John asks:

> Does this come out of the supposedly "competitive" environment whereby
>  people can "buy" their power from other companies even though PG&E and SCE
>  still actually deliver it?  I never could figure out how that all really
>  worked.
>
>  Unfortunately, they're now doing the same thing in Britain.

Perhaps the clearest and shortest explanation of California's problems
appeared in an op-ed piece in the NY Times by Paul Krugman, an economist I've
long held in high regard. In a piece he wrote a few days ago, he wrote:

========================================

January 7, 2001

RECKONINGS

Abuses Of Power

By PAUL KRUGMAN


How did California get into its electricity mess? Now what?

Start with the less interesting question. The biggest single cause of the
California power crisis is simply that nobody expected demand for electricity
to grow so rapidly. When the political momentum for deregulation was
building, in the mid-1990's, California's economy was still suffering the
aftereffects of a nasty recession; most experts thought that there would be
excess generating capacity well into the next decade. Then California began
growing faster than anyone had thought possible. The result was surging
demand for power.

To cope with an increase in demand, you either need to persuade consumers to
consume less or make it possible to produce more. But California's
deregulation did neither.

First, while the wholesale market in which local utilities buy power from
generators has been set free, the prices charged by local utilities to final
users have stayed under state control -- at the request, let us add, of the
utilities, which wanted protection from a price slump. So consumers have had
no incentive to economize on electricity use.

Meanwhile, no new power plants have been built. This is partly the result of
the regulatory hurdles that would-be builders of plants must surmount; it is
probably also the result of the fact that companies that already own
substantial shares of California's generating capacity, and which therefore
stand to benefit from a tight market, have little incentive to add capacity.
(Some analysts believe that these power companies have actually withheld
power from the market for the same reason, though this is not the core of the
crisis.) Eventually new plants constructed by new players will ease the
strain -- but this will take time.

So for the time being California finds itself with a demand for electricity
that it cannot meet. One result has been rationing of power, mainly hurting
businesses rather than families. But the physical shortages of electricity
have actually been more or less manageable; what is really pushing the state
to the brink is the financial fallout. California's utilities find themselves
in a bidding war, both with one another and with their counterparts in
neighboring states, for the limited supply of wholesale power available. This
bidding war has sent wholesale electricity prices to 40 or 50 times their
normal level, bringing huge windfall profits to the companies that generate
power, but also bringing the utilities that deliver power to the edge of
bankruptcy.

It's a miserable story -- botched deregulation meets Murphy's Law. But the
main question is, Now what?

Bear in mind that while the huge profits now being earned on electricity
sales will lead, over time, to construction of more plants, it could be years
before the situation returns to normal. So what are the options?

The simplest option would be for California to deregulate all the way -- and
let the prices to final consumers go as high as necessary to persuade them to
limit their demand to the available supply. This would work; it would be
efficient; and it would also transfer tens of billions of dollars from
California consumers to eight lucky power companies.

An alternative would be a temporary and partial reregulation: placing price
caps on wholesale power, while also raising prices to consumers, and engaging
in some power rationing while fixing the pricing system and hastening the
arrival of new generating capacity. This would be messy, somewhat inefficient
and a lot fairer. It would also, however, require federal help. California
has already found that it cannot unilaterally impose price caps on wholesale
power because other states are also short of power, and the electricity
simply goes elsewhere. So this solution would require higher-level
intervention.

If the "power summit" now scheduled for this week had happened a year ago,
one could reasonably have expected a compromise along the lines of the latter
alternative -- that is, a compromise that, without trying to wish the
shortage away, tries to limit the damage to consumers and the windfall
profits to producers. But George W. Bush doesn't just have an ideological
attachment to free markets; he has close personal ties to some of the
companies that are making such huge profits in California right now.

Mr. Bush has been conspicuously silent on the California crisis. But in the
end it's his decision. Will he help California find an answer that does not
involve paying a huge ransom to his friends?

=========================================

Wirt Atmar