California: Round Up the Usual Suspects?

The ruckus of public outcry and rush to lay blame in the California power crisis is reminiscent of the tales of Mary Shelley’s Frankenstein monster. It is merely an observation on the human condition to note that we must, during troubled times of any sort, have a scapegoat for the pitchfork-armed locals to chase after, oil soaked torches held high. In this case, there are two convenient targets of opportunity for the populace and pundits to pursue: the government that supposedly controls and oversees the monolithic power companies, and the power companies themselves. Dr. Frankenstein and his monster, if you will.

And lest we forget, there’s the bride – the concept of deregulation itself.

It’s not terribly surprising that it took a significant event like we're witnessing in California to draw out the interest and ire of the average consumer. Maybe the concept of Energyland.com, and the issues that this website has been trying to convey for the past few years, were just a wee bit ahead of our time. Yet I remain under no false illusion that even now, much of anyone outside of California gives a watt about what's happening in the Golden State. If the situation in California is not impacting your own electric bill and the lights come on when you flip the switch, the current crisis is probably no more than a 30 second sound bite on the evening news to you.

As I have said for many years, "You should be paying attention." While in some ways, the situation that evolved in California is unique to California, there are enough similarities in the deregulation efforts and power infrastructure / distribution / marketing schema with every other state to warrant close attention by everyone. The only thing we're hearing now from other states who lagged California in deregulation by a year or two is "Naw, it can't happen here. We did it differently."

Did it differently? That's not what I was hearing a few years back as I talked to regulators and industry participants from many states. Almost every state in the union that has or will be deregulating / restructuring their power industry used or is using the California experiment as a template for their own. Yes, there may ultimately be differences, but there's a lot of overlap, as well.

"So what’s the cause and who do we toss the pitchfork at?", you ask. My first response to that question is that it really doesn’t matter. You can follow any of the news links or discussion links on the California Crisis page at Energyland.com and find out that there’s plenty of blame to be cast upon the waters. But the bottom line is that artificial price caps imposed at the outset of "deregulation" in California are expiring, and combined with lousy demand forecasting and a heretofore-apathetic public, reached a point of confluence in the past few months. Artificially imposed price caps expired, and California is underpowered – a net importer of electricity. Mr. Supply Side, meet Ms. Demand.

Adam Smith couldn't have scripted this any better. This was a no-brainer. Costs were going to go up when the caps expired. It didn't take an economics major to figure it out. But no one was paying attention before the deregulation process in California was fate acompli.

In my opinion, textbook economics simply do not apply to this situation. Free market forces don't work well with a commodity like electricity that, for all intents and purposes, can't be stored. Also, for true competition there has to be an abundant supply (or oversupply) of the commodity. Witness how oil prices stabilized for most of the 1990's.

That’s simply not the case (and won’t be for a long time, if ever) with the California power market. Left unsaid in the whole debate on blame-sharing lies the fact that both the regulators and power companies in California made the assumption that a wave of "startup" power companies trying to capture market share - ergo, competition - would contain the cost of electricity. But no one apparently considered a scenario whereby wholesale electricity costs would spike high (for whatever unclear reason) and remain high, forcing most of the startups to abandon their ambitious plans and leave the fledgling market. The incumbents were left with the 800 pound gorilla of deregulation sitting on their fence, and forced to continue acting in a retail supplier role, with very minimal control over the wholesale market.

You think that maybe Ken Lay of Enron is having the last laugh now?

The last chapter in the current California power crisis won't be written for some time yet to come. You can rest assured, however, that the repercussions will continue to be felt across the country, and indeed the globe. Those repercussions aren't isolated to electricity supply - political careers will be short circuited, jobs will be lost, families will be disrupted, and geographic boundaries (from an electric power perspective) will become even more parochial.

In other words, you ain't seen nothin' yet.

Rick Cowels

http://www.energyland.net/deregulation/pc01242001.asp

-- Martin Thompson (mthom1927@aol.com), January 30, 2001