CAEM's Fifth Anniversary

Speech in PDF Format (36k)

The past five years have been a most remarkable period in the domestic energy industry. The initiative to create a new entity to address energy issues during the beginning of this remarkable period five years ago came from Ken Malloy. Already a nationally recognized public policy “entrepreneur” Ken’s immediate past experience coordinating national and international energy dialogues for the Department of Energy lead him to conclude that a new national policy catalyst would be beneficial to the energy debate.

In the spirit of “truth in packaging” Ken Malloy put the mission of the new organization directly into its name, leaving no confusion as to its direction, intent or objectives. Thus was formed The Center for the Advancement of Energy Markets (CAEM). As it celebrates its fifth anniversary it is a good time to reflect on whether the celebrant has lived up to its name. Ladies and Gentlemen, has the Center for the Advancement of Energy Markets lived up to the goals of its founder and the expectations of its supporters?

The Goal is the Name

CAEM was founded during a period when the words “deregulation,” “restructuring,” and unbundling entered the electric and natural gas industry energy vocabulary. By 1999 the natural gas industry had been experiencing the benefits of the “restructuring” of the gas pipeline industry by the Federal Energy Regulatory Commission. About this same time the “gas bubble”, created after the deregulation of wellhead gas by the US Congress, was disappearing. Some states introduced retail access or “deregulation” to allow consumers direct access to competitive natural gas suppliers.

The wholesale electric power market grew in dramatic fashion following a series of state decisions to rely on wholesale markets, rather than construction by incumbent electric power companies, to meet new capacity requirements. These newly created or greatly expanded wholesale power markets experienced booms and busts in some regions. The retail electric power sector reflected success and failures of state designed programs resulting from their initiatives to restructure their electric power industries by mandating retail access.

During this first five years the failure of the California electric power wholesale and retail experiment loomed largest over the industry. Some observers tried to extrapolate the “lessons of California” to that of a certainty that electric power markets could never work satisfactorily. We at the CAEM preferred to conclude that the California experience merely proved that “badly designed markets work badly” and nothing more than that. Given the division of regulatory authority between the states and federal government in both electric and natural gas energy industries, the investigations of any issue had to include both state and federal considerations and aspects.

Thus, five years ago, as California entered a period when wholesale prices would unexpectedly rise, testing its market and regulatory model, and as the independent power sector found its assumptions about future profitability seriously challenged, CAEM stepped into the public policy spotlight. It was also early in its founding that Ken Malloy found in Jamie Wimberly, an experienced policy analyst and observer, a partner to share the management burdens of the newly formed CAEM as its president.

The Functions of a “Center”

The choice of the term “center” was Ken’s in consultation with many others. His vision was to create a place where the various and numerous interests could come together to discuss critical energy issues. As an experienced public utility regulator at both the state and federal level and a utility attorney and consultant, Ken recognized that both the initial board of directors and the participants in the CAEM’s activities had to represent all the stakeholders. CAEM’s programs have therefore been open to and included representatives from regulatory and legislative branches of state and federal governments, the private and public sectors energy providers all along the value chain, academicians, experts from other non-profit research institutes, state ratepayer advocates, energy equipment and technology providers and representatives of the various supporting professions of engineering, accounting and law. The CAEM has also served as both a virtual and physical center by providing the venues for dialogues, presentations, workshops and targeted subject specific research projects.

The Notion of “Advancement”

The goal of the CAEM has always been more that just the study of markets in the energy industry. The goal has also included the objective of providing the intellectual support to advance markets where such support was justified. To “advance” markets required first knowledge of where markets were at that point in time five years ago. While there were some summary tables, charts and maps showing where “restructuring” had occurred state by state the information readily available did not provide sufficient detail to accurately depict the diverse scenarios and forms of restructuring within the United States. To fill this information void one of the first major CAEM projects was the creation of CAEM’s “Retail Energy Deregulation Index”, now commonly referred to as the “RED Index.” Expanded to include Canada, Great Britain, Australia, and New Zealand, this effort produced a very usable report and created the ability to actually assess how each market was structured and where these newly deregulated markets stood on the spectrum of partial to full competition. The RED Index was but one manifestation of the CAEM’s advancement goal to “chronicle and understand changes in domestic and global energy markets.” By itself the RED Index demonstrates that CAEM has achieved its goal of “advancement” of energy markets.

The Necessity of “Energy”

Energy is vital to life. The CAEM is about energy. The link between increasing energy consumption and improvements in the human condition is still there. One third of the world’s population is fully served with energy in the form of adequate electricity. Another third has inadequate electric service. And one third of humanity, two billion people, still has no electric service at all.

We live in the part of the world that has adequate service. We seek a future where this energy service continues to be adequately provided in ever more efficient, less environmentally intrusive and more socially acceptable ways. At CAEM there is also the belief that as the developed world engages markets to deliver this superior brand of energy the lessons will both apply and spur the introduction of a viable electric and gas infrastructure to the under developed parts of our globe. The CAEM has among its goals to “develop consensus on mission-critical issues relating to the success of energy restructuring.” It is also to be assumed that these mission critical issues, when solved, will also advance the construction of energy infrastructure where it is most needed around the world.

The past five years have also reminded us of the inherent complexity and vulnerability of the electric infrastructure in the developed world with almost contemporaneous blackouts in the US, Canada, England and France. In the US the causes were found to be attributable to lack of 19th century skills of tree trimming, training and communications among system operators and not to any introduction of competition in wholesale markets. While the blackouts were caused at the transmission level the reliability of service at distribution is also a major concern. One of CAEM’s recent programs addressed the issue of quality of service in energy delivery in the form of a Customer Care Survey looking at current and future customer service quality issues to insure that the restructuring of markets results in superior and not inferior service quality.

The Appeal of “Markets”

The CAEM has sought to “expound a market-oriented vision for energy.” The appeal of markets is that market-driven solutions have been proven to be superior to government mandates. The opposition posed arguments that at retail “electricity” or “natural gas” were too complicated for consumers to understand either as commodities or services. That was hard to accept as these were the same consumers who made daily decisions concerning complicated issues of life insurance and casualty insurance purchases, mortgages, buying or leasing decisions in automobile financing, credit card repayments decisions etc. Yes, there have been places and circumstances where markets, as designed, may have failed. But these failures have been well documented to be failures of design and regulation of markets rather than in the notion of markets themselves.

The year 1999 was also notable in the energy industry outside of the United States as well. It was in 1999 that the European Union made its bold move to allow large industrial customers choice of electric suppliers. During this period when America has struggled with the creation of wholesale and retail energy markets the countries of the Europe Union have made steady progress towards a single goal. This July 1st almost two thirds of Europe’s customers have, in theory, retail access. The EU’s goal is open access for all consumers in Europe by 2007. CAEM programs have noted this policy success in the “Old World” with a mixture of admiration and wonder. In my opinion the lack of attention over here to Europe’s success has been both notable and regrettable.

Recognizing this, CAEM has organized programs, seminars and studies designed to evaluate where markets are, where they should be and how to get there. The RED Index has been expanded to cover foreign countries. During the past five years, the CAEM has looked at the affects of markets throughout the value chain. One example of this concern has been the creation of a national forum on the future of the electric and distribution utilities under restructuring scenarios. Called the “Disco of the Future Study,” this effort brought together over sixty experts representing all the various stakeholders to identify issues and business models most compatible with a successful energy future market structure. The CAEM also looked at issues concerning the imperfections in retail markets with the establishment of the “Default Forum” to address the issues of “provider of last resort” when markets do not turn out as optimistically expected.

Reaching the Goal: Informing the Policymakers

The five year mark in the life of the CAEM has now come and will quickly go. A lot of people wondered in 1999 whether we needed a think tank devoted exclusively to energy competition issues. I thought so then and I think so now. Events of the last 5 years have certainly vindicated the original vision we had for CAEM. I am proud to have been part of the group that had the boldness to have ignored conventional wisdom and taken the road less traveled. The desire for affordable, convenient, adequate and environmentally sustainable energy is universal. The engagement of market forces, where possible, will help us all attain that goal.