New York Times
June 27, 2001
Turning California On
By PAUL KRUGMAN
T hose wimpy Californians, with all their fuzzy talk about
conservation and their hostility to Big Energy, were supposed to spend
this summer sweltering in the dark. But events are not following the
script. Summer has begun, yet so far power supplies have been adequate
and prices have been fairly reasonable. In fact, in the last few days
wholesale electricity, which often sold for $750 per megawatt hour
this time last year, has been going for less than $100, sometimes less
than $50.
Everyone seems reluctant to talk about this good news, out of fear
that saying anything optimistic would be a self-defeating prophecy.
And it is still possible for things to go very wrong. Still, the
contrast between dire expectations and the relatively benign picture
so far demands an explanation.
One big reason for California's improved energy situation is
conservation. Taking temperature into account, California consumers
are using between 5 and 10 percent less electricity this summer than
expected.
Another reason is a sharp drop in the price of natural gas, an
important part of the cost of generating electricity. More on that in
a minute.
The most important factor in the turnaround, however, is that the
state's power plants are back on line. In March, with air-conditioners
turned off, there should have been plenty of spare generating
capacity. But around 15,000 megawatts, a third of the state's
capacity, was mysteriously unavailable. Now the offline capacity is
less than 4,000 megawatts.
Why are the state's power plants operating again? More to the point,
why weren't they operating back when the state was desperately short
of power, and prices were much higher than they are now?
Many economists now accept the uncomfortable answer: Generators
deliberately withheld electricity from the market in order to drive
high prices even higher. Until recently the evidence for this market
manipulation was purely circumstantial; but it has now been reinforced
by direct testimony by former employees of one generator.
So why did the market manipulation stop? Generators now sell much of
their output under long-term contracts with the state, which reduces
the incentive to drive up prices in the spot market. But the main
answer is probably that intense public scrutiny, culminating in the
recent decision by federal regulators to impose price caps, has
convinced generators that they had better behave themselves. (The
details of the price caps, it turns out, may be less important than
the signal that the regulators are, finally, prepared to do some
regulating.)
The natural gas story may be similar. Last year El Paso Natural Gas,
which controls one of the crucial pipelines serving California, leased
a big chunk of that pipeline's capacity to its own marketing
subsidiary. That subsidiary has been widely accused of using its
control of the pipeline to withhold gas from the California market,
and thereby drive up prices. The company denies the accusation, and
says that an internal document that talks about "ability to influence
the physical market to the benefit of any financial/hedge position"
wasn't saying what it seemed to be saying. But when the lease expired
at the beginning of this month, gas prices in California promptly
plunged 50 percent.
And so, sooner than anyone expected, it seems that the worst may be
over. A drought or a heat wave could still cause rolling blackouts.
But time is on California's side; some new power plants will come on
line in a few weeks, and many more over the course of the next 18
months.
The big loser from all this for somebody always gets hurt even by good
news is, of course, Dick Cheney, the architect of the Bush
administration's drill-and-burn energy plan. Remember that Mr. Cheney
sneeringly dismissed conservation as a mere "sign of personal virtue,"
and was scathing about people who thought price controls would help.
Now things are suddenly looking up partly because of conservation, and
partly because price controls and the threat of further government
intervention have deterred energy producers from manipulating the
market.
It turns out, in other words, that Mr. Cheney who prides himself on
his tough-mindedness was naïvely out of touch with reality. And the
real realists were those silly people who thought that California
could solve its crisis by saving energy and suing energy producers.
Copyright 2001 The New York Times Company