In Broad Daylight
The New York Times
September 27, 2002
By PAUL KRUGMAN
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."
I wrote that in March 2001, when the California electricity crisis was at
its height. Even then the experts I talked to - economists who
followed the situation closely, and kept an open mind - believed that
energy companies were deliberately creating shortages. But only in the
last few weeks, with a series of damning reports and judgments,
has conventional wisdom grudgingly accepted the obvious.
And that's the real mystery of the California crisis: how could a $30
billion robbery take place in broad daylight?
True, it was always hard to pin down specific acts of market manipulation.
Stanford's Frank Wolak likens energy companies to an employee
who keeps calling in sick: the pattern is clear, but unless you catch him faking
an ailment, it's hard to prove that he is malingering.
But the evidence is starting to pile up. First there were those
Enron memos. Then the California Public Utilities Commission
determined that most of the blackouts that afflicted California between November
2000 and May 2001 took place not because generating capacity was
inadequate, but because the major power companies kept much of
their capacity off line. Most recently, a judge for the Federal Energy
Regulatory Commission has ruled that El Paso Corporation
used its control over a key pipeline to create an artificial natural gas shortage.
But why did energy companies think they could get away with it?
One answer might be that the apparent malefactors are very
big contributors to the Republican Party. Some analysts have suggested that
energy companies felt free to manipulate markets because they believed they
had bought protection from federal regulation - the conspiracy-minded point out
that severe power shortages began just after the 2000 election, and ended
when Democrats gained control of the
Senate.
Federal regulators certainly seemed determined to see and hear no evil,
and above all not to reveal evidence of evil to state officials. A previous
FERC ruling on El Paso was, in the view of many observers, a
whitewash. In another case, AES/Williams was accused of shutting down
generating units, forcing the power system to buy power at vastly higher
prices from other units of the same company. In April 2001, FERC
and Williams reached a settlement in which the company repaid the extra profits,
but paid no penalty - and FERC sealed the evidence. Last
week CBS News reported that "federal regulators have power control room
audiotapes that prove traders from Williams Energy called plant
operators and told them to turn off the juice. The government sealed
the tapes in a secret settlement" - the same settlement? - "and still
refuses to release them."
If that's true, FERC caught at least one power company red-handed,
in the middle of the crisis, at a time when state officials were begging the
agency to take action - and then suppressed the evidence. Yet this story has received
little national play.
For some reason it has never been cool to talk about what was really
happening in California. When the crisis was in full swing, most
commentators clung to a story line that blamed meddlesome bureaucrats,
not profiteering corporations. When the crisis came to an end, it
suddenly became old news.
Maybe our national faith in free markets is so strong that people just
don't want to talk about a case in which markets went spectacularly bad.
But I'm still puzzled by the lack of attention, not just to the disaster,
but to hints of a cover-up. After all, this was the most spectacular abuse
of market power since the days of the robber barons - and the feds did
nothing to stop it.
And if FERC was strangely ineffective during the California crisis,
what can we expect from other agencies? Across the government, from the
Interior Department and the Forest Service to the Environmental Protection
Agency, former lobbyists for the regulated industries now hold
key positions - and they show little inclination to make trouble for their once
and future employers.
So we ignore California's experience at our peril. It's all too likely to
be the shape of things to come.
nytimes.com
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