Krugman: Cal Power & Bush

Michael Pollak mpollak at panix.com
Sun Jan 7 01:03:51 PST 2001


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



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