Anticipating California’s Electrical Minsky Moment

By Jock O’Connell

Among the journalists reporting on America’s maritime trade are those who profess with almost reflexive regularity that a certain trade union poses the single gravest threat to the competitiveness of the Ports of Los Angeles and Long Beach. Since it’s still a free country, they are entitled to their obsessive prejudices.

For my money, though, there is a far greater antagonist confronting these maritime gateways: the State of California. At least, the International Longshore and Warehouse Union has a vital stake in keeping the ports in business. That, however, is not necessarily a sentiment broadly shared by officials at the state capital in Sacramento.

There is no question that the state’s ambitious environmental agenda is being advanced at great cost to its seaports and indeed to the entire logistics sector of California’s economy. Meeting the singularly stringent clean air mandates imposed in California results in costs far higher than those borne by competing ports most anywhere else in the country.

That’s been true for some time. What’s emerging as an even knottier existential challenge is the disjointed manner in which the state is gearing up for a zero-emission future.

In Econ 101, you’re introduced to the tension between two forces: supply and demand. It’s generally preferable that the two stay roughly in equilibrium. Occasionally, though, things go awry. One such occasion occurred in California this summer when extremely high temperatures pushed up the demand for electricity to a level that strained the supply of available megawatts. In response, Governor Gavin Newsom took a number of actions to reduce the stress on the state’s electric power grid, including an executive order issued on August 31 that temporarily suspended the requirement that ocean-going vessels berthed at California ports use shore power.

This was not the first time that had happened. It almost certainly won’t be the last.

The late summer power emergency should serve as a warning about how much things could get out of hand unless the state substantially increases its ability to generate and distribute electrical power. Talk of a horizon filled with more energy-efficient technologies notwithstanding, moderating demand for electricity is not a realistic option. Indeed, less than a week before the governor was obliged to declare an emergency, the California Air Resources Board (CARB) approved an Advanced Clean Cars II rule that establishes a year-by-year roadmap to ensure that -- by 2035 – 100% of all new cars and light trucks sold in California will be zero- emission vehicles.

More or less simultaneously, the state is moving to replace gas with electricity to heat homes and businesses, even doing away with gas stoves and ovens. (My mother had an electric range, while I cook with gas. Who knew mom was the environmentalist in the family?)

CARB had already been pressing the state’s logistics industries, including its seaports, to embrace zero-emission modes of moving goods. In particular, CARB has long targeted the state’s ports, so often labeled by editorialists as the state’s biggest stationary sources of toxic emissions that one might wrongly conclude that the ports have done nothing to improve matters. The remarkable progress the ports have actually made in slashing emissions and the response from the air quality regulators is a testament to the old adage that no good deed goes unpunished.

Adding to the challenge of ensuring that supplies of electricity will be sufficient to meet predictably higher levels of demand, state policy has been to focus on renewable energy sources such as wind and solar while diminishing its reliance on power plants that burn fossil fuels or use nuclear reactors. It will be a tricky, changing horses in midstream transition.

Ultimately, the danger is that one curve (supply) rises more slowly than the curve defining demand. And that creates the potential in California for an electrical Minsky Moment.

Myron Minsky was an American economist famed for his studies of financial crises. Even though he did not coin the term for which he is best known, I would like to think that Professor Minsky formulated the underlying thesis one Saturday morning after watching a Looney Tunes cartoon. Specifically, I have in mind the one in which Wile E. Coyote madly chases the Road Runner off a cliff and, for an instant, is allowed to realize that his exuberance is no longer sustainable. And so, like a market driven by impetuous investors or policymakers, the coyote experiences a Minsky Moment before plunging into an abyss.

So the question becomes whether the State of California can avoid a Minsky Moment when its zealous pursuit of a zero-emission economy proves untenable?

This is no longer Pat Brown’s California. Brown’s terms in office preceded the California Environmental Quality Act, which was signed into law in 1970 by Brown’s successor, a progressive environmentalist named Ronald Reagan. Among CEQA’s presumably unintended consequences was the creation of legions of attorneys dedicated to serving clients who were opposed to building most anything, most anywhere. Since then, the state’s record in building out any element of its infrastructure (apart from sports arenas) has not been especially encouraging.

The lack of affordable housing may be the pre-eminent example, but what particularly prompted this commentary was an October 9 New York Times lamentation on California’s high-speed rail (HSR) project, quite possibly the most egregious failing in the long history of infrastructure building in this country. Oh, sure, we might one day be able to get from Los Angeles to San Francisco by train in 2.5 hours. My guess, though, is that none of us boomers will be around to enjoy the ride.

Here’s the most revealing takeaway from the Times piece: “Now, as the nation embarks on a historic, $1 trillion infrastructure building spree, the tortured effort to build the country’s first high-speed rail system is a case study in how ambitious public works projects can become perilously encumbered by political compromise, unrealistic cost estimates, flawed engineering and a determination to persist on projects that have become, like the crippled financial institutions of 2008, too big to fail.”

An amusing but telling aside in the Times story dealt with the decision of SNCF, the French national railroad, to forego participation in the California HSR project. SNCF, which had inaugurated a high-speed rail service between Paris and Lyon in 1981, likely felt it had something to contribute to California’s project. Eventually, though, SNCF backed out of the project in 2011, telling state officials that they preferred to focus on a similar project in Morocco, which the French pointedly described as “less politically dysfunctional” than the Golden State. (Morocco’s bullet train, which SNCF then helped construct, has been up and running now for 4 years.)

Not to be scooped by the Times, the Washington Post chimed in with an October 12 report on the same dismal topic: “Originally touted as a sub-three-hour link between San Francisco and Los Angeles, this mega-project has not carried a single passenger in the 14 years since the state committed to building it. It has made a lot of public money disappear, though: more than $10 billion, with the ultimate cost estimated at $113 billion.”

As with so many other projects undertaken with the noblest of intentions, plans that looked good on paper – or in theory – have typically run up afoul of competing political agendas, armies of litigious citizens, and sheer bureaucratic incompetence, not to mention the exceedingly high costs of doing most anything in California.

Readers of the Sacramento Bee are routinely regaled by tragicomic tales of how efforts to introduce computer technology to state government agencies almost invariably go askew, resulting in endless delays, extraordinary cost overruns, and infuriating failures to upgrade the computer systems by which agencies like DMV or the State Personal Board manage their records. As the Bee’s former political columnist Dan Walters noted in a July 5 piece in CalMatters, there is an almost endless litany of missteps that have plagued state government for years. “While California’s Silicon Valley and other technology hubs may be global leaders in the development of information technology, its state government has been chronically incapable of implementing IT systems that work as promised.”

One of the most spectacular and recent IT failures noted by Walters was the meltdown of the Employment Development Department’s systems for handling the unemployment insurance benefit claims filed by the hundreds of thousands of California workers who had lost their jobs due to pandemic-related shutdowns, while simultaneously approving billions of dollars in payments to fraudsters.

Within state government’s push for a zero-emission economy, the policy dichotomy is reflected in the clashing cultures of the two agencies at the core of the electricity issue: the California Air Resources Board and the California Independent Systems Operator (CAISO). For better or for worse, they are the horses to watch in this race to that imagined zero-emission future.

CARB is the agency chiefly responsible for cleaning the state’s air. It’s been active on this front since 1967, when it was established by legislation signed not by either of the Governors Brown but by Ronald Reagan, the aforementioned progressive environmentalist. On the other side is CAISO, which manages the flow of electricity across the high-voltage, long-distance power lines serving 80 percent of California and part of Nevada.

CARB is the state’s primary bureaucratic driver of the state’s future demand for electrical power. ISO, although not in the electric generation business, is ultimately responsible for ensuring that the grid is up to meeting the anticipated demand.

But, while one is in the business of forging the environmental regulations to implement an exceedingly ambitious but largely ambiguous state policy, the other functions in the much more constrained world of physics and the nearly equally constraining world of finance.

CARB’s role is made easy by the fact that making sure its regulatory policies are achievable is someone else’s job, mostly those private utilities and public agencies that generate power and supervise its distribution statewide.

It’s a division of labor that gives rise to a good deal of handwaving and magical thinking on the one side and mounting levels of exasperation on the other.

The temptation to despair is strong.

Disclaimer: The views expressed in Jock’s commentaries are his own and may not reflect the positions of the Pacific Merchant Shipping Association.