" the electricity crisis in the Golden State is partly the result of market manipulation by power
generators. The report alleges that generators overcharged the state's utilities, which
distribute power to consumers, by more than $6 billion over a 10-month period".
From RECKONINGS
March 25, 2001
The Price of Power
By PAUL KRUGMAN
From The New York Times
W elcome to the Cartel California. Last week a report by the Independent
System Operator, which runs California's power grid, made it more or less official:
the electricity crisis in the Golden State is partly the result of market manipulation by power
generators. The report alleges that generators overcharged the state's utilities, which
distribute power to consumers, by more than $6 billion over a 10-month period.
The report is almost certain to be ignored by federal authorities. But I'll come back
to that in a minute. First, there are a couple of things I need to make clear about the
report's claims.
The I.S.O. is not alleging that power generators were part of some vast conspiracy.
Actually, I shouldn't have used the word "cartel" in the opening sentence. The
generators didn't have to conspire: the logic of the situation made it easy, almost
irresistible, for each individual company to manipulate the market. In fact, to believe
that the generators didn't engage in market manipulation, you have to believe that
they are either saints or very bad businessmen, because they would have been
passing up an obvious opportunity to increase their profits.
Imagine the situation: it's a hot summer, and the California electricity market is very
tight. You are one of only a handful of major players selling wholesale electricity.
Surely the thought has to occur to you: what would happen to prices if one of my
plants just happened to go off line? And when companies act on that thought . . .
well, you get the picture.
It's also important to realize that accusations that power companies were
withholding electricity to drive up prices didn't emerge out of nowhere when the
crisis erupted; this isn't a case of politicians suddenly looking for scapegoats. On the
contrary, economists were raising red flags about the possibility of market
manipulation long before California's woes hit the headlines. Indeed, some
economists warned about the issue before California even deregulated: there was
clear evidence that "market power" was a problem in Britain, which began
experimenting with deregulation and privatization years before the movement came
to America.
And the research evidence continues to pile up. Just before the I.S.O. issued its
report, the economists Paul Joskow and Edward Kahn circulated a study that found
strong evidence that "exercise of market power" played a large role in raising
electricity prices last summer. The authors aren't leftists, or even opponents of
deregulation. They were merely trying to look objectively at the evidence, which
points more or less unmistakably to the conclusion that deliberate withholding of
electricity to drive up prices has been an important factor in the California crisis.
Still, there is every reason to believe that Washington will turn a deaf ear to this
evidence. As an article in this newspaper explained on Friday, the Federal Energy
Regulatory Commission, which is supposed to act as the nation's watchdog over the
energy industry, lately seems more like a lapdog. I was particularly struck with the
report that FERC's staff found that California's power companies "had the potential
to exercise market power," but could not conclude that they had actually used that
power. As I said, those power generators must be saints, bad businessmen, or both.
What should the regulators be doing? I'm skeptical about proposals to make the
generators pay big fines; it's not clear that you could figure out which company was
responsible for which part of the problem, or for that matter that the companies
were doing anything illegal. What FERC could do is impose a temporary cap on
wholesale prices. This would limit the financial damage to California — the state
government is currently spending more than a billion dollars a month to subsidize
electricity purchases. And in a market where "exercise of market power" is a major
factor, a wholesale price cap might actually increase supplies, because power
companies would no longer have an incentive to withhold electricity to drive up its
price.
But it's not going to happen. Blame knee-jerk free-market ideology, or the political
influence of the power companies (many of which are based in, yes, Texas).
Whatever the reason, it is hard to imagine an administration less likely to be
sympathetic to California's plight than the one currently in power.
And if this indifference makes Californians angry, it should. |
