California Gets A Mulligan

There is no doubt that electricity markets are a mess.  Electric utilities have been regulated for so long and in so many ways, and new capacity is so hard to add, the deregulation experiments tend to fail over short time periods for any number of reasons.  In California, what was called "deregulation" never really was such, since pricing signals were never passed on to consumers and therefore never really influenced demand.  In Texas, the areas where my company operates still struggle with deregulation, and we have seen few price or customer service benefits. 

This is not that surprising when you consider other major industries that have been so thoroughly regulated.   Railroads come to mind, for example.  Deregulation occurred thirty years ago and we are only recently starting to see a renaissance in that industry.  Pre-deregulation airline incumbents (e.g. Delta, United, American) are still struggling with open markets.

Mike Gibberson links a pair of court decisions that may set back any progress made in deregulating at least the wholesale electricity markets.  In a series of suits, the State of California is seeking a mulligan, asking the court to rule that wholesale electricity contracts it entered into in 2000-2001 should be voided because the price was too high and FERC did not have the authority to allow blanket market-based rather than cost-based electricity pricing.  And the judges seem to agree:

The panel held that prices set in those bilateral transactions pursuant
to FERC's market-based program enjoyed no presumption of legality.

I don't think there is anything more depressing to a good anarcho-capitalist like myself than seeing the government rule that a price negotiated at arms length by the free will of consenting, and in this case well-informed adults enjoys "no presumption of legality."  If not, then what does?  Is that where we are heading, to a world where no voluntary actions enjoy a presumption of legality?

By the way, one has to remember that this is not a case of an impoverished high school drop-out in East St. Louis signing a high interest rate loan he didn't understand.  This is the case of highly paid electricity executives and government electricity officials signing electricity contracts.  It is as ridiculous to argue that they were somehow duped in buying the one and only item they ever buy for resale as to argue that Frito-Lay somehow shouldn't be held responsible for the price it negotiates for potatoes.  These electricity companies knew they had obligations to supply power at retail at certain rates and failed to lock up enough supply in advance.  Whether Jeff Skilling gamed the short-term spot market is irrelevant - the utility executives were at fault for finding themselves beholden to the spot market for so great a volume of electricity, and doubly at fault for taking this power at insane rates when other lower cost options were available to them (such as cutting off customers on interruptible contracts).

  • Hopefully these are the secret contracts Gray David signed to "end the electricity crisis" 😉

    Good Riddance.


  • I believe these are exactly the "Gray Davis contracts," and the contracts may have in fact contributed to resolution of the crisis (haven't looked carefully at this aspect, but the timing is approximately right and some logic says taking a big chuck of load out of the real time market and into long term contracts could have the effect of dampening exercise of market power).

    Of course there is some hypocrisy involved in signing contracts to solve a problem, and then after the problem is solved, claim that the contracts were, in effect, signed under duress and so shouldn't be honored.

    (Actually, "problem is solved" is too strong, since California is still trying to fix its market design problems. The crisis has been averted, perhaps due to the long term contracts that the state entered into.)

    (And by the way, just one "b" in "Giberson.")