There's deregulation and then there's crimminal activity. Deregulation, which is always shorthand for - we don't have a clue about American capitalism - doesn't open the entire industry to wholesale fraud.
======Severin Borenstein
Director of the University of California Energy Institute and a professor of business at the Haas School of Business at California-Berkeley
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The FERC was supposed to be the referee on prices, right?
The FERC is supposed to make sure that prices are just and reasonable in the wholesale electricity market. The FERC has not done its job. They, by and large, were uninterested in reviewing and carefully thinking about whether this market would work. And then when it became clear that it didn't work, even to FERC, who in November said the prices were not just and reasonable, their response was to say, "Yes, but we're not going to do anything about it."
What's that all about?
The [current] chairman of the FERC is a person who believes very deeply in markets, regardless of the facts.
But the past chairman?
The past chairman was also of that type. He seemed to not believe that the FERC really needed to worry about prices in these markets.
Democrat or Republican?
I don't think that that philosophy is strictly only associated with one party. There's no question that the Clinton administration would have liked to see more intervention and pressured FERC, but FERC is an independent regulatory agency. There's a limited amount that the president can do to pressure such an agency into specific actions.
The president of the United States couldn't have influenced FERC by appointment, or by just in bully pulpit, concerning what was going on?
There was a lot of pressure towards the end of the administration to do exactly that, and it wasn't very successful.
So FERC took it upon themselves to stay out of the fray?
They went further than staying out of the fray. They stayed out of the fray and they blocked attempts by the California Independent System Operator to control prices and to take actions that would have helped.
What's the rationale behind that?
I'm not a political scientist, and I'm not sure why these people act the way they do. The chairman of the FERC now is somebody who doesn't really understand economics and doesn't really understand how businesses operate. In many speeches very recently, he's said, "You have to just let the market work," which is of more religion than understanding of economics. In any market in the United States, we don't just "let the market work." Every market is regulated to some extent by antitrust laws, by health and safety laws, etc. The question is, how much intervention should there be? And that, when done right, is a careful policy question, and not one that can be addressed by campaign slogans.
... The FERC has a history of being a legal-oriented regulatory agency, where the legal process matters much more than good policymaking. They do have some economists on staff at the FERC, but they actually don't pay any attention to them. The decisions have been made by the commissioners who, by and large, have very little training and history in the energy business or in economics, and by high-ranking lawyers, who also don't seem to understand how markets work, which isn't very surprising. Up until very recently, most of what they regulated wasn't very market-oriented, so they didn't really understand markets and they, for the most part, didn't need to. In the electricity business, that was particularly true. ...
The problem is we're now moving toward the market-oriented industry, and they still don't understand how markets work. So they make claims, for instance, like, "Price caps will discourage investments." Well, that's absolutely right. If price caps are set too low, they will discourage investments. But as any economist knows, there's a level at which they would discourage investment and price caps that are higher than that won't discourage investment, and actually can improve the operation of industry.
So the FERC could have intervened and stopped this crisis from happening?
The FERC could have intervened and certainly lessened the crisis. I think that, to completely avoid the problems ... we really needed to have a retail price increase in California as well, and we haven't seen that. And that's not the first jurisdiction. The first jurisdiction is at the wholesale level.
We needed both of them acting rationally?
That's right. The FERC has dropped the ball on the wholesale market, and the California Public Utilities Commission has dropped the ball on the retail market.
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