Let's look back over the past few years-what we got right and where we went wrong.
Do you recall how you felt at your last class reunion? Well, that's exactly what an editor feels when asked to reminisce in public about days gone by at the magazine to which he gave his best years.
And let me tell you: Nothing will make you wince more than re-reading the things you wrote only a few short years ago, or sober you up as having to re-evaluate the articles that you were once so eager to publish. With the benefit of hindsight, one can see the awful truth only too clearly. Many of the issues and ideas that once seemed are today consigned to the dustbin of history.
So we come to the 75th anniversary of the publication of . Few magazines ever live that long. Nor should they. Yet here we stand. Launched in 1929. Still kicking in 2004.
Alas, we lack space here to tell the whole story. (For you historians, let me recommend the magnum opus by former Editor Cheryl Romo on PUF's 60th anniversary, "To Furnish Our Readers With the Facts," []. Or that pearl from our most famous editor, Francis X. Welch, "Fifty Years of Fortnightlies" []. Or my own piece, written on PUF's 70th Anniversary, "Above All, A Name," [].)
Nevertheless, we can learn from the experience of the past 10 years-a time of turmoil like no other in the utility industry. So let's lean back and have a little fun. What can we learn from Public Utilities Fortnightly over the past decade?
Dead Ends and Wrong Turns
In all candor, the magazine tilted a little too far overboard on a handful of topics:
- Stranded Investment
- Consumer Content
- Transmission Pricing
- PUHCA and PURPA Reform
- Gas vs. Electricity
Other topics come to mind, of course. For example, we once suggested that regulators might require an electric-style "ISO" to manage gas pipeline capacity (). But that came to nothing.
Stranded Investment. But you can hardly fault us for going over the top on stranded investment. What a terrific story for the mid-1990s. It had winners and losers. It could be reduced to dollars and cents. It made us feel smug.
After all, we had just won the cold war. The Soviet Union was defunct. We reveled in the superiority of free enterprise over a managed economy. Yet American utilities found themselves on the wrong side of history. As financial writer Charles Studness put it, "Stranded Cost Recovery: It's Un-American" ().
The parallels were compelling, but in the end, ultimately meaningless. As things turned out, nothing was really ever stranded. Utilities today value their precious nukes and coal plants like mother's milk. In hindsight, we can see that we wasted altogether too much space in print on this red herring.
Nevertheless, we did open our pages to some with a contrarian view, and for that we should now be grateful. Listen, for example, to Randall Falkenburg, explaining how, in a state adopting a central, pool-based spot market, utilities with large market shares of generation could use aggressive marketing strategies to maintain power prices at high enough-levels to keep coal plants in business:
"Our modeling indicates that prices can be maintained at $58/MWh, which is probably less than the cost of new coal-fired generation. In this case, the stranded cost for the New York PoolCo as a whole goes negative" ().
Consumer Content. We also thought consumers wanted retail choice. We believed that utilities just didn't "get it." Well, it turned out its was the that didn't get it.
Consider marketing and consumer content-how utilities needed to stop thinking about themselves as conduits for delivery of commodities, and instead to repackage their image as a provider of lifestyle services. Don't think megawatts or therms. Instead, think "comfort provider."
Ahmad Faruqui defended this view up until the very start of the California power crisis: "Customer choice offers energy service providers the opportunity to innovate their products and better serve customers" ().
Yet this prediction has proven entirely wrong. British correspondent Alex Henney identified the first wave of problems ().
Later, it fell to industry gadfly Steve Mitnick to burst the bubble for good, in his telling critique of irrationally exuberant energy marketing ().
Perhaps T.W. Merrill summed it up best when he asked rhetorically whether retail competition was inevitable. He provided his own answer: "Not necessarily. As more customers are co-opted by market-sensitive prices, the cries for retail wheeling will recede" ().
Transmission Pricing. Once upon a time, we invited two top-level utility experts to develop a pair of articles that advocated distance-based (megawatt-mile) pricing for electric transmission as part of the deregulation of wholesale power markets () One urged an embedded cost method. The other pressed for an incremental model-what was known as an "impacted approach."
Like Pickett's charge at Gettysburg, these two articles formed the high-water mark for fully allocated cost-of-service pricing. Each excelled at bean-counting. But together they marked an absolute dead-end.
In reality, it turned out to be much simpler to measure the local differential in the generation price, treat that as a measure of the value of congestion, then tack that fee on top of a fixed-access charge derived from the embedded cost of the proprietary grid system owned by the "sinking" utility. The result is locational marginal pricing (LMP), with a license-plate access charge. How simple.
So we switched gears and started running pieces on the new method, starting with a piece from lawyer Stephen Teichler ()
PUHCA and PURPA. Heaven help us. How many times over the past 10 years has the heralded the imminent repeal of the Public Utility Holding Company Act, or the Public Utility Regulatory Policies Act (PURPA)? 'Nuff said.
Gas vs. Electricity. Sometimes, an editor encounters a personality so fun and compelling that he just goes overboard. That was the case when I met Mark Krebs, a lawyer from Laclede Gas. Mark was mesmerizing when I heard him speak at an industry conference in St. Louis on the integrated resource planning and demand-side marketing. Mark had another term for DSM - "damned stupid marketing." He also complained of regulators who concocted reward-based incentive schemes for electric utilities to foster "conservation" and serve the public interest by shifting utility customer consumption from natural gas to electricity. Regulators said that was more efficient. But Mark bristled. He showed me data on the cost efficiency of each and every step in the entire fuel cycle for both for electricity and gas (seismic studies, well-drilling, coal hauling, line losses, etc.) showing that a shift of retail load from gas to electricity is no bargain.
Well, I kind of egged on Mark to contribute something, and the result was an article guaranteed to get under the skin of our electric readers (). The title was my own choice. So was the subtitle: "How the electric industry uses DSM and IRP to build load, ignoring basic truths found in fuel-cycle analysis."
Pretty soon we had a letter on our hands from Steven Rosenstock, manager for electrotechnology policy at the Edison Electric Institute, and we found ourselves refereeing a full-fledged brawl ().
Well, someone should have slapped my hand. I knew full well that Mark's piece would likely create a debate. It was loads of fun, but perhaps I was guilty on this one of staging a media event.
Ahead of the Curve
Nevertheless, I thought we positioned ourselves fairly well ahead of the curve on other topics:
- Spot Markets
- Generation Risk
- Gaming the Power Price
Spot Markets. In 1995 we put together what was probably our single most influential magazine issue of the decade. In that issue, we presented an open symposium on the pros and cons of setting up a centralized regional spot market for the trading of wholesale power and the determination of an open-market, competitive power price.
In the largely pre-Internet world of that time, the pages of a magazine offered exactly the right place to conduct this sort of debate. File-trading electronic bulletin boards were still largely foreign to the utility industry. And so we attracted exclusive and original writing and comments from a wide spectrum of the top energy policy-makers and thinkers of the time, including Bill Hogan, Larry Ruff, Jeff Skilling, Vikram Budhraja, Robert Haywood, Patrick Thompson, Robert Levin, Ralph Cavanagh, Ellen Roy, Jan Schori, and Ashley Brown ().
That feature led to several follow-up articles in succeeding issues, as many other industry experts took the bait and weighed in on the question.
Generation Risk. Then there was the question of whether electric utilities should continue as before to own and operate generating plants. David Wagener struck an early blow (), building a convincing case that utilities no longer earned a high enough return on equity to justify carrying power plants in their asset portfolios. This notion, at the time, was quite alarming.
Soon we followed up a substantial analysis of why state public utility commissions needed to bifurcate the rate-making process by unbundling the cost of capital. That would create in essence two separate rate cases for vertically integrated utilities-one case for the wires business, with a lower cost of capital, and a second case for the generation segment, with a higher return on equity (ROE), to reward a higher rate of risk ().
This bit of heresy then attracted the attention of the premier rate-of-return witness of the time, Joseph Brennan, who teamed with Robert Malko in crafting a response. In short, Brennan and Malko argued that competition might actually reduce risk, as the telephone industry had seen falling ROEs both for competitive long-distance carriers, as well as for the still-regulated Baby Bells ().
Gaming the Power Price. That brings us to the question of gaming behavior in competitive power markets. And on that point, was out ahead. Years before the Enron debacle and the meltdown in California, we had run a piece by Ed Krapels and Vito Stagliano, with this prophetic quote: "Speculators will move in and out of electric futures for reasons that have little to do with supply and demand" ().
And yet perhaps our most notable scoop on gaming was something I had written, commenting on things I had heard at EEI's 1997 financial conference. At that time, I had quoted a certain Charles Oglesby, from an energy trading subsidiary of Houston Industries, on how energy traders might deal with an hour-ahead spot market: "We think we know a little bit about what will happen," he said [and I wrote], "if we hold our plant out for a few hours.
"We might decide to hold our plant off the market at 12 noon," he added,"even if the price looks favorable, because we know we can get a better price at 4 p.m."
In my column (), I added this tongue-in-cheek comment: "Imagine that. Did I just hear a utility say that it might try to 'game' the generation market?"
Some five years later, I was told that investigators examining the root causes of the California power crisis of summer 2001 had focused on my modest column as one of their most convincing pieces of evidence that traders had gamed the market.
They had read it in Public Utilities Fortnightly.
They Said It.
Fifteen favorites from Fortnightly.
"I've visited his house, I've swam in his pool. I've drank his wine."
"It hasn't been fun to be in transmission."
"I could put a [solar] system on somebody's roof and make them personally innocent of killing the planet."
"Stranded investment? It's a yawn."
"Bondholders' prayers have been answered-and the answer is no."
"Boy is that a bucket of worms."
"Try it at a cocktail party. It doesn't work."
"I feel like I'm at the second day of a two-day meeting and I missed the first day."
"We anticipate a four-year transition. … Heck, we have a five-year contract for telephone service with MCI."
"The rising tide has lifted all boats, even the leakiest."
"Just do something."
"Price caps cause higher prices."
"It's hard to imagine why the ISO would ever be controversial."
"No economists were killed or injured in the writing of this article."
"Tell customers they have a choice: freedom or security."
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