Re: California Energy Crisis: a report from Cato

From: Peter C. McCluskey (
Date: Sun Jul 22 2001 - 20:50:56 MDT ( writes:
>Check it out at

 They claim that more nuclear power would have had no effect on peak
prices. They seem to base this on two faulty assumptions. They assume
the price of natural gas would be unaffected, even though replacing
some natural gas use by nuclear would seem to reduce total demand for
natural gas. They also seem to assume that there are no cost differences
between the natural gas based producer who would be the marginal producer
with more nuclear power and the one was the actual marginal producer. It
seems likely that most producers have some costs that differ from competitors
(e.g. different labor costs due to different locations).

 They argue that in an otherwise free market, the restrictions on long-term
contracts wouldn't have affected prices.
 They have a reasonable claim that it ought not to have affected retail
prices, but given the actual political climate it seems likely that consumers
and/or taxpayers will actually end up paying something that approximates
average prices that the utilities faced.
 They also claim that producers who signed long-term contracts at low
prices would go bankrupt and renege on their contracts, as some who
actually signed such contracts have done. The claim that a significant
fraction would go bankrupt seems to reflect an unusual pessimism about
the reasonableness of the relevant bankruptcy laws, and/or an unusual
lack of confidence in the ability of producers to hedge their risks.
I'm fairly confident that many producers would or did sign long-term
contracts with natural gas producers, and that those natural gas producers
would have wells operating at predictable enough costs to fulfill those
contracts. My impression is that some of the actual breach of long-term
contracts to which the paper seems to be refering started when the utilities
broke the contracts by failing to pay, which would at least have been
postponed a long time if the utilities had had more such contracts.
 They seem to imply that that long-term contracts would not have affected
the blackouts, but it sure looks to me like, given the mistaken retail price
caps, the rate at which the utilities lost money would have been drastically
reduced, possibly by enough to keep them solvent until the shortage ends.
If they had been solvent enough to pay the QFs most of what they were owed,
fewer of those QFs would have shut down due to lack of cash, and the
available QF generating capacity would have been larger. I suspect this
would have averted most of the blackouts.
 But at least their analysis is better than the airline ticket analogy, which
suggests that spot prices will normally be much higher than long-term contract
prices (that kind of price discrimination happens in airline ticketing because
the last-minute business traveller is less price sensitive than early ticket

 Their claim that a "three-year dry spell" "reduced hydro-electric generation
in California" is misleading. California has had three years of increasingly
dry weather, but 2001 was the first of those years to actually be drier than
the historical average. Maybe if they had been talking about the west as
a whole rather than California the claim would be right.

Peter McCluskey          | Fed up with democracy's problems? Examine Futarchy: | or .ps

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