Re: California Energy Crisis: a report from Cato

Date: Sat Jul 28 2001 - 22:12:57 MDT

I think Chris's analysis is very accurate, but there are a couple of
places I would differ slightly:

> I found Cato's Policy Analysis on "California's Electricity Crisis" [1] to
> be quite informative and very valuable.
> ...
> The report explains that the retail price controls mean that consumers
> were more price insensitive than the politicians believed. In the short
> term, consumers can't change the kinds of appliances they have, and they
> don't hear about prices until the end of the month, so the argument says
> they can't react to changing prices. The promised price reductions for
> consumers who reduce their use by 20% or more, combined with the high
> prices charged recently have resulted in more consumers reaching the
> target than anyone expected. Consumers react to prices after all! :-)

Right, but the point is, the prices faced by consumers did not actually
change until a couple of months ago (with the exception of San Diego
Gas and Electric customers; see below). It does not make sense to
discuss price elasticity or sensitivity of consumers in a situation where
their prices do not change. Wholesale prices were climbing through the
roof but retail prices were constant. Do we really want to say that
consumers were unexpectedly price insensitive to wholesale prices, when
their retail prices were not changing? The concept of price sensitivity
should be reserved for the case where people are reacting to changes in
the prices they pay, not to changes in the prices someone else pays.

The 20% rebate is an interesting lesson in price structure, too.
People love to get a discount and "win" something. We've been going
around the house turning out lights at night and came in with a 28%
savings over last year. The rebate was only about $30, not really all
that much compared to the total household budget, but it still feels
like we've accomplished something. Having a concrete goal makes it a lot
easier to hit. I understand that while they expected something like 10%
of homes to qualify, it's been more like 30%.

I think the lesson of the San Diego customers is also instructive.
SDG&E managed to pay off their stranded costs, a technicality in the
deregulation bill, which allowed them to pass on their higher costs to
customers starting more than a year ago. When wholesale prices shot
through the roof, so did retail prices in San Diego. SDG&E customers
saw their electricity rates skyrocket, doubling or tripling in some cases
[2]. This should be an ideal test case for those who identify the price
caps as the root problem in the California debacle.

What happened? Customers reduced their consumption, yes, but that was
not the principle effect. In fact, they essentially went on strike.
They refused to pay. They got legislation passed to roll back the rates.
They took the law into their own hands [3].

I strongly believe that this is exactly what would have happened
statewide had we had a truly deregulated electricity market last year.
Those who claim that the only problem with the deregulation problem
was its incomplete nature need to recognize and understand the lesson
of San Diego. Historically, people do not tolerate the discipline of
the free market in cases of extreme shortage of crucial commodities,
whether it is clean water after a hurricane, gasoline after the OPEC
embargo, or electrical power this past year.

> In
> addition, prices of natural gas rose nationally, and there were problems
> with some of the natural gas pipelines coming into the state, reducing
> access to supplies of natural gas, just when it was needed to replace the
> missing hydro.

I think that the report downplays the charges of price manipulation in
California natural gas. I don't have the details but there was apparently
a situation with the pipeline where we had a near-monopoly for some weeks,
and during that time California prices were much higher than elsewhere.
Once this hit the media and people started paying attention, California
natural gas prices plummeted.

The rise in cost of natural gas did play a big part in raising electricity
prices, but it may have been as much an example of market manipulation
as what the electricity producers are accused of.

> If consumers had been price-sensitive, the huge rises in marginal costs
> would have led to marginal reductions in demand. Instead, the utilities
> and the ISO reacted as if filling the demand was worth any price, which
> of course kept demand steady, and drove prices ever higher.

Again, consumer prices did not change. Lack of price sensitivity is not
the phrase I would choose to explain the fact that demand was constant.

> The one factor (rising prices) that would normally have allowed demand to
> react to supply prices was missing, and that allowed prices to go
> sky-high. The most important factor in fixing the problem is to remove
> the price caps. Moving some customers to real-time prices would help the
> situation.

Real-time pricing is an interesting option. I was reading some articles
at where people have put up solar panels and sell their
electricity to the state during the day, getting high prices, and then
draw electricity at night when the price is low. Granted, it is heavily
subsidized at this point, but you can get pretty good payback times.
One of the hurdles is the shortage of the real-time meters which are
necessary for this to work.

Most consumers can easily shift much of their electricity consumption
to the night, so they would be the beneficiaries of realtime metering.
Small businesses would probably be hurt as their hours are relatively
fixed. So politically it will probably be hard to expand the program.


> [1] Cato Policy Analysis #406 "California's Electricity Crisis: What's
> Going On, Who's to Blame, and What to Do". Jerry Taylor and Peter Van
> Doren.



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