Re: California Energy Crisis: a report from Cato

From: Chris Hibbert (
Date: Wed Aug 01 2001 - 22:52:25 MDT

> (Chris Hibbert) writes:
> >"Peter C. McCluskey" wrote:
> >> 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,
> >
> >How so? They said it happened before in the 80s. I don't know the
> >history, myself. What do you think bankruptcy laws could do?
> Bad bankruptcy laws can make it sufficiently easy to renege on contracts
> that contracts are useless. With the best bankruptcy laws, bankruptcy
> would be painfull enough that most companies will avoid it. The actual
> bankruptcy laws are somewhere in between those extremes.

Okay. Now I see that I don't disagree with your "The claim that a
significant fraction would go bankrupt seems to reflect an unusual
pessimism about the reasonableness of the relevant bankruptcy laws."

> Your version is even farther from the truth than theirs. 98 was one
> of the wettest years on record. [...] (I pay close attention to this
> because of its effects on when and where I kayak).

I took their word for it. I have a notoriously bad recollection for
this kind of detail, myself. I'll accept your argument that weather
wasn't a big part of it (without digging through the data myself.) That
just means the other factors have to carry the whole weight. I think
that makes the consequences of the political choices even greater, since
there were fewer disasters to blame.

> Our disagreements about what happened are probably minor.
> I think the effects of spot market pricing instead of pricing via long-term
> were about as foreseeable as the effects of the mistaken retail pricing,
> and if either of these two mistakes had been avoided the problems would
> not have amounted to a crisis.

Okay. I think the retail price mistake is bigger, but I won't argue
that it's much bigger. If long-term contracts had been used, the
extreme prices would arguably have been cut from a factor of 10 higher
than normal to only a factor of 3 (let's say). That would clearly have
been enough of a difference that the utilities wouldn't have been taken
to the verge of bankruptcy. (One teetered over, the other tottered

> The retail pricing mistakes may be the most important issue to emphasize
> because of governments' widespread pattern of making this type of mistake.
> But your use of the word "normally", and the paper's attempt to claim that
> it was the only, are probably misleading. We have a long history of retail
> power prices being pretty insensitive to short-term changes, and many
> governments have accomplished this without crises (the main problem being
> inefficiency). The restriction on long-term contracts appears to be the
> least normal contributor to the crisis.

(presumably, you meant "the paper's attempt to claim that it was the
only *factor*". I'm not sure what you meant by "many governments have
accomplished this without crises". I'll treat it as 'utility markets
have often gotten through situations about as bad as this before without
apparent crisis.")

Hmmm. Yes, utility markets have long operated in a way that isolated
consumers from short-term fluctuations in the wholesale prices of power.
 So, you're right that I meant "normally" in a different sense. I think
the difference here was that the restructuring put a cap on prices, so
that unlike the normal situation in a power market, not only were
consumers not seeing the hourly or daily fluctuations, but they weren't
even exposed to the price rise that was occurring on a scale of months.
Of course they'd react slower to a price rise that was only evident with
the monthly bill, but they weren't even getting that, so they didn't
react at all.

I still say that the difference made by making consumers price sensitive
is to add resilience to the system, while the difference you're arguing
for from long-term contracts is that it holds down prices (in cases like
this in which there's an unexpected rise.) Markets work because demand
and supply interact through prices. That's how the market manages to
allocate goods to their highest valued uses. Prices go up, people use
less. Prices don't change, people don't change their usage. (Unless
you can convince some of them that it's a crisis. I think many people
are reacting to the crisis and the perceived need for solidarity rather
than to the actual change in prices that has gotten through to us.
That's also what California did about water "shortages". Rather than
raising prices, they convinced most people to "work together in this
time of shortage.")


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