Turning California On
RECKONINGS
June 27, 2001
By PAUL KRUGMAN
Those 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 detailsof 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-burnenergy 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.
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