Re: PK on CA EE

[Eugene Coyle <eugenecoyle@xxxxxxx>]

> "Devine, James" wrote:
>
>        Pen-l experts on energy issues -- Gene Coyle? -- is Krugman's description of
>        California's energy emergency mostly correct? all correct? all wrong? mostly
>        wrong? none of the above?

Jim,
    The Krugman piece is, I reluctantly would say, mostly on target.  I'll just excerpt a few lines to comment on, or just coment.

First, I agree with PK that it is a long shot for California to recoup money from the generators.  Which is slightly different than renegotiating the contracts.  Krugman writes:
 

> The contracts in question were signed about a year ago, when wholesale
>        electricity prices in California were more than 10 times normal levels. Last
>        June, however, prices suddenly plunged. Now the state wants those contracts
>        canceled.
>
>        Does the state have a case? The conventional wisdom is that California has
>        only itself to blame for its power crisis, that the debacle was the result
>        of "flawed deregulation."
This mixes two things.  One, the outrageous contracts, and two, the
debacle.  The contracts were Governor Davis' response to the debacle,
not the debacle.  Of course there is a second debacle, i. e. the contracts,
but these cannot be attributed to "flawed deregulation" but rather blatant
stupidity on the part of the Governor.  Or perhaps worse.  Advisors
on the contracts were people with conflicts of interest-- interests in
the companies they were negotiating with and/or strong ties to Southern
California Edison.  I can't imagine anyone with experience and a clear
head signing contracts running for ten years to deal with an immediate
shortage -- and many of the contracts don't even kick-in until late this
year or next.  Amazingly bad work.

    In the last week the Governor appointed one of these "advisors", Mike Peevey, formerly president of Southern California Edison, to be a CPUC Commissioner.  Peevey has a long history of being on the wrong side of things.  Years ago he was a high level Labor bureaucrat (with an MA in economics from Berkeley) and he ran the pro-nuke campaign against Prop 15 in 1976.  (I think it was '76.)  A nasty piece of work.  This apppintment might be part of the Governor's campaign for re-election, i. e. demonstrating he is more free market than William Simon's kid.

This next quote from Krugman I like:
 

> But try asking what "flawed deregulation" means, and you
>        usually get a long pause. Eventually you hear that wholesale prices were
>        deregulated, but retail prices weren't - which is true, but doesn't have
>        much to do with what went wrong.
If you follow this mess as I do, you'll have read by now 1,000 times that
retail prices weren't deregulated and everything would have been fine if
they had been.  This line comes out of the UC Berkeley Energy Institute
which has done a lot of papers on the electric de-reg issue, very few of
which have any merit at all.  What isn't reported, along with the
claim, is that retail rates were frozen at a very HIGH level, enabling
the utilites to over=-collect billions of dollars to pay off their nuke
and other investments.  The free market freaks never said anything
about freeing retail rates until the market spiked.  You didn't see
any clamor from the marginalists when people were paying way above marginal
cost.  Only when retail prices were below "marginal cost" did they
speak up.  And of course the prices weren't marginal cost at all,
simply set by cooperation (or collusion) among the generators.

But had retail rates been unfrozen, goes the claim, then customers would have reacted by cutting usage and forcing those nasty generators to behave.  There is a lot wrong with that, but for the San Diego area, retail rates were deregulated, and when prices spiked the reaction was both reduction in use and, more importantly, political outrage which forced the Governor to re-freeze the rates.  One thing wrong with the claim is that it starts with the assumption that there was a shortage of supply compared with demand.  The falsity of that assumption is well known, and Krugman notes it.

The next point to take up if from this Krugman passage:
 

> If conventional wisdom was right, the crisis should have gotten even worse
>        last summer. Instead, electricity suddenly became abundant, and prices
>        plunged. Frank Wolak, the Stanford professor who heads California's
>        electricity market surveillance committee, has explained why: by June,
>        thanks in part to energetic conservation, most of the state's power needs
>        were being supplied under those long-term contracts.
I think it is much more complex than what Krugman says here.  The
California price spikes spread throughout the whole Western United States. 
Industries shut down from Montana to Washington and beyond.  Thousands
were laid off in the West.  The political pressure grew too much for
FERC to bear and price caps were put on.  There was conservation,
but induced by civic responsibility, not free market prices, which remained
capped at the retail level until late Spring of 2001.  The public
joined hands and saved energy for the common good.  (And pocketbooks,
I admit.)  I don't think the last phrase of the quote above is close
to accurate.  Most of the state's power needs were NOT being supplied
then under the long-term contracts.

    It is interesting the Krugman quotes Frank Wolak -- part of the old boy trusting of a distinguished economist at a prestigiious university.  And Wolak missed an awful lot throughout this whole experience.

Gene Coyle
 
 
 

 

February 26, 2002/New York TIMES.

The Power Perplex
By PAUL KRUGMAN

Until recently, it seemed unlikely that California would ever get anything
back from the energy companies that, in the view of state officials, robbed
the state of billions of dollars. Then came the Enron scandal. Will
revelations about Enron's political machinations, and new allegations by
former Enron employees that the company manipulated California's electricity
markets, change the odds? California officials apparently think so.
Yesterday they filed a suit with the Federal Energy Regulatory Commission,
seeking a renegotiation of electricity contracts signed during the state's
power crisis. They may hope that FERC officials - particularly the chairman,
Pat Wood, who was recommended for the post by Enron's Ken Lay - will feel
the need to demonstrate their independence by getting tough with energy
companies.

The contracts in question were signed about a year ago, when wholesale
electricity prices in California were more than 10 times normal levels. Last
June, however, prices suddenly plunged. Now the state wants those contracts
canceled.

Does the state have a case? The conventional wisdom is that California has
only itself to blame for its power crisis, that the debacle was the result
of "flawed deregulation." This conventional wisdom has become conventional
mainly because it fits so well with our era's enduring faith in markets.
(And I mean faith: "I believe in God and I believe in free markets," Mr. Lay
once declared.) But try asking what "flawed deregulation" means, and you
usually get a long pause. Eventually you hear that wholesale prices were
deregulated, but retail prices weren't - which is true, but doesn't have
much to do with what went wrong.

The key fact about California's crisis is that it peaked not in summer, when
air-conditioners gobble electricity, but in the cooler months. Supplies
should have been ample. Instead, there were severe shortages, because for
some reason a third of the state's capacity stayed off line.

The power companies say that generators were shut down for maintenance after
being worked hard the previous summer. But the mysterious shutdowns went on
for about six months, and continued despite sky- high prices for
electricity. Surely there was time and incentive enough to carry out some
expedited repairs.

A more likely explanation - widely accepted by energy economists - is that
power companies found that they could make more money by shutting down some
of their plants, and hence creating shortages that sent prices into the
stratosphere, than they could by actually meeting demand.

If conventional wisdom was right, the crisis should have gotten even worse
last summer. Instead, electricity suddenly became abundant, and prices
plunged. Frank Wolak, the Stanford professor who heads California's
electricity market surveillance committee, has explained why: by June,
thanks in part to energetic conservation, most of the state's power needs
were being supplied under those long-term contracts. The spot market, which
was so easy to manipulate, had become relatively small; so the incentive for
power companies to drive up spot prices by taking generators off line had
largely vanished. Lo and behold, idle capacity came back on line, and the
crisis was over.

Now the truth is that California's deregulation probably was flawed, but the
flaw was in trusting markets too much, not too little. As Mr. Wolak points
out, California's system differed from other deregulations mainly in
offering remarkably few safeguards against market manipulation. And the
state paid an enormous price for its gullibility.

Will California win its suit? I have my doubts: money still talks. But at
least the post-Enron change in climate makes it possible to revisit
California's crisis, a crisis that should have provoked a rethinking of our
economic ideology, before the ideologues flush it down the memory hole.

My Feb. 22 column mentioned "line 47" in this year's 1040. What I said was
correct, but has been subject to misinterpretation, most of it innocent,
some of it deliberate. Let me say it another way: Most people think that
they received both a rebate and a tax cut. But the rebate was only an
advance on the tax cut; it must be counted against the refund you would
otherwise receive. Hundreds of thousands of early filers have already gotten
this wrong. The effect is to give many people a rude shock, which is not
what this economy needs.

--------------

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine