SYNOPSIS: Evidence mounts that California is spiraling downward, powerwise Recently 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.
Originally published in The New York Times, 11.12.00