Page 45 - Sustainable Cities and Communities Design Handbook

22 Sustainable Cities and Communities Design Handbook

parties may have been less than fully honest and cooperative, the process was
designed with only one premisedthat the consumer would be indifferent to
the fact that power was generated by QFs and that this rate would be set to
match the utilities’ avoided cost (Summerton and Bradshaw, 1991).
These contracts were not just created in a political process, they were based
on utility provided numbers reflecting what the utility would have spent if it
had gone ahead and built another plantdin this case a gas-fired steam plant
that was the best technology at the time. Parenthetically, the problem with QF
contracts came with technologies where there were no direct comparable fuel
costs, such as wind, and so the contract negotiators took estimates for future
oil and gas costs as a basisdbut they made a mistake and calculated these
costs way too high.
The real issue was not with the concept of avoided cost. Another problem
came in that neither the regulators nor utilities accurately estimated the
amount of interest by independent producers, which turned out to be much
more than expected. No cap or recalculation was included in the rate design to
be instituted after a certain amount of power was contracted.
The problem from an economist’s point of view is that the system is
regulated to achieve political goals, and the inclusion of these political goals
into the rate system leads to inefficiencies that the market is supposed to
correct. There are two sides to this argument. First, the regulated system is not
perfect, and as Joskow points out, it can do better without being thrown out.
Mistakes are made in the regulatory process, and neither party built in
adequate protection in case the policy did not work out as well as desired. Two
redundant voices in planning seem to be better than one, and the benefits of the
public input are not balanced against the losses.
The other side of this issue is that in the interest of the public good many of
the values the economists define as political interference need to be included
by regulation or else they would not be included at all. For example, increasing
reliance on renewable sources of energy is a social value that would probably
not be realized under pure market forces. Yet the development of adequate
renewable industry is essential for reducing greenhouse gases, for promoting
the technological innovation in solar and wind that will arguably be the
technologies for the future. The capital-intensive nature of the electricity
industry means that long-term industrial values need to be introduced by
regulation rather than the market, and it is good for the whole industry in the
long run to enforce change. The economists miss the value of the latter.

THE ISSUE OF DEREGULATING AGILE ENERGY SYSTEMS

The deregulation structure and mechanisms in California were designed
by generally well-meaning people. Most of the government officials and
industry leaders who made decisions leading to the California crisis were not
personally incompetent, malicious, or corrupt, but they simply designed a