SYNOPSIS: The Economic rationale for complete energy dereg is invalid, and the current situation sucks too.
Let them eat cake!" cried the new president's friend, a key campaign supporter who was also a prominent advocate of bakery deregulation, not to mention the owner of a chain of cake shops.
O.K., not exactly. Kenneth Lay, chairman of Enron, was a prime mover in George W. Bush's presidential campaign; he has also been an influential voice in favor of electricity deregulation, and Enron is profiting handsomely from the electricity it sells in California. But what he actually said was that California's power consumers "need to see the price signals [that is, pay much more] and start modifying behavior to reduce demand until we get new supplies." He also rejected the plea of California officials for a federally imposed cap on wholesale electricity prices, arguing that this would merely "start spreading the shortage around." And his friend the president has echoed his views.
Full disclosure: Before this newspaper's conflict-of-interest rules required me to resign, I served on an Enron advisory board that turns out to have been a hatchery for future Bush administration officials. (What was I doing there? Beats me.) I can't say that I got to know Mr. Lay well, but I presume that he is an honorable man. He was, I assume, sincere in those remarks which one can't say about everything one has heard from former members of that board and he also, one must admit, has a point. But in a deeper sense he is missing the point.
It's true that the California power system lacks adequate conservation incentives. The regulated prices paid by homes and businesses do not rise or fall with the wholesale price. So even in a situation of severe shortage, with wholesale electricity selling for many times its normal price, individuals have no incentive to cut back; that is why there are blackouts.
Why didn't California deregulate the whole shebang? For a very good reason: The distribution of power, its actual delivery to your house, is still a "natural monopoly" you can't have multiple power lines running down each street. It would have been bad economics and worse politics to give the utilities that distribute electricity free rein to exercise their monopoly power. Someone should have warned that the system needed nonetheless to give consumers an incentive to conserve during power shortages; but the enthusiasts for deregulation led state officials to believe that power would be so abundant that such technical details wouldn't matter.
Clearly, it's a priority for California to revise that pricing system. But even so, there is a very good case for a wholesale price cap; far from "spreading the shortage," such a cap would probably increase short-term supplies, and provide some much- needed financial relief.
The most pressing problem, after all, is not the blackouts but the imminent bankruptcy of the utilities; their financial distress also indirectly contributes to the blackouts, because of the difficulty they have in paying suppliers. And the wild wholesale market also, arguably, leads to another source of reduced supply: power-generating companies have a clear incentive to produce less than they can, because doing so drives up the prices they get on what they do produce. A temporary price cap would both take off some of the financial pressure and reduce the incentives to "game the system."
And there's a deeper principle involved, too.
Nobody to the right of Ralph Nader denies that prices have to be allowed to serve a role as "signals" of shortage or abundance, that the profit motive is what makes our economy run. But even now the public rightfully draws a line, fuzzy but real, between profits and profiteering. Natural gas prices that rise in a cold winter are acceptable; $10 a gallon for bottled water after a hurricane is not.
And one can sympathize with the many people in California who feel that what is happening to them falls on the wrong side of that line that the Houston-based companies that helped sell naοve officials on the glories of a deregulated market are now saying: "Sorry, it hasn't worked out the way we promised, but tough luck you'll pay the cost for our mistake, and we'll profit. And don't even think about alternatives our friend the president won't let you try them." It's not entirely fair but it's not entirely unfair, either.
Houston, you have a problem.
Originally published in The New York Times, 1.24.01