New York Times
January 7, 2001
RECKONINGS
Abuses Of Power
By PAUL KRUGMAN
H ow did California get into its electricity mess? Now what?
Start with the less interesting question. The biggest single cause
of the California power crisis is simply that nobody expected
demand for electricity to grow so rapidly. When the political
momentum for deregulation was building, in the mid-1990's,
California's economy was still suffering the aftereffects of a
nasty recession; most experts thought that there would be excess
generating capacity well into the next decade. Then California
began growing faster than anyone had thought possible. The result
was surging demand for power.
To cope with an increase in demand, you either need to persuade
consumers to consume less or make it possible to produce more. But
California's deregulation did neither.
First, while the wholesale market in which local utilities buy
power from generators has been set free, the prices charged by
local utilities to final users have stayed under state control at
the request, let us add, of the utilities, which wanted protection
from a price slump. So consumers have had no incentive to economize
on electricity use.
Meanwhile, no new power plants have been built. This is partly the
result of the regulatory hurdles that would-be builders of plants
must surmount; it is probably also the result of the fact that
companies that already own substantial shares of California's
generating capacity, and which therefore stand to benefit from a
tight market, have little incentive to add capacity. (Some analysts
believe that these power companies have actually withheld power
from the market for the same reason, though this is not the core of
the crisis.) Eventually new plants constructed by new players will
ease the strain but this will take time.
So for the time being California finds itself with a demand for
electricity that it cannot meet. One result has been rationing of
power, mainly hurting businesses rather than families. But the
physical shortages of electricity have actually been more or less
manageable; what is really pushing the state to the brink is the
financial fallout. California's utilities find themselves in a
bidding war, both with one another and with their counterparts in
neighboring states, for the limited supply of wholesale power
available. This bidding war has sent wholesale electricity prices
to 40 or 50 times their normal level, bringing huge windfall
profits to the companies that generate power, but also bringing the
utilities that deliver power to the edge of bankruptcy.
It's a miserable story botched deregulation meets Murphy's Law. But
the main question is, Now what?
Bear in mind that while the huge profits now being earned on
electricity sales will lead, over time, to construction of more
plants, it could be years before the situation returns to normal.
So what are the options?
The simplest option would be for California to deregulate all the
way and let the prices to final consumers go as high as necessary
to persuade them to limit their demand to the available supply.
This would work; it would be efficient; and it would also transfer
tens of billions of dollars from California consumers to eight
lucky power companies.
An alternative would be a temporary and partial reregulation:
placing price caps on wholesale power, while also raising prices to
consumers, and engaging in some power rationing while fixing the
pricing system and hastening the arrival of new generating
capacity. This would be messy, somewhat inefficient and a lot
fairer. It would also, however, require federal help. California
has already found that it cannot unilaterally impose price caps on
wholesale power because other states are also short of power, and
the electricity simply goes elsewhere. So this solution would
require higher-level intervention.
If the "power summit" now scheduled for this week had happened a
year ago, one could reasonably have expected a compromise along the
lines of the latter alternative that is, a compromise that, without
trying to wish the shortage away, tries to limit the damage to
consumers and the windfall profits to producers. But George W. Bush
doesn't just have an ideological attachment to free markets; he has
close personal ties to some of the companies that are making such
huge profits in California right now.
Mr. Bush has been conspicuously silent on the California crisis.
But in the end it's his decision. Will he help California find an
answer that does not involve paying a huge ransom to his friends?
Copyright 2001 The New York Times Company