Is Price Gouging Root of Crisis?

Following is the editorial that resulted from IEP's editorial board meeting
with the Orange County register on
May 24:

Is price gouging root of crisis?
Orange County Register Editorial
May 21, 2001

The president is "allowing the price-gouging energy companies, many of whom
reside in Texas, to get away with murder," Gov. Gray Davis said on Thursday
in response to a George W. Bush energy plan that doesn't call for caps on the
price of electricity sold by out-of-state generators to California.

This remark captured the essence of the Davis approach to the energy
problems: Blame everybody else, call for government price controls even
though they historically have reduced the supply of energy, and use divisive
and even conspiratorial rhetoric.

On the same day Governor Davis was blasting the Bush energy plan, his
appointee who runs the Public Utilities Commission, Loretta Lynch, told a
newspaper that power generators purposefully keep their plants idle to jack
up prices. Attorney General Bill Lockyer said that he found evidence of what
Ms. Lynch called "artificial shortages."

We're interested in seeing the evidence, of course. But it looks suspiciously
like politicians are using the "power-gouging" theory as a way to bluster
rather than come up with concrete solutions. It also is a way for those who
are ideologically hostile to deregulation - perhaps cynical of business and
capitalism in general - to demonize merchant generators and pave the way for
a government takeover.

No doubt, wholesale electricity prices have skyrocketed. Prices zoomed from
$200 a megawatt hour late last year to nearly $2,000 last week, according to
the San Francisco Chronicle. The newspaper reports that plant shutdowns are a
cause of the price spike.

Yet a number of analysts have found the price-gouging theory to be dubious. A
Dow Jones Newswire column analyzed Federal Energy Regulatory Commission data
on the amount of forced outages over the past two summers. Yes, there were
nearly four times as many plant closures by plants owned by five big
producers in summer 2000 than in summer 1999. But, as writer Mark Golden
pointed out, outages for all plants - including municipally owned ones and
small Qualifying Facilities that have no incentive to game the system - were
658 percent higher in summer 2000 than in summer 1999. The writer notes that
"four of the Big 5 are either constructing big new generators in California
or have applied for permits to do so. That would seem to fly in the face of a
withholding strategy."

An April paper co-authored by William Hogan, a professor at the John F.
Kennedy School of Government at Harvard University, could not prove there
wasn't manipulation, but explained, "it is unlikely to be the dominant factor
and may not even be significant."

The bigger issue, the Hogan paper argued, is the "seriously flawed"
restructuring system that caused the electricity market collapse. "[T]he
principal policy focus should be on fashioning workable solutions for the
other more serious problems in the market design that relate to the
underlying causes of the market meltdown."

Other analysts argue that, to whatever degree price-gouging has taken place,
it is solely the fault of the retail price caps and other government rules
that have distorted the market.

The large number of shutdowns has not been the result of any conspiracy, the
power generators say, but the result of needed maintenance on facilities that
have been overworked. Many of these are older plants that require more
shutdowns for maintenance than new ones.

"People can invest money in various different markets," Jan Smutny-Jones told
us; he is executive director of the Independent Energy Producers Association
in Sacramento, which represents QFs and merchant generators. With politically
charged hearings, demonization of power generators, proposals for
excess-profits taxes and threats of seizing property made by California
Democrats, he said generators may conclude that California is a dangerous
place to invest.

Gov. Davis said the Bush plan won't add any new electrical power. But neither
will Davis' grandstanding about price-gougers.

In fact, it may even dissuade electricity investment. The governor needs to
apply his "will it create new power?" standard to his own rhetoric, then get
busy leading the state out of this mess.