Tag Archives: James A. Bacon

The Market Path to Green Energy

jesse_morris

Jesse Morris with the Rocky Mountain Institute shows off the headquarters building’s rack of batteries. By storing electricity and drawing upon it at optimum times, RMI qualifies for advantageous rates from its electric co-op.

Economic forces increasingly favor wind and solar. Creating the right regulatory incentives could accelerate the adoption of renewables, says the Rocky Mountain Institute. 

by James A. Bacon

Consolidated Edison, the utility that provides New York City’s electricity, confronted a challenge in the summer of 2014. Forecasts showed that demand for electricity in parts of Brooklyn and Queens would overload the company’s electric grid by 69 megawatts on the hottest summer days by 2018. The traditional solution would have been to build a sub-station at a cost of $1.2 billion.

Wondering if there might be a better way, Con Ed solicited ideas for alternative solutions. So far, it has gotten 80 suggestions. Some were so good that the company plans to employ a portfolio of techniques — mainly energy-efficiency measures, fuel cells and neighborhood-scale solar — to shave off 52 megawatts at a cost of only $200 million, according to Inside Climate News.

Although 2018 is still two years away, early indications are positive. The so-called Brooklyn-Queens Demand Management project is being watched widely as an example of how energy efficiency, solar power, battery storage and other green energy strategies can not only reduce carbon-dioxide emissions but save rate payers money.

That’s just one example of how innovation is blasting apart the traditional electrical utility model, says Jesse Morris, a principal with the Rocky Mountain Institute (RMI), whom I chatted with when I visited Aspen, Colo., earlier this month. (Sad but true, my idea of a vacation includes meeting policy wonks in the places I’m visiting.) RMI bills itself as a market-oriented, environmentalist think tank. Re-conceptualizing the electric grid is one of RMI’s main missions. And Morris is one of RMI’s leading thinkers on the subject.

I wondered if RMI was thinking about things we should be thinking about in Virginia. Meeting me in RMI’s net-zero energy headquarters building in Basalt, Colo., Morris outlined three “big, disruptive trends” he sees transforming the electric grid.

The Internet of Things (IoT). The Internet is permeating everything; every new appliance, device, sensor and actuator is being assigned an IP address, and each device is capable of talking to the others. As a result, businesses can track energy usage with unprecedented precision, generate unprecedented volume of data to analyze, and control systems with unprecedented precision. When millions of thermostats, lighting systems, hot water heaters and other energy-consuming devices are connected, managing the demand side of the electricity system is getting easier and easier.

Declining cost of enabling technologies. The cost of generating solar power and wind power is dropping steadily. Renewables are economically competitive with conventional energy sources in geographic “pockets” around the country, and those pockets are growing. Meanwhile, progress is being made in related technologies such as lithium ion batteries which can store excess electricity production from wind and solar and release the power when needed most. “The cost trajectory of batteries is incredibly promising,” says Morris.

Corporate demand. Many corporations are insisting upon green power. Indeed, environmentally sensitive companies like Amazon Web Services are driving the demand for solar power in Virginia where the company is building many of their energy-intensive data centers. “Last year,” says Morris, “more solar and wind farms in Virginia and North Carolina were deployed by corporations than utilities.”

While the grid of the future isn’t here yet, says Morris, it is coming. At present most experimentation is occurring in places like Hawaii, California and New York where there is a strong commitment to green power and high electric rates make it easier to justify investing in alternative approaches. But change is occurring everywhere. Con Ed’s Brooklyn-Queens project shows that the potential exists to save literally billions of dollars.

The Brooklyn-Queens approach to electricity infrastructure is not pervasive, he says, because state regulations don’t encourage most utilities to think like Con Ed. Power companies make money by building stuff — power stations, transmission lines, sub-stations, distribution lines, and the like — and earning a Return on Equity on their outlay of capital. Approaching a problem as Con Ed did, which saves the expenditure of $1 billion, doesn’t help a traditionally regulated power company grow. Regulators need to change rate structures to incentivize companies to economize like Con Ed. Continue reading

Petersburg’s Other Fiasco

petersburg_city_hall

Petersburg City Hall

by James A. Bacon

Poor Petersburg. The economically depressed Southside city of 32,000 serves as a vivid warning of just about everything that can go wrong for a local government in Virginia. Not only is the city running a massive General Fund budget deficit, it is falling millions of dollars behind in the collection of revenues for its water system.

The heart of the problem is a botched rollout of a meter-reading system that was pitched as a low-risk way for the city to overhaul its aging infrastructure without a tax increase. The city contracted with systems-controls giant Johnson Controls to install meters that would transmit usage figures electronically, obviating the need to send employees door to door to collect the numbers. Supposedly, the overhaul would pay for itself through more accurate readings and personnel reductions.

But something went wrong. First, the $3.9 million project experienced overruns of $1.4 million, bringing the final cost to $5.3 million. Second, it didn’t work properly. A year and a half later, surely enough time to work out the kinks, some people are reporting that they haven’t received water bills for months, while others say they have been billed too often, sometimes to the tune of thousands of dollars.

City officials blame the vendor, Johnson Controls. Yesterday City Council voted to hire an outside attorney to pursue litigation against the company to seek remedy, and has asked for assistance from the Virginia State Police.

While it is possible that Johnson Controls bungled the installation of the meters (Full disclosure: I own 400 shares of Johnson Controls stock), the City of Petersburg’s track record and evidence in the Richmond Times-Dispatch’s reporting of the story suggest that the city itself might have contributed to the problem.

First, the article mentions that more than a fifth of the cost overrun came from a $300,000 change order the year after the contract signed. No mention of whether there might have been other change orders.

Second, the contract was negotiated by then-City Manager William E. Johnson III, under whose watch the city’s General Fund plunged into such chaos that City Council fired him. If his oversight of city books was dismal, the same might well have been true for his oversight of the contract.

Third, it’s not clear from published accounts that the billing problem can even be traced to the meters. Meters report water usage; they do not send out billing statements. Perhaps the billing problem arose from the integration of the meters with the billing process. If so, responsibility gets murky. A successful launch of the system would have required collaboration between Johnson Controls and the city administration.

Fourth, Mayor W. Howard Myers admitted that he and other council members were unaware that the project had experienced cost overruns, or that city administrators had approved Johnson Controls’ work months after the system went live and residents had began complaining about faulty billing. This is the same mayor who declared, after being informed that the city had closed the year with a 20% deficit, “I had no idea. I’m like, wow, where is this coming from?” This is not a mayor who is on top of things, and if he blames the vendor for the mayhem, there is no reason to take his appraisal very seriously.

Fifth, in February, Myers hired Paul Goldman, law partner of former state Del. Joseph Morrissey, to investigate the matter at the rate of $330 per hour. But the city terminated the contract before Goldman could complete his job — more money down the drain. (I would conjecture that Goldman couldn’t finish the job because he found the matter to be an indecipherable morass that would take far more time than anyone had initially imagined.)

The business of government is complicated — and getting ever more so. I admire the everyday citizens who dedicate their time to running for office, helping constituents and overseeing government. They don’t get paid enough for what they do. But many of them, especially in smaller jurisdictions, are ill equipped to master the complexities of the job. Frankly, it’s a wonder we don’t see more fiascos like Petersburg’s.

We Weren’t Hiding Anything, Says UVa’s COO

What would T.J. say?

What would T.J. say?

by James A. Bacon

University of Virginia officials vigorously dispute allegations by members of the General Assembly that the university was less than transparent with its $2.3 billion Strategic Investment Fund, a pot of gold that critics have characterized as a slush fund. Patrick D. Hogan, chief operating officer of the university, supplied records yesterday from a Board of Visitors subcommittee meeting showing that members had discussed using investment earnings to invest in projects approved as part of the long-term plan in 2014.

Said Hogan: “We have absolutely nothing to hide.”

Reports the Daily Progress:

The investment fund originated with more than $1 billion in investment returns that had accumulated between 2009 and 2014. Officials had talked about using this money to pay for some of the projects outlined in UVa’s strategic plan, passed in 2013. The Cornerstone Plan, as it’s called, lays out a broad series of goals, including improvements to UVa’s technological infrastructure and a wave of faculty hires.

The plan — initially priced at $564 million over five years — was not completely funded when it was passed, and there was concern that costs could be passed on in the form of tuition. The idea was to take some of the investment returns that had accumulated over the years and use them to pay for these improvements.

The investment returns were combined with other reserves to create the fund, which could pay out up to $100 million annually, Hogan said.

“We recognized then that the Cornerstone Plan needed long-term support,” he said.

Hogan said the creation of a permanent fund will allow UVa to improve the student experience without passing the cost on to students. This fund will pay for the improvement projects UVa hopes to undertake — hiring new faculty and providing them with research startup money, for example — without straining operating funds.

Bacon’s bottom line: Changes to the fund apparently followed normal bureaucratic procedure, moving quietly through a Board of Trustees subcommittee before surfacing before the full board. I’m prepared to believe that UVa administrators thought they were being transparent. But there was a breakdown somewhere if some board members were caught by surprise and it’s taken this long for UVa to explain in a way that people can understand how the fund came to be. What Hogan did not address in the Daily Progress article was why the board felt compelled to discuss the issue in closed session. Such an action does prompt people to wonder, “What were they hiding?”

At the end of the day, the controversy is over how to use an investment windfall amounting to $100 million a year — whether to invest in initiatives to make UVa a more prestigious institution or to lower costs for Virginia students. Clearly, the administration and a majority of the board favor advancing the university’s institutional interests over its historic mission of providing an affordable, quality education for all Virginians. All the rest is window dressing.

With Health Care Premiums Up 14%, Virginia Should Act

Lasik eye surgery . Eww, it looks gross. But it's cheap, it's safe and it's unregulated and unsubsidized.

Lasik eye surgery . Eww, it looks gross. But it’s cheap, it’s safe and it’s unregulated and unsubsidized.

by James A. Bacon

Insurance companies participating in Virginia’s Affordable Care Act health exchanges are asking to increase rates by an average of 14% next year. In making presentations to the State Corporation Commission yesterday, they said the increases reflect (1) general health care inflation that affects everyone, and (2) and an imbalance in sick versus healthy participants in the plans.

Under state law, the SCC is required to review and approve premium rates for all types of health plans, reports Katie Demeria with the Richmond Times-Dispatch. If an insurance company’s rate filing has met the state’s minimum loss ratio requirements and all assumptions are defensible from an actuarial perspective, it is virtually impossible to turn down the rate-hike request.

“Some of these rate increases are more than what people would want and, in some cases, could be more than what some people would bear,” said Commissioner Mark Christie. “But we also have an obligation to ensure that these companies remain in business so that the can pay the claims they’re obligated to pay by the people who pay their premiums.”

Bacon’s bottom line: There is not much that the Commonwealth can do about the imbalance between sick and healthy participants. The Affordable Care Act (widely known as Obamacare) anticipated the problem by taxing people who fail to enroll. The incentive, as stiff as it is, is not sufficient to induce as many healthy people to enroll as are needed. This design flaw in the federal legislation is beyond the power of Virginia lawmakers to fix.

But the General Assembly does influence how health care markets operate in Virginia, and lawmakers can affect the general cost of delivering health care. Not only do legislators have a political responsibility, they have a moral responsibility to create the conditions for Virginia health care markets to become more affordable and accessible.

Existing state-level laws and regulations muck up the efficient functioning of health care in many ways. First and foremost is the Certificate of Public Need (COPN) law that thwarts competition from newcomers and ossifies the existing delivery system in place. Legislators are on top of that one, and they’re not letting go.

But there are many other areas that need reform. The most glaring is state-mandated benefits for small-group insurance policies. Employers big enough to self-insure can structure their policies packages any way they want. Small employers who have to band together to create a viable risk pool don’t have that option. Insurers must package some 30 state-mandated benefits into their policies, whether those benefits are desired or not. These include everything from “newborn children” to “reconstructive breast surgery” and “colorectal cancer screenings.”

While any one of these benefits may not seem unreasonable in itself, the collective package severely limits the ability of insurers to offer affordable, trimmed-down plans. For example, one plan that I think would sell well (because I would buy it) would have two main features: (1) negotiated rates so I don’t have to pay the outrageous nominal fees that hospitals and doctors charge, and (2) catastrophic coverage if medical bills exceed, say, $20,000 in a year. In other words, I would pay all bills out of pocket up to $20,000 but at negotiated, discounted rates, and I would be protected from catastrophic loss. Such a plan, as I understand it, is illegal. That’s why you cannot find it in the Virginia marketplace.

A third way the state could help is increase price transparency so patients can exert consumer pressure on health providers for discretionary procedures. Consumer pressure has kept down the cost of Lasik eye surgery and cosmetic surgery, which are not regulated or funded by government. Consumers could exert downward pressure on many other procedures as well if they had easy access to the price data.

There’s much more, but those are the big three. As a nation and a state, we can continue to fixate on the zero-sum question of “who pays?” — transferring wealth from Peter to Paul — or the win-win question of how we make the system function better for everyone. The wealth-redistribution approach has not worked well for anyone. It’s time to try win-win.

New Criticisms of UVa Investment Fund

Slush

Slush?

by James A. Bacon

Lawmakers have raised new concerns about a $2.3 billion University of Virginia investment hoard that critics have characterized as a “slush fund.”

The controversial pot of cash was originally labeled as “University Operating Funds.” Then it was marked “Strategic Investment Fund” in a Jan. 31 document — two weeks before the Board of Visitors formally authorized the naming of it as an investment fund, reports the Daily Progress.

“It’s almost like the board is there to rubber-stamp [administrative decisions],” said Sen. William R. DeSteph, R-Virginia Beach.

“In light of this cash reserve, why are we raising student tuition and acting like we’re broke?” asked Sen. J. Chapman Peterson, D-Fairfax City.

The university has designated the fund to recruit new faculty, build new lab space, and provide financial aid to high-achieving students from low-income schools around Virginia in support of its “affordable excellence” program.

The magnitude of the controversy has grown in recent days. DeSteph, Peterson and other legislators also allege that the university gave conflicting reasons for opening up a $300 million line of credit. Summarizes the Daily Progress:

In November, the board gave the administration clearance to take out up to $300 million in operating lines of credit.

According to previous university statements, this cleared the way for the university to transfer $480 million in operating cash to the Strategic Investment Fund — providing it with a boost while keeping UVa’s bond rating strong.

But according to minutes from the November meeting, during which Chief Operating Officer Patrick D. Hogan addressed the board, the purpose of these new lines of credit was to meet different “stress scenarios” facing the university, such as an inability to fund operating expenses or convert assets into cash “without significant losses.”

“The operating lines of credit will be a new source of liquidity and are being considered only as back-up liquidity,” according to a summary of the action item provided to the board in November.

DeSteph said the administration acted inappropriately. It appears administrators told the board — and the public — it would use these lines of credit one way and then decided to use it another way, he said.

“What they told the public was they were going to set up lines of credit and only use them if needed,” DeSteph said. “It looks like they set up the lines of credit and maxed them out.”

The legislators also charged that the Board of Visitors went into closed executive session last month to talk about the fund. “I feel like they’re trying to do as much of their business beyond the public’s eye [as possible],” said Peterson. “A $2 billion cash reserve? How can that not be a public issue?”

In Hampton Roads, Life Is Not a Gas

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Hampton Roads and other Tidewater communities see proposed natural gas pipelines in Virginia as a boon to economic development.

by James A. Bacon

While debate rages in western Virginia over the economic impact of natural gas pipelines on property values and local economies, we hardly hear a peep from the low country areas of Virginia and North Carolina that would benefit from an expanded supply of gas.

Elected officials claim, and economic developers confirm, that inadequate supplies of gas to Hampton Roads and outlying communities prevent them from competing for energy-intensive industrial customers, crimping efforts to grow their economies and create jobs.

“I’ve heard from cities and developers and builders. … We’ve got to get more capacity here,” says Sen. Bill DeSteph, R-Virginia Beach, chair of the Hampton Roads Caucus, who persuaded the region’s 33 state senators and delegates to sign a March letter supporting the proposed Atlantic Coast Pipeline (ACP).

Voices from Hampton Roads and places like Brunswick and Greensville counties, where new gas-fired power plants are being built, have been quiet during the pipeline controversy. The impact of pipeline construction is less tangible and immediate than it is for, say, landowners in the path of the ACP and the proposed Mountain Valley Pipeline. And the benefits are more theoretical — fresh gas supplies would put their communities in the running for manufacturing projects they can’t compete for now, but it’s not as if there’s a big job-creating project waiting in the wings. Natural gas proponents aren’t barraging the media with press releases, filing lawsuits or marching on the state capitol.

Still, economic developers and political leaders have quietly lined up behind pipeline development, especially the Atlantic Coast Pipeline. For DeSteph, the aha! moment occurred about two-and-a-half years ago when demand from a severe cold snap swamped the local gas distributor, Virginia National Gas. The utility had to tell some of its largest customers to curtail their use of the fuel, as called for under contract. “I was shocked that we shut down the gas supply,” says DeSteph. “In my opinion that’s something we should never do.”

While big industrial customers usually can manage such outages, supply curtailments send a signal that gas supplies are limited. No energy-intensive manufacturer would want to locate or expand in Hampton Roads when they could locate worry-free in other communities. Noting that the Norfolk Naval Station was one of the entities that curtailed its gas use, DeSteph even fears that the capped gas supply could undermine the region’s status as a military hub.

The decline in natural gas prices made possible by fracking and the exploitation of the Marcellus/Utica gas fields has driven the re-shoring of energy-intensive manufacturing back to the United States, says Rick Weddle, president of the Hampton Roads Economic Development Partnership. But the areas benefiting from the trend have been those with access to the abundant gas supplies. Hampton Roads isn’t in the running.

The Atlantic Coast Pipeline, designed to carry 1.5 billion cubic feet of gas per day, could change that. The pipeline would run from West Virginia through Virginia to North Carolina. A spur would split off from the main pipeline to deliver gas to Virginia Natural Gas, which has signed a 20-year customer agreement, and whose parent company AGL Resources is one of the partners in the project. The pipeline also would serve Piedmont Natural Gas serving the North Carolina market, which is a partner, too. (Dominion Resources, a sponsor of this blog, is the managing partner.)

A bigger supply of natural gas to the region would expand the prospects that Hampton Roads could compete for. “We would target new industries,” Weddle says.

The same logic applies to smaller communities in eastern Virginia and North Carolina, which also sit at the end of the existing pipeline distribution system.

The big five utilities in the industrial recruitment game are wastewater, electricity, fiber-optic cable and natural gas, says Christopher Chung, CEO of the Economic Development Partnership of North Carolina. “Most companies want gas, whether they’re using it for heating or as part of the manufacturing process. Not one hundred percent need it, but most do. It’s really hard for a community to make the case to recruit a manufacturer if it doesn’t have natural gas. Not impossible. But so many locations do have it that you’re at a major competitive disadvantage if you don’t.” Continue reading

Free the Data!

data

by James A. Bacon

I’m not sure if this idea will lead anywhere but it’s worth a try: The Commonwealth of Virginia has released an open data set of job postings in the state with the hope that someone will come up with innovative ways to use it.

The initiative arises from an executive order by Governor Terry McAuliff establishing the Commonwealth Center for Advanced Research and Statistics that, according to the Washington Business Journal, aims to improve labor market, workforce and education data.

“The data is available, and now we are gearing toward finding ways to make insights,” said Kim McKay, a research and policy analyst at the Council on Virginia’s Future, one of the program’s sponsors. “It’s important to note that this is a early stage pilot program.”

“This is the first time any state has taken online job postings and curated it for public use,” said Aneesh Chopra, co-founder of Arlington-based Hunch Analytics and a former secretary of technology of Virginia. “The governor made the goal to make the labor market work better … and this is a down payment on the idea.”

Chopra hopes that businesses will start finding uses for the data, just as the weather forecasting industry created applications that fed off government-compiled weather data.

Bacon’s bottom line: I’m not smart enough to imagine how the data, comprised of public and private job listings dispersed across multiple job sites, can be used. Maybe someone will come up with a brilliant idea, maybe nothing will come of it. In either case, state government is spending next to nothing to make the data available. It’s worth a try. Perhaps this initiative will lead to the liberation of other data sets and spark the creation of entirely new information products.