February 2001

California: Reality TV As Energy Policy

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2001/03)

Anthropologists tell us that the study of cultural artifacts illuminates, in a larger sense, how day–to–day life was actually lived in that society. In the electronic age, it is the key to understanding how the California mess came to be and how it may evolve. We have "reality TV": ‘Survivor’ and now ‘Temptation Island’; we have California, in real life.

We create a game with artificial rules to test whether man’s known proclivities to be greedy, nasty and brutish can be vanquished by the elevated efforts of divines (in this case, economists, their modern successors) to channel those instincts into "higher" (i.e., more broadly culturally appropriate) forms of behavior. (We call this game deregulation to achieve free market economics). And, we sit back and are titillated by the lusty profit-driven tug of war, or horrified when the results get out of hand.

In American energy public policy, we have added both a subtlety and complexity to the game by having not one, but two dimensions of survivor game rules. As a consequence of the noble skepticism of our founding fathers, familiar both with man’s known proclivity to abuse centralized power over resources and his equally well known parochial desire to squirrel away whatever he can for himself, regardless of the societal consequences we draw imaginary governance lines across lines of physical economic production and the action of physical laws on electrons. (We call that applying "federalism" to energy policy.)

Whatever the particular theory one may have for what "caused" the California energy situation, two things probably can be agreed upon: It reflects the deus ex machina of "private" players, differently situated, trying to maximize their respective economic situations (defined broadly to include stranded cost recovery, power sales revenue maximization under applicable market conditions and rules, and reconfiguration of rate burdens among customer classes) and/or political situations, "public" players pandering to their constituents’ desire for unlimited economic goods at the lowest price or for unlimited rights to private recovery in the event of economic scarcity. The conflict "policy" players purporting to achieve some hypothetical golden mean from all of this in the name of higher societal socioeconomic principles and mathematical algorithms. Like reality TV’s market; ratings, political ratings are the rationale are the true ultimate rationale for this script.

Which brings us to Washington, D.C. – where problems get "resolved." Our Supreme Court has just stood its own federalist principles on its head to deliver a "sustainable" election result. We’ve had our Inauguration, now it is up to the resulting incoming Federal government to decide whether it will do likewise to its federalist principles and unleash its mighty powers to correct the operational mess which one state’s fullest exercise of its power has inadvertently produced (and which now threatens not only its citizens as consumers, but predictably all of us in the Federal union as citizens of the American economy). Will energy policy reality TV turn interactive?

Enter stage right, the announced proponents of "free" markets: Energy Secretary Abraham who (in the past, as a Senator,) would have abolished the U.S. Energy Department outright and FERC Chairman Hebert, who would let untrammeled free markets reign, till long term "real" equilibrium beats some price signaled economic sense into people and incentivizes enough powerplants to be built to redeem California from the darkness. Can these disciples, respectively, of Quayle and Lott pragmatically bring their principles together with reality before we have one sixth of a nation standing over silenced chip fabs and silenced data transmission cables, while dragging down the financial institutions that lent money to the utilities that kept the power distribution wires humming in the Golden State. (One lending brokerage firm has gone so far as to suggest that "California Unplugged", will be "A Drag on Global Growth", i.e., in the local patois a bummer for investor dudes.)

Now is when posturing has to give way to pragmatic life principles or we will have a very unpleasant reality. We’ve heard a lot about how now there are "adults" running the Government. Those same folks did not do so well with reality in the last Energy crisis, because they kept mouthing platitudes and watching their own checkbooks and letting the devil take the hindmost. The result dragged America down for a decade. Let’s hope they do better playing Energy Survivor and Temptation Island in this new millenium. Price controls and consumer rebates may be Satan; but governments cannot, when dealing with an unstorable and essential commodity, put their faith alone in long term emergence of necessary supply. You don’t have to be a Keynsian to know that "In the long run, we are all dead." There’s very little time for posturing and enjoying the entertainment of the TV simulation game we’re playing out now in California. Recognition of the need for regional solutions; phased rehabilitation of distribution system owners; some oversight of the wholesale sales profit opportunities; and some consumer price responsibility for consumer consumption all need to be imposed, at least for some identified reconstruction period. Playing it on and for the tube can take us down the tubes. Judge Judy presiding in Bankruptcy Court (the looming solution today) just does not have all the legal tools – not to say the moral authority or the broader public interest mandate to deal with the California situation in a salutary manner. One hopes ironically that the new Administration harkens back to the fateful ruling of the Supremes that gave it power: "It’s about equal protection, stupid." Stay tuned.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.