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Negawatts -- Enron-Style

Enron owned Portland Gas and Electric in Oregon and had significant operations in California and beyond, so it was easy for them to manipulate the California energy market. All that the traders in Portland had to do was play a shell-game with the energry transfers and collect the fees.
Negawatts -- Enron-Style
Joseph Somsel, EnergyPulse.net, 9.30.03

To paraphrase an infamous Woody Allen quip about casual sex, economics is a social science, but as social sciences go, it's gotta be one of the best. Consider "negawatts" -- a term coined by soft energy path guru Amory Lovins in the 1970's. Its economic logic is difficult to refute. In an increasing marginal cost business such as electricity has been since the first Arab oil crisis in 1972, the next unit of consumption will raise the average cost of a unit. Since all customers share the same utility price structure, it makes some economic sense for EVERY customer to subsidize the NEXT customer to NOT consume. That next meter hookup will just cause everyone's bill to go up.

The contra case would, one might presume, also be true -- in a declining cost business, every customer should subsidize the next new customer. That might have happened back in the Golden Age of electricity when marginal costs were declining. Electric utilities were actively promoting "Gold Medallion" all-electric homes and sold electric appliances from showrooms off their office lobbies. How many PUCs encouraged their utilities to sell electric hot water heaters at a loss is probably a great topic for a doctorate thesis.

Perfect economic logic or not, I've never believed either to be wise public policy. I just couldn't say why. The recent revelations about Enron's "Deathstar" trading gambit in California suddenly made the madness of negawatts perfectly clear.

What, really, is a negawatt? The answer is "nothing," nothing but intent. The problem is that is that there is an infinite supply of nothing and an unrestricted supply of intent. Since negawatts are composed of nothing, then it follows that there is no give-and-take, no accountability. Imagine asking someone "where did you get that nothing?" The answer is that one merely wills a negawatt into being.

What a business! An infinite supply at zero cost where no accountant need ever balance a credit with a debit. Little wonder that Enron found a way to sell negawatts and make it pay. One of their vehicles was the "Death Star" scheme used to great profit during the California electricity crisis. Enron owned Portland Gas and Electric in Oregon and had significant operations in California and beyond. The method was pretty simple -- traders at Portland would schedule in the day-ahead market a big block of energy flow for the next day. They would chose to route the flow over a California transmission line that they could comfortably predict would be overloaded the next day from their intended transaction, say a 1000 megawatts over the Pacific Intertie from COB (California-OregonBorder hub) to the Palo Verde switchyard at the big nuclear power plant near Phoenix. They would also schedule a return flow back from Arizona through Nevada to Portland on lines that where not in California.

The computers of the California Independent System Operator (Cal ISO) would book the transaction as a routine matter. The next day, when the transmission line appeared to be heading for overload, Cal ISO would offer the scheduled users a "congestion revenue" to cancel their shipment. Enron traders would, of course, be waiting and would take Cal ISO's offer of money and cancel their booked power flow. In this case congestion revenue is just a form of transmission negawatt. Since Enron had no real economic motive for the transaction, the cancellation fee was pure gravy, sometimes as much as half a million dollars a day.

So where did the money that Cal ISO paid Enron come from? That's easy -- the poor, dumb ratepayers of California. That reveals another significant feature of negawatts -- only governments are willing to buy them, or more generally, governments have to compel others to pay for them. No one with a lick of sense is going to pay money from their own pocket to someone else for NOT using electricity. It becomes an mandated income transfer, much like taxes that go for farm subsidies or welfare payments -- a little from a lot going to a few. And, given Lovins' logic, we should be happy that government is taking our money since it's in our best interest in the end. And should you refuse to pay, you too will become an involuntary, uncompensated negawatt provider when your meter is yanked and your house goes dark.

Today, some estimate that Lovins' negawatt concept has blossomed into a $5 billion a year "business," not counting Enron's innovations. Its usual form is as electric conservation devices and services provided by local utilities at the direction of government. Replacing your old refrigerator? Get a $25 check if you buy one that meets energy consumption standards whether you needed the extra motivation or not. The fundamental question that arises with government insistence on electricity conservation is, why don't intelligent, presumably rational consumers buy their own voluntarily? One answer might be that Amory Lovins is sooo much smarter than everyone else. (I've heard him speak and he is a very sharp guy so this explanation may have convinced many people.)

A wiser economic explanation is that people and business have better ways to spend their money. A business is run for profit and usually capital is a limiting factor of production. While some conservation projects will pencil out, most will find themselves competing with projects that will produce more profit than conservation will yield in savings. For individuals, economists are finding that a family's discount rate is much higher than they expected. The additional expense of a highly efficient refrigerator might well give a five year payback but baby needs new shoes -- today.

The ultimate answer is that as the master resource, energy is still cheap, even if its marginal cost is increasing, and is still driving our industrial or post-industrial economy. Schemes that supposedly deal with mandatory energy negawatts only distort the overall workings of the free market and pervert the wisdom of millions of people making their own decisions about their own money. As Enron proved, some business people will gladly make a quick buck on someone else's stupidity, especially if it's politicians spending other peoples' money.

Background: Joseph Somsel is a degreed nuclear engineer holding an MBA from California Polytechnic University. He has a broad work background in the nuclear power industry and in the overall electric utility business. This includes experience with architect/engineers, utilities, NSSS suppliers, and consulting firms. Current interests include the business end of electricity. He has also been involved in the entrepreneurial development of niche electrical generating sources in California and Colorado. His electricity went out TWICE during the California energy crisis.

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