At 12:13 PM 5/31/01 -0700 Matt Grimaldi wrote:
>Gray Davis is at least doing what he can about the situation,
>not trying to shove it off as "somebody else's problem".
That's why he has repeatedly blamed Bush and FERC for this problem?
>He's implemented short-term measures that might be able to
>relieve some of the acuteness, and long-term measures that
>will hopefully bring an end (or at least a reduction) to the crisis
>on the way, as several new plants are being built and/or on
>the drawing board.
And Davis was involved in the building of the new plants how?
> Do you
>feel you can justify wholesale prices as high as $988/MWh, when just
>before the crisis the average price was $30/MWh? And the $30 price
>was rather high already.
Absolutely.
Its called *scarcity.*
For example, can I justify that the price of an "inverted Jenny" postage
stamp is $150,000, when the stamp originally sold for 24 cents?
Absolutely.
We accept high prices for scarce goods all the time, be it Jackie Kennedy's
dress or a Joe DiMaggio rookie baseball card or a diamond. In each of
these cases we use prices to allocate scare goods. Why should electricity
be any different?
That is why spot prices for electricity are so high. Many clients have
long-term contracts for electricity. The excess electricity produced by
suppliers is then sold on the "spot market." As buyers scoop up the
supplier's spare electricity, prices will rise as the electricity becomes
more scarce. Eventually, the electricity supplier will be down to its
last MW of electricity? How do you choose who gets that last MW of
electricity? Indeed, if the price were capped for $30 for that last MW,
there might well be 1,000 buyers who would each want that last MW. How
does the supplier choose?
Here are the possibilities I can come up with:
1) The supplier uses its own biases to choose who gets the last MW. i.e.
the last MW goes to friends or cronies of the supplier.
2) The supplier holds a random drawing among all those desiring to purchase
the last MW. This, however, is often highly unequitable as no weighting
is conducted by need. Lighting a neon sign has the same weight as
lighting a hospital.
3) The last MW is auctioned to the highest bidder. Thus, the person who
values the last MW of electricity the most will pay the highest price for
the last MW. After all, nobody will pay more for a MW of electricity
than the value that MW of electricity imparts to the user - unless
compelled to do so by a government. Thus, there is an upper limit on the
price of electricity in that the supplier cannot charge more than the value
the MW will impart to the user.
Let me conclude by relating one of my favorite stories:
The City of Galveston, TX is located on the Gulf of Mexico, and as such,
yearly faces the risk of hurricanes. When a hurricane is bearing down on
Galveston, the price of plywood to board up windows and doors regularly
increases to several times its ordinary cost. People from surrounding
cities load up their trucks and vans with plywood, and drive down to
Galveston to take advantage of those high prices and make an extra buck.
Now, the City Council of Galveston, TX thought that this was grossly
unfair. If plywood cost a certain price in January, then the price
certainly should not increase several times just when then citizenry needed
the plywood the most. Neglecting for a moment that everyone living in a
hurricane zone like Galveston should stock up on plywood whenever the price
is relatively cheap - the City Council took matters into their own hands,
declaring that plywood prices would not be allowed to increase whenever
there was a threat of a hurricane.
Sure enough, the next hurricane rolled around, and prices stayed flat. Of
course, without the high prices, the truckloads of plywood from
entrepreneurs from nearby inland communities never materialized either.
This time around, the City of Galveston was terribly short of plywood, and
when the hurricane finally hit, the damage was enormous.
Suffice to say, the City of Galveston promptly repealed its ordinance in
time for the next hurricane.
JDG
__________________________________________________________
John D. Giorgis - [EMAIL PROTECTED] - ICQ #3527685
"The point of living in a Republic after all, is that we do not live by
majority rule. We live by laws and a variety of institutions designed
to check each other." -Andrew Sullivan 01/29/01
