I recently interviewed a guy who explained his approach to long-term contracting to me as follows: “always structure your contracts to ensure that your counter-party makes money, and you’ll never have a bad contract negotiation.” It’s a great point, too often lost by those who are convinced that all negotiations are zero-sum games.
Lest one think that hard-nosed, selfish negotiating is limited to greedy financial types, I bring you this story from South Carolina, where a change in utility regulation to incentivize energy efficiency was blocked by environmentalists and consumer advocates on the grounds that it would give too much money to utilities. It seems to me that they have made a big mistake.
Regulated utilities have no incentive to invest in energy conservation or generation efficiency. Moreover, they have no incentive to encourage their customers to make investments that would save them money, since the standard guaranteed-return + cost-pass-through pricing model doesn’t let them keep the gain.
This doesn’t make utility managers bad guys; it just means that they are responding to a bad set of signals. If your parents give your big brother a cookie every time he punches you, your big brother is not entirely to blame for the welts on your arm.
Jim Rogers knows this, and proposed his Save-A-Watt program to give his company, Duke Energy, a financial incentive to encourage their customers to conserve. Consumer advocates and environmentalists opposed, broadly on the basis that we shouldn’t pay utilities to do things they’re supposed to do anyway. The South Carolina utility commission agreed:
... they objected specifically to the heart of the plan: Duke’s request to get a financial return for power plants it doesn’t have to build.
To be quite clear, Duke has many flaws. They like expensive coal plants. They’ve tried to do some things that look an awful lot like gaming carbon markets. And they are a card-carrying, dues-paying member of the BS-machine that is ACCCE.
But that doesn’t mean we can’t give them credit for trying to reform the rules, so that they can sever (however partially) the disconnect between the interests of their shareholders and their customers (not to mention the environment). It seems a shame to me that those efforts were blocked in the name of the environment and consumer.
Ultimately, this issue is much bigger than Save-a-Watt, Duke, and South Carolina. Our regulatory system desperately needs reform, and effective reform will necessarily create massive wealth transfers away from those who benefit from the status quo. It was ever thus, and is why vested interests are always so conservative. Those who seek reform therefore have four choices:
- Give up. It’s simply too hard to change the status quo, they’re too powerful, so quit.
- Bribe. Buy off enough people to get diluted reform passed. Pay some people to do the wrong thing, others do to the right thing and tell yourself that you’re net better off if it helps you sleep at night. (See: grandfathering, allocation of CO2 emissions permits.)
- Get naive. Insist on intellectual purity, and pretend you’re politically strong enough to get it done on your own. You’re either with us or against us. Gonna get me some evil-doers. No more coal. Che Guevara kicks ass.
- Change the rules so that everyone makes money from doing the right thing.
When it comes to carbon policy, most legislative bodies seem to favor option No. 2, in part because ideological purists on both sides of the aisle can’t find middle ground in option No. 3. But real, lasting reform inevitably comes out of that fourth approach, finding ways not to penalize those who benefited from the old status quo, but rather to give everyone an incentive in a better future. (Think Mandela.)
To be sure, the Save-A-Watt program doesn’t really deserve to be mentioned in the same breath with Nelson Mandela. But it is cut from the same cloth, fixing a lousy rule to give everyone a profit in a better future. And it seems awfully tragic that it was killed by ideologues whose success will come at the expense of the very interests they claim to represent.
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Comments
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Anthony Posted 6:31 am
01 Mar 2009
Sound a little like programs in California.
Opposing the program simply because Duke will make money does not make any sense. If they are opposing the program because Duke will take too much of the savings, then argue the proportions not the concept.
I came, I saw, I cried
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Russ Posted 7:16 am
01 Mar 2009
Assuming I found much plausibility in this, I'd consider it at least as likely that "ideological purists" didn't start out that way, but became that way out of disgust at the corruption, cowardice, and paltriness you're sticking up for there.
But I don't think your construction is plausible. I hardly think most of these people need any encouragement from ideologues to go in for bribery, appeasement, laziness, and wretched smallness of vision. I think they do that just fine on their own.
As for this:
4.Change the rules so that everyone makes money from doing the right thing....
...But real, lasting reform inevitably comes out of that fourth approach.
"Inevitably"! So I guess all the history books I ever read (about Greece, Rome, medieval Europe, the Renaissance, the Reformation, Elizabethan times, the English civil war, the Thirty years' war, the czars, the French Revolution, the whole 19th century revolutionary ferment....I could go on but you get the idea), where few of the attempters made much money, and few seemed to be particularly trying to, are all wrong.
I guess I could have saved myself alot of effort and just read one grist post.
Or maybe not:
(Think Mandela.)
It's certainly an odd view of reform which considers the complete betrayal of the Freedom Charter, the thoroughgoing privatization of the country while the vast masses remain just as impoverished as they were under apartheid (indeed in some ways they've been worse off), and the thuggish regime of Thabo Mkebi, to be a rip-roaring success.
But those who were rich under apartheid remained rich, and you did say that's important to you. "Don't seek to bring criminals to justice", and the rest of it.
After all, those of us who still believe in quaint things like justice are just "ideologues", "naive"*, poets. Especially because we have the temerity to not particularly care about your profit motive.
[*BTW, I stand by my assessment, which I've written about elsewhere here, that in these days of crisis and potential to dare great things in the name of great values is no more naive and no less politically practicable than the defeatism of picayune goals and conventional prejudices about what's politically "possible", which latter course has been going on for so long now with such meager results.
I don't say these things to gratuitously heckle anybody, but to defend and fight back against these increasingly nihilistic attacks on principled people and on the very concept of principle itself.]
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Gar Lipow Posted 8:57 am
01 Mar 2009
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Gar Lipow Posted 9:01 am
01 Mar 2009
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ids Posted 9:36 am
01 Mar 2009
finding ways not to penalize those who benefited from the old status quo, but rather to give everyone an incentive in a better future
and Rush Limbaugh
George Will once asked Dr. Friedrich Von Hayek, tremendous classical economist, great man, 1975, George Will, Dr. Von Hayek, why is it that intellectuals, supposed smartest people in the room, why is it that intellectuals can look right out their windows, their own homes and cars and look at their universities and not see the bounties and the growth and the greatness of capitalism? And Von Hayek said: I've troubled over this for years and I've finally concluded that for intellectuals, pseudo-intellectuals, and all liberals, it's about control.
. . .
On the left side when you get into this collectivism socialism stuff, these people on the left, the Democrats and liberals today claim that they are pained by the inequities and the inequalities in our society. And they believe that these inequities and inequalities descend from the selfishness and the greed of the achievers. And so they tell the people who are on different income quintiles, whatever lists, they say it's not that you're not working hard enough, you could have what they have, perhaps, if you applied it. They're stealing it from you.
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Pompey Road Posted 10:06 am
01 Mar 2009
After what has just happened to the economy because of deregulation in the Markets I don't see why carbon reducing regulation and tax incentives for corporations doing the right thing would be out of line. They will reintroduce regulations back into the markets and regulations in the international markets is all that will restore the confidence back in this global economic system. Regulated energy production and environmental concerns go hand in hand.
The regulations that made them keep up the power infrastructure was weakened to the point AEP even quit cutting the limbs from the power lines in Appalachia. We have power some months about as much as Baghdad does, well when it storms it may as well be a third world country. We went for years with uninterrupted service when they maintained the lines.
It should be the same for carbon, a mix of tax and incentives in order for the government to reach a desired, "OK planned outcome."
I like a modified option #4
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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JMG Posted 6:07 pm
01 Mar 2009
("Nice little shop you got here -- boy, it'd be a shame if anything happened to it. How's about I look out for you and make sure that nothing bad happens to you ...")
I have said repeatedly that I agree with your basic premise here. I've been quoted saying "It's better to make the bastards rich for doing the right thing than to see the bastards get rich for doing the wrong thing."
But the bastards have to cooperate some too. Trying to get a return on unbuilt plants is simply too far beyond the pale --- too much of No. 2, not enough of No. 4.
The 5% Project
Let's live on the planet as if we intend to stay.
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Sean Casten Posted 10:52 pm
01 Mar 2009
That idea though isn't on the table, so we're left with trying to work within the paradigm we have. If utilities were "normal" businesses, they could make money by lowering their costs. There are, after all, two routes to profitability: revenue growth and cost reduction. And the customer who helped them to do so would be their friend.
The problem is that utilities aren't normal. All of their costs are supposed to be passed through to customers, while their revenues are set by capital they deploy. The result is that they are agnostic to cost avoidance, unless it is coupled with the deployment of non-utility capital, in which case they are downright hostile to it. We can quibble with whether or not they "should" be conserving costs anyway, but that ignores the fact that the regulatory model has historically ensured that they don't.
I agree that it sounds fishy to say that they earn a return on capital they don't deploy, but that is simply because that's the way that utility revenues get set. One could just as easily reframe it as saying that if a utility customer takes an action that lowers utility costs by $1, the utility ought to get to split that dollar with the rate payer. Not because they deserve it per se, but because the current system is set up to make them oppose and needs to be fixed.
The challenge - and you can see this in the other comments above - is that there is this tremendous tendency to try to frame this as the big corporate fat cat against the little guy, which makes for a nice soundbite, but doesn't really get at the core of the issue. Yes, Duke is rich and can easily be pilloried for all the things they've done against the public interest. But without understanding why they've acted that way (back to those regulations), we're tilting at the wrong windmill.
Back in 2003, I wrote a paper on this called "5 Aces and a Winking Dealer" (See here if you're in the mood for the detail.) The point of the title was exactly this issue: if you're sitting at a poker table and your opponent plays 5 aces while the dealer keeps winking at him, you've got to conclude some degree of complicity and accountability on the part of the "House". Utility regulation is exactly this problem. Regulated companies, just like unregulated companies exist to make money, and there's no particular benefit in faulting them for doing so. But when they behave in ways contrary to the interest of society, it is the regulator that is to blame - after all, they're the ones who wrote the rules and keep them in place.
Save-a-watt isn't going to fix all of that, but it is that critical first step that admits that the current system has a problem.
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amazingdrx Posted 11:58 pm
01 Mar 2009
...when they behave in ways contrary to the interest of society, it is the regulator that is to blame - after all, they're the ones who wrote the rules and keep them in place.
A big part of the problem is that regulators are chosen from industry and go back to industry for their "rewards" (bribes) after they serve in government.
Then factor in the whole reagan revolution principle of industy self (no) regulation, under which government is purposely made incompetent (heackuva-job-Brownie appointments) in order to erode public confidence, and the self-fulfilling prophesy of corrupt incompetent governance is acheived.
Reasonable regulation and incentives for conservation and efficiency directly to homeowners, farmers, and businesses might work better. Giving more incentives to the same old monopolies probably won't change the status quo.
Some power companies are actually proactive passing on government incentives to their customers for renewables and conservation, a power company here pays 23 cents per kwh for customer's solar energy. They are reimbursed by government.
But most power companies take the incentives for the renewable energy generated by customers and impose net metering at retail rates. Making it impossible for customers to actually make their investment pay beyond simply offsetting their bill.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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ids Posted 12:24 am
02 Mar 2009
http://www.msnbc.msn.com/id/29429727/
Poor fat cat paradigm
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Sean Casten Posted 12:33 am
02 Mar 2009
Duke's plan may not be perfect, but if the good guys have a counter offer, they should have made it, not simply argued that the whole thing ought to be thrown out. To do otherwise simply cements the status quo and grants it a wholly-unjustified perception of perfection.
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biodiversivist Posted 12:48 am
02 Mar 2009
I think its rich to watch politicians grill bankers when they are the ones who failed to regulate them. Every one of those politicians would have acted the same way if they were running those institutions.
Congress has an abysmal approval rating. They probably get together in the back room after the hearings and congratulate each other for acting all moral and shit.
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Pompey Road Posted 1:04 am
02 Mar 2009
I suppose rules and regs need to be looked at from time to time and adjusted for efficiency. The problem with our system is the only revisions are political. As we change from a liberal to a conservative administraion "vice versa" the revisionist start scanning the regulations looking for some wording changes for their advantage. Midnight regulation changes also needs to be addressed.
You will always have the two camps, to regulate or not. The argument should be if regulation for environmental purposes is the model how can you adjust for efficiency overtime while keeping the politics out of the process.
It is almost impossible to write a regulation or tax scheme that loopholes can't be found in for one party or the other to take advantage of. I agree that a utility has to be able to earn a profit in order to stay viable and keep providing energy. Sometimes a reg or tax scheme may have to be tweaked in order for a utility to survive. How do you do this and keep the lobbyist out of the picture everytime you have to make adjustments.
The government has to step in at times and regulate the economy. The government has to step in at times to regulate an environmental or health & Safety issue. The question for me would not be to regulate or not but how to regulate in a manner that allows for reasonable adjustments without throwing the process wide open for every lobbyist or politician with an agenda.
The eons of time and nature was good to us down here. It was not until we become civilized that destroying our habitat become fathomable or fashionable.
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ids Posted 1:40 am
02 Mar 2009
Sean, the SC proposal: The company wants to raise rates to an amount equal to up to 90 percent of what it would cost to generate the electricity that would have been produced had it not been for the energy-savings plan.
If this is another case for enviro's to be blamed for damning the good for being imperfect, then it's a sick gristwash world we're living in.
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Sean Casten Posted 3:25 am
02 Mar 2009
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JMG Posted 3:49 am
02 Mar 2009
What really has to happen is to abolish private fossil fuel utilities and drive the rate of return to zero (or negative) for all fossil fuel produced power. If the geniuses want to make a profit, let them produce power that profits the world, rather than merely imposes their costs on society.
If we're serious about dealing with climate, we're going to have to quit asking corporations for permission.
The 5% Project
Let's live on the planet as if we intend to stay.
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2wheeler Posted 3:58 am
02 Mar 2009
I agree with Sean Casten's comment above at 08:52 (his second seems obvious and understated).
DrX doesn't know how good he has it, in his comparative paradise for green energy producer/consumers (Wisconsin):
Reasonable regulation and incentives for conservation and efficiency directly to homeowners, farmers, and businesses might work better. Giving more incentives to the same old monopolies probably won't change the status quo.
Some power companies are actually proactive passing on government incentives to their customers for renewables and conservation, a power company here pays 23 cents per kwh for customer's solar energy. They are reimbursed by government.
But most power companies take the incentives for the renewable energy generated by customers and impose net metering at retail rates. Making it impossible for customers to actually make their investment pay beyond simply offsetting their bill.
I suspect that any rate givebacks are due to regulations in effect requiring such (counterbalance for consumers in the face of the utility monopolies).
Ohio ratepayers like me don't even get retail for any net metering we'd install-- we get WHOLESALE (retail less the utility's alleged costs of service delivery) back from any excess power put back into the grid. But, hey, we at least get to average our use/generation over a year's time before asking for the big cash back payment on any net excess we'd generated. This leaves ZERO threat to the utility's baseload control of the rest of the grid energy production.
Try figuring out the payback time on that one folks. It's quite long indeed. Totally bolsters the status quo stranglehold the utils have on the system of power production and usage; exactly the opposite of the decentralized future that renewables and smart grid could take us to. It's therefore no wonder the utilities are the last ones to come onboard with the concept of distributed renewable green energy. Until those holding the cards today, figure out how to own the means of production and profit from it, it will be up to the people on their own to bootstrap a way toward sustainable energy future.
To be fair Ohio does have a recently passed mandate for 20 percent "advanced/renewable" energy but it's likely to be laughable what passes for "advanced". Will it pass for a legitimate RPS? Time will tell.
Any fair system of energy savings cost incentives would probably skew the profit sharing the other way around-- 90 percent for the consumers who are subject to the monopoly's predation, and 10 percent to the monopoly. It would still be a huge amount of profit if the available low-hanging fruit were adequately addressed (probably 1/3 of the electricity being used today by homes and businesses, in my opinion could be saved using cost effective measures).
Moving toward sustainability with hopefulness, one revolution at a time.
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ids Posted 4:14 am
02 Mar 2009
Sean, refrain from your knee-jerk acceptance of anything that says "efficiency" combined with a market based solution, and it might be worthy for an environmental blog. It seems Duke made the
http://www.southernenvironment.org/newsroom/press_release ...
gross offer, why not go after them rather than me.
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