A Middle Class Renaissance with a Green New Deal

Oct 13, 2010Jon Rynn

green-jobs-150Thinking outside the box to lower unemployment, boost the middle class and rebuild the country.

green-jobs-150Thinking outside the box to lower unemployment, boost the middle class and rebuild the country.

Currently, there seems to be no consensus on what a progressive candidate should stand for, particularly in terms of the economy. Reregulating the financial system, as important and difficult as it would be to achieve, will not by itself rebuild the middle class. Neither would Medicare for all, as critical as that would be, or ending our wars, or even forcing China to revalue its currency. The rot in the US economy is too great to be healed by simply stopping many of our destructive policies.

It seems to me that the centerpiece of a progressive economic agenda has to be about creating and maintaining jobs: permanent, high-skilled, good-paying jobs. And not just a million jobs here and there, but tens of millions of good jobs, to bring under- and unemployment down, lift the new (and old) poor out of poverty, and retain what remains of the American middle class.
The self-sustaining job creation engine that has propelled growth for the last two centuries is broken. That job engine was fueled by the manufacturing sector. Particularly since the Age of Reagan began, those industries have been out-sourced, and with them, much of the middle class and their jobs. In 2007, manufacturing accounted for 11% of all jobs, whereas in 1970 it accounted for 24%. So the 13% of the jobs that used to be in the factories could easily soak up the 9.6% of the working population that is currently unemployed, as well as about half of the 7% that are “involuntarily” part-time workers.

Each manufacturing job leads to many more service jobs. According to a 2003 report by the Economic Policy Institute, each manufacturing job supports almost three other jobs in the economy. But that also means that the loss of each manufacturing job leads to three others being lost. There is simply no way to turn around the jobs situation without turning around the decline of manufacturing.

So how can we kick start a manufacturing boom? This is where economic logic meets environmental necessity. We need to drastically cut carbon emissions if we are to have any hope of keeping the same planet as the one that civilization developed on. We need to rid ourselves of oil before its coming decline in availability rids us of our ability to transport ourselves or our goods. And how do we reach those goals? By creating a transportation system based on electricity, electricity that is powered by the wind and the sun. Such a system would be centered on electrified passenger and freight trains, with electric cars and transit mainly moving people to and from train stations, within densely populated town and city centers, which will also have to be built or rebuilt.

Reconstructing transportation, energy, and urban infrastructures will more than take up the productive energies of the almost 27 million underemployed and unemployed people. (According to the latest statistics, there are 14.8 million officially unemployed people, plus 9.5 million involuntarily part-time and 2.5 million “marginally attached” -- that is, people who want to work but can't for a longer period of time than the “unemployed”). In fact, these rebuilding projects would probably soak up many of the people employed in the kinds of low-level service jobs that the “post-industrial” economy has been so good at creating.

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These new jobs would involve both constructing the new systems and working in the factories that provide the trains, cars, rails, electric transmission system, wind turbines, solar panels, and many other products that would be needed to put a green transformation in place. A manufacturing renaissance would ensue only if those factories were located in the United States, whether run by foreign or domestic firms. From Alexander Hamilton's advocacy of the protection of “infant industries” to China's meteoric rise, governments have supported industrialization on their own soil, and this transformation must also stay within the US.

A believable explanation of how to restore the US economy would serve as an anchor for a Green New Deal. Progressives could take the offensive instead of falling back on the defense. In fact, we could put the conservatives on the defense. Their version of how the great job creation engine works is based on the fantasy of standing back and letting “the market” do it's magic. We can pray to the gods of the market to somehow come up with tens of millions of jobs, or we can use the government to build badly-needed systems and finance the employment of tens of millions of people. That's not socialism; that's called realism.

A program based on a self-sustaining jobs machine, with manufacturing at its core, would allow progressives to add other planks to the platform in a holistic, integrated, reinforcing way. A public banking system could be used to funnel capital to critical infrastructure projects, such as a high-speed rail system, instead of into the casino economy. The military-industrial complex could be turned into an infrastructure-industrial complex. Medicare for all would mean less costs for all businesses. Workplace democracy, the idea that employees should own and operate their own firms, would guarantee that firms, factories and jobs would stay in the United States. States and localities would have new sources of revenue to maintain our collapsing infrastructure and repair the education system, which are needed for all of the new jobs and construction.

Even taxes for the middle and lower classes could go down if transportation, energy, and urban systems were built using debt-free greenbacks, as in Lincoln's day. The revenue from these systems, the savings from retiring the national debt with greenbacks, and fair taxes on the wealthy and corporations would all lead to little or no income taxes for the bottom 80% of the population. Drink that, Tea Partiers!

With a possible political debacle staring us in the face, it behooves the progressive community to look “outside the box”, as the New Dealers did in the 1930s. As in the 1930s, not every desired outcome can be achieved, but the programs implemented then and since grew out of ideas that took time to percolate and circulate among wider audiences. A Green New Deal will take many, many news cycles to generate. If we can look to the future, we can give ourselves time to build campaigns that are based on the idea of “rise and shine” as opposed to “inevitable decline”.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science from the City University of New York.

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The Other Side of the ‘Mancession’: Women Left Behind

Sep 23, 2010Bryce Covert

The world can't work without women -- but are they getting a raw deal on job creation?

The world can't work without women -- but are they getting a raw deal on job creation?

As construction and manufacturing jobs crumble, many have dubbed this downturn a “mancession”. It’s even prompted some to declare that we are facing the "end of men". But women shouldn’t celebrate their economic victory just yet. It’s true that men have lost more jobs than women -- according to Newsweek, they’ve made up for two thirds of the 11 million jobs lost since it all began. But are women getting left out of President Obama's job programs and stimulus spending? They hold only 12% of the total US engineering jobs and 25% of manufacturing and construction jobs. Yet a study by the United States Conference of Mayors found that half of the projected new “green” jobs being created by stimulus programs will be in heavily male-dominated areas such as engineering, consulting, manufacturing, construction and forestry. Infrastructure spending, such as Obama’s recent proposal, will also be funneled toward construction and manufacturing work, where few women find employment. These programs are putting people back to work and rebuilding our physical infrastructure, creating jobs that are sorely needed. But will women be an unintended casualty?

While men felt the brunt of the initial bubble burst, traditionally female-heavy industries such as nursing and education are now getting slashed in the wake of falling state revenues, points out Eileen Boris, Hull Professor and Chair of the Department of Feminist Studies at UC Santa Barbara. High unemployment has hit states’ tax bases and tapped them out for benefits, so they’re looking to save anywhere they can. Secretary of Education Arne Duncan has estimated that these budget cuts imperil 100,000 to 300,000 public school jobs. Hospitals have had to shut their doors in the face of mounting debt loads. Women are highly concentrated in these suffering industries. As of 2009, 2.6 million women worked as registered nurses and 2.3 million as elementary and middle school teachers, making up for 82% of all teachers, according to the Department of Labor. And while some of the stimulus money went to propping up Medicaid programs and schools, indirectly saving women’s jobs, it never created new ones, Boris adds.

And just because men find themselves without jobs, it doesn’t mean women are making strides, Mary Gatta, Director of Gender and Workforce Policy at the Center for Women at Rutgers, points out. Women started out at a disadvantage long before the recession. They often work lower wage jobs, support their families and -- more and more often -- relatives, and experience a wage gap compared to male peers across all industries. And Jennifer Klein, professor of history at Yale University, adds that women often work in “precarious” jobs with irregular hours and low benefits. Women’s unemployment is “incredibly significant right now,” she says, not just because so many are heads of household -- over 20% in 2000 and trending upwards -- but because these days two working parents are necessary to keep most families financially afloat.

Unfortunately, there is historical precedent here. FDR’s groundbreaking public work programs, such as the CCC and CWA, had dismal numbers on including women. Only 8,500 women were employed in the CCC, compared to about 3 million men. The WPA was slightly better (after advocates like Eleanor Roosevelt pushed hard for inclusion), employing 460,000 women at its peak in 1936, but still put women to work on projects specifically for them: sewing, nursing, housekeeping, etc. These tended to be lower-skilled and lower-wage jobs than construction work. Public policy was shaped this way because, just as in this recession, people thought that women weren’t suffering from unemployment as much as men, Klein explains. But she points out that “women were in the workforce and certainly unemployed during the Depression… It was just a question of whose unemployment was prioritized.” It is estimated that more than 2 million women were unemployed at the start of 1933. There was also a pervasive social stereotype that cast men as the sole breadwinners and women as dependents, even if that “didn’t necessarily correspond to reality and for millions of families,” says Klein.

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Beyond false social assumptions, there are political reasons that led both FDR and Obama to focus spending on construction jobs. Linda Gordon, professor of history at NYU, points out that such jobs have visible results, which were an imperative for both presidents as they faced strong opposition to their programs. Just take a drive up the Hudson River Parkway in New York, Gordon suggests, and you will soon see beautiful bridge after beautiful bridge thanks to the New Deal. These projects also have a multiplier effect, as they don’t just employ bridge builders, but also steel workers who make the raw materials. In women-heavy industries, which Gordon calls the “caring professions” and the “educational professions,” it’s hard to quantify the beneficial effects. No one can agree on what makes a “good” teacher – see the fracas over a recent attempt by the LA Times – but it’s pretty easy to tell how much a bridge costs and whether it works. How much is a well-educated child worth? How do you quantify a comfortable old age? How much should we pay for librarians who bring literacy to their communities?

But there are indeed multiplier effects in investing in woman-heavy industries, whether or not they are as easy to quantify. While few doubt that America’s infrastructure is badly in need of repair and that we’re being outmatched in green innovation, we also have to invest in what Gordon calls the “human infrastructure.” Instead of nonprofit groups like Teach for America throwing college grads into classrooms, the government can invest in making that person a teacher’s assistant, simultaneously training a new teacher while easing another’s workload. Less-skilled workers can be employed in libraries to take some work off of the higher-skilled librarians, who can focus on archival tasks. There is a tremendous need for elder care in this country as the population ages and more families support older relatives. But care facilities are often understaffed and the staff is underpaid, leading to poor care, she adds. And meanwhile these jobs -- health care workers, child caretakers, even waitresses -- are “here to stay,” because they’re hard to outsource, says Gatta. Investing in these jobs keeps the money in our own economy.

It’s also important that government spending on jobs programs doesn’t perpetuate the segregation of the labor market. The New Deal assumed that women couldn’t or wouldn’t work in construction. But women are perfectly capable of participating in the green economy, says Amy Norquist, President and CEO of green roofing company Greensulate. “I think the barriers are more related to re-training oneself to address the needs of a new kind of industry,” she says. Stephanie Hass, Fund Development Associate at STRIVE, a job training organization that has a program for women in green construction, agrees. “When you say construction, [women] imagine themselves on a site and lifting heavy stuff, but I think there’s a lot of different opportunities.” The same was true during the 1930s, Gordon says. During World War II, when factory jobs were heavily staffed by women, “women loved these jobs.” At the end of the war, when the jobs were being handed back to the returning men, around 80% of women said they would keep their factory job if they could. The CCC was overwhelmed with applications from women. “It certainly is not true that women don’t like to work outdoors,” Gordon says. But in order for women to have equal access to those jobs, they need access to training and education programs. That requires outreach to women to let them know what’s available. “I think women can, should and will play a big part in this -- especially in finding ways to innovate,” Norquist says.

At the same time, none of this should come at the expense of the jobs women already hold, warns Boris. We need to make sure more jobs are created in women-heavy industries and ensure that the jobs they already hold are livable. Women are heavily concentrated in jobs with low pay, with 1.7 million working as nursing home aides, 1.3 million as maids and housekeepers, and 1.2 million as child care workers, according to DOL. Meanwhile, the quality of these workers’ jobs is being degraded by an industry speed-up, Gordon points out. Classrooms are packed with more and more students. Nurses handle more patients while their hours and pay stay the same. These service and care jobs need to be improved so that they have livable wages and benefits, as well as access to career ladders, Gatta says. They should be revalued by making sure they pay a living wage, fall under the Fair Labor Standards Act, and be allowed to unionize, Boris says. Women also need access to child care so that they can pursue these careers. These jobs should be revalued -- for, after all, “The world can’t work without them!” Boris adds.

So where does this leave us? While the first wave of layoffs may have been dumped on men's shoulders, perhaps the "mancession" has ended -- because now we're all affected. The stimulus projects and green collar jobs need to continue. But we can -- and must -- open up our policies to make sure they cover us all.

**Stay tuned for more on this subject as we continue to explore the ways the recession has affected women.

Bryce Covert is Assistant Editor at New Deal 2.0.

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The Political Economy of Energy

Sep 9, 2010Joe Costello

From the BBC:

The inventor of a low-cost solar cell that could be used to build electricity generating windows has been awarded this year's Millennium Technology Prize.

From the BBC:

The inventor of a low-cost solar cell that could be used to build electricity generating windows has been awarded this year's Millennium Technology Prize.

"Gratzel's innovation is likely to have an important role in low-cost, large-scale solutions for renewable energy." "Natural photosynthesis was the inspiration, and our solar cell is the only one that mimics the natural photosynthetic process."
Gratzel cells rely on nanotechnology to produce power from sunlight. "We are using nanocrystal films in which the particles are so small, they don't scatter light," said Professor Gratzel. "You can imagine using those cells as electricity producing windows. What's very exciting is that you collect light from all sides, so can capture electricity from the inside as well as the outside."

"You could think that the glass of all high-rises in New York would be electricity generating panels," he said.

NYT:

This week, in one of several recent breakthroughs merging natural processes and solar technology, researchers at the Massachusetts Institute of Technology described the creation of solar cells just a few billionths of a meter wide that mimic this ability of plants’ chemical engines to self-repair and regenerate.

“We’re basically imitating tricks that nature has discovered over millions of years,” Michael Strano, a professor of chemical engineering who led the team behind the discovery, said in an M.I.T. news release.

The transistor and the photo-voltaic cell were invented at roughly the same time. However, the amount of money spent developing the transistor and the microchip exponentially dwarfs the amount spent on developing the solar cell and all other forms of renewable energy combined. There's important reasons for this and they're essential to understanding the political economy of technology. First, energy from fossil fuels in the early 1950s was relatively cheap, subsidized, and the costs of its environmental impact socialized. Nuclear fission, the military-industrial complex's new energy technology became the designated energy of the future and devoured almost all energy development dollars.

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Secondly, energy was monopoly-controlled. In the case of electricity, the reform of the electric industry in the 1930s created a system controlled by state sanctioned public and private monopolies. While the oil industry's conglomerates are not officially state sanctioned, they are nonetheless monopolistic. Technologies create their own infrastructures, companies, bureaucracies, and even elected officials, whose most important job becomes protecting the established technology. This creates a problem that is as much political as it is economic or technological in replacing entrenched technologies -- the politics of technology. From an energy perspective, if you add the swapping-out of existing fossil energy sources with renewable sources creates no new net societal wealth, except for in areas of environmental restitution.  Instead it is a process of wealth redistribution -- taking wealth from established power. In most cases, it is established power intimately entwined with the state. Understanding this in all its facets will give you a better understanding of the political economy of energy.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Getting Off Oil is Job #1

Sep 3, 2010Joe Costello

The International Energy Agency announced the world is going to become increasingly reliant on OPEC for oil, more accurately the Persian Gulf, as other members of OPEC will soon enough be formerly petroleum exporting countries. The WSJ writes,

The global dependency on the members of the Organization of Petroleum Exporting Countries for oil will rise in the next five to 10 years as production by non-OPEC nations declines, the chief of the International Energy Agency said Friday.

The International Energy Agency announced the world is going to become increasingly reliant on OPEC for oil, more accurately the Persian Gulf, as other members of OPEC will soon enough be formerly petroleum exporting countries. The WSJ writes,

The global dependency on the members of the Organization of Petroleum Exporting Countries for oil will rise in the next five to 10 years as production by non-OPEC nations declines, the chief of the International Energy Agency said Friday.

"We have seen an increase in non-OPEC supplies. But in the mid-term, non-OPEC production will decline," Nobuo Tanaka, the agency's executive director, told reporters on the sidelines of a conference. "So, dependency on OPEC oil will increase."

OPEC's 12 members, who include Saudi Arabia, the United Arab Emirates and Kuwait, account for about 40% of the global oil (production).

So, I guess a trend that's been going on for over three decades is news. The increase in non-opec supply is almost entirely due to the global economic contraction. Here's some better numbers, not that numbers have any relation to economic reality these days, nonetheless, the countries around the Persian Gulf have 60% of known global oil reserves -- speaking of unreal numbers -- while, the EU, the US, China and Japan, who conveniently enough account for 60% of the world's economy have only 9% of the world's remaining oil reserves, and if you cut the US out of that equation it would drop to 3%.

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The entire corporate globalization experiment of the past few decades is built on the premise of cheap oil. The entire global "oil market", increasingly unable to provide cheap oil, is built on the American military, and the American military is built on debt, which each year becomes ever more unsustainable. Now, we could go to the EU, China, and Japan and say you guys need to start kicking-in to pay for our military service, but I doubt that would go over well with anyone, no one's going to give money without a corresponding increase in say. Or we can begin to realize that the entire corporate globalization experiment, premised on cheap oil, is at best problematic and more accurately a failure. We as a planet need to begin creating a non-oil based economy, that is, we need to truly become post-modern. But when you have an economy, politics, and culture completely addicted to oil, that's difficult. Instead you get desperation like ethanol and biofuels, which is the equivalent of the addict selling-off the food, furniture, and soon enough the house. Getting off oil is job 1 for any sustained economic revival and that means a complete redesign of our infrastructure.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Broken Politics, Bubble Pricing, Environment, and Agriculture

Aug 30, 2010Joe Costello

Shed your fears and lose your guilt
Tonight we burn responsibility in the fire
We'll watch the flames grow higher

Shed your fears and lose your guilt
Tonight we burn responsibility in the fire
We'll watch the flames grow higher

As I was standing by the edge
I could see the faces of those who led pissing theirselves laughing
Their mad eyes bulged and their flushed faces said,
"The weak get crushed and the strong grow stronger."
In the funeral pyre, we'll watch the flames grow higher
-- Paul Weller

However effective you think "markets" are at pricing, one thing you can say is bubbles completely distort pricing mechanisms to the point of being valueless. When you add into that a corrupt political process using government to further distort costs, you get a system that is completely dysfunctional and incapable of meeting the challenges of the times. Here's two good examples. The first is a piece in the Post about the establishment environmental groups lamenting the fate of climate legislation in DC. Any legislation to increase fossil fuels price was doomed with the financial crisis and resulting economic slowdown, though in return, the slowing economy gave you the greatest reduction in fossil fuel use in 30 years, certainly much greater than any proposed legislation at this point. Much, certainly not all, of the established environmental movement has propagated the notion that the mechanisms, culture, and practices that led us to environmental breakdown are going to be the same ones offering solutions. Let's look at one, the idea that a broken politics, without first being repaired, can get us needed change. The Post has a piece with one of the most ludicrous quotes I've seen in 30 years following politics:

"The oil industry has tremendous reach and control in the United States Senate," said David Di Martino, a spokesman for Clean Energy Works, a coalition of more than 60 groups that includes big names such as the Sierra Club, the Natural Resources Defense Council and the Environmental Defense Fund. "Our mistake was miscalculating . . . how far into the Senate it went."

Miscalculating? Really? The oil industry has power in DC? Don't misunderstand, this kind of political thinking is rampant in environmental circles. Many think they don't need to educate the public and can just pull the levers of a broken system. Try to get money from the big non-profit funders for public education on taxing oil. You can start with Pew founded by Sun Oil, then go to the Rockefeller Foundation, or if both of them don't work try the Ford Foundation. There are few funders who believe in public education -- after all, its expensive, and well, who wants to deal with the great unwashed? And don't worry, they won't react when the price of energy goes up, Al Gore has told them the world's ending.

Anyway, right now on energy there's two viable things to push, money for renewables and efficiency/conservation.

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The environmental movement is simply about looking at the human impact on natural resources and natural systems. Energy of course is fundamental, but even more so is food. You can go without energy a lot longer than without food. Now, there's been a growing number of stories about potash (potassium) appearing in the news, since BHP is attempting to take over one of the world's largest producers. Mined potash is a necessary element to modern agriculture practices. Limited increasingly by area, that is Canada and Russia dwarf all other known reserves, the price of potash, like many other agriculture commodities went through a massive price spike before the financial crisis. Here's an interesting BBC discussion on the entire global agriculture issue(tx zerohedge). Pay attention to Hugh Hendry's quote near the end. He states,

"For thirty-years, the price of agriculture has collapsed, fallen 90% in real terms. So, we haven't invested in this sector. As a society, as a world society we acutely vulnerable to the business of feeding ourselves."

Agriculture prices have been falling for a couple hundred years. Modern agriculture practices developed in the last hundred years are totally tied to fossil fuels, and no doubt, the last three decades precipitous fall is also tied to the preceding great rise in commodity prices caused by the oil crisis of the 1970s. But Mr. Hendry's point is well taken, we haven't invested in agriculture, in large part because our bubble financial system of the past quarter-century has not accurately priced its importance. If you want to bet which of the great environmental threats will be the first to bite us, I'd put money on our completely unsustainable agriculture practices.

The most important point of both these stories is what got us here isn't going to get us out.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Renewable Energy: The Power of Positive Feedback Loops

Aug 16, 2010Jon Rynn

electric-tower-150 When you design a national wind/solar/geothermal energy system, the benefits of each part are increased and reverberate through the economy, creating a virtuous cycle.

electric-tower-150 When you design a national wind/solar/geothermal energy system, the benefits of each part are increased and reverberate through the economy, creating a virtuous cycle.

When the Roosevelt Administration designed the Tennessee Valley Authority (TVA), it was designed as a set of mutually self-reinforcing parts, as a holistic system – including electrification, flood control, soil conservation, fertilizer production, and plenty of good, long-term jobs. The same concept of mutual gain applies to renewable energy – at a regional, and even national level, an economy running on solar, wind and geothermal energy would constitute a system, creating more than the sum of its parts.

By building dams, the TVA both controlled floods and provided electricity. By teaching farmers about soil erosion and good soil conservation practices, rains stopped turning into the floods that occur when soil is poorly maintained. By controlling floods, agriculture became more dependable, and it became possible to set up industries such as fertilizer manufacture, whose output was then used to strengthen the farming economy. With a strong farming system, the commercial sector expanded, using the electricity provided by the dams – which were made more reliable because there was less flooding. These relationships are examples of positive feedback loops, that is, by increasing something (like electricity) you increase something else (like manufacturing) that then loops back to increase the first set of factors (in this case, by enriching the region).

In just the same way, by designing a national wind, solar, and geothermal system, the benefits of each individual piece of equipment are increased, and those benefits reverberate within the wider economy, looping back to support the renewable system. One of the common criticisms of renewable energy is that it is intermittent – that is, the wind doesn't always blow, and at night the sun doesn't shine. However, as Professor Mark Jacobson of Stanford University has been arguing, since the wind is always blowing someplace in the continental United States, if you design a regional or even national system that places wind turbines in areas with different wind patterns, the output of power becomes reliable. In fact, an interconnected system could provide at least 33% of a wind system as baseload power, that is, you would be confident that at least one third of your power needs were provided for by wind, a function now filled by coal, natural gas, and nuclear energy.

But wind could be just one part of a national renewable energy system. Concentrated solar power, or CSP, uses large arrays of mirrors (mostly in the desert) to concentrate energy on a tower that then creates steam that drives an electricity-generating turbine. The big advantage of CSP is that it can store much of this heat in things like molten salt. At night the CSP plant can use that heat to continue to generate electricity. As Joe Romm points out in an article about CSP, “Solar thermal plants covering the equivalent of a 92-by-92-mile square grid in the Southwest could generate electricity for the entire United States." Paired with an Interstate Wind System, the benefits would probably increase –- by the time the stored heat in a CSP ran out, it would be late enough at night that the wind system could provide all of the remaining electric needs of the country.

There are other storage technologies that could banish intermittency. The sodium-sulfur battery, which can be the size of a house, could be used to store excess energy if too much wind is blowing , or to store electricity for times when the wind isn't blowing enough. There are newer sodium-sulfur batteries that are more appropriate for storage at the building level, adding a whole new level of flexibility to a national renewable system.

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Now add solar panels and solar hot water heaters on top of buildings to the national design. Make those buildings more and more energy-sipping by retrofitting them to retain heat in the winter and cool air in the summer, and we make the system even more resilient. Solar panels and hot water heaters are most efficient at the height of the day, when air conditioning needs often bog down an entire electric system (and can sometimes lead to blackouts). Much of the current electric system is composed of what is known as peak load generators, usually fueled by natural gas. By using solar panels and hot water heaters, and insulating buildings, we could eventually replace “peak” generators – but only if decentralized building energy systems are combined with a national system, one centered on technologies such as wind and CSP.

Building-based geothermal energy can also add to the virtuous cycles within a renewable energy system. The least well-known clean energy source, geothermal heat pumps (GHP), use the fact that the temperature of the ground, even 10 feet deep, stays at a constant temperature of 50 to 60 degrees throughout the year. Since heating the air and water in buildings uses about one-third of both our electricity and natural gas, and since coal-fired plants provide 50% of our electricity, we could shut down all of our coal plants simply by installing GHPs under all of our buildings to fulfill their heating and cooling needs.

But of course we don't have to rely on any single renewable technology to make our electrical system carbon-and-pollution-free. The beauty of wind, solar, and geothermal, used together, is that each one complements the other. Wind can provide a baseload, constant supply, while geothermal heat pumps and solar water heaters can decrease the need for that baseload power. CSP can help in the most energy-intensive part of the day, while solar panels and efficient buildings can be used to take the “peak” out of “peak power”. Large batteries and CSP heat storage can be used to smooth out any remaining problems with intermittency.

The final piece of the renewable puzzle is to create a national system to transmit clean electricity from one coast to the other. Currently, our national electric grid is in miserable shape; but Portugal just rebuilt their electric grid to accommodate renewable electricity – so why can't we?

Obviously, we have a challenging political environment, to say the least. Roosevelt wanted to establish an entire network of regional authorities around the country, modeled on the TVA, and he couldn't prevail in Congress. But we have to start somewhere, and the place to start is to at least understand and have a public conversation about the potentialities of a holistic, renewable electricity system. I'd bet that wide public interest in a program that would generate millions of new, good jobs, and provide reliable clean electricity, would be something that could change political calculations in a hurry.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press.  He holds a Ph.D. in political science from the City University of New York.

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Energy Deregulation - Troubled Past Portends Scary Future

Jul 22, 2010Wallace Turbeville

oil-rig-150A deregulated energy sector encourages manipulation, greed, and catastrophes.

oil-rig-150A deregulated energy sector encourages manipulation, greed, and catastrophes.

My earlier ND20 article outlined the deregulation of energy commencing in the 1990s.  Unleashed from government constraints, the industry was to serve the public's energy needs efficiently and economically. Free market forces were to supplant the waste and unwarranted burden of governmental oversight, forcing down prices and improving operations.

I must report that things did not work out very well.  Everyone is aware of the Deep Water Horizon oil spill and the Upper Big Branch Mine explosion.  The costs in human life, environmental damage, jobs and financial loss have been enormous.  It was all the direct result of the subversion of regulation by the oil and coal industries, a form of deregulation known as "regulatory capture."

Far less understood are the consequences of deregulating the other two energy sectors, natural gas and power.  After 60 years, price regulation of wholesale markets was ended by Congress and the regulators.  Vertically integrated power utilities divested many of their generating assets to unregulated Independent Power Producers to take advantage of the new free market.  Derivatives trading in these markets was then deregulated, allowing the banks and big oil firms to dominate price hedging.

Consumer prices were supposed to fall as fierce competition and unfettered trading improved efficiency.  That did not happen.  For the decade commencing in 2000, when the last phase of deregulation was completed, power prices increased 40% more than the rate of inflation. Natural gas price performance was worse. In 2009, gas prices plummeted as demand evaporated with recession. Before that year, gas prices increased 110% more than inflation for the period.

No doubt, competition drives down prices.  But if the costs of creating competition increase prices more, the net result is just a bad business deal.

Energy is a capital intensive industry.  Before deregulation, most capital investment was made by price-regulated businesses, such as gas pipeline companies and vertically integrated utilities operating within protected franchise territories. Regulated utilities and pipelines had extraordinarily low capital costs because of low risk. The new unregulated businesses were much riskier because they were exposed to market price changes.  For the consumer to benefit from deregulation, savings from competition had to overcome higher capital costs of the riskier companies.

This problem has gotten progressively worse since full deregulation.  Price risk was seen to be an unacceptable credit exposure for the unregulated companies.  Prices had to be hedged through derivatives transactions for the companies' credit standing to be acceptable.  Today, when energy companies present themselves to investors and ratings agencies, they feature their hedging strategies prominently to justify higher share value.

Most energy firms are not well-equipped to secure hedges in the conventional trading markets.  Derivatives positions require ready access to cash, and a lot of it.  Values change abruptly and the swings can be very large.  Adverse moves must be covered immediately with cash collateral posted to clearinghouses and counterparties.

Whipsawed by the need to hedge and the intolerable cash requirements of hedging, energy companies have turned to devices created by banks which can be used to avoid liquidity demands.  These devices involve risks and costs that the energy companies often do not understand (or, perhaps, care to understand). As long as they have access to hedges and the costs and risks are obscure, their businesses can survive.

Incidentally, the energy companies fought hard to secure the "end user" exemption in the financial reform legislation largely to preserve these devices.  If the cost of hedging were to become transparent under the reforms, share values would be lower.

The weakness and high capital cost of unregulated energy are illustrated by the bankruptcy of three of the largest unregulated power companies since 2003 - Calpine, Mirant and NRG. In 2008, Constellation went to the brink of bankruptcy, only to be bailed out by a cash infusion of $1 billion by Warren Buffet and the sale of a 49.9% interest in its nuclear facilities to Electricite de France for $4.5 billion.  Constellation was considered the most sophisticated unregulated producer since it was staffed largely by former Goldman Sachs personnel. Ironically, it almost failed because of a recordkeeping error related to trading.

The bankrupted companies and Constellation represent power generating capacity sufficient to serve all of the needs of New York, New Jersey, Pennsylvania and New England.

There is much, much more.  The effect of predatory bank energy trading of energy is the subject of a forthcoming article. In addition, several notorious events in the recent past were rooted in energy deregulation. Four are described below. Remedial action was taken in each case, but the stories should not end there.  Sharp minds are still hard at work seeking unfair advantages which endanger the system. We must expect similar disasters and scandals if regulatory controls are not somehow re-imposed.

California Energy Crisis. Anticipating deregulation, the state established a set of rules for the economic allocation of wholesale demand among competing power suppliers. A continuous auction process set prices during each day at levels necessary to secure supplies. In the summer of 2001, as demand peaked, suppliers implemented strategies to game the system. There were many complex strategies with ominously named, as if the traders were playing video games. (Enron's "Death Star" was most notorious.) Generally, they were designed to withhold supply, drive up prices and then sell at enormous premiums, all within short timeframes. The utilities commission refused to allow the power distributers to pass along the costs to customers. After suffering brownouts, $45 billion in losses and the bankruptcy of Pacific Gas and Electric (which serves most of northern California), the Federal Energy Regulatory Commission and the state combined to force an end to the crisis using price caps.

Round Trip Trading. Unregulated electronic trading on the Intercontinental Exchange offered a major opportunity for manipulation. Traders at two firms could collude to transact at a price and then execute a reversing transaction later so no one lost money. Energy markets are really collections of small markets based on specific delivery points.  Round trip trades artificially moved the price of gas and power at specific delivery points for the advantage of the participants. As an added incentive, ICE had a program of granting stock warrants (tremendously valuable in an IPO) based on customer volume which was inflated by the rigged trades.  When round trip trades were discovered in 2003, it became apparent that the practice was widespread.

Amaranth. This hedge fund put on a massive, highly leveraged position betting on the spread between natural gas prices for deliveries in March and April in each of the years 2007 and 2008. It was the idea of Brian Hunter, a 30 year old trader who was later dubbed by the DealBreaker blog as "the destroyer of all worlds."  In 2006, the trades lost $6.8 billion and Amaranth (a symbol of immortality in Greek mythology) collapsed. Energy markets were massively disrupted. To put this in perspective, Long Term Capital Management lost "only" $4.6 billion in 1998.  However, LTCM was integrated into Wall Street and the Fed stepped in to force a takeover by several banks to bail out investors. Does this sound familiar?

Financial Transmission Rights. The theorists behind deregulation of the power markets had a problem.  Power delivered to the grid nearer the site of demand and transmitted along uncongested paths is more valuable than the alternative. Power could not be priced efficiently in daily auctions without accounting for this value. Predictably, the experts came up with a market-based solution.  Rights to transmit from point to point would be periodically sold at auctioned by system operators to provide price signals.  But too few parties were interested in such rights to assure a valid auction.  The theorists proposed mechanisms to attract outside, financially interested bidders.  To a cynical, market-savvy observer, this was a recipe for speculation by traders in a highly volatile derivative instrument without having to post margin to cover risks.  In 2007, unsurprisingly, a few thinly capitalized shell companies which faced transmission rights losses to PJM (the system operator for the Mid-Atlantic region) simply walked away. PJM members had to kick in $100 million or so to cover the loss.  While this loss pales in comparison with Amaranth's, the episode illustrates how deregulation of complex markets can have perverse and unpredicted consequences.  If the members had refused to pick up the tab, claiming that PJM was inept and the risks were undisclosed, the largest power system in the United States might have financially failed.  In truth, this alternative appealed to many members.  We are lucky that the loss was small enough so that they paid up after a short struggle.

Some may say that the chicanery and ineptitude outlined above should not trouble us.  After all, remedies and firewalls have been put into place.  Do not believe it.  The deregulated energy sector is complicated, fast moving and large. It bristles with tempting opportunities to make a quick buck by manipulating the system. For deregulated energy, the past portends the future.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.

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Will Criminals Exploit Cap and Trade?

Jul 21, 2010Marshall Auerback

marshall-auerback-150Cap and trade promises to be a broken system, easy to exploit.

marshall-auerback-150Cap and trade promises to be a broken system, easy to exploit.

The story below is certainly not surprising, but it is yet another strong illustration as to why the carbon trading proposals embodied in the Obama Administration's cap and trade proposals are misguided. Money laundering is very easy when you have an opaque pricing structure with little in the way of regulatory protections. It's the environmental equivalent of credit default swaps. Worse, the cap and trade system doesn't work.

The European model introduced a quantity-based (capped) carbon trading system (CTS) with offsets. And, as Bill Mitchell has pointed out, Phase I was a disaster because more permits were issued than there was pollution and the market collapsed from the excess supply of permits. Phase II of the scheme was fatally compromised by heavy lobbying from large polluters who were able to gain under priced pollution permits.

The reality is that Carbon Trading Schemes amount to nothing more than a privatization of the atmosphere. Cap schemes assume that we have a known pollution level that is safe. Are we truly confident about that? Does the science support such an assumption? There may be a point -- that we certainly cannot predict with any accuracy -- beyond which there is no trade-off between pollution and other goods and services. After that point the planet dies.

If we are serious about climate change and carbon emissions, nuclear power has got to be part of the discussion, as Robert Bryce points out in his seminal new b00k Power Hungry. In the book, Bryce notes that, "To meet baseload demand in the U.S. requires using fossil fuels, mainly coal, and nuclear power. Nuclear plants, which provide about 20 percent to the grid, now supply 73 percent of the nation's emissions-free electricity. That's the equivalent of taking 100 million cars off the road every year."

But in the meantime, the criminals can have a field day, as the article below illustrates:

Carbon trading a front for money-laundering: experts

Agence France-Presss

Organised crime gangs are using carbon emissions trading schemes as fronts for money-laundering, experts warned on Friday. The experts who attended a meeting of the Asia Pacific Money Laundering Group (APG) said crime syndicates are resorting to new methods to hide their illegal proceeds.

One "issue that we've looked at closely is money laundering associated with carbon emissions trading schemes", APG executive secretary Gordon Hook told a news conference after the five-day meeting.

Hook did not elaborate on how crime syndicates were using carbon emissions trading schemes to launder money.

Emissions trading schemes place a limit on the amount of greenhouse gas pollution which companies can produce, forcing heavy polluters to buy credits from companies that pollute less - thereby creating financial incentives to fight global warming.

Read the full article here.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Book Notes: McKibben's EAARTH

Jul 21, 2010Bryce Covert

earth-150Our Life on Earth is Too Big To Fail.

earth-150Our Life on Earth is Too Big To Fail.

Our world -- our food, our energy, our economy -- has become Too Big Too Fail, which is to say, Too Big. What used to be local, separate systems are now all interconnected, from fossil fuels to food supplies. And these systems are all insulated from the risk we take in destroying our planet slowly -- actually, these days, quickly -- but surely. No agribusiness or electric utility is paying the full cost of the damage to the system, just as no bank feels exposed to the cost of another financial meltdown (a good bailout will make you feel invincible). But in a world in the midst of a climate disaster, we're about to experience complete system failure.

Bill McKibben makes no attempt to comfort or calm the reader of his new book, Eaarth: Making a Life on a Tough New Planet. He makes it clear that we are beyond taking measures to save our grandchildren; we need to take measures to save ourselves. Eaarth, his term for this planet that human activity has so transformed it resembles a new one entirely, will require us to completely change our lives if we want to keep living on it. And you thought passing financial reform was hard!

This is not your father's Earth. Climate change has already permanently altered our landscape. "This is the current inventory: more thunder, more lightning, less ice. Name a major feature of the earth's surface and you'll find massive change," McKibben says. "We are overwhelming the system," says Richard Zeebe, assistant professor of oceanography at the University of Hawaii. While we pump carbon into the atmosphere, plants that normally absorb it are so hot that they are absorbing less. Hotter temperatures will mean falling crop yields while populations continue to grow. In 2008, 40 million people became hungry because of climate change. A "savannizing" process is turning swaths of rain forest into desert. Animals are shrinking to adapt to the new climate. Jellyfish populations, which thrive in warmer waters, are exploding. The oceans are acidifying as they absorb more of our carbon emissions. "Forget the grandkids; it turns out this was a problem for our parents," McKibben says.

Just as with the financial sector, the system's complexity will mean its downfall. "We've connected things so tightly to each other that small failures in one place vibrate throughout the entire system," McKibben points out. A decision to turn some of our corn crop into clean-burning ethanol sent food prices skyrocketing and nearly starved us all. When Peanut Corporation found salmonella in their food, they poisoned 19,000 people through products that ranged from dulce de leche cookies to dog treats before a recall in January 2009. "It's not just the banks that have gotten too big to fail, but all the arrangements of modern life." That includes the economy, power generation, and perhaps most important of all, our food supply. After all, as McKibben says, "The only truly crucial question that human beings ask is: ‘What's for dinner?'"

The name of the game is no longer grow, but maintain. Obama's stimulus program, McKibben points out, was not meant to build more roads, but to simply repair the crumbling ones we've got. "When the wind blows harder and lightning strikes more often and more rain falls and the sea rises, repair and maintenance become full-time jobs." We have to turn to safety rather than risk and start thinking in terms of long-term consequences -- this applies not just to Goldman Sachs' business practices, but our entire economy. And we have to stop trying to grow at breakneck paces and think about just staying the size we are. In McKibben's words:

The economy that has defined our Western world is like a racehorse, fleet and showy. It's bred for speed, with narrow, tapered legs; tap it on the haunch, and it accelerates down the backstretch. But don't put it on a track where the rain has turned things muddy; know that even a small bump in its path will break its stride and quite likely snap that thin and speedy leg. The thoroughbred, like our economy, has been optimized for one thing only: pure burning swiftness. (Also, both are now mostly owned by sheiks.) What we need to do, even while we're in the saddle, is transform our racehorse into a workhorse -- into something dependable, even-tempered, long-lasting, uncomplaining.

And it also means going from the Mega Big Corporation model to the local community model -- particularly in agriculture. We need smaller, more diverse systems that are reliable and harder to tamper with. "The vast conformity of our agriculture puts us at risk -- there are no more firewalls than there were in our financial system," McKibben says. As Move Your Money urges consumers to move to community banks and get away from the bad practices that ferment in hulking corporations, McKibben urges Americans to buy food at local farmer's markets to support diversified farming. Smaller farms can implement more Eaarth-friendly practices such as intercropping, planting more crops in a year, and crop rotation. Plus it will be cheaper -- getting rid of all the middlemen involved in producing food can bring down its cost. And it doesn't have to come solely from farmers, either: a garden in your backyard or on your roof can be an excellent source of low-carbon food.

McKibben also wants to find "the equivalent of farmers' markets in electrons": localized, distributed energy generation. Electrons are conserved by transporting them over smaller distances. Electricity can be generated from renewable energy sources that are close to home. Rather than building a forest of windfarms in windy North Dakota and shipping that electricity a long way over expensive-to-build, not-yet-existent transmission, use "hydropower in the Northwest, offshore wind in the East, solar energy in the Southwest." But none of these sources are as important as plain old conservation, which McKinsey estimated in 2008 as being able to cut world energy demand 20 percent by 2020.

A lot of these changes will need to come from above. "All this change would get much easier if the federal government favored small players, not huge corporations," he says. And as for us, moving from explosive growth to steady survival will take a huge attitude shift. But what other choice have we got?

Bryce Covert is Assistant Editor at New Deal 2.0.

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The Stealthy Deregulation of Energy

Jul 19, 2010Wallace Turbeville

electric-tower-150How the energy sector is running rampant -- and what to do about it.

electric-tower-150How the energy sector is running rampant -- and what to do about it.

A colleague with an encyclopedic knowledge of the economy told me recently that he did not have a good feel for energy deregulation.  My friend thought its obscurity may have been planned by the industry. From my perspective, deregulation happens because the energy sector is treated as multiple sub-units by state and federal law: oil, coal, gas and electricity; fuel extraction and transportation; power generation, transmission and distribution; energy derivatives trading. For example, it's impossible to find government data on the size of the energy sector in relation to GDP.  The regulatory framework, dismantled in the last two decades, viewed energy as a many separate businesses. Deregulation was not a single act, but several, taken a different times and affecting different agencies.

The industry, however, sees itself as integrated.  At the strategically important hub of the industry are the large banks and oil companies. They exploit the relationships between the types of fuels and energy as well as the phases of the process, from fuel extraction to retail consumption. It is time that policymakers thought the same way.  The various legislative and regulatory steps in deregulation need to be catalogued and tied together to understand the industry's perspective.  In a follow-up post, I will examine a chain of disastrous consequences that grew out of deregulation, a window on our future if deregulation is not reined in.

The stakes are large.  Viewed as a whole, energy is enormous and affects almost every component of the economy.  An industry so large and fundamental can do much damage if allowed to run rampant. The opponents to regulation are the most powerful and politically influential corporations in the world.  Remedies for deregulation must be muscular, and the politics must be aggressive and direct. It is simply not possible to meaningfully reform energy by seeking compromise and consensus.

Oil and Coal Deregulation

 

These fuels, developed more than a century ago, have been regulated primarily through safety and environmental rules at the point of extraction. Commercial activity is relatively unconstrained.  In fact, the government encourages exploitation of the resources through tax incentives, a form of "anti-regulation."

Deregulation has been accomplished through subversion of the bureaucracies.  Because of the British Petroleum oil spill in the Gulf and the Upper Big Branch Mine explosion, we are painfully aware of industry control of the Minerals Management Service and the flaunting of violations by Massey Energy and others.  Given current events, further discussion is not required.

Natural Gas Deregulation

 

Commencing in 1938, all pricing in the natural gas business chain was regulated by the state and federal governments.  The Federal Energy Regulatory Commission (the FERC) was given jurisdiction over pipeline companies. Federal law required that the producers sell to the pipeline companies who, in turn, sold to distributers. Prices at the wellhead and on the pipelines were regulated by the federal government.  Prices paid by customers to distribution companies were controlled by state utilities commissions. The goal was to avoid exploitation of market power in the concentrated industry.

In 1985, Congress amended the law to allow pipelines to transport and store gas on behalf of producers.  This allowed producers to sell directly to distributors, transactions outside FERC jurisdiction. Direct sales in the wholesale market were deregulated. FERC Order 636 issued in 1994 mandated open access to pipelines for producers, ending price regulation of the wholesale market completely.

Electricity Deregulation

The power industry originated as a collection of local enterprises.  Power was generated, transported and sold within state-franchised regions. This made sense because power plants could be built near the customers to minimize transmission. In contrast, fuels were extracted at places where they could be found and transported over long distances. Consumer prices (except for prices charged by non-profit state entities and rural co-ops) were regulated by state utilities commissions.  Private utilities were allowed to price power sufficiently high to recover fuel costs, operating expenses and a fair return on invested capital, all subject to review and approval by the commissions.

As demand grew, utilities established interconnections between the franchised territories to serve customers more flexibly. The interconnected transmission evolved into the grid, owned separately by the utilities but operated under agreements governing cooperation. The FERC was given regulatory authority over the system to assure reliability.

The Energy Policy Act of 1992 mandated that the grid be opened up to allow access to all qualified marketers of power.  The utilities resisted the mandate by imposing restrictions that stifled access.  The FERC issued a series of Open Access Orders in 1996 which brought an end to resistance.

A more subtle form of deregulation which arose from open access was "disaggregation."  Utilities could sell generating assets to unrelated parties or unregulated subsidiaries of utility holding companies. The new owners now had access to the grid.  Returns on the invested capital would no longer be regulated by the state.  Investment banks relentlessly marketed the idea to utilities and made enormous fees restructuring and recapitalizing the utilities and the independent generation companies, now known as "independent power producers" or "IPP's."  On a worldwide basis, the most successful and aggressive IPP was a rather boring gas pipeline company which jumped into the business under a suitably modern name - Enron.

Trading Deregulation

 

Enron, the banks and big oil perceived an enormous new opportunity.  Deregulation meant that there were new buyers and sellers of fuel and wholesale electric power.  The new buyers and sellers no longer relied on the certainty of regulated prices.  They now were exposed to layers of price risk and became customers for financial hedges. A new derivatives marketplace was born.

After a period of moderate success, it became clear that more deregulation was needed for a completely unfettered market.  The Commodities Futures Modernization Act of 2000 (CMFA) contained provisions known as the "Enron Loophole" in honor of that company's immense effort to secure its passage by a skeptical congress.  Over-the-counter energy derivatives trading and electronic trading platforms for energy were both exempted from the Commodities Exchange Act regulations.

Initiatives to exploit the new unregulated market sprouted like weeds during the debate on the CFMA.  Enron Online was established in late 1999.  Using internet-based screens, traders could transact with Enron without using (and paying) brokers.  Enron made markets in all energy products (meaning it would respond to a bid at some price, even if no other trader would transact). If a trader used Enron Online, he or she was certain of getting a transaction done, even at obscure delivery points with uncertain prices.  Enron Online quickly captured a huge market share and one year later its unregulated status was clarified by the CFMA. Enron profited from the fees for use of Enron Online; but the market power resulting from dominance of multiple energy price points was far more valuable.

The major banks and oil companies founded the Intercontinental Exchange, an electronic energy trading environment, in mid-2000.  Using ICE, the sponsors and other traders could meet and transact physical contracts and derivatives. The brokers were cut out of more business.  Like Enron Online, ICE was exempted from regulation under the CFMA.  The sponsors could replicate the Enron strategy of exercising market power by becoming market makers for energy price points. The sponsors pumped business through ICE and eventually sold off their shares for a profit considered at the time to be outrageous.

The two banks in the forefront of energy trading were Goldman Sachs and Morgan Stanley. In those days, before energy was completely "derivatized," it was thought that traders needed access to the physical energy product to mitigate risks in these volatile and relatively thinly traded markets.  In late 2001, Goldman partnered with Baltimore Gas and Electric to own an unregulated IPP. Goldman supplied the traders and BG&E supplied the physical product.  The new energy trading firm called Constellation became wildly successful.  Goldman dissolved the relationship in 2003, after becoming comfortable with naked energy derivatives.

So by the end of 2001, the second phase of deregulation of energy was completed with the emergence of a huge new and unregulated trading market for energy derivatives controlled by Enron, the banks and big oil. Alas, Enron did not enjoy the spoils of its victories for long.  It soon exploded like a supernova and filed for bankruptcy. Enron was a victim of its own aggressive free market philosophy carried to the extreme of self-dealing and fraud by its officers and employees.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.

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