance market or policy makers who expect dumping EUA early will lead to even lower prices later in 2010.
The Ticking Time Bomb in Cap n’ Trade Models
That allowance price problem was the context for the questions put to Dr Severin Borenstein, Director of the UC-Berkeley Energy Institute. Severin is a very smart, very savvy guy who has been at the front lines of energy research long enough to know a few things about policy analysis. Speaking recently at a meeting of private equity players focused on the clean tech and energy space he commented on allowance prices and whether cap and trade legislation could revive prospects for effective green house gas emissions reduction policies.
“There is a ticking time bomb under these cap and trade models. Most studies ignore the supply elasticity of fossil fuels. Analysis to date hasn’t focused on resource price change in response to cap and trade – resource scarcity and price changes are likely to be central,” he said. [1]
He went on to say that he felt that it would require a carbon allowance price of between $80 and $100 per tonne to displace coal. Achieving significant reductions in greenhouse gas emissions needed to focus on that coal displacement goal or market participants would simply pay a lower carbon tax and make only modest changes in their behaviors.
Coincidentally, this is almost exactly what the California Energy Commission and California Public Utilities Commission said in their implementation report on AB32 the California Global Warming Solutions Act to the California Legislature.[2] In short, these state agencies charged with implementing GHG emissions reduction concluded that natural gas prices would need to be $13.87 or higher per MMBtu and the applicable carbon tax would have to be $100 per tonne or higher for the program to be effective in achieving its goals for emissions reduction.
So what?
The BIG PROBLEM Waxman-Markey supporters and environmental advocates face is to get their policy goal implemented they must raise gas prices and carbon taxes so high it will crater the economy and keep them there long enough to drive a stake through the heart of the coal industry once and for all so it cannot be resurrected.
If you think the greenmail price was high for a vote for ObamaCare in Nebraska and Louisiana wait until you see what it will cost to buy off enough politicians to get 60 votes for this cap and trade program in an election year.
And if Waxman-Markey cannot find 60 votes, then Plan B logically would be to unleash US EPA with its endangerment finding to wreak havoc on the coal and utility industries. The problem with such blunt instruments of torture as regulations is that a lot of unintended consequences can happen along the way.
[1]
http://www.greentechmedia.com/articles/read/severin-borenstein-on-cap-and-trade
[2]
http://www.cpuc.ca.gov/PUC/energy/Renewables/hot/33implementation.htm
Mavericks Riding the Wave of Electic Rate Increases
This time of year in California the ocean currents and weather set up patterns of very big waves beloved by surfers from around the world. It is tricky to know when the Mavericks surfing competition will take place so airplane tickets and surf boards are ready as enthusiasts watch the California weather reports. Give them the signal and they descend on the Central California coast.
For California ratepayers 2010 brings a kind of Mavericks competition with energy bills as the era of rate freezes closes with a decision in December 2009 approving electricity rate increases for all classes of customers of PG&E including Tier 1 “baseline” customers which had been frozen since the early days of wholesale power competition in the 1990’s for PG&E and SCE customers.
The energy mavericks have been the upper tier ratepayers who have the misfortune of living on the hot side of the mountains or in the desert or the great Central Valley where gas heat isn’t a big problem but summer air conditioning is a must. These Mavericks have borne the brunt of frozen rates since the revenue requirement from the frozen Tier 1 baseline customers was pushed up the user curve and added to already higher rates.
How High Will Electricity Rates Go?
I wrote recently about the surprise electricity customers in the Central Valley got when they opened their electricity bills. The bills reflected the summer A/C period so they were high, but unfortunately smart meters had been installed about the same time and there was some good publicity sought by utility and politicians over the smart meters bringing the promise of a more efficient energy future.
Killing the Utility Messenger Won’t Solve the Problem
That protest of rates was BEFORE this latest rate increase kicked in for PG&E and a similar one for Southern California Edison (SCE). Temperatures outside have cooled down, but inside ratepayer are slowly steaming. Their immediate focus is the utilities that are sending them the bills. But PG&E, SCE and Sempra are regulated and they charge the rates that the CPUC tells them to charge—no more and no less.
PG&E’s 2010 rate structure looks like this:
| 2009 Rates ¢/kwh | 2010 Rates¢/kwh | |
| Tier 1 Baseline | 11.5 | 11.9 |
| Tier 2 up to 130% | 13.1 | 13.5 |
| Tier 3 up to 200% | 26.1 | 27.6 |
| Tier 4 up to 300% | 38.1 | 40.6 |
| Tier 5 over 300% | 44.3 | 47.4 |
California has a tiered rate structure of inclining blocks meaning the more energy you use the higher the rate. With the rate increase approved by the CPUC average rates will go up 3%. But average is the politicians’ way of spinning the news about rates. For Tier 1 baseline customers this means their rates will rise from 11.5 cents per kilowatt hour to 11.9 cents—high by national averages but a good deal in California.
But for the Tier 5 customers rates go up from 44.3 cents per kilowatt hour to 47.4 cent. OUCH! This may be good energy efficiency inducing behavior and it certainly has worked, but it only portends the rate increases to come when the full costs of renewable energy and smart meters and other demand side programs are factored into rates over the next few years.
Calculating the impact on your electricity bill from a CPUC rate change is a little like doing your Federal Income Tax with its own Alternative Minimum Tax equivalent in the tiered rate structure for tiers 3, 4 or 5. You need a lot of time and a good calculator. If you want to see for yourself go to the link below for a detailed explanation that is guaranteed to put you to sleep before you get to the answer.[1]
“Nothing concentrates the mind so well as the near term prospect of a hanging,” said Mark Twain.
The next wave of California Mavericks will not be surfers but waves of ratepayers heading to Sacramento looking for someone to hang over the looming cost of living into the political correctness that is driving energy policy in the Golden State. It sounds great! It makes great headlines! We love to be green and clean and at the cutting edge of technology. But being at the bleeding edge of policy as well as technology often costs more—much more. But add these looming rate increases to an economy with 10% unemployment, huge budget deficits, and surly voters and you have a volatile cocktail at the next election for any incumbent.
This wave of rate increases will be like the Mavericks surfing contest which brings out dare devils to ride the waves. But in this case it will take deeper pockets and a better economy to be able to afford our energy future.
“How do you turn the world’s 6th largest economy into the 15th largest?” as the old Sacramento joke goes. ” You make it subject to California regulation.”
Or in an economy deeply under water, Californians might decide move to Texas or Iowa where taxes are low, baseload generation moderates rates, wind energy is plentiful and the rates are not 11.9 cents per kilowatt hour let alone 47.4 cents. As an added bonus—in Texas there is no income tax!
[1]
http://www.pge.com/myhome/customerservice/financialassistance/medicalbaseline/understand/
