A common response to energy-market risk is a complex market infrastructure, with significant administrative effort and cost dedicated to managing the risks and ensuring that the market functions...
Viewpoint: In Defense of Markets
The latest resistance to deregulation is built on a foundation of lies.
reliability issue, one that, amongst other things, would be improved by greater regional coordination, rather than a surfeit of control areas based upon the traditional service zones of vertically integrated utilities. Ironically, the central infrastructure required for effective electricity markets commonly provides such coordination.
** “What About Enron?”
This brings us to another frequent red-herring employed by the anti-marketeers—an attempt to create guilt by association through some form of ad hominem reference to Enron. The implied argument goes: “Enron wanted electricity markets. Enron was bad. Therefore, electricity markets must be bad, too.” In addition to the association being gratuitous, such an argument is, by definition, a logical fallacy.
Competitive electricity markets did not cause the collapse of Enron, with its trading activities generally regarded as profitable. However, even if Enron had lost money in these activities—even if they had been the greatest contributing cause to its bankruptcy—the concept of competition and choice, in electricity or any other market, is not invalidated because a participant in that market fails. Poor performers go broke. This is a Darwinian consequence of the free market.
On the flip side of the coin, Enron certainly was involved in trying to manipulate some of the electricity markets in which it participated, with varying degrees of success (generally depending upon the quality of the market design). This behaviour was in most cases unethical and in some cases illegal. It is nonsensical, however, to suggest that this is reason for dismantling the markets themselves. Many of Enron’s most egregious abuses occurred in the securities markets, concerning the trading and manipulation of its own stock, yet no one seriously suggested shutting down the stock markets. It also is ironic that, as an arbitrageur, Enron was no great fan of organized markets, as such markets serve to promote price transparency and trading efficiency, whereas an arbitrageur profits from market inefficiencies and unequal information.
The demise of Enron was a corporate failure in the general sense—involving bad investments, magnified by inadequate governance and executive malfeasance. As such, Enron’s gaming of electricity markets and its broader corporate misdeeds were symptoms of the same cause; a culture of unbridled hubris, willing to play fast-and-loose, with markets and the law.
** “What About California?”
Finally, a legitimate example of electricity market failure. The California malaise was summed up best by Larry Ruff: 6
“The disaster in California’s restructured electricity market has been blamed on many things, including failure to build new power plants, high prices of natural gas and air pollution allowances, greedy suppliers, and the lack of demand reductions in response to high prices. But if there had been no restructuring, these same realities would have been managed without outrageous prices or financial collapse, and probably with fewer blackouts. Such factors ‘explain’ the failure of California’s electricity market in the same sense that gravity ‘explains’ the collapse of a bridge. It is an explanation that in no way excuses such a badly botched design.”
The initial Californian market was a classic product of design by committee—an unwieldy mish-mash that attempted to be all things to