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Technology Stocks : The *NEW* Frank Coluccio Technology Forum -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (1824)	1/24/2001 2:14:22 AM
From: wonk	Read Replies (2) \| Respond to of 46821

Ron: Just catching up on the thread and thought I briefly jump in. IMO, your position is: 1. Too quickly dismissive of mthomas' assertion that there may be some degree of manipulation in this crisis; 2. To quick to lay the blame on"regulation" which stigmatizes a legitimate but flawed attempt to introduce market mechanisms to promote efficiency; 3. Failing to address the public policy issues which are brought into question; 4. Not following the money. Regarding: 1. Demand has not "skyrocketed.' Most studies I've seen show that statewide demand in CA is generally in keeping with long range forecasts. That is not to discount the regional disparities. Nevertheless, as demand has risen, both intra and interstate, in conjunction with a whole host of other factors (regulatory imperfections, climate-related supply reductions, transmission capacity bottlenecks) which has constricted supply a situation has occurred in which any one generator has developed market power. If you harken back to undergraduate macroeconmics market power is generally illustrated by the ability to effect price by withholding supply. Hence, profitability can be maximized at less than the maximally efficient production capacity. There is some body of evidence which suggests that this is occurring today in CA. If true, there is profiteering (in the pejoritive connotation) occuring. (see answer 3) 2. The issue in CA with electricity, or anywhere in the US for that matter, or in telecom or any other Industry traditionally regulated, is not an issue of Regulation v. No Regulation. Rather it is an issue of Poor Regulation versus Sound Regulation. Remember, the public utilities (and their allies and lobbyists) in CA were full partners in the crafting of the deregulatory legislation. Legislation is give and take: the utilities got a lot of things that their opponents were loath to let them have. They also had to accept certain restrictions they didn't want. a. Case in point was the initial restriction on long term contracts. Without going into detail, the utilities accepted this restriction because of the other benefits they got out of the deal. The restriction on long term contracts was too insure that post deregulation, a viable competive market emerged for generating capacity. If the regulated arms had been permitted to hedge all their needs by long term contracts, then there would have been no way that competitive sources would have developed due the inability to finance a multi-million / billion capital investment in a market where the base load is tied up in long term deals and the new entrants are viciously competing for scraps. b. The whole "business is good" - "governement bad" is a red herring. The argument is being made ad infinitum, ad nauseum about no new power plants being built. Again a whole host of factors came into play, but it wasn't so simplistic as impediments due to all the 'tree-hugging wackos' in CA. In the early part of the decade there was plenty of generating capacity hence no need to build capacity and more importantly no ability to finance new construction from the public markets. As the decade wore on and some deregulation, any deregulation, became more certain both the companies themselves as well as the public markets became loath to even attempt to commence new builds. Its called regulatory uncertainty. Note that since the passage of the bill, quite a number of new generating plants have been authorized with capacity scheduled to come on line late this year. Again, a red herring. 3. The public policy issue here is clear. To say its CA's problem is shortsighted. When I look out the window of an airplane I see no geographical lines draw in magic marker on the face of the earth. Prior to the whole deregulation impetus, there was a general recognition that reliable, safe, and affordable electric power was a National Security Interest of the United States. What's happening in CA is going to effect both the national and world economy. We could argue whether that effect will be ripples in a bathtub or a tsunami, but there will be effects. Nevertheless, I would strongly submit that the national interest of the United States trumps private and state interests. 4. a. Look at the profitability of the generating plants and their new owners: Southern, Dynegy, Reliant etc. I cannot give you an exact numbers but they are up something on the order 4-10 times. Contrast that with the stories of higher natural gas prices and all the shutdowns due to planned and unplanned maintenence which should - in theory - lower profitability. I think its safe to say that the latter is just hand-waving and "spin" to deflect inspection of massive profit taking in this situation. Would I expect them to do anything less? Absolutely not, but then that conclusion circles back to answer three. b. The CA utilities also profited from the whole situation - prior to the supply demand equation constricting. Go back and look at their profitability prior to the commencement of this situation. Go back and look at how they were able to recover their sunk costs far in advance of what even they expected to do. Go back and look at the rate decreases promised but never delivered as they recouped those sunk costs so rapidly. These guys don't have clean hands either. Its axiomatic but quarter to quarter management will kill you almost every time. This is already way to long, but let me ask a rhetorical question. What have the ratepayers of California done wrong? California uses a lot of electricty, but its is also one of the most efficient, if not the most efficient consumer in the US. Furthermore, one of the consequences of deregulation is that the largest consumers get the best deal, i.e., the chip fab gets a significantly lower price per kilowatt hour than the average consumer. All the electric utilities knew years ago that this was the dirty little secret of deregulation. Residential bills and small and medium business bills would increase, the largest user's would decrease - a clear transferral of wealth from the public and small business - to whom? Of course the foregoing could be acceptable if the process led to a system which was MORE safe, MORE reliable, and MORE efficient. However, there was a reason that electric utilities were a regulated monopoly for 100 years. Its a trusim, but when people don't learn lessons from the mistakes of history, they are condemned to repeat them. ww p.s. Hope things are well with you. Long time since the battles about the evil M&Ms and short sellers on the AZNT thread.