Institutions and Climate Change:Lessons from the California Energy Crisis in 2000-2001

Prof. Tim Duane

University of California, Berkeley

duane@uclink.berkeley.edu

February 7, 2002

Institutions and Collective Action

• Institutions vs. Organizations

• Governance vs. Government

• Scales of Time, Space, andSocial Organization/Action

• Theories of Social Action(anticipatory vs. crisis-driven)

Political Opportunity Taxonomy

• Characteristic Features (benefits, costs):• Majoritarian (distributed, distributed)• Entrepreneurial (distributed, concentrated)• Client (concentrated, distributed)• Interest Group (concentrated, concentrated)

Opposition will tend to be well-organized unless distributive cost issues are addressed

A Dynamic Theory of Policy

• Phase (connectedness, social capital):

• 1. Exploitation (weak, weak)

• 2. Conservation (strong, strong)

• 3. Release (strong, weak)

• 4. Reorganization (weak, strong)

Social cycle repeats itself (1-2-3-4-1-2…)due to success in solving the wrong problem

Climate Change’s Key Features

• Incremental and cumulative effects

• Uncertain magnitude and distribution

• Diffuse benefits of avoiding risks?

• Concentrated costs of mitigation?

• Complexity and non-linearity?

• Accessibility of issue for public?

Risk Aversion in Policy

• Risk neutral principles for policy?

• Risk prone behavior (“upside”)

• Risk averse behavior (“downside”)

• Uncertainty’s impact on risk profile

• Influence of other factors on preferences

Factors Affecting Preferences

• “risk” = probability x consequence

• Voluntary vs. Involuntary (100x)

• Control vs. No Control (5x)

• Natural vs. Human-made (20x)

• Delayed vs. Immediate (30x)

• Ordinary vs. Catastrophic (30x)

• Known vs. Unknown (10x)

Hazard vs. Outrage Problem

High Outrage Low Outrage

High Hazard

society and policy-makers respond

global climate change, biodiversity, indoor air quality

Low Hazard

distributive issues lead to strong local pressure (debate about hazard and QRA)

society and policy-makers ignore

Evolutionary Developmentof Institutions and Policy

• Policy entrepreneurs raise issue visibility• Information generation and diffusion• Democratic discourse on policy options

(competing narratives and rhetoric)• Development of compensatory mechanisms

(overcoming the ability to veto policies)• Adoption of policies to effect change

(usually with a significant transition period)

What’s Missing from this Model?

• Presumes central authority and capacityfor implementation of selected policies

• Presumes predictive capacity and certainty

• Fails to address non-linear discontinuities

• Tends to legitimate a dominant narrative

• No development of a conditional (if: then)“incident command” system for crises

A Few Lessons from History

• Political institutions: reactive, not proactive

• Institutional incentives often generate“unexpected” behaviors by private actors

• These behaviors are often predictable,but assumptions often preclude analysis

• Risk preferences are often ignored; instead,dominant narrative biases risk perception

• Crises often result from the convergenceof several conditions with low probabilities

Illustrations from Recent History

• Tahoe (cone of diminishing flexibility)

• Savings and Loan Crisis and Bailout

• Northern Spotted Owl and Old Growth

• Florida Everglades and Florida Bay

• California Energy Crisis

• Threats to Homeland Security

• Enron collapse and fallout

Lessons from the CaliforniaEnergy Crisis in 2000-2001

• Dominant narrative: competition is good,and state regulation is inefficient (“bad”)

• AB 1890 was a political settlement toovercome sources of possible “veto”

• Assumptions dominated any analysis(resulting behaviors were predicted)

• Competing narratives were dismissed(no room for real democratic discourse)

Deregulation & “Restructuring”

• Cost overruns and “oversupply” problems

• PURPA’s impact on generation technology

• Pressure from large industrial customers

• Successful deregulation in other sectors

• “The age of market triumphalism”

• 1992 Energy Policy Act => Exempt Wholesale Generators/“market-based rates”

“Attack of the Killer Tomatoes”

• CPUC initiated deregulation proposals

• Legislature crafted a political compromise

• Utilities would sell 50% of thermal plants

• “Stranded costs” would be recovered through frozen retail rates (“headroom”)

• Single market for all transactions (PX)

• New operator of grid for reliability (ISO)

Prelude to the crisis: 1996-2000• IOUs sold 18,348 MW for $3.326 billion

• Low spot market prices (oversupply) + uncertainty (Prop 9 in 1998 + demand) + spot market structure = few new CA plants

• CA added 1.2 million people in 1998-2000; + 3.7% in 1998-1999 + 5.0% in 1999-2000

• WSCC surpluses were consumed by rapid demand growth in the Desert Southwest and masked by high hydro in the Pacific Northwest; only average hydro in 2000

Factual Misunderstandings• “no new power plants in 1990s”: 5058 MW of non-

utility-owned generation (by design)

• “environmental regulations stopped plants”: plants were permitted by CEC but not built;BRPU contracts killed by IOUs and FERC

• “price caps caused utility bankruptcy”:price floor designed at utilities’ behest; billions of $ transferred from “headroom”

• “price caps constrained new development”:price caps were 10-30x spot market prices

Misunderstanding the Problem => Misdiagnosis and Treatment

• A little knowledge is dangerous with only one data point (Econ 1 vs Antitrust 101)

• Simple explanation: S < D => shortages (consistent with superficial symptoms)

• Sophisticated market analysis: buried in theappendices of CEQA documents or reports by politically neutered “experts” (complex)

• Result: only the symptoms were treated

Why the Patient Looks Fine Now

• Diagnosis: compound fracture of the leg and blood everywhere (rolling blackouts)

• Treatment: hook the patient up to an IV, then set the fracture and bandage the wound

• Patient: vital signs are good; bone is healing

• Ignored: the IV has delivered 10-12 billion units ($) and is still hooked up; commitment to keep the patient hooked up for 15 years

A Hypothetical Scenario...• Gasoline sells for $2/gallon at most stations

• One station insists on charging $25/gallon

• Every other station will simultaneously stop pumping gas unless the one station is paid

• Once the station is paid $25/gallon (even if only for one gallon), every other station will simultaneously be paid $25/gallon (for all sales, even if they were charging only $2)

• Some stations are shutting down frequently

The $64 Billion Question:• How long before you and your fellow citizens

would take over the gas station?

• Hypothetical understates electricity market manipulation by an order of magnitude: $3800/MWh vs. $30/MWh = $250/gallon!

• 5-6 generators have 4-19% market shares (1973 Arab share = 5%; OPEC = 12%)

• If power plants were gasoline stations, the people would have taken them over by now

The Limits of Political Discourse

• Very few political leaders had the courage publicly to call for power plant seizures (Angelides, Burton, CPUC’s Dick Bilas)

• Most Republicans cried “socialism” even at state ownership of the transmission system, while offering no viable plan of their own

• Agricultural interests stopped state takeover of hydro plants, driving water costs up more

• The public is still in the dark about costs

Implications for Climate Change

• Assumptions must be challenged vigorously and repeatedly; analytic models = heuristics

• Heretics must be given a prominent voice in discourse (not limited to the EIR Appendix)

• Low probability convergent conditions must be incorporated into both risk assessment and development of conditional incident command system (if this occurs, then…)

Broader Institutional Principles

• Institutional development will require attention to governance structures that transcend regulation/market dichotomy

• All markets operate within a regulatory context (even if not through legal system); challenge is to define structure of markets

• Resolution of distributive issues is key to policy adoption; veto power can dominate