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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: Zeuspaul who wrote (3636)	4/22/2001 4:56:36 PM
From: cnyndwllr	Read Replies (3) \| Respond to of 23153

Free market force vs regulation should not be, and is not, a national or a moral issue. The study of economics reveals many instances where free markets are sometimes ineffective and inefficient. As Z points out, we don't leave the highway system to the market. You could throw in education, national defense and others. What do you do when a service that may be vital to the well being of a country is at stake? What kind of benefits and costs are not recognized in the profit and loss statements of companies that do business for profit? How do you allocate scarce resources where the most good for the most people may not be accomplished by allocation through market pricing? (Did anyone follow the South African Aids medicine issue?) These are the types of questions that come up periodically and the answers are sometimes that the free market is not the best answer. It is not just socialistic thinkers that reach these conclusions, there is agreement among the greatest advocates of capitalism and free market forces. Any study of economics will clearly include the analysis of those instances where free market pricing and competition are not efficient or equitable, and does not work. The free market, which is the best system of allocating resources, has some limitations. I believe that the issue of energy markets should be discussed in that context. It seems clear that energy markets have at least two characteristics that leave room for sound arguments for some regulation. One is that the availability of energy in our society is inarguably vital from an economic, health and national security point of view. The cost of energy is high. The cost of energy outages, even short term, is astronomical. I think Z may be right in stating that the free market has no incentive to build in the excess capacity that will only be required in those instances that occur to infrequently to justify investment. In some sense there is actually a free market disincentive to build for that possibility, since in a free market when you have a scarce recourse that is vital, the pricing is in the hands of the seller. Imagine if there was only enough medicine to treat 10% of those suffering from a life threatening disease and your child had it. What price would be too high? Look what happened in Ca when the availability of power fell below the demand. That is admittedly a different level of "need" but the scarcity of a resource that has become an economic neccesity for industry, heating and the running of our complex health, government and social infrastructure revealed the pricing power that would rest in the hands of energy producers in a world where energy became scarce. A second reason for regulation is probably found in the hidden costs of energy that are not reflected in the balance sheets of energy producers and consumers. This would include things like health and environmental costs as a result of the use of energy in one form or another, including costs that will likely be paid by our children and their children and not by us. The historical answer has been a hybrid free market-government regulated system. In California the "deregualtion" was in reality an attempt to move more towards free market and away from government regulation. I'm all for deregulation whenever possible. The thought of beaurocrats having control over anything, much less anything as important as energy is frightening. On the other hand, the thought of placing total control of a necessary resource in the hands of a few very large corporations is equally scary. The answer appears obvious, there will be free market pricing but not to the point that the prices will be allowed to interfere with the basic functioning of the economy. In answer to Whitepine's pivotal question, a fair price will be a price that would allow energy companies to make a profit that would encourage the allocation of capital to the energy sector and reward investors for their risk. It would not be a price that would result in a shock to the economy with effects that far exceeded the benefits that might be realized by pumping that extra capital into the energy coffers. In other words, even though the tail might have the power to wag the dog, the government would not allow it. If you disagree, think what would happen if the California crisis spread to the western states and then east. The fact that energy companies stood in the unique position of being poised to benefit from being in the sweet spot of controlling the availability, and thus the price, of a necessity would not justify the use of that pricing power to price to the last penny. Just as we would react to a water shortage, a health shortage or some other emergency situation, we would control both the allocation and the price of that resource. It only seems different because it is California that is in that box now and not the rest of the country. As a side note, I do agree with all of the criticism of the California legislature and both governors, Republican and Democratic, one for his role in helping to create this and one for his role in refusing to face it. It is interesting that the state referred to sometimes as the "socialist" state, was actually leading the way in terms of deregulation. If it hadn't led the way then one of our other states would likely have stumbled and we would be talking about how stupid they were. I don't have the answers, but neither do those who want to let the "market" control this near term scarcity. Ed

To: Zeuspaul who wrote (3636)	4/22/2001 8:39:40 PM
From: whitepine	Read Replies (2) \| Respond to of 23153

You have not defined “just and reasonable price,” Zeuspaul >Just and reasonable pricing should be COST BASED in a market that has been defined as dysfunctional. I'll pick a number if you want...how 'bout 20 percent above cost. Whitepine> Interesting position. Let me understand, when gas/electric companies were not earning 20% profit, you would propose to increase their rate of return. Seems as though today’s income is just beginning to pay for a decade of below-average profit, so CA consumers, even if they paid their bills, still owe the companies for historic profits of 20%. Wish it were so. CA changed their regulations (not total deregulation) in an attempt to get even lower prices and a free lunch. Yes, it is too bad the changes did not produce the intended results. Error was socialist planning. Second, with 20% guaranteed, who pays for new entrants into power production and their costs? If the principle is applied to other areas, there would be rampant over-production of all goods and services…and even if consumers did not want a product(s). Someone (read the state and taxpayers) would have to pay the 20% tax to ensure that each producer received their 20%. For myself, I would move to CA and buy a $3Mil yacht and establish a charter service. Sales and rentals would not matter. Even though few might charter my services, I would be guaranteed 20%. In fact, as my costs went up, so would my profit. My bags are packed… (review the legislative history about the impact of rent/price controls in NYC. I doubt many would agree this system is worthy of emulation.) Taking your example a step further. Assume it is a hot day. I am willing to buy your water @ $2/glass. Thousands of others are also willing to buy your water. In fact, the line is so long that it stretches over the horizon. You only have 20 gallons to sell. Zeuspaul Why do I only have 20 glasses of water to sell? Whitepine> 20 gallons, 2000 gallons, no difference. The point is finite supply. Everything is scarce. Point is that if you do not use the price system, you MUST use some other criteria, and prejudice is the only alternative. Zeuspaul >The supply of energy is short because of poor planning by the energy producers. [ABC] The market influenced producers have opted to produce energy from natural gas....the easy way...the way to make a fast buck. Whitepine> CA power supplies are inadequate from historic lack of investment. Assumption was that CA could buy sufficient quantities on the spot market without long-term contracts. Great idea for free lunch and even lower prices as those with excess capacity were bidding to sell. But when spot market prices rose, crunch time. CA had insufficient long-term contracts. Love your use of cliches>fast buck< Have always been confused by fast and slow bucks. They all look the same to me. Zeuspaul >You can't argue with success...LADWP has plenty of power available at reasonable cost. They do not have to ration their power. Whitepine> Observe your misunderstanding of economics. You casually use the words “plenty of power at reasonable cost” as though they have enough to supply the entire state. They do not! Their capacity is finite. Zeuspaul > Utilities have been guaranteed a profit. Whitepine> So are you suggesting that any entity that promised to produce power was, or is, guaranteed 15% profit without regard to the price of production? If so, CA would have had much more investment, regardless the costs or (in)efficiencies. Profit would have been guaranteed. Such was not the case or thousands of corps would have installed billions of solar cells and tacked on 15% to their costs since profit was guaranteed by the state. Such was not the case. If you can document the specifics of the guarantee, I certainly would appreciate the source. I am unaware any such guarantee ever existed. Zeuspaul >If you want market based power you will have a short supply. Market based experiments have proven this to be the case. Whitepine> Just one example is need to vitiate your generalization. The relatively low prices for natural gas during the previous decade stand in stark contrast to your contention of shortages. That the economics of power generation and distribution was working is only part of the problem. It was only working in a static world. Power production, population increases, and the costs of producing power are not constants. Zeuspaul >The US from 1900 to 1990 was static???!!!!!! Whitepine> { see below[ABC] } CA has experienced growth during the last decade, yet by your own admission, no new production facilities have been built in the last decade. In your previous post you said, “If systems are working it is generally not a good idea to monkey around with them...especially on a large scale.” Excessive environmental restrictions are now coming home to roost. In fact, CA has revised/created many new rules related to both power consumption and production. It seems the socialists in control did not anticipate the cumulative price effects of their creative legislative actions. Because of new EPA regulations, several refineries are closing. New refineries are not being built because the cost of the new regulations is greater than a normal rate of return. We are creating high prices through excessive governmental intervention. CA is only the worst example. IMHO, the costs far exceed the marginal benefits. Yes, it seems few in CA want a power plant built in their neighborhood or even in their state. Zeuspaul >I was referring to my neighbor. It is better to centralized power production facilities than to let every tom dick and harry fire up a generator in his back yard. No new large production facilities have been built in the state in the last ten years or so. However 25 percent+/- of the power generated in California now comes from small independent producers. The Feds and Edison didn't want to build new power plants in California because they did not believe the power use forecasts by the California Energy Commission. Blame it on NIMBY if you want but it is not true. Whitepine> Perhaps you can document the actions CA tried to take to increase production during the last decade in opposition to FERC and Edison. I have not read anything to support this. Yes, NIMBY and BANANA are the unfortunate hallmarks of the new age. (http://www.enr.com/new/editorials12201.asp) Zeuspaul >Some things are best left under government control. The government has a good track record building and maintaining roads. Whitepine> No problem. Increase your taxes and buy coal mines, drilling rigs, pipelines, refineries, etc. Write your own oil/gas/coal exploration and development plan. Run them at cost and create a socialist utopia. If you can do it at a “just price,” I am certain we will all follow your lead. Good luck. Zeuspaul > The so called free market has been in place for many years and it DID NOT result in an electric power system with adequate capacity. Whitepine> This sentence contradicts your position in [ABC] above. You might review the basic logic of the price system and the difference between shortage and scarcity. My understanding of economics is different than yours. I don't mean to shy away from further discussion, but my time, too, is scarce. You may post a counter, but I believe I have made a few cogent points. We differ on a number of issues. Readers will create their own views about the relative wisdom of our differences. Regards, whitepine