SYNOPSIS:

DOBBS: Some good news for you Californians, all right. Casey, thanks. Casey Wian. My next guest tonight says the California crisis is easing: Economist and "New York Times" columnist Paul Krugman, in an editorial today in fact, argued that power companies are now generating more electricity only after facing "intense public scrutiny." Paul, good to have you with us.

PAUL KRUGMAN, "NEW YORK TIMES": Good to be back.

DOBBS: You think scrutiny has led to greater power generation.

KRUGMAN: Yes, let's be clear. I don't think there's anything here -- I don't think we'll see energy executives going to prison or anything like that. But throughout this crisis, throughout this past year, there's been this X-factor, this mysterious failure of capacity to be used. And there's been a lot of circumstantial evidence, now there's a little bit more sort of stories suggesting that power companies have taken a look and said, gee, I wonder what would happen to the price if one of my generators went off line, and actually acting to the answer to that questions. Now, the generators are coming back online. The X-factor, which was working massively against California during the winter months when there should have been plenty of power, now seems to have gone away.

DOBBS: At the same time, it's important for us to recall, too, that the change in the regulatory mechanism that California was buying power, particularly long-term power, added measurably to their problems.

KRUGMAN: I think there's blame to go in all directions here. It's clear that California set up a badly engineered regime. It set up a regime that was an open temptation to the kinds of things that were going on this last winter.

DOBBS: As an economist, are you surprised how, frankly, quickly the market though is working? Because we have -- in a question may be of one of expectations, but we had been led to believe that this market was so in this equilibrium that there would be a year or two of protracted energy crisis. It does appear we're seeing easing, doesn't it?

KRUGMAN: Oh, yes. The numbers are stunning. The wholesale prices right now in California are running at levels that people I spoke to didn't expect to see until the summer after next. So it's faded away very rapidly. A heat wave, a drought could make it come all back. But this is an incredibly rapid turnaround.

DOBBS: Let's turn to G.E. "The Financial Times", as we've reported, they will have the story tomorrow morning. G.E. coming with a new proposal to Mario Monti and the EU Commission. What do you make of that?

KRUGMAN: First of all, I think Jack Welch really wants to go out with this deal. I think that we're seeing an attempt now, this is a gray area case, everybody acknowledges that Mr. Monti has a case, everybody acknowledges that G.E. has a case -- just what shade of gray it is unclear. What G.E. is doing is mixing a little white paint into the gray trying to shift it.

DOBBS: A little more power.

KRUGMAN: I think it might work, because everybody would like a way out of this confrontation. But you know, the real message here is not about G.E. or Honeywell. It is, hey, there's another economic superpower on the block, and the United States has to live with that.

DOBBS: And live hopefully very productively and beneficially.

KRUGMAN: Yes, but they've got veto power on our mergers, remember that.

DOBBS: That in itself is new. Paul, as always, good to have you with us. Paul Krugman. Next on MONEYLINE, a staff shortage weakens profits for the nation's second-biggest drug retailer. Details just ahead in our "Sectors Report."

Originally broadcast, 6.27.01