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the real wolf
reckonings
by paul krugman
ecently i received a letter from an economist i respect , chiding me
for my " naderite " columns on the california energy crisis . he just
didn ' t believe that market manipulation by power companies could
possibly be an important issue ; it sounded too much to him like the
sort of thing one hears from knee - jerk leftists , who blame greedy
capitalists for every problem , be it third - world poverty or high
apartment rents . the left has cried " wolf ! " so many times that
sensible people have learned to discount such claims .
but now a bona fide wolf has arrived , whose predatory behavior is
doing terrible damage to our most populous state  * and nobody will
believe it .
true , california would be heading for a summer of power shortages
even if it had never deregulated . and even if there was workable
competition in the wholesale electricity market , prices in that
market would spike during periods of peak demand , transferring
billions of dollars from either taxpayers or consumers to the
generators .
but the evidence is now overwhelming that there isn ' t workable
competition in california ' s power market , and that the actions of
generators " gaming the system " have greatly magnified the crisis .
the key fact is that california has somehow remained in a state of
more or less continuous power shortage and very high wholesale
prices regardless of the level of demand . a rash of outages has
kept the electricity market conveniently  * and very profitably  *
short of supply even during periods of low demand , when there ought
to be lots of excess capacity .
as frank wolak , the stanford economist who also advises the
state ' s power grid , has pointed out , an outage at a power plant is
a lot like an employee calling in sick . you can ' t tell directly
whether he is really sick or has chosen to take the day off for
other reasons , but you can look for circumstantial evidence . and
such evidence has convinced mr . wolak that " generators use forced
outages strategically to withhold capacity from the market "  * a
view shared by a growing number of other researchers .
which brings us to the latest move by the federal energy
regulatory commission . on wednesday , the commission apparently
decided to offer california some relief , and put new price caps in
place on the california electricity market . i say " apparently "
because the more you look at the plan the less likely it seems to
be any help at all . indeed , the measure was passed on a 2 - to - 1
vote , with william massey  * the one commissioner who has been
sympathetic to calls for price controls  * voting against it on the
grounds that it would be ineffectual .
what ' s wrong with ferc ' s plan ? first , it caps prices only in
emergency conditions  * ignoring the fact that electricity prices
have stayed at hard - to - explain levels even when there is no
emergency . in effect , the plan is laid out as if the electricity
market were really competitive , in spite of all the evidence that
it is not .
second , even those emergency price caps are full of loopholes ,
offering extensive opportunities for what mr . wolak calls " megawatt
laundering "  * selling power to affiliated companies that for one
reason or another are exempted from the price controls ( for
example , the controls do not apply to " imports " from neighboring
states ) , then selling it back into the california market . severin
borenstein of the university of california energy institute adds
that because the allowed price depends on the cost of generation at
the least efficient plant , generators will have a clear incentive
to produce inefficiently : " i predict we will find some plants we
never heard of before that are suddenly operating again , and they
will be pretty inefficient . "
the general verdict seems to be that this is not a serious plan .
there are serious proposals to mitigate the crisis out there  *
indeed , last fall mr . wolak submitted a proposal that was well
received by other experts  * but ferc has ignored all of them .
the charitable interpretation is that ferc still doesn ' t get it ,
that it just can ' t bring itself to believe that this time the wolf
is real . the uncharitable interpretation is that last week ' s action
was meant to fail . the medley report , an online newsletter , calls
the ferc plan " a grand exercise in posturing without substance . .
. a very clever temporary move by the bush administration to
deflect any political fallout " from the looming disaster .
whatever the explanation , the plain fact is that ferc and the
administration have yet to offer california any significant
relief .
00 fo 04 b 3 blabf
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updated throughout the day .
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copyright 2001 the new york times company
nytimes . com article : the real wolf
this article from nytimes . com
has been sent to you by vkaminski @ aol . com .
/ - - - - - - - - - - - - - - - - - - - - advertisement - - - - - - - - - - - - - - - - - - - - - - - \
looking for better it solutions ?
toshiba is uniting digital , mobile and network innovations
in a bold new vision of information technology for today
and tomorrow . take a closer look at life in the new digital age .
and imagine how good it can be . visit toshiba . com for more details .
the real wolf
reckonings
by paul krugman
ecently i received a letter from an economist i respect , chiding me
for my " naderite " columns on the california energy crisis . he just
didn ' t believe that market manipulation by power companies could
possibly be an important issue ; it sounded too much to him like the
sort of thing one hears from knee - jerk leftists , who blame greedy
capitalists for every problem , be it third - world poverty or high
apartment rents . the left has cried " wolf ! " so many times that
sensible people have learned to discount such claims .
but now a bona fide wolf has arrived , whose predatory behavior is
doing terrible damage to our most populous state  * and nobody will
believe it .
true , california would be heading for a summer of power shortages
even if it had never deregulated . and even if there was workable
competition in the wholesale electricity market , prices in that
market would spike during periods of peak demand , transferring
billions of dollars from either taxpayers or consumers to the
generators .
but the evidence is now overwhelming that there isn ' t workable
competition in california ' s power market , and that the actions of
generators " gaming the system " have greatly magnified the crisis .
the key fact is that california has somehow remained in a state of
more or less continuous power shortage and very high wholesale
prices regardless of the level of demand . a rash of outages has
kept the electricity market conveniently  * and very profitably  *
short of supply even during periods of low demand , when there ought
to be lots of excess capacity .
as frank wolak , the stanford economist who also advises the
state ' s power grid , has pointed out , an outage at a power plant is
a lot like an employee calling in sick . you can ' t tell directly
whether he is really sick or has chosen to take the day off for
other reasons , but you can look for circumstantial evidence . and
such evidence has convinced mr . wolak that " generators use forced
outages strategically to withhold capacity from the market "  * a
view shared by a growing number of other researchers .
which brings us to the latest move by the federal energy
regulatory commission . on wednesday , the commission apparently
decided to offer california some relief , and put new price caps in
place on the california electricity market . i say " apparently "
because the more you look at the plan the less likely it seems to
be any help at all . indeed , the measure was passed on a 2 - to - 1
vote , with william massey  * the one commissioner who has been
sympathetic to calls for price controls  * voting against it on the
grounds that it would be ineffectual .
what ' s wrong with ferc ' s plan ? first , it caps prices only in
emergency conditions  * ignoring the fact that electricity prices
have stayed at hard - to - explain levels even when there is no
emergency . in effect , the plan is laid out as if the electricity
market were really competitive , in spite of all the evidence that
it is not .
second , even those emergency price caps are full of loopholes ,
offering extensive opportunities for what mr . wolak calls " megawatt
laundering "  * selling power to affiliated companies that for one
reason or another are exempted from the price controls ( for
example , the controls do not apply to " imports " from neighboring
states ) , then selling it back into the california market . severin
borenstein of the university of california energy institute adds
that because the allowed price depends on the cost of generation at
the least efficient plant , generators will have a clear incentive
to produce inefficiently : " i predict we will find some plants we
never heard of before that are suddenly operating again , and they
will be pretty inefficient . "
the general verdict seems to be that this is not a serious plan .
there are serious proposals to mitigate the crisis out there  *
indeed , last fall mr . wolak submitted a proposal that was well
received by other experts  * but ferc has ignored all of them .
the charitable interpretation is that ferc still doesn ' t get it ,
that it just can ' t bring itself to believe that this time the wolf
is real . the uncharitable interpretation is that last week ' s action
was meant to fail . the medley report , an online newsletter , calls
the ferc plan " a grand exercise in posturing without substance . .
. a very clever temporary move by the bush administration to
deflect any political fallout " from the looming disaster .
whatever the explanation , the plain fact is that ferc and the
administration have yet to offer california any significant
relief .
00 fo 04 b 3 blabf
visit nytimes . com for complete access to the
most authoritative news coverage on the web ,
updated throughout the day .
become a member today ! it ' s free !
http : / / www . nytimes . com ? eta
how to advertise
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
for information on advertising in e - mail newsletters
or other creative advertising opportunities with the
new york times on the web , please contact alyson
racer at alyson @ nytimes . com or visit our online media
kit at http : / / www . nytimes . com / adinfo
for general information about nytimes . com , write to
help @ nytimes . com .
copyright 2001 the new york times company