FERC's Market-Power Test:
Why a new market-power screen-accounting for the relationship between customers and suppliers in the wholesale...
I wanted deregulation. But not if we can't do it right.
As an economist, I confess I failed to predict the disaster in California . But I wasn't the only one. Anybody who tells you differently is either lying, fooling himself, or guilty of Monday morning quarterbacking.
Granted, there were those who foresaw problems with electricity deregulation. That was the safe betgiven the path they chose in Californiabut certainly not at the scale that transpired. Some, like myself, thought problems might arise. But we also believed that natural market forces would right most wrongs over a short transition period. That didn't happen. That's where I get frustrated.
Instead, the industry fell into a tailspin that quickly collapsed into free fall. The dynamics of a properly functioning market just never got going. Wholesale prices rose dramatically, followed by rolling blackouts and financial calamity for the state's two largest electric utilities.
We watched an industry self-destruct in real time.
Some say that unfavorable market conditions combined with faulty restructuring rules (easy to spot now) and the inherently strange features of electricity as a commodity to produce a disaster that was all but inevitable.
To me, as an economist, that seems reasonable. Prices rose because of very tight supplies but the new rules for "deregulation" prevented the market from smoothing itself out to a new equilibrium. And electricity markets are truly unlike other marketsdifferent in ways conducive to unstable markets. Lack of storage forces real-time balancing of supply and demand. At the same time, demand and supply show extremely low price elasticities in the short run. All this makes prices volatileand markets prone to possible manipulation. And that's as short an answer as you'll get from an economist, though clearly other forces were also at work.
But for the non-economist, and for skeptics of deregulation, the story seems simpler. Markets, they say, just can't be trusted. And those who buy the costly bulk power (privately owned utilities, in the main) take much the same tack. They argue that the new market rules and design are flawed in allowing power producers the opportunity to charge as-of-now inexplicably high prices to electric utilities and other wholesale buyers. They would have the government step in and bail them out or impose price constraints on wholesale power to stop the hemorrhaging. Meanwhile, the producers say we should expect high prices as the natural outcome of an inherently volatile market, but that normality should return when supply and demand are more in sync.
Who's right? The debate rages on, yet one thing is clear: The politicians smell a rat and want someone to pay, even if they don't yet know exactly who to blame.
As one observer notes, "Certainly the temptation has never been greater for politicians to find market abuses, show their indignation, and then craft a remedy, even if they are not sure of what is really going on." The post-mortem has become a blame game, wasting time and money.
And the repercussions will be enormous. Anyone who believes in utility deregulation with the fervency of