JOELGEHMAN.COM

With my dissertation on the horizon, over the past few months I’ve been exploring a variety of possible research settings. One idea I have considered involves studying the Pennsylvania Electricity Market as an in vivo cultural-economic-political experiment (ala Michel Callon and colleagues). At the risk of simplifying a relatively complex situation, three major pieces of state legislation have recently collided: deregulation, renewable portfolio standards, and consumption management. At the same time, the EPA is imposing new emissions reporting requirements on utility companies. All of this has generated a number of controversies, many of them entangled with issues related to sustainability, accounting and temporality — all themes I am hoping to explore in my dissertation.

1. Deregulation started in 1996 with the passage of the Electricity Generation Customer Choice and Competition Act. By January 1, 2001 all Pennsylvanians – theoretically – had the freedom to select their electric generation suppliers (“EGSs”). However, at the same time, the Act permitted the electricity distribution companies (“EDCs”) to recover their “stranded costs,” meaning “investments in infrastructure made before the law was passed that may have become uneconomic and unrecoverable in a competitive environment” (source). In exchange for the right to recover these stranded costs, electricity rates were capped. These caps expired in phases, with the last of the caps set to expire on January 1, 2011. Thus, despite some 14 years of “competition,” there is little to no retail competition in most regions of the state. However, PPL’s rate caps expired Jan 1, 2010, with bills expected to rise 30%. Early evidence suggests PPL customers are switching en masse, with 16.9% of residential, 23.3% of commercial and 68.6% of industrial customers having switched by January 16 (source). As one result, there is an unfolding debate over whether or not deregulation works.

2. Although deregulation is an interesting story on its own, the situation is complicated by the Alternative Energy Portfolio Standards Act (“AEPS” or Act 213 of 2004). AEPS requires that an annually increasing percentage of electricity sold to retail customers in Pennsylvania by EDCs and EGSs be derived from alternative energy resources. The level of alternative energy required increases according to a fifteen year schedule, including minimum thresholds that must be met for the use of Tier I (8% by 2020), Tier II (10% by 2020), and solar photovolatic resources. Of note, EDCs were exempted from compliance with AEPS for the duration of their “cost recovery period” as specified under the 1996 Customer Choice Act. In other words, not only are utilities such as PPL faced with new competitors, but at the very same time they are also subject to renewable portfolio standards. As a result utilities must supply a minimum percentage of their electricity from specified sources, even while face price pressures and uncertain overall demand. And while alternative suppliers (EGSs) face the same constraints, the result is an entirely new set of market dynamics.

3. Act 129 of 2008 imposed new requirements on EDCs , with the overall goal of reducing energy consumption and demand. The Public Utility Commission (PUC) will implement the Act in phases. The first phase will deal with the PUC’s obligation to adopt an energy efficiency and conservation program by Jan. 15, 2009. Subsequent phases of the Commission’s Act 129 implementation process will address EDC and default service provider responsibilities; conservation service providers; smart meter technology; time-of-use rates; real-time pricing plans; default service procurement; market misconduct; and cost recovery. The Act also expanded the types of alternative energy sources that qualify as Tier I alternative energy sources under the AEPS Act to include specific categories of low impact hydropower and biomass energy.

Against this backdrop, other events are unfolding. For example, another piece of legislation – Clean Energy and Green Jobs legislation (HB 80 and SB 92) — seeks to extend the AEPS to 2024, while increasing the Tier I requirement from 8% to 15%, including 3% from solar power. Those in favor of such legislation recently published a study by Black & Veatch. The study concludes that the pending legislation “will lead to nearly 130,000 new jobs and save between $1.9 and $4.6 billion for Pennsylvania consumers.”

Update March 26, 2010: It looks as if some others at Penn State think the Pennsylvania Electricity Market is an interesting research setting too.

In “Off to the Races,” New York Times columnist Thomas Friedman contrasts “two basic strategies for dealing with climate change.”

The Earth Day strategy is epitomized by a series of eponymous events as well as other summits, such as Copenhagen. “The Earth Day strategy said that the biggest threat to mankind is climate change, and we as a global community have to hold hands and attack this problem with a collective global mechanism for codifying and verifying everyone’s carbon-dioxide emissions and reductions…”

However, Friedman questions the viability of the Earth Day strategy. “[A]nyone who watched the chaotic way [the Copenhagen] conference was ‘organized,’ and the bickering by delegates with which it finished, has to ask whether this 17-year U.N. process to build a global framework to roll back global warming is broken.” Thus, while agreeing that the Earth Day process has not been “a waste,” Friedman dubs himself “an Earth Race guy.”

The Earth Race strategy considers “averting catastrophic climate change [to be] a huge scale issue. The only engine big enough to impact Mother Nature is Father Greed: the Market. Only a market, shaped by regulations and incentives to stimulate massive innovation in clean, emission-free power sources can make a dent in global warming.”

This Earth Day versus Earth Race logic leads Friedman to conclude that priority one is “getting the U.S. Senate to pass an energy bill, with a long-term price on carbon that will really stimulate America to become the world leader in clean-tech.”

==========

If you believe that CO2 is an externality (and most people now do), then removing uncertainty through regulation seems to be important step. Until CO2 emissions (and its “equivalents”) have a price, there is little incentive for internalizing such costs. But I fail to see how such a policy is the exclusive domain of an Earth Race strategy. It seems that regulating carbon is also a logical conclusion of an Earth Day strategy.

Moreover, despite potentially agreeing with his conclusion, I am not sure about Friedman’s logic. For one, the either/or dichotomy implicit in Friedman’s article ignores the potential interdependencies between an Earth Day strategy and an Earth Race strategy. If anything, I suspect the Earth Race strategy is best understood as an emergent response to the growing prominence (political and otherwise) of the Earth Day strategy. Having said that, I would not go so far as to suggest that an Earth Race was either an inevitable response or even the only possible response to the Earth Day strategy. Further, it is difficult to imagine the Earth Race strategy having any traction were it not for the forty years of effort put into the Earth Day strategy. In fact, it is not entirely clear that the Earth Race strategy has sufficient traction to sustain itself.

Additionally, it is ironic that Friedman’s proposed solution — “the Market” — is only viable when “shaped by regulations and incentives.” I am not troubled by these conditions. If anything, I see them as acknowledgment(whether intended or not) that markets are social constructions. As a result, markets are not inherently capable of solving social problems. “Greed is good” (or bad) only if and when human institutions make it so. “Successful” markets require every bit as much explanation as market failures. However, if Friedman’s conditions are also intended to signal the possibility of intentionally designing a “perfect” (i.e., rational) carbon market, then we should be concerned. As social constructions markets are not inherently rational.

Finally, my biggest concern involves Friedman’s comparison between the Earth Race strategy and the Space Race, in which “two countries competed” to “be the first to put a man on the moon.” While a potentially interesting analogy, apart from sharing the word “race” it is unclear to me what the two scenarios have in common. In particular, it is not clear how (if at all) market dynamics played a role in the space race — either in the United States or (especially) in the Soviet Union.  Instead, if there is a parallel between the space race and climate change, it seems to me the lesson is that creating public goods may require massive government investments in technologies, and protection from market dynamics.

In short, I find Friedman’s latest article thought provoking. His contrast between Earth Day and Earth Race strategies provides a compact way of thinking about alternative approaches to a complex problem. And yet, while inclined to support his conclusion that we need a carbon market, if anything, such a policy seems entirely inconsistent with the lessons of the space race. It would not be inaccurate to describe the space race as dependent on a singular enemy, driven by an appeal to nationalistic fervor, and indebted to massive governmental investments in the industrial-military complex.

In other words, if Friedman is right, if what we need is an Earth Race strategy, and if the Earth Race is like the Space Race, then it seems the last thing we need is a carbon market. Instead, what we need is an enemy, more nationalism and massive spending. However, in the case of climate change, the problem is that we have seen the enemy. The enemy is us. “Them” in this case is “Us.” Pushed in this direction, an Earth Race strategy suggests annihilation is victory. If that is the case, there can be no winner in the Earth Race. Thus, I am inclined to think that solving climate change is probably not at all like putting a man on the moon. And considering the moon walk remains an enigma, perhaps that’s not such a bad thing.

But then, to what shall we liken climate change?