Shouldn't Cheney reimburse California for the $30 Billion he stole?

Great Debates
41

Before you guys get down and dirty in the pit, I suggest you take a look at this.

First, before I get started, you should know that: (1) I’m a lawyer who practices in, among other areas, the energy field; (2) I went to Law School with Sua Sponte, so Ace, you may, or may not want to pay attention to my comments; and (3) like it or not, listen up!

You must understand that energy regulation occurs primarily on the State level. The FERC is an board which has little to no authority over day-to-day the operations of any power generator/marketeer. You MUST understand that Energy Co.s have to get a license in every state they conduct business. Enforcement of regulations is also generally a State issue.

I hear a question…what does the FERC do then?

Glad you asked, lets ask the FERC:

from the FERC website:

The Federal Energy Regulatory Commission is an independent regulatory agency within the Department of Energy that

Regulates the transmission and sale of natural gas for resale in interstate commerce;
Regulates the transmission of oil by pipeline in interstate commerce;
Regulates the transmission and wholesale sales of electricity in interstate commerce;
Licenses and inspects private, municipal and state hydroelectric projects;
Oversees environmental matters related to natural gas, oil, electricity and hydroelectric projects;
Administers accounting and financial reporting regulations and conduct of jurisdictional companies, and;
Approves site choices as well as abandonment of interstate pipeline facilities.

http://www.ferc.fed.us/About/about.htm

You see! FERC generally regulates INTERSTATE transfers, so intrastate problems are a STATE issue, and therefore, not Bush/Cheney/Clinton’s problem.

As for the FREC’s roel in the whole Price Cap debate, well, Cali PUC tried to take care of the problem, but as you may understand, the Federal government has a way of making something into an Interstate issue when enough voters with dollars start to scream. Generally though, the FERC doesn’t want to get involved with such matters.

Next, if you want to understand what really is happening, the underlying problem in the energy market arises from lack of supply, which created the opportunity for Enron to make fake trades (pushing up volume of trades, making people think their was a ‘power grab’ and thereby boosting prices). BUT, if there was more supply (ie more power plants), there would be no opportunity for Enron to do its evil deeds.

The suppliers tend to be the old skool utilities, who hang on to their precious gems. Power plants dont grow on trees, so you must build 'em. An expensive proposition. A few independent power co.s were trying to build their own, but, ohho, ENRON, then, whoops Dynergy. Ok, no more free $$ for you, so sorry.

The energy market has been problematic at best. Supply side problems as a given, besides Enron’s shredding nonsense, its wacked out accounting and perhaps a little securities fraud by a few malcontents (not limited to Enron), they remaining energy companies are surviving quite well thank you. And without Enron sucking all the air outta the room Bill Gates style, everyone should be ok real soon.

<condescending tone>
So, guys, keep those pointy fingers in their holsters.
and lets all sit down for milk and cookies, shall we…
</condescending tone>

42

  1. Apropos nothing the 1996 California legislature is no longer with us due to term limits. Well, not quite nothing: I would say it was problematic that they didn’t have to face the consequences of their decisions.

  2. I suspect that a combination of market fundamentalism, technical complexity, an inattentive media and neglect to put the plan in front of a board of professional economists is to blame for the 1996 snafu. BTW, that last mistake was not made by Carter when he deregulated airlines in the 1970s; the FAA’s economists were pretty good, IIRC. Weirdly, CA happens to have some pretty competent energy economists, who could have been asked.

CA residents who voted for the feel-good term limit initiative, also share part of the blame.

  1. And PG&E management is to blame. Let’s remember that they signed off on the plan that would later drive the company to bankruptcy.

  2. Sua: Thank you for the summary. Let me quote, "So, by August 28, 2000, there were public allegations of price gouging. By September 13, 2000, FERC was “weighing its options.” By October 3, 2000, Edison was seeking price caps from FERC. On October 27, 2000, FERC imposed price caps on backup power. On November 1, 2000 FERC met and rejected the idea of wholesale price caps. By November 22, 2000, California utility regulators were asserting that there had been market manipulation. "

Ok, then we start to blame Clinton in, what, October 2000? By that time the market fundamentalists had stated that, “Price controls will only make things worse”, and their critics had pointed them back to their Introductory Economics texts. (See “Natural Monopoly”).

I speculate that Clinton didn’t want to do much of anything right before the election. It’s less clear to me why he didn’t move as a lame duck, except that (perhaps) he didn’t control FERC directly.

  1. Abe: Welcome to the Straight Dope!
    We both probably know that FERCs slowness in implementing regional price caps made the intrastate price caps ineffective. Enron could simply sell the power out of state (then, as it transpired, resell it in-state.) So, yeah, this is a Federal matter. Interstate commerce and all that.

  2. Yes, I guess I would say that Clinton did err in not pressuring FERC to move after November 4. But I would assert that the solution to this particular problem grew more obvious over time. So I (personally) would apportion more intense blame on policy makers making the same mistake in May 2001 than in, say, August 2000.

  3. Given the short run inelasticity of the demand curve for energy (absent real-time pricing) power providers can enjoy substantial market power even if substantial excess capacity exists. So some sort of regulation is necessary (again, absent real-time pricing and long term contracting within a reasonable market context).

  4. I’ll also note that the putative disadvantages of the sort of regulated-monopoly system that we had for, oh 80 years, are dwarfed by the damage of ill thought out deregulation. Market fundamentalists share some blame for first advocating deregulation, then ducking responsibility after the fact by claiming that (oh) CA didn’t do true deregulation.

  5. I note and acknowledge that Sua doesn’t actually blame Clinton or Bush. I do, as noted above. The only caveat I have is I don’t know the extent to which the President can order FERC to do what it wants. Any insight Abe or Sua?

43

That is not entirely correct. The state’s utilities were required to sell of at least 50% of their fossil fuel generation facilities. The companies that bought the power plants were companies such as Reliant, Dynegy, AES, and others.

If I am not mistaken I think FERC also had jursidiction over deciding if prices were just in reasonable in the state.

Link on FERC from Frontline

Note the comments by Wolak and Rattey. IIRC FERC has the authority to regulate whole prices.

44

You’re welcome. I note, however, that the summary I provided turned out to be incomplete. I later posted a link from a July 28, 2000 article, which reported that Gov. Davis had instructed California utility regulators to seek price caps from FERC. So, the earliest formal request (that I’ve been able to find) was back in July 2000.

My position all along in this thread (despite Ace’s distortions) is that we never blame Clinton. First of all, it is not a “market fundamentalist” position that “price controls will only make things worse.” Yes, the “natural monopoly” argument has validity, but there were two huge problems with price controls. First, the problem, particularly in 2000, was perceived as a supply problem, and price controls would discourage increased supply. There is ample real world experience demonstrating this.
Second, - well, back in August 2000, a consumer activist said it better than I could:

Actually, Clinton had ample political reaons to intervene early on. In early August 2000, just about the time Davis first requested price caps, Bush and Gore were running neck and neck in California polls. If Clinton had imposed price caps, it probably would have given Gore a substantial boost in California.

I submit that what was really going on here was that California politicians were trying to pass a political hot potato to Clinton, and Clinton refused to accept it. It was always within Gov. Davis’ and the California legislature’s power to end the crisis.
Just about all of the options you have set forward in the rest of your post - particularly long-term contracts - was within California’s authority. But just about all of them would have required (at least short-term) increases in retail electricity bills, and Davis didn’t want to be blamed for that. So he refused to act, and instead pleaded for Clinton to save him from himself. Clinton refused to let Davis get off the hook.

I’m not a market fundamentalist, but California didn’t do true deregulation. A system in which (1) wholesale prices are deregulated, but (2) retail prices aren’t set free isn’t deregulation, particularly where (3) the “deregulated” utilities are prohibited, by regulation, from entering into long-term contracts.

Actually, I do place responsibility on Bush, to this (very limited) extent. For the California government to fix the problem, they needed financially healthy utilities. For example, no supplier would enter into a long-term supply contract with a bankrupt utility, so be early 2001, that tool was no longer available to Davis.
'Course, the utilities wouldn’t have been in financial dire straits had Davis acted earlier. So the fault lies with California government, but some responsibility lies with the Bush Administration. And, self-evidently, that responsibility is neither criminal nor negligent in nature. The Bush Administration made a call that turned out to be the wrong one (and, to their credit, they reversed course pretty quickly). That happens.

Sua

45

Did they? They did get pushed into some limited caps but a I recall the crisis magically disappeared following Jeffords’ defection and the beginning of a senate investigation.

46

Did they? They did get pushed into some limited caps but as I recall the crisis magically disappeared following Jeffords’ defection and the beginning of a senate investigation.

47

Ned, I’m not sure about a Senate investigation, but the FERC under Bush imposed hard caps, not limited caps, in June 2001. The limited caps, or “soft” caps, had been imposed by FERC under Clinton, in December 2000.

Sua

48

(ARRRRRRRRRRG.)

No, that’s False. (1) FERC instituted price controls in June 2001. Result: no more witholding of power. In other words, supply increased.

(2) Let’s go back to Introductory Economics. Imagine the monopolist, who faces a downward sloping demand curve. The monopolist cuts back on output for the purpose of increasing the price.

In the case of electricity, where the short run demand curve is extremely inelastic, any supplier who controls a large fraction of excess capacity can raise the price a lot.

If, OTOH, a price cap is set, there is no longer any incentive to cut back on output. So actually price controls lead to increased supplies, in certain contexts. This is consistent with basic economic theory (marginal revenue curve becomes discontinuous, BTW) and practice.

The consumer activist showed the need for regional price controls, because the price controls of any given state could be circumvented.

In other words, the ball was in FERC’s court.

What I was trying to say earlier (BTW) is that, with all due respect, there were a lot of observers making the same error that Sua made above during the Summer of 2000. They were thinking of price controls on a competitive market - and in most market contexts such opposition would be appropriate.

So, yes, the Economist could report that people were up in arms about electricity deregulation during the Summer of 2000. But the point about price controls increasing supply took a while longer to make its way out of the media echo-chamber. A reasonable watershed might be the point when Edison called for price caps (10/2000). (If they were on the ball though, they would have advocated them in 6/2000 or earlier).

IMHO, getting this basic policy point clear is more important the fixing blame.

Caveat: If the regulator sets the price cap too low, it can discourage output. And there is the issue of discouraging investment. But none of this should be too important in practice, provided the cap is set at a reasonable level, eg one near where the old regulated price formula would have placed it.

49

flowbark, you are obviously correct - the price caps did increase supply. The point I was trying to make is that the Clinton Administration’s perception in the year 2000 was a reasonable one. It wasn’t apparent that suppliers were withholding electricity (for example, the proffered explanation of the shutdown of electrical plants - for “maintenance” - was reasonably accepted as true). And, more to the point, other deregulated states were not having the same problems California has, even though they did not have price caps.
There were conditions in California, particularly certain aspects of deregulation, that meant that its experience was going to be different than that of other deregulated states. But those conditions are much more apparent in retrospect.

Sua

50

As the White House coughs up dates and names, things begin to get more interesting… Check out: http://www.bagnews.com/topica/smokingmagnetsthumb.html

http://www.bagnews.com

51

Sua: Glad we in sync regarding the more important matters. Back to the blame game:

As the nature of the problem became more apparent over time, so did the solutions.

Which is why I blame GWB for not heeding NYT op-ed pieces in early 2001.* Instead, he hung CA out to dry.

That said, a lot of people fumbled the ball in this crisis and, much as I hate to admit it, W may not top the list.

I suppose the California PUC might get special mention: after all, it’s their job to look after the public interest. And to repeat, PG&E and Edison management should not have signed off on the plan, never mind actively lobbied for it.

Finally, I would maintain that electricity deregulation is not a straightforward exercise; I hope that policy makers devote some serious study to the issue the next time around. (In other words, I’m not yet convinced that allowing long term contracting alone is a panacea, absent further study.)

  • Tracking newspaper editorials during this period might be an interesting way of evaluating the misperceptions and errors of the elite.