Editor’s Note: Fortnightly interviewed Constellation Energy CEO Mayo Shattuck this summer. His comments were included in Fortnightly’s June Frontlines column. The complete transcript of the interview follows, as part of an ongoing series of conversations about managing during a time of fundamental change.

 

FORTNIGHTLY: How does the changing U.S. utility landscape affect Constellation’s strategic direction? How have changing markets and government policies factored into Constellation’s decision to sell trading businesses and generating assets?
SHATTUCK: A few macro trends are important to our strategy. The first, clearly, is that when the credit markets vaporized, certain businesses that we were in couldn’t be supported by the credit environment. It’s important for us to be an investment-grade company—particularly for a couple of the businesses we’re in, and less for another. Most utilities feel they should have an investment-grade rating because it leads to a lower cost of capital. Most state regulators would agree.

On the marketing side, marketing activity requires a daily posting of collateral. These numbers can move significantly with volatility in commodity prices. The change in the credit markets of last year and this year make it more difficult to support a commodities trading operation. To the extent you are focusing on marrying these two together, you’ll make sure you yield to an investment-grade company. But if you can’t make it in the market, you have to redirect your positions.

We took our non-core positions in commodity trading and gas trading and reduced the collateral associated with those by divesting them. That’s allowed us to get quickly to a place where we have three core businesses, and we have an investment-grade company and can march forward with a narrower scope—namely Baltimore Gas & Electric, our generation fleet, and our large-customer supply business, selling electricity and gas to large commercial and industrial customers. That’s the one that needs a significant amount of working capital, and therefore requires us to be investment grade and still have access to credit markets to support it. We’ve significantly reduced our exposure to trading operations.

The one business that doesn’t necessarily need to be investment-grade on its own is the merchant generation business. We are a merchant generator, but we’ve managed the balance sheet so we’re retaining an investment-grade rating.

The business of trading commodities and the depth of counterparties has changed. That’s another reason to pull back on exposures and markets. The liquidity and depth of these markets has changed. As a consequence, people participating in these markets have to reduce their exposure, or they could find themselves too big in some of these markets.

 

FORTNIGHTLY: How are you managing the regulatory changes happening in your service territory?

SHATTUCK: In Maryland, the issue that continues to be topical here is whether the deregulation of 1999 is working or not. We’ve been an advocate of competitive markets for some time, and are at the point of seeing the effect of falling prices on rates. That’s true in Maryland and Pennsylvania. Just at this moment the markets are beginning to respond to recessionary forces and also to other elements of competitive markets. We’re beginning to see falling prices, and the auctions taking place in PJM are yielding lower prices. So the debate about whether to re-regulate comes at an auspicious time, given how markets evolve under pure competitive forces. We’d like to see that continue, and see it across the United States.

Having said that, there is a certain degree of angst on the part of regulators and legislators about just how much time it takes for this whole process of deregulation to work. So there are advocates out there for certain kinds of re-regulation, developing a hybrid market. We have to engage in those discussions and consider whether there are certain elements of deregulation aren’t working well. That has been topical here in Maryland for a couple of years. We’ve been very willing to engage in that debate, even though we are advocates of competitive markets and are at the point where we should look to see what effects competition is having on rates in deregulated markets.

FORTNIGHTLY: As Constellation strengthens its alliance with EdF, how will the company be better positioned for success in the U.S. energy industry?

SHATTUCK: One of the reasons for the strategic alignment with EdF is to build up capacity for development of new nuclear. We’ve had a very effective partnership for three or three and a half years, and we keep pushing the ball down the road. They have an interest in having a greater footprint in the United States, so they have greater visibility to the markets, and understand where best to deploy their capital and their investment in UniStar with us.

We’re very pleased by this outcome, where they’ll own half of the existing nuclear fleet. It gives us a chance to have a significant partner to look for a variety of ways to ensure we can participate on the new nuclear side. All of us are respectively pretty small in the scheme of things to be building plants that can cost $10 to 13 billion. We have to think creatively about the alliances we need in order to do that—not just money, but skill and perseverance and links to other strategic partners.

We have a model that we believe allows us to participate in what we believe is an imperative to build a new nuclear capacity in the United States. We will stay in the game and lead the charge. We’ve been at it for four years. The DOE loan-guarantee program is going well, and we’re excited to be part of that process. Obviously we face challenges going forward, but we’re an example of a company that would be building a merchant plant and it will be exciting to see new nuclear happen as a merchant project.

 

FORTNIGHTLY: How does the trend toward green energy, conservation and distributed resources affect Constellation’s business plan?

SHATTUCK: We advocate for a realistic mix in generating capacity. This recent investment in the last 10 years in renewables has been fantastic, but we need to focus on the capacity of the grid to absorb and manage these intermittent resources. The model requires a balanced mix of all resources. Our attention to base load in the future is an equal imperative. We can’t lose sight of base load requirements.

It’s no surprise to anyone we have a balance of nuclear and fossil assets. We’ve tried to move the ball on efficiency and demand reduction and conservation. We have some innovative things happening in Maryland. We’re an advanced state, in the sense we’re already decoupled. We have incentives to help people reduce consumption—our Peak Rewards program. We’re moving down a path of the modern utility, where people are going to help the evolution of the grid by virtue of understanding their own use. We have the early starts of an AMI project, and we’re working on the early stages of things like smart grid and hybrid vehicles. All these things will make a huge difference in the long term, and every utility has to be looking at these things. I believe we are marching down a very progressive path on that front, and our state regulators are cooperative and interested in doing so.

On the competitive side of the house, where we’re selling power and services to large C&I customers, that business has grown to be quite large. We’re not only selling power and gas to these customers now, but offering other services associated with their participation in renewables. We’re installing solar panels, putting in distributed generation. That whole movement will be an important part of the future as companies like ours educate large C&I customers in how they can manage their energy use.

It’s part of our long-term business plan, balanced with strong low-cost base load power. That’s why we’re as involved as we are in the nuclear movement. But there is tremendous interest among customers in distributed generation, particularly for applications like peak-shaving, and improving their own environmental footprint. There are a lot of angles of attack that will drive distributed generation to play a more meaningful role, and hopefully that’s where technology and innovation also will play a significant role. My hope is that innovation leads to methods where we have much more capacity in much smaller sizes, hopefully in renewables technologies that will help society.

 

FORTNIGHTLY: From a management perspective, how are you managing the changes Constellation is going through? What are the most important issues that demand your attention, and how are you dealing with them?

SHATTUCK: The events of the last year clearly have been a distraction, but the operating units are doing just fine. There’s no reason for the operating units to be distracted. It’s the requirement of management to make sure they’re steadily focused on safety, reliability and their basic operations from a day-to-day basis. I think we’ve come through the stormy capital market period very well in that respect.

The areas of the company most affected were those being downsized as a result of the credit markets. The businesses themselves actually were doing reasonably well. It was the credit underpinning supporting them that dissolved. The difficulty is explaining to people that have performed well why they have a reduced amount of capital allocated to them, and they’ll have to go through a downsizing of employees.

As a result of the businesses we divested, most of those people ended up at Goldman Sachs, Macquarie Cook and EdF. Most of these people just transplanted themselves to their new owners, and that allowed us to devote capital to our new objectives. That was understood, and people felt good about how they were treated, but no question the specter of the credit and capital markets collapsing at the end of last year made everyone nervous. We had to change a lot of senior managers and put in place people that wanted to look out 10 to 20 years as opposed to thinking about what hedge fund they wanted to join. That all went very well. We made some management changes at the right time.

We’ve gone through the vast majority of the transition. In our last earnings call, we talked about a de-risking process, including divestiture. We’ll be proving ourselves in the next year as we downsize our participation in commodities markets.

 

FORTNIGHTLY: What aspects of the commodities business are you keeping?

SHATTUCK: We have a central service area to deal with the hedging requirements on the generation side and the customer supply business. We sell power around the country in places where we have no generation. That requires a sophisticated backbone of risk management. We have supporting operations for hedging of our generation fleet as well as megawatt hours that we sell to C&I customers. That’s the primary purpose of the operation now. It’s managing the remnants of what we now call the portfolio optimization book, which is really just the gradual reduction and elimination of the old commodities trading book. The market understands that.

 

FORTNIGHTLY: What have you learned from this transition at Constellation? What advice would you offer to a utility company CEO who is facing a similar set of challenges?

SHATTUCK: There were a lot of lessons learned in all of this. One of the main lessons is associated with the quality of our earnings mix. We tried to build a business based on this evolution of the competitive markets in the United States and internationally. At the end of the day, we weren’t successful at convincing people about the quality of earnings that fall into a bucket of trading earnings. They weren’t valued in the market place, so the additional risk associated with lower quality earnings wasn’t worth it. When the credit crisis came that problem got exacerbated, and we made the decision to move rapidly out of that.

The interesting lesson I find for myself and that may be applied to some others is that the utility industry does generate very high quality earnings. Whether from distribution, transmission or generation, they are high quality because they are repeatable, more annuity-like. To the extent you degrade your model with a lower quality earnings base, you potentially aren’t adding as much shareholder value as you might hope.

 

FORTNIGHTLY: The merchant power business carries some of the same kinds of risks, doesn’t it? How does that affect the quality of earnings?

SHATTUCK: On generation side it will be more cyclical, and of somewhat lesser quality, but still of high quality. It’s the trading revenues specifically that cast some doubt as to whether you’re really going to be rewarded for good performance. Trading earnings probably belong on bank balance sheets, and even they struggle a bit with how much value they get from trading revenue.

There are aspects of the marketing business, of which trading support is one, that can get a good value. A sales and marketing arm, as an example, where we’re providing risk management services to large customers, is shown to have high repeatability, high retention rates and good margins. That kind of business should be rewarded with a decent multiple.

All of our companies need access to the capital markets. We all borrow, but there are some aspects of the business that are really dependent on it. All utilities are dependent on access. The generation companies, obviously, to build these big projects must have access to capital markets. Those are the priorities when it comes to reliability of our system. We have to put capital there. In areas that we consider on the margin I think that great care has to be given to the quality of those earnings, so you’re really aiming toward achieving the highest shareholder value you can, and not putting a higher risk-reward expectation on lower-quality earnings that eventually could come back and hurt you.-Michael T. Burr

Posted: July 28th, 2009 under Uncategorized, credit crunch, nuclear renaissance, recession, regulation, renewables, utility stocks.
Comments: none

-Mark T. Williams, Boston University Finance & Economics Department

For several decades, the top four U.S. independent investment banks—Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers—have been instrumental to the growth of America’s power and gas utility industry. With the sudden shotgun marriage of Merrill Lynch, the bankruptcy of Lehman, and the transformation of Goldman Sachs and Morgan Stanley into bank holding companies, the investment banks are now history.

Additionally, Wall Street investment banking has been consolidated rapidly with “the Big Three” commercial banks—Barclays PLC, Bank of America and J.P. Morgan—taking advantage of bottom-feeding opportunities.

This dramatic reshaping of Wall Street has come too swiftly to fully comprehend, yet it will have an immediate and lasting impact on the utility sector.

With immediate job losses among investment bankers, a decline in their ranks will reduce competition for underwriting utility bond deals. Less competition will equate to higher fees. This might not be immediately visible in a weak economy, but it will show up as the economy eventually rebounds.

Significant investment banking consolidation and downsizing will result in a loss of institutional knowledge as older experienced investment bankers are forced to take severances.

Having a banker who knows the history of the utility, and the company’s management and its level of corporate risk-taking, can be invaluable when structuring and underwriting bonds, as well as providing M&A guidance. Utilities will need to begin building new relationships.

The recent market crisis, including the bankruptcy of Lehman, has resulted in significant market uncertainty. The proposed $700 billion Treasury Department bailout has raised additional concerns about how such a plan will be funded. Such events have placed increased pressure on interest rates, raising the cost of both short-term and long-term capital. In addition, as more of the investment banking business falls in the hands of fewer commercial banks, it remains uncertain whether utilities can count on the same level of service they enjoyed previously. The corporate cultures of investment and commercial banking can be quite different, and Wall Street’s reshaping might result in customers losing out.

Prior to the weekend shotgun wedding with Merrill Lynch, Bank of America CEO Kenneth Lewis was less than enthusiastic about how investment banking activities might fit inside his institution. Moreover, it’s unclear whether these banks will view serving the gas and power utility industry as a strategic priority. For example, although Barclays is buying Lehman’s defunct investment bank, the European bank reportedly hasn’t decided which divisions it would keep and build a franchise around.

In the weeks and months ahead, one trend to watch closely is whether the investment bankers who are able to find new homes will be randomly scattered around Wall Street, or whether the Big Three banks will make it a priority to keep these utility teams intact.

Now that the Big Three hold more of the cards, they should reach out to the utility industry and pronounce their intentions. What will be their level of commitment? Will they devote the capital needed to adequately service this industry? We might be in a recession, but the market will recover eventually, and the utility industry will continue to grow and prosper. Having a knowledgeable investment banker ready, able and willing to underwrite or structure a merger will be crucial.

So the message to Barclays, Bank of America and the other institutions that may be the future home to our power and utility industry investment bankers: Whatever you do, be good to them, as they are an endangered species, and vital to this industry’s future.

Editor’s note: Williams previously was a senior vice president of Citizens Power LLC, a Boston based energy trading company, and a vice president with Edison Mission Energy. Prior to that worked at the Federal Reserve Bank as a full examiner.

Posted: September 24th, 2008 under Uncategorized, bear market, credit crunch, finance crisis, investment banks, recession, subprime lending.
Comments: none

By Michael J. Zimmer

I like the fundamentals of the biomass footprint even more now this year. Wind is facing trouble with the PTC extension, turbine product availability, a nagging de minimis capacity factor, and need for transmission that isn’t being developed nationwide. Transmission constraints could strand many new renewable energy projects over the next five years, as occurred for cogeneration, small power producers and independent power projects during the prior decades.

Now is the time to diversify the renewables supply base with existing technologies that have more base-load attributes—such as geothermal, hydropower and biomass, including landfill gas and municipal solid waste. Biomass in particular offers great potential for increased expansion in the next five years.

The key to success for advanced biomass development will arise from the ability to lock up sufficient and reliable fuel supplies. Failure to do this will keep biomass from scaling up until non-cultivated, closed-loop fuels become competitive on an emissions-cost adjusted basis. The determining factors are political, structural and technical/agronomical at this stage.

The political issue comes down to GHG regulation and setting carbon costs. If the GHG regulatory calculus prices carbon under $50 a ton, it will be a long time before any alternative power sources can really compete with fossil fuels, particularly coal. Until carbon emissions credits reach $50 a ton, coal plants won’t sequester carbon, but likely will just buy credits in a compliance regime. That’s exactly what occurred after enactment of the Clean Air Act Amendments of 1990, when major scrubber investments and more capital intensive strategies were postponed for a dozen years or more.

The technical issue arises from the difficulty of securing firm fuel supplies. A closed-loop solution could project biomass ahead of wind and solar in many ways, making it the least-cost renewable supply option with better operating characteristics. But I’m hearing more discussion bemoaning the possible environmental costs of increasing reliance on cellulosic energy sources. What happens after 10 cycles of harvesting switchgrass, poplar and kudzu, without any serious fertilizer input? A natural biome replaces humus nutrients with necrotic material from the previous growing season. If we’re burning that material, the humus will disappear and eventually the soil will turn into sand.

However, by aggregating supplies under a regional “hub” approach, a closed-loop system can allow careful management of growing biomass areas. And of course biomass fuels from such sources as forest thinnings, sawdust and bark from private and government properties could be aggregated by rural communities. Rural development funds to supply clean, untreated lumber for biomass power production could revitalize local forest industries. And federal and state lands can contribute feedstocks from efforts to cull overgrowth and avoid forest fires.

Additionally, biomass power plants with waste-heat capture equipment can provide thermal energy for drying, processing or other industrial or commercial purposes. This enhances the community tax base, prompts a new feedstock industry, increases local jobs and contributes to the local economy.

From a public-policy perspective, the critical factor will be for lawmakers to include supply chain and logistics support in energy legislation, to create a closed-loop biomass fuel industry and provide proper scale to capture the potential of biomass power. Inordinate focus on creating incentives for supply, without anticipating the complete logistics of transportation, storage, handling and distribution, is a fatal flaw of many of our national energy strategies for all of our fuels and power strategies. Correcting this flaw will allow the industry to harvest the true potential of dispatchable biomass power.

Michael J. Zimmer is Of Counsel with Thompson Hine LLP in Washington, D.C.

Posted: June 26th, 2008 under biomass, carbon regulation, renewables.
Comments: none

By Michael T. Burr

Every article we publish in Public Utilities Fortnightly is incomplete. The virtual cutting room floor is always littered with content that didn’t fit for one reason or another.

For this year’s CEO Forum feature story, we asked several utility leaders about climate change regulation. Very little of what they said made it into the June cover story, “Conservation Compact,” so we’re presenting a more complete edit of their responses here in the Public Utilities Blog.

While it’s fair to say none of the CEOs departed far from their corporate message about the topic, their comments illustrate growing concerns among utility executives about how to regulate greenhouse gases fairly and effectively.

Chris Dutton, Green Mountain Power

Fortnightly: Given your experience in a RGGI state, what’s your perspective on federal greenhouse gas regulation? How can utilities reach a compromise on GHG regulation and allocation methodologies?

Dutton: I think the better and fairer approach is a carbon tax. Whether that’s politically feasible is another issue, but that’s a more competitive and less cumbersome approach than a cap-and-trade program, which has a whole host of complications associated with it.

New England as a region has a relatively small carbon impact, in terms of generation, because of the predominance of natural gas and nuclear power in the supply. There’s very little coal in New England, so those issues are a little different for us than they are for parts of the country that depend on coal-fired generation.

One of the things we’ve been able to do outside the power supply arena is to change the way we behave in the four corners of our business. We’ve converted all our line trucks and operating vehicles to biofuels. And we operate with an office blueprint that is radically different from what’s typical in our business. At Green Mountain Power there are no private offices. I as the CEO have a work area that’s about 9’x9’, and we have low partitions. There’s no private office. That’s meant we require a lot less office space than is traditionally the case, and you can guess the corporate culture advantages this approach brings. We try to be very transparent in our behavior within the company and in our interactions with both regulators and the general public, and a part of that transparency is the idea there are no hidden agendas. Part of that concept is no private offices.

We’ve been operating this way for about eight or nine years and we just love it. It gives the place a sense of energy and direction that didn’t otherwise exist. But also, shen you operate in a place that doesn’t need as much space, you don’t need to heat and cool it.

J. LaMont Keen, Idaho Power

Fortnightly: What’s your perspective on mandatory greenhouse gas regulation?

Keen: GHG regulation now seems certain to happen. The presidential candidates both support regulation in some form and it has been ruled that carbon is a pollutant that EPA should regulate. The discussion now centers on how and what type of regulation will occur.

Whatever the form carbon regulation takes, it’s important that regulatory efforts be applied economy-wide. We recognize the electric utility industry is probably the easiest to regulate, but if carbon regulation is to succeed no single sector should be unfairly burdened. More importantly, time frames should also be consistent with development of the carbon capture and sequestration technologies needed to comply.

If applied appropriately, either a carbon tax or a carbon cap-and-trade mechanism could work. Either way, the key is getting adequate research dollars collected and applied toward developing the necessary technologies.

In a cap-and-trade program, how allowances would be apportioned is the million dollar question, raising serious issues of effectiveness and fairness no matter how the apportionment is done. Whatever method takes place, it is appropriate that companies gain some recognition for the wisdom of earlier decisions to invest in and develop emission-free forms of generation.

Fortnightly: How will the industry reach a compromise on that? I’m hearing diametrically opposed views on this.

Keen: I don’t believe it’s appropriate for the allocation method to come out in a way that’s biased against companies with a smaller carbon footprint today. Some of the concepts I’ve heard discussed might do that.

I think it’s very speculative at this point. The devil truly is in the details, and it’s going to be a divisive issue for the industry. It’s possible for the industry to come together and strike a balance, but we have some fundamentally different starting positions for the discussion.

Bill Johnson, Progress Energy

Fortnightly: What’s your perspective on federal greenhouse gas regulation?

Johnson: Carbon regulation is a certainty. We believe that a well-designed cap and trade system will have the least negative impact on our customers and the overall economy, and will help us make real progress toward a low-carbon economy. An effective climate change policy must be achievable with timelines that are in harmony with technology. It must also be affordable, with reasonable allowances that put all states and players on a level field, and include provisions that protect consumers from rate shock and limit the damage to the economy.

Fortnightly: What would a level field look like for a ratepayer in a state that already has a relatively small carbon footprint, and has been paying high rates for a long time? Should their climate friendly infrastructure pay off in this level field?

Johnson: This whole subject is pretty complicated. When allocating allowances, those most affected by the new standards should get the most mitigation. Coal dependent customers will carry the brunt in two ways, paying for emissions and paying for new infrastructure. We need to have no-cost allowances in the early years, and more costs as technology develops.

Allocation of allowances ought to be based on emissions levels. Carbon emissions is where the allowances ought to go. I don’t think it’s a good idea to try to increase rates in some parts of the country because rates in other parts are higher. That doesn’t seem like a sound public policy basis for addressing carbon emissions.

Mark Jacobs, Reliant

Fortnightly: What’s your position on federal GHG regulation?

Jacobs: We’re committed to environmental stewardship. The best approach is a national policy rather than state by state. We believe a cap-and-trade system is the best approach, because it has worked incredibly effectively for SOX and NOX, and we also think it’s important that any legislation provide enough lead time to allow new technologies and market forces to work.

Energy efficiency is one of the easiest and most cost-effective approaches to addressing GHG emissions, and the smart energy things we’re doing will have a meaningful impact on the carbon footprint.

What happens to credits and allocations of allowances will get a lot of attention and debate, but we believe there should be a bridge provided for existing generation, and some of the proceeds raised by the auction need to go into development of new technology. We don’t think it’s appropriate to be taking proceeds and subsidizing known technologies. Someone might say they ought to get a price break for building a nuclear plant, but the prices are such today that people will build it without the incentive. We ought to take the proceeds and put them into the technology solutions to store CO2.

Dennis Wraase, PHI Holdings

Fortnightly: Given your experience in RGGI states, what’s your perspective on federal greenhouse gas regulation? How can various utilities and generating companies, with different resource strategies, reach compromise on things like allocation methods?

Wraase: As someone who operates in four states—which fortunately are somewhat together in RGGI—I think it would be far better to have a federal standard than to have 50 states doing 50 different things. Also the sooner we get to this, it will solve an awful lot of problems with power plants that need to get built and technology that needs to get developed.

A lot of the efficiency projects we do don’t include social cost. So once a dollar value is assigned to carbon, there may be more efficiency projects that become cost beneficial. That would be helpful.

As for a compromise, I’m not sure the industry will ever come around to agreeing, and neither will the states. This is a winners-and-losers proposition. That’s why I’m one of those who’d be more in favor of a tax as opposed to cap and trade. It avoids a lot of problems associated with how you allocate allowances, which is highly controversial. A tax is easily understood and can be applied economy wide.

Posted: June 24th, 2008 under carbon regulation, climate change, energy policy.
Comments: 1

By John A. Bewick

The Presidential candidates increasingly are including energy-policy issues in their stump speeches. And the Democratic contenders propose enormous spending programs—from $50 billion (Sen. Hillary Clinton) to $150 billion (Sen. Barack Obama)—with a New-Deal style appeal for investing in the country’s energy future.

Last year, Obama said, “This is our generation’s moment to save future generations from global catastrophe. It will take a grass-roots effort to make America greener and end the tyranny of oil.”

Clinton, in a speech at the National Press Club, said “Instead of national security dictating our energy policy, our failed energy policy dictates our national security.”

Sen. John McCain likewise includes the energy theme in his campaign promises. In April 2007 he said, “We have the urgent need and the opportunity to build a safer and thriving future with more diverse, reliable, and cleaner energy. But it will take another indispensable commodity to make it happen—American leadership.” McCain is well known as the perennial co-sponsor, with Sen. Joe Lieberman, of legislation that would mandate carbon constraints.

It seems the next president, regardless of who it is, is going to attack development of clean energy vigorously. If mountains of public money are to be spent on development of new technologies, there is an equally mountainous question of how those funds should be managed to assure the money is not wasted—i.e., that the investment yields commercially viable, clean energy technologies that get widely deployed in the coming decades. Who should manage this project—the federal government or the private sector?

While the Department of Energy might seem like an obvious choice, its track record suggest otherwise. For one thing, DOE’s annual appropriations are subject to political whims, as well as political competition inside the beltway—with defense, health care, education, and other departments clamoring for their share. Further, the agency’s tendencies to pick so-called winners like FutureGen before the facts are in about commercial viability suggests it would be the wrong model for managing a New Deal-scale energy development effort.

So what about the private sector? The Electric Power Research Institute (EPRI), funded by the utility industry, has prepared a comprehensive and detailed RD&D program for developing commercial, climate-friendly power generation technology. EPRI brings a great degree of industry credibility, but its budget model severely constrains its resources, and its track record is mixed, when it comes to wide-scale deployment of technologies developed.

The Gas Research Institute might be a model worth replicating. It generated 30 percent success on commercial ventures—twice the normal industry rate of success—with a benefit/cost ratio of 7:1. GRI selected its projects under the oversight of a government watchdog—FERC—with multiple review boards—including industry, academia, public interest groups and technical experts—all contributing in a formalized project appraisal methodology that winnowed out the important, likely winners with amazing success.

Plus GRI’s funding model bears more resemblance to the broad-and-deep stream that might characterize a New Energy Deal. GRI was funded by a surcharge on interstate gas pipeline sales.

It comes down to this: whom do you trust? No one I know trusts the government to develop commercial products. And historic examples support this sense of mistrust.

After World War II, Alfred Loomis shut down the MIT Rad Lab that had developed radar during the war by January 1946, because he felt companies like RCA and Motorola would do a much better job of exploiting the commercial potential of electronics. By contrast, the National Laboratories associated with atomic energy were not closed. And while they have produced valuable research, their efforts have paled in comparison to what the RCAs and Motorolas of the world have produced.

America might need a New Deal to finance the mammoth clean energy challenge, but such an investment must be managed by the private sector—perhaps in a GRI-style structure—to ensure public spending actually results in cost-effective technologies being developed, commercialized and deployed.

(EDITOR’s NOTE: This blog entry provided a preview of John Bewick’s article, “Cultivating Clean Tech,” which appeared on the cover of Fortnightly’s May 2008 issue. Bewick, formerly secretary of environmental affairs for the Commonwealth of Massachusetts, is founder of Compliance Management Inc., an environmental consultancy based in Hingham, Mass. -MTB)

Posted: April 2nd, 2008 under 2008 elections, R&D, energy policy.
Comments: none