I wrote: >One point the fellow [from the CA state legislature] made, BTW,
was that the situation was made worse by the California commitment to avoid
blackouts at any cost. In the face of this declaration of inelastic demand,
the power companies are more than willing to charge any cost...<
David Shemano wrote:
> You say that demand is inelastic and the power companies can charge whatever
> they want. Well, how can you say that, as an empirical matter, when retail
> prices haven't risen?
Because the restructuring fixed retail prices to allow PG&E, SCE, and,
until recently, San Diego Electric (or whatever it's called) to "recover"
the costs of their wasted investment in nukes. (It's part of the American
Way that those with political power should have their losses covered by the
state. Little did anyone know that the price floor would become a price
ceiling, so the distribution companies would start complaining about what
had been a boon to them.) The price I was referring to (and I'm sorry I
wasn't clearer) was the price that the California state government pays in
its effort to make sure that power is available to consumers in the face of
the bankrupt or un-credit-worthy power distributors, which were having a
hard time buying power from the wholesalers (the real villains in this
piece). And retail prices have risen in San Diego, as they have for natural
gas.
>Epistemologically, how can you know?
it's true that a lot of the whole restructuring -- so-called "deregulation"
-- made the entire operation of the CA electrical market opaque to folks
like us. That's one reason why the utilities were able to "game" the state
and to rip off tremendous amounts of money from California. How do I know?
I was just reporting what the economist/lawyer (and expert on bankruptcy)
from the state legislature was saying. I actually wasn't reporting anything
that I know, since I'm far from an expert on this subject. But I'll try to
give a tentative answer. I hope that any experts -- Gene Coyle? -- will
correct me.
>Aren't you saying that conservation is impossible?
I don't understand where this question comes from. California has been
conserving. (California is very efficient in terms of energy use per
capita.) It will do so. But what I was saying was it sure looks to me as if
the problem isn't actual scarcity of energy or actual overuse of energy as
much as the totally uncompetitive market for energy, which the energy
companies created and took advantage of, with the aid of FERC (the
Federales, the Federal Energy Regulatory Commission) and the CA state
government. BTW, until very recently, the energy companies were part of the
leadership of the organizations which were supposed to be helping the
consumer. So the foxes were guarding the hen-house. As happens so often,
Big Government is harnessed by Big Business to rip off the public.
I guess what you are asking is: why can't people in California simply cut
back on the quantity of electricity they use (to "conserve"), in response
to the price signals (the substitution effect)? This seems to be the wrong
question: the price to Californians (either at the retail level or to the
state government) is much higher than the cost of producing the damn stuff.
The energy producers should be forced to conserve on their profit winnings
(through lower, fixed prices at the wholesale level) rather than forcing
the consumers -- who did not create this problem and are thus not to blame
-- to radically restructure their lives. I don't think price controls are a
long-term solution, but in a case where the producers are earning
dramatically high monopoly rents, they make sense in the short run. Of
course, the FERC won't go that way, what with President Clinton in
office.... or for that matter, with President Bush.
BTW, I think that Krugman may be right that there isn't really an energy
crisis (though of course it depends on how you define "crisis"). I don't
think that the long-run problem is that "we're running out of energy"
(since there are lots of new sources and new ways to use old sources more
efficiently) as much as "we're polluting this planet to death" (the
externality problem, or what libertarians call "neighborhood effects" --
big neighborhood!) In the short run, the problem is that the energy
companies (or at least most of them) are taking advantage to grab as much
as they can. Of course, the Cheney gang -- part of the same power bloc --
is using this "crisis" to undermine environmental restrictions (making the
_real_ long-term problem worse) and to help their friends get their hearts'
desires. Interestingly, all this encouragement of the supply side could
eventually spur _over production_. Then the President will be going on TV
to tell us to waste more energy ... or more likely will be bailing the
energy corporations out with taxpayer dollars. (The big bucks being earned
now will largely have been shifted elsewhere, as part of diversified
portfolios and new ventures ... including new efforts to use government
power to rip off consumers and workers... so they won't available to allow
the energy companies to bail themselves out.)
But return to the issue of higher energy prices, something that is
happening soon. Because it's quite costly to cut back on energy use, it's
likely that if the powers that be were to simply let the prices rise, it
wouldn't encourage substitution or conservation as much as _income_
effects: people will deal with the higher prices by cutting back on dinners
at restaurants, videotape rentals, visits to Disneyland, new cars, dental
check-ups for the kids, etc. To feed the greed of the energy producers,
they'd cut back on other elements of their budgets, especially those
discretionary items. People are already doing so, in my experience, but it
would intensify, encouraging a regional recession and a falling-off of
state tax revenues. Of course, some or many would end up homeless, because
they have expenses -- such as rent -- that can't simply be cut back.
There's going to be a lot of hardship, and it's not because people were
over-spending on energy, but because the energy corporations have "gamed"
the market. There's also another effect: the higher prices may lead to a
lot of political discontent, aimed not only at Sacramento but also against
the energy companies.
Given the discussion I heard on Friday, it seems like the solution will be
akin to what's available across La Cienega Blvd. from where I live: in Los
Angeles, unlike in Culver City, they have publicly-owned power which has
not been exploited by the energy companies. It's inexpensive compared to
that offered by the private sector, without being wasteful. Of course, the
move toward municipalization of power -- something that's already happening
-- may shock the energy companies to start being a little more sane in
their greed. This may be the actual solution to the "energy crisis" in
California. (For those who don't like that, most Californians are looking
back with nostalgia to the "good old days" when the Public Utilities
Commission fixed prices relative to cost -- to guarantee a "fair" profit.
It wasn't perfect -- among other things it encouraged the building of all
those nukes -- but at least it worked better than the "solution" that those
who dress their greed in "free market" rhetoric foisted on the state.)
> How about a comparison of electricity and gasoline. Gasoline retail prices
> are unregulated and have doubled over the past one-two years from
> approximately $1.00/gallon to $2.00/gallon. There are no shortages, no gas
> lines -- just the usual grumblings about conspiracies that will disappear
> when the price goes back down in several months.
Shortages are not the issue (though as I said, if the state were to allow
shortages, it makes demand less inelastic). Shortages are just another cost
of rationing, just like high prices. Waiting in line for gas (as in the
mid-1970s) is simply a different way of rationing items in short supply. Of
course, it's not one that favors those with lots of money like rationing
with prices is. In any event, the problem is that the energy corporations
have created a situation where we see either high prices or big shortages.
But of course, the _actual_ result has not been high prices (so far) or
shortages as much as the state government wasting its budget surplus --
it's now officially a deficit -- to keep both consumers and the energy
companies happy, in an effort to avoid the kind of popular discontent
mentioned above. As the expert I heard speak noted, the using up of the
surplus (and the increase in debt) is going to hobble the ability of the
California to do positive good for a decade or more, adding on to the
sabotage engineered by Governors Reagan, Wilson, et al., and by the "tax
revolt" (which he didn't talk about). This place is turning into worse than
Mississippi in terms of social services. And we already complain about
illiterate students!
I'll read the AMERICAN SPECTATOR article some other time. Isn't a violation
of the sacred rights of intellectual property to post the whole article?
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~JDevine
