Energy costs and energy markets [The Price of Power studio session]

Transcript: Energy costs and markets

In capitalist economies, market behaviors -- what producers are willing to produce for a desired profit and what consumers are willing and able to pay for those products -- help determine many of the energy options available to us.

These are selections from the whole transcript. Some comments will also occur on other themed pages because they cover more than one topic.

Jim McClure: Well, right now we have a tremendous demand for natural gas because it was relatively low priced, relatively abundant and relatively friendly to the environment and so the, the demand for natural gas went up very rapidly and now we're bumping against the ceiling of availability at prices we're willing to pay at the current market price.
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Jude Noland: And we also saw a tremendous leaps in efficiency in terms of gas turbine technology where they were must more efficient and they were also developed in to be much less polluting and so it was a to a large extent a win/win situation. The problem is that with everybody putting their eggs in that basket we had price, pressure on the price of natural gas and it starts to become expensive.
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Ralph Cavanagh: Well there's a, we run a risk here, which with Peter Johnson in the room I can't let us run here, because I remember some things he did. If we distinguish sharply, if we say, well we talk, first we'll talk about how we produce it and then we'll talk about how we use it, as if those were completely independent, and it was Senator McClure I think who had a hand in the first legislation in the United States that said we are going to treat energy efficiency -- ways of getting more work out of less energy -- as a resource equivalent to production, and we're going, we're going to weigh them against each other and we're going to pick the best buys first. Peter of course you had to do it for the first time. And I just got to say we cannot talk about electric generation in isolation from decisions about use; we ought to be looking at them together. And the philosophy of the northwest and the legislation Senator McClure got through in 1980. I think it came down to a fundamental philosophy of let's just buy only what we need, pick the best buys first, treat energy efficiency options on equal terms with generation, and, you know, the leading resource developed in the Pacific Northwest over the past 25 years wasn't gas, wasn't coal, wasn't nuclear. It was energy efficiency.
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Ralph Cavanagh: Uh and so let's just keep that on the table, continue to look for the best buys, my optimistic view of this is that, that in fact we have a lot more options on the table than we had 20 years ago when Peter started this out. And we have them for both transmission and for energy production. And I just want to say one of the things Bonneville's doing that I think is great with transmission, putting all the options on the table. It's not, not viewing new transmissions lines, Jude, you wrote the story about this. Not saying that the only way to solve a transmission problem is a new line, there's a host of technology options; let's pick the best buys first.
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Corbin McNeill: But the, the reality is, is that we are going to have to produce more energy in a growing economic environment and clearly we have to balance environmental concerns with price concerns, with other social aspects that we have. If energy prices continue to rise as the Senator has indicated then in fact we're going to have to subsidize some people of low income in order to provide them the same quality of living that everybody else has. And while conservation can in fact and should be a part, green power should be a part, we need a diversity of energy sources that meet environmental concerns, that meet national security concerns, which may not be a regional problem here, but clearly a national energy policy is one thing that national politicians have to concern themselves with and we must have economic, a system that supports the economic advantage that the United States has in the world environment because we have low energy costs and its one of our competitive advantages in the world economy.
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Jim McClure: Let me inject one other little note in, in this question of whether we have enough energy and whether it's important for us to have enough energy. Back at the time we were having energy shortages in this county and they were having severe consequences I remember when President Carter declared war on energy and then he surrendered in the same statement, but it's the first time I ever heard a president declare war and surrender at the same time because he said we can't do it, we can't get enough energy. Well that I rejected that view then and I reject it now I think we have to measure the tradeoffs and make some hard decisions and the public ought to be informed about what the tradeoffs are and what the costs are so they can make informed decisions. But I remember very distinctly I'll paraphrase this because I can't remember it, can't quote it accurately, but the statement came from the NAACP they said we have learned by bitter experience that we can't get more for our people by taking it away from someone else. We're going to have to get more if we're going to share in the fruits of this great country of ours. We'll have to get more, but we'll have to get it out of more not by taking it away from someone else. And therefore we must have an energy policy that gives us adequate supply so even the most depressed of people. The people at the lower ends of our economic stock and social strata can share in the dream of this country. Now I thought that was a profound statement at the time that it was made and I think its adequate as a part of our discussion of why it is that energy policy must provide a, a sufficient supply for all our people.
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Jude Noland: Well I think that also reinforces what we're also saying about the importance energy efficiency because if you do the right kind of weatherization and build housing stack to super efficient standards those folks at the lower end of the economic spectrum will be spending a lot less of their money on energy because it won't cost as much to run their household.
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Jim McClure: Well, but Jude, there's another one of those tradeoffs because it costs money to do those things. So you put money into the housing stock instead of the into the energy that's consumed -- that's one, one of the problems I had with the Seattle Master Builders program; they wanted to force economic energy efficiency into the building standards, but they didn't want to measure the economic tradeoffs that were involved.
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Ralph Cavanagh: But of course the solution to that is your own Northwest Power bill, which requires that the cost of the conservation be compared to the savings delivered.
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Corbin McNeill: To some extent it is, but it's both a supply and demand supportive bill; there's energy, or let's say it is more probably more production than it is a conservation bill, but there is conservation elements to it and there are renewable energy investments in that bill. But again I think while Peter is right I you know there the Pew Trust in Philadelphia has recently come out with a program that says that many of these programs that environmentalists would like to portray as coming to the fore in the next 20 years don't have as much of a chance of coming to fruition as the environmentalists would have liked to have portrayed them to do. And I would offer that we have had while we have not had, we've had attempts at demand side management, but they have not been overly successful and in part it goes back to what Jude has basically said is individuals find it difficult to try and manage their choices on fractional tenths of a cents differences in energy that they don't see. This is a macro policy problem its one that Ralph is very familiar with because it, this is the sum of millions of people doing business with incremental savings to them and individuals don't get overly concerned about the incremental savings. So you have to have broad policy issues of, of conservation you know better building standards and things of that nature, but to spite all of that and there's been a lot of it and, and in one of the pieces that we saw earlier it talked about cutting consumption from 3% growth to 1 to 1 1/2 % growth. A lot of that did come through some of the conservation measures that we have taken over the years.
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Jim McClure: But you've touched on something that I have to return to for a moment. There has to be an incentive whether it's a base load or a transmission system or an individual consumer there has to be an incentive of some kind. It doesn't have to be economic, but the ones that seem to work best seem to be economic. So there has to be a reason why people do these things in order to affect their own bottom-line whether it's a homeowner or a business or a base load provider or the transmission system. And we ought to be spending more time trying to find the ways in which we structure the, the systems that we all use in order to make sure that the people who have to make investments or pay bills have an incentive to do it in the way that's most constructive for our society.
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Ralph Cavanagh: I, I'm just reminded I always, nuclear power is fortunate in its champions and it has many and they're eloquent and effective. In the end you don't want the enthusiasts making the decisions on any of this it seems to me. What you want is a hard-headed process that looks at all the options and picks the best buys first and what I've got to say for me what's, what's at least eloquent in terms of the record of nuclear is that the region of the country with probably the strongest nuclear culture and the strongest nuclear technology culture. The region of the country with the most rigorous system for picking winners and losing on the merits over the last 25 years has . . . nuclear plants, and that's the Pacific Northwest. That could change if the technology gets much better, if it gets faster, if it gets more nimble, if it solves some of these problems and I don't want to rule out the possibility that any of these technologies could break through, but let's stay, let's make sure we have an honest way of picking on the merits, let's make sure we have Peter Johnson's calling the shots at the end of the day who have to look at, I mean and Peter you had to make some of the toughest choices in the history of the nuclear industry.
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Peter Johnson: The cost of these plants as were out of control they were just going to the point where they were going to literally sink this federal agency and so I had to act it was a fiscally driven decision rather than a technology driven decision, but I'm going to come back and ask you're right in the middle of the INEEL program looking at new potential nuclear options. I can remember there was a 1,000 megawatt unit that was twinned in order to get construction you know advantages of scale then I served on the committee of the National Academy of Sciences looking into the future of nuclear power in 1990, 93 and we came up with a 500 megawatt light water reactor with passive safety features. It was going to have passive methods by which it would you know turn itself down in the event of an incident. Then I read here just recently where the Nuclear Energy Institute is recommending in this new energy bill 1,000 megawatt plants, again apparently twinned and it's going to require federal financing to get 'em going. So here we. And then in the meantime there's been some fluidized bed techniques or technologies and now we're talking about gas cooled if I understand correctly. Why, tell us why can we feel better about the science behind nuclear today then we could earlier?
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Corbin McNeill: I argue that you don't need to do it, you need to have an economic design that a somebody's willing to invest in. The public, public, my argument is, is that public confidence will be built over a period of time by the successful operation of current plants, by the licensing of Yucca Mountain, and then 50 years from now from the potential non-proliferation resistant reprocessing of fuel.
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Ralph Cavanagh: Well, see I think this is, this is precisely the wrong way to look at it because then you have quotas for everybody, like in the relative level of enthusiasm and political clout and I still think we are best off if we have an honest process that has all of us theologians in there. I'm going to push for all efficiency and Corbin is going to be in there with every nuclear plant he can muster. But Peter is right there isn't, the fundamental problem is one of economic scarcity, and my biggest concern right now is the, the institutions that are most important in making these decision are our utilities. We haven't talked enough about them. Because they have one fundamental problem if you want to take Peter's advice that efficiency and demand side solutions are the best it is a problem as Corbin mentioned that most utilities profits are tied to increasing sales. The good news is we know how to fix that. Like you know Oregon pioneered rate reforms that break the link between utilities profits and the amount of electricity and natural gas they sell. The problem is those reforms have not been executed across the west and in fact virtually every utility in the west now has its profits tied directly to increases in the use of gas and electricity and that throttles investment inefficiency in demand side. The most important message for me to leave with folks is we know how to fix that problem, it is not inherent in the utility business. There are utilities that have solved that problem and become international leaders in energy efficiency and an overriding priority for the west right now ought to be solving that problem so the financial interests of the utility system are aligned with the interests of their customers in greater efficiency.
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Corbin McNeill: The I'm going to disagree with Peter here and because its related to Ralph's thing. Its not clear to me that deregulation has been a failure all right. Now I come from the east where there are a number of successful implementations of deregulation. It has I will say that it has removed, it has shifted the economics of the system from individual decision making rather than top down planning. The utility industry was prior to this and in many cases still remains one of implementers of public policy. Now you can debate whether that's right or wrong and there will be some people that will debate that it is not, it is wrong because it shifts issues from a economic determination to a political determination and that's shown through the subsidization, the taxes and things of that nature that go on and thee are many people in this country that are not for that kind of implementation. If Peter, or excuse me Ralph.
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Corbin McNeill: If Ralphs premise were fully implemented -- that we had winners and losers based upon economic determination without subsidization -- I, I have no difficulty with that at all. But I have not seen that in implementation to date. That doesn't mean its not feasible to do it, but I just don't think that it has, it has succeeded to date. And there are, I mean there are fundamental underlying beliefs in this country that object to that kind of way of doing things and right or wrong and I happen to believe that we are relatively well-centered so that we swing back and forth in small increments rather than going back and forth in, in very destructive kinds of changes in what we go on. So I, I think the tension is right just that I fall on one side of the line and I think Ralph falls on the other side of the line.
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Jim McClure: Here I am sitting on Peter's right, but I'm going to disagree with him a little bit on what we can afford to do. And I'll put it a little bit on the other side of things. What, how can we afford not to meet this challenge? I participated several years ago in an energy forum in Atlanta sponsored by former President Carter. And we it was after the Kuwait, Desert Storm original battle in Kuwait when we threw Sadam out of Kuwait. And we went around the room at the end of that discussion and then the when Jimmy Carter said now how many people in this room believe that the war was all about oil and everybody in the room except myself said yes it was all about oil. Well without quarreling with that for a moment how much did we spend if indeed that was all about oil. How much did we spend on the military adventure, how much do we spend on a military posture, how much do we spend on the indirect costs to our economy because we didn't have an energy policy that avoided that impact from that section of the world. So I don't think we can afford to look at, at it from the standpoint of just it costs X number of dollars and we're operating in the red today because we're operating in the red today for two reasons. One is economic downturn and the others military expenditures. Both of which are driven by energy policy.
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Jim McClure: You asked a moment ago about what mistakes can we make in this field and what, what shouldn't we do. And we touched on this a little earlier, but I want to return to it because I think its fundamentally important. If you expect find answers don't expect the utility industry by itself to find all the answers. On the other hand don't expect the government by itself to find all the answers either. I think its going to take a partnership between all of the parties that are involved each one doing their part of it. Don't expect utilities to do what they will not do. Don't expect the government to do what it cannot do.
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Mark Maher: We see that struggle today in generators wanting to site their power plants and then want Bonneville and in my case to take the business risk and build transmission without a commitment of funds upfront or a long-term contract and so we don't have the money as, as Peter mentioned earlier. Government funding is going down and our borrowing authority ability is capped and limited and so our resources, transmission systems a capital sink, it takes a lot of capital to keep that running and maintained and to do expansions takes large amounts of capital. We don't have that and so we're looking for generators who want a site to front that. They don't have the funds to do that now and so we're, we're seeing a real lull in, in development.
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Jim McClure: Well, there was one way to get more capital available and that is to have a regulatory climate in which there is predictability so that people who want to make the investment can make the investment with the assuredy that they will get a return on their investment.
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Corbin McNeill: And in fact you have private transmission companies now who may be willing to step in and do some of that; in fact the bypass on the Path-15 in California was in fact done in that manner.
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Ralph Cavanagh: This is it seems to me fundamentally is I happen to agree with Senator McClure on this point you have got to have a utility sector that can invest based on reasonable assurance about who its customers are and where the money will come from. A fundamental premise of Northeast style electric restriction Corbin as you well know is that all of that certainty is stripped away. The utility is denied its ability to serve as an investor on behalf of its customers and you basically rely on the spot market and entrepreneurs coming into the spot market and that I would submit hasn't worked very well. That is sure, in the short-term you can get some price reductions as the existing assets are shuffled around, but if you want long-term investment in the kind of infrastructure we're all talking about, demand or supply side there has to be a portfolio manager, a utility with the capacity to look along the arm, weigh the options against each other and pick the best buys. Without that we have chaos and we sure got that in the West in 2000 and 2001.
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Mark Maher: There was chaos when the price in power in California was up. We had 50 applications for combustion turbines that wanted to connect with our system and get into that gold rush in California, and they almost all have disappeared and so it, it's, it created a fits and starts environment.
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Jim McClure: I would submit that it was the wrong answer for whatever problem existed. There were some problems. Deregulations not the total reason for California market cratering the way it did; it was a regulatory climate that preceded that, that prohibited investment.
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Jude Noland: But part of the, part of the issue was there were a lot of people who believed that they could make a lot of money if the utility industry were deregulated and, and a lot of people did make a lot of money and then of course that money went away for a lot of those people, such as Enron, but, but regardless that was a big part of the incentive was if we open this market up to deregulation and prices are based on the market that's great because then you know if, if power's in short supply its going to be more expensive and so we can build new plants and make a lot of money building. . . plants.
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Corbin McNeill: I will tell you that the consumer in Great Britain under similar circumstances has incurred a windfall in lower prices in their market.
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Jude Noland: I'm not sure if that's necessarily totally true.
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Corbin McNeill: Well, at least in the last four years they have.
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Ralph Cavanagh: But it's called . . . to the west. I think what it comes down to here, I doubt you disagree with this, in the west right now for better or worse the investment decisions we're talking about are by in large going to have to be utility decisions. The old, the high-flying entrepreneurs who were going to come in and take over for the utilities are either gone or bankrupt.
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Ralph Cavanagh: Or dependent on utility contracts to do anything and so I think as, as the public tries to sort out how is this going to play out, what's going to happen the big utilities of the west -- the Idaho Powers, the PacificCorps', Pacific Gas and Electric when it emerges from bankruptcy in the wreckage of the California restructuring -- what decisions they make, what incentives they face and how they figure out to bring their customers into some of this, that's why this is really going to play out and happily everybody has a hometown utility and sometimes the hometown utility's policies are a whole lot easier to influence as you know Senator then a distant capitals on the east coast. And I think all of us would encourage folks who care about these issues to learn more about what the local utility's doing, what is it investing in energy efficiency, what efforts is it making to tap into those opportunities that Peter Johnson identified. What renewable energy options is it seeking. What's its long-term perspective on nuclear and fossil? These issues are being played out in every hometown utility in the west and that's where the real action will be for the foreseeable future on all of this.
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Ralph Cavanagh: About which and we've been talking as much about opportunities as threats around this table and let's be clear there's a lot we need to do to capture the economic and environmental benefits that we've all been discussing. Let's not worry about the rapacious northeasterners taking away, let's worry about our failure to get what's within our own region and available to us.
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Corbin McNeill: Yeah my view is that each of these and this would be supportive of, of Ralph and that each of these issues needs to be addressed under the circumstances of you've got to restore the place to its natural habitat. That then incurs a cost that begins to find the right economic source. I, my view is that what many people call externalities right whether it's CO2 emission into the air we don't have ways to value those to charge the cost to the person that utilizes them and it is the inability to do that in my opinion and, and to have a definition that, that goes out 30 or 40 years in time that really causes us to have these just arguments about cost versus environmental impact and things of that nature. For instance if you were to say, All right, all those places have to be restored like you know in I think coal mining regions in the midwest when they have a pit mine they've got to restore it back to something similar to what it was.
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Corbin McNeill: Yeah and, and if we could do that in what we have going forward then we begin to achieve what I think are the right economic decision criteria that I would be confident in which I'm not confident in today as to what is the right portfolio choice.
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Jim McClure: Having been at the focal point of a lot of those environmental debates -- they are highly valued by a lot of people, and there isn't an acre out there anywhere that isn't highly valued by some, somebody who's going to contend for their protection and for their use in the way they define the use. But I do agree with you that we need to find a, a much, much better way to internalize cost.
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Corbin McNeill: And you were beginning to do that in terms of forests and . . .
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Jim McClure: I wish we did it across the board much better and I agree with with Peter that I'm glad we have those environmental policies in place, I think that they've in some instances overrun their objectives and we need to balance that dialogue better and make it just better decision-making process, but nevertheless we're there and I'm glad we're there. There are a couple of areas we haven't touched on Joan one is where do we go. We talked mostly about electricity -- maybe its because of this light bulb out.
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Jim McClure: Yeah but there are other things, we touched a little bit I'm very, very strong in the future of hydrogen technology. And I think we will have a hydrogen economy sometime in the future. We'll depend a great deal upon electricity in order to do that however. I think fuel cells have a, a great promise, but they also have an energy feed stop that you've got to find and utilize so it, those are not total, total answers, but I look at the conservation ethic and we've gone through a great deal of that and yet I just picked up a, a magazine published in August of this year General Motors has now developed a 1,000 hp engine for an automobile. Isn't that great? I look at.
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Jim McClure: Well, we've talked mostly about electricity today because it, it is the energy's, it is the form of energy chosen most by people today in business or individual homes except for transportation and that's where hydrogen comes in because it becomes a transportation fuel as your fossil, liquid fossil fuels are and something we badly need. But electrical energy is the energy of choice today and that's why we're looking mostly at how, how you produce and distribute and price the availability of electrical energy.
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