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ENERGY



Turning California On

By Paul Krugman <krugman@nytimes.com>

Those wimpy Californians, with all their fuzzy talk about
conservation and their hostility to Big Energy, were
supposed to spend this summer sweltering in the dark. But
events are not following the script. Summer has begun, yet
so far power supplies have been adequate -- and prices have
been fairly reasonable. In fact, in the last few days
wholesale electricity, which often sold for $750 per
megawatt hour this time last year, has been going for less
than $100, sometimes less than $50.

Everyone seems reluctant to talk about this good news, out
of fear that saying anything optimistic would be a
self-defeating prophecy. And it is still possible for things
to go very wrong. Still, the contrast between dire
expectations and the relatively benign picture so far
demands an explanation.

One big reason for California's improved energy situation is
conservation. Taking temperature into account, California
consumers are using between 5 and 10 percent less
electricity this summer than expected.

Another reason is a sharp drop in the price of natural gas,
an important part of the cost of generating electricity.
More on that in a minute.

The most important factor in the turnaround, however, is
that the state's power plants are back on line. In March,
with air-conditioners turned off, there should have been
plenty of spare generating capacity. But around 15,000
megawatts, a third of the state's capacity, was mysteriously
unavailable. Now the offline capacity is less than 4,000
megawatts.

Why are the state's power plants operating again? More to
the point, why weren't they operating back when the state
was desperately short of power, and prices were much higher
than they are now?

Many economists now accept the uncomfortable answer:
Generators deliberately withheld electricity from the market
in order to drive high prices even higher. Until recently
the evidence for this market manipulation was purely
circumstantial; but it has now been reinforced by direct
testimony by former employees of one generator.

So why did the market manipulation stop? Generators now sell
much of their output under long-term contracts with the
state, which reduces the incentive to drive up prices in the
spot market. But the main answer is probably that intense
public scrutiny, culminating in the recent decision by
federal regulators to impose price caps, has convinced
generators that they had better behave themselves. (The
details of the price caps, it turns out, may be less
important than the signal that the regulators are, finally,
prepared to do some regulating.)

The natural gas story may be similar. Last year El Paso
Natural Gas, which controls one of the crucial pipelines
serving California, leased a big chunk of that pipeline's
capacity to its own marketing subsidiary. That subsidiary
has been widely accused of using its control of the pipeline
to withhold gas from the California market, and thereby
drive up prices. The company denies the accusation, and says
that an internal document that talks about "ability to
influence the physical market to the benefit of any
financial/hedge position" wasn't saying what it seemed to be
saying. But when the lease expired at the beginning of this
month, gas prices in California promptly plunged 50 percent.

And so, sooner than anyone expected, it seems that the worst
may be over. A drought or a heat wave could still cause
rolling blackouts. But time is on California's side; some
new power plants will come on line in a few weeks, and many
more over the course of the next 18 months.

The big loser from all this -- for somebody always gets hurt
even by good news -- is, of course, Dick Cheney, the
architect of the Bush administration's drill-and-burn energy
plan. Remember that Mr. Cheney sneeringly dismissed
conservation as a mere "sign of personal virtue," and was
scathing about people who thought price controls would help.
Now things are suddenly looking up -- partly because of
conservation, and partly because price controls and the
threat of further government intervention have deterred
energy producers from manipulating the market.

It turns out, in other words, that Mr. Cheney -- who prides
himself on his tough-mindedness -- was naively out of touch
with reality. And the real realists were those silly people
who thought that California could solve its crisis by saving
energy and suing energy producers.

Copyright (c) 2001 New York Times Co. All Rights Reserved.