Sunday, July 29, 2007

Illinois Power Agency

One of the focus areas for this blog is electricity and energy, specifically energy policy. On the sidebar under "electricity" you can see a variety of other posts on this topic.

To recap what has happened over the last 15 years or so in a few sentences:


- The power industry used to be regulated at the state level and consisted of many smaller utilities that were combined generation (coal & nuclear plants, hydro), transmission (long lines connecting their grid to generation and neighboring utilities), and distribution (local lines in your city that bring the power into your house along with the crews and systems to run it)
- There was always a substantial government presence; the Tennessee Valley Authority (TVA) and Bonneville Power Agency (out west) were massive players, and major cities such as Los Angeles (Los Angeles Department of Water and Power) were essentially municipally owned utilities or major government entities outright
- This model had the utilities responsible for managing their growth through seeking out new generating resources by building their own plants or buying a "share" of a neighboring utility's efforts
- Utilities were in a "cost plus" or "rate of return" environment when they were allowed to earn a regulated profit on some portion of their costs to keep their ability to purchase power and raise money in the credit and stock markets
- While this model had a lot of problems (utilities had bad incentives) and there were plant cost over-runs, in hindsight, it looks pretty good

The "NEW" WAY:

- Utilities bought each other up; where there were many utilities in a state now there may be only one and it probably spans multiple states; the number of entities has been dramatically reduced
- States "deregulated" (I hate to use that word because it is a sham - they "regulated differently") on a state-by-state basis, mostly segregating the generation of power from transmission and distribution
- Utilities sold off their generation assets (mostly to unregulated arms of each other) and basically stopped building any "base load" generating assets; they just ran assets harder, remodeled, and bought easy to site and assemble (but expensive) gas generating units
- California melted down and almost went bankrupt; Enron turned into a sham, and states such as Montana got caught in the crossfire
- Deregulation is basically dead in its tracks, everywhere
- Energy growth (demand) continued to grow, unabated. But baseload generating plants, which can take a decade to plan, site, permit and build, are no where in site

The Situation in Illinois:

In Illinois they had a "rate freeze" on the major utilities for many years. Illinois used to have among the highest rates in the nation; now we are merely high. The rate freeze has expired and the first round of auctions came in with rate increases of approximately 25% on average, with some areas in Central Illinois hit even harder (owned by Ameren a St. Louis energy company that has been growing in the region).

Since rising electricity rates are political poison and they hit everyone, the Illinois politicians are all over this. Good governance may get lost in the shuffle, but Illinois elected officials know that an energy crisis can hurt their careers.

ComEd is the local distribution company and they are crying poverty and saying that they will go bankrupt if they can't raise rates to pay for power that they no longer provide; they neglect to mention that the main power provider is Exelon, their parent company, so it is really out of one pocket and into another. In this blog I even mentioned that it isn't out of the realm of possibility that the state will ultimately seize back the generating assets of Exelon to avoid going bankrupt; we aren't there yet but this game is in the 3rd inning, not the 9th.

Like everywhere else, no one has done anything to solve the fact that demand for electricity continues to increase while nothing is being done to provide future capacity. The NIMBY's and years of indoctrination by the greens has effectively killed any hope of siting serious new capacity in Illinois. This is all the more shameful because Illinois has abundant coal reserves...

The Illinois Power Agency:

The legislatures engineered a compromise with the utilities recently; the utilities would get their rate increase (part of it) and the state would charter a new department called the "Illinois Power Agency" with a mission to purchase power for the state and (somehow) reduce costs. The Chicago Tribune has a generally good article titled "Illinois Back in Power Market" that describes the proposed agency, although details are few.

The article compares the situation in Naperville, Illinois a larger suburb that purchases its own power with Exelon, the mammoth power company. Naperville is able to negotiate better rates (lower cost of generation) than Exelon. Per the article this was done by a series of "requests for proposals" or RFP's that the city kept issuing until they finally received rates they liked, at which point they jumped in and locked in the rate. The alternative to this sort of ongoing RFP and negotiation process is to have an auction of some sort like the state tried last year. To be honest the auction didn't work that badly; rates were going to go up (since generation is so limited) but didn't go up as much as feared. Still, it isn't good to be solely dependent on an auction because poor timing (i.e. an energy price spike) will require you to buy all your power at the worst time; probably a blend of the auction (spot) and negotiations is best, overall.

Per the article:

In its simplest terms, the new power agency will periodically seek bids for electricity from generators such as Exelon, Ameren, Midwest Generation and others. It can then negotiate for the lowest possible prices for residential consumers. That electricity will be distributed without markup by Commonwealth Edison and Ameren. The utilities will earn money through a distribution fee.

"We have all now bought into this deal," ComEd CEO Frank Clark said last week, adding that he thought the Illinois Power Agency could work. "This is a government entity," Clark said. "It does not have shareholders, and it does not have to have profits."

Thus, after all of the experimentation with incentives and deregulation, we are basically back to WORSE than the original situation of 15 or so years ago. It is a "pure" government entity, charged with negotiating with sophisticated financial experts on the other side. I don't think you can summarize it any better than to say that there are no shareholders, and no profits. I was looking for a mention of GOSPLAN, the former USSR planning agency for the economy, to complete the (dismal) picture. And to think that 15 years ago we were worried about sub-optimal incentives; now we have no incentives whatsoever except to hope that government bureaucrats get it right.

Part of the charter even authorizes them to build power plants and raise money; I frankly find it astounding to believe that a government entity will be able to build anything substantial at all in this climate, with die-hard NIMBY's fighting them at any turn. Government workers want to make their jobs easier, not harder, and they are short term focused. Better to let the supply / demand imbalance get worse and worse each year than to take the political heat and start a long term construction program. However, they will be in for a hard ride because it is a stretch to believe that they are going to be able to stem the rising rates that will enrage the constituents.

The head of the proposed agency is a lawyer, to boot. Per the article:

"Susan Hedman, senior assistant attorney general and Madigan's top adviser on utility issues, played a critical role in designing the Illinois Power Agency, or IPA."

Wouldn't you want someone with experience in power or finance, since these are complex, long-term negotiations? Can't they hire a lawyer to do the legal aspects and hire someone who knows power to run the agency?

My Perspective:

Sad and doomed as this plan may be, the silver lining is that the state has finally recognized that they need to DO SOMETHING to try to fix the problem. They also recognize that they can't blame others for rate increases; they built the current situation and the power companies have no incentives to fix it. The real solution of building more plants, of course, is nowhere on the horizon, but perhaps in a few more years after rising rates and collapsing reliability, we may try to do something about that too. Unfortunately even if we were all TRYING to build something it would still take a decade from that point forward, so Illinois is going to spiral downward financially and in terms of reliability until they figure this out, if they ever do.

In a different post I will lay out the likely course of electricity across the US and the natural gas industry, since the two are intertwined and will suffer complimentary fates.

Suffice it to say that for 15 years working, trying and monitoring the situation I have never been more depressed and without hope. This time period should rightly be viewed as the "dark ages" of electricity and energy policy. All this time has been wasted, we ate our spare capacity, and built no institutions looking towards the future. An utter failure of governance and planning...


Dan from Madison said...

"Doomed" was a great choice of words.

Dave Schuler said...

Well done, Carl. Could you really expect much better from the half-wit son-in-law we've got as governor in the one party state of Illinois?

You might want to check in on Lynn Kiesling Knowledge Problem. Lynn lives in Evanston and teach econ at NU, specializes in energy policy.

BTW, I live in Chicago, too. We ought to arrange a meet-up some time. I've met "Lexington Green"--he lives in Oak Park. Rick Moran of Right Wing Nut House is out in Algonquin and Dave Burge of iowahawk is somewhere on the Northshore. Mark Safranski of Zenpundit lives in Carol Stream (I think).

Dan from Madison said...

If that meetup is arranged I will drive down from Madison. That is a great group of guys you have named there.

Dan from Madison said...

I am not so sure you can pin this one on Blago though. A lot of these things have been stewing long before his corruptness showed up downstate.

Carl from Chicago said...

Thanks for the comments! Unfortunately our problems started before Blogo and, while he has done nothing to help the situation, he really isn't making it that much worse. The fact that he is overtly political makes him harder for the power companies to deal with - Republicans have a "soft spot" for businesses but Blogo is virtually a socialist in his policies so they fear him. Blogo would do ANYTHING to stay elected and that definitely scares them.

It would be great to meet up. You can contact Dan or I through the masthead. Although we can only talk so much in power, I get depressed...

rexki said...

Just jumped over to the ComEd real time pricing - BES-H and this Capacity Charge is nuts. CUB says that its dropping off once the IPA goes online, late 2009, I guess that is in 3 weeks or less since its the first week of Dec 2008.

Also my electricity usage went down about 50% due to discovery of vampire "standby" electricity. If more Illinois people woke up to their ComEd bills rising in both cost and killowatt hours - vampires on the plug, we might not need to build any more plants, just intelligence in and out of the grid. If we need more electricity in certain areas, then maybe a Sterling Engine Solar collector generator might be the solution.

Anonymous said...

Great article and follow-up comments...can u guys help to us all a bit by enlightening us about the vampire comment made by rexki...please. I've just about had it with con'ed! Thanks.

Rexki said...

Vampire = Standby Electricity.
1. The microwave telling you what time it is 30 watts while not cooking anything.
2. The garage door opener waiting for you to hit the remote while the entire house is asleep - 30 watts
3. The remote ceiling fans waiting for you to turn them on. - 15-25 watts
4. The outdoor remote security light sensors consuming vampire electricity during broad daylight with the light off - 15 watts per sensor.
5. The AC compressor outdoors left electrified during the 7 months of the year its not used - 10 watts.
Total watts mentioned above: 100 watts. Cost is 877 kWh times .16 = 140.32 per year.