If You Really Loved Me You'd Let Me Eat Your Brain

This is a reply to a Betzee's comment on a different thread. She mentioned the deregulation debacle and I felt like making an entry out of it, so there. The blockqoute portions are from Betzee's comment.

The California deregulation plan failed because it ignored the laws of supply and demand, plain and simple.

Energy is like any other commodity. Buyers and sellers use futures contracts to lock in known amounts of a commodity at a known price ahead of time. What happened in California is that futures contracts were forbidden and buyers and sellers could only buy on a spot market. This meant every hour of every day buyers and sellers were constantly buying and selling energy for the next hour, sometimes for the next few minutes. Futures contracts reduce uncertainty and one thing every good strategic business planner will tell you is that companies hate uncertainty.

The California deregulation plan also increased transaction costs. One common answer to the question “Why do corporations exist?” is that they reduce transaction costs. I buy my groceries from a supermarket who buys them from a broadline distributor who buys them from producers or co-operatives that represent multiple producers. Each of those entities exists to coordinate transactions and reduce the overall costs of buying and selling. I don’t drive out to the nearest dairy farm every time I want a gallon of milk, nor do I fly down to Chile to buy seasonal produce. The intermediate entities take care of that for me. I can’t think of the last time I went to a supermarket and they didn’t have what I wanted, so the system is working quite well.

I also don’t request bids for the electricity I’m about to use every time I flip on a light switch. The transactions costs involved would be prohibitive. In the California deregulation scheme everyone in the supply chain – producers, transmitters, distributors, utilities – everyone had to deal with a spot market. Transaction costs went through the roof. No one could buy power for the next month or year – it was the next day at most, every day, every hour. Spot market rates went through the roof and the costs were passed on to businesses and eventually consumers.

The California deregulation plan was the result of legislation enacted in that state in 1994. In 1996 the legislature unanimously passed a bill setting up short-term spot markets. In 1998 utilities started operating under the new plan. By summer of 2000 wholesale process had skyrocketed. It doesn’t help that no new power plants had been built in California since 1985 due to frequent NIMBY and green protests.

A pretty balanced analysis of the issue can be found here.

The deregulation disaster was predicted by many economists but their cries were ignored. I wonder what hand people like Krugman or the sitting FERC people had in the debacle.

As a Californian I know full well what Enron got in exchange for its generous contributions to Bush-Cheney 2000: the opportunity to rook Californians by rigging the energy market.

Enron must have used their time machine, because as I pointed out above, the deregulation scheme was planned and went into effect six and four years before 2000, respectively. Enron was critical of the deregulation plan from the beginning – remember the PUC testimony where Enron warned that the plan would lead to price spikes? I’m glad she acknowledges that CA pols pocketed Enron campaign funds also. Like Gray Davis.

As for Bush not fixing California’s deregulation mess – good call! It’s their mess, let them pay for it! Why should I as a Wisconsin consumer, already part of state-regulated energy market, pay for the foolishness of consumers in another state? Huzzah for GW and FERC chairman Hebert.

California is not Bush friendly and that's another factor. Might i remind you, Bush has no qualms about imposing market protecting steel tariffs when the steel workers were deemed an important constituency to his reelection effort.

Yes, duly noted, and I agree. Tariffs are a bad idea and that was a purely political move. Well, almost everything Rove does is purely political, but he usually hides it quite well.

The opulence of his 2nd inauguration reflects the importance our society attaches to being superrich which in turn encourage unethical business practices.

I don’t see a connection. Who paid for the inauguration? I thought it was all private funds. And if that’s the case we’re in no position to tell people how, when, where, or with whom they should freely congregate. Or maybe we should ban all parties in the US until everyone on the planet has enough to eat, a satellite dish, a cell phone, and an SUV.

Breakfasts with Bush, attending a rock concert with his daughters, etc., was for sale to the highest bidder.

I’d prefer those things not happen in the White House. They should also not make fundraising calls while on federal property. Unless there is no controlling legal authority, that is.