Deregulation and Electricity Prices

How well has deregulation of electricity markets worked for consumers?:

Competitively Priced Electricity Costs More, Studies Show, by David Cay Johnston, NY Times: Retail electricity prices have risen much more in states that adopted competitive pricing than in those that have retained traditional rates set by the government, new studies ... show. The findings ... raise questions about the reasons market competition produced higher retail prices than government regulation...

The data are the latest to show that competition, which was promoted by big industrial companies and Enron as the best way to create competitive incentives to reduce prices, has instead resulted in higher ... prices. Some big industrial customers have turned against the changes they once championed, saying that if markets produced lower prices they would favor them but that electricity auctions have not worked.

In market states, electricity customers of all kinds, from homeowners to electricity-hungry aluminum plants, pay $48 billion more each year for power than they would have paid in states with the traditional system of government boards setting electric rates, according to ... analysis of Energy Department data...

Under the rules of these markets, every electric power generator whose bid is accepted gets the highest price paid to supply power, called a clearance price or single-price market. In most auctions, each supplier gets the price at which they offered to sell, known as an as-bid market.

One result of clearance pricing is that nuclear power plants, which must run at a steady rate even when demand for power is minimal, have at times collected $990 per kilowatt-hour for power they had offered to give away during low-demand hours.

Gordon van Welie, president of the New England Independent System Operator, which runs the electricity market in that region, said ... he anticipated steady improvements in the efficiency of the auction markets over the next few years as rules are refined, and pointed to a report showing that wholesale prices in all markets declined last year compared with 2005, in contrast to the rise in retail paid by those who use the power.

I'm going to turn this one over to the microeconomists. Here's Hal Varian with a general discussion of auctions:

Tales of manipulation and design flaws from the crypt of auction history, by Hal Varian, Economic Scene, NY Times:  Auctions, one of the oldest ways to buy and sell, have been reborn and revitalized on the Internet. When I say ''old,'' I mean it. Herodotus described a Babylonian marriage market, circa 500 B.C., in which potential wives were auctioned off. Notably, some of the brides sold for a negative price.

The Romans used auctions for many purposes, including auctioning off the right to collect taxes. In A.D. 193, the Praetorian Guards even auctioned off the Roman empire itself!

We don't see auctions like this anymore (unless you count campaign finance practices), but auctions are used for just about everything else.

Online, computer-managed auctions are cheap to run and have become increasingly popular. EBay is the most prominent example, but other, less well-known companies use similar technology. DoveBid, for example, auctions off surplus industrial equipment. Excess machinery that would be rusting in back lots in Chicago can be put to use in Shanghai. Internet auctions facilitate these transactions, reducing waste and duplication.

The economist William Vickrey wrote the first major theoretical analysis of auctions in 1961 and received the Nobel for this work 35 years later.

Mr. Vickrey's work has been refined and extended by dozens of economists over the last 40 years. It is a beautiful and powerful theory, leading to several important insights that have had a large impact on auction design.

These days, when governments decide to auction off state-owned resources, they routinely hire economists for advice on how to design the auction. But bidders also hire economists to figure out how to beat the system.

Paul Klemperer, an Oxford economist, recently wrote a paper called ''What Really Matters in Auction Design,'' which includes many amusing, and sobering, stories of auction manipulation. This paper, and related materials, can be downloaded from his Web site at www.paul klemperer.org.

Mr. Klemperer argues that the principles of good auction design are the same as for any other market: try to encourage entry, and try to discourage collusion.

Ascending-bid auctions, particularly when they involve only a few bidders, are often susceptible to collusion, since participants can use early rounds to signal intentions.

In 1999, Germany sold some mobile-phone spectrum by auction, with one rule specifying that any new bid had to exceed the previous high bid by 10 percent. Two serious bidders were involved.

One company bid 18.18 million marks on blocks 1 to 5 and 20 million on blocks 6 to 10. Why the difference? Note that 18.18 million plus 10 percent is just about 20 million. The first company was sending the second a message: ''We think 20 million is the right price: let's not compete to push it up.'' The signaling strategy worked: the auction ended after two rounds, and each bidder got half the blocks at the same low price.

This is an example of an offer to compromise being encoded into the bids. Bidders can also encode a threat to punish. In the mid-1990's, two telephone companies were in a bidding war in a spectrum auction for Lot 378 in Rochester, Minn., generally bidding in round numbers. One company suddenly bid $313,378 and $62,378 on two other lots in Iowa that the second company thought it had won. The message there was also clear: stop bidding on Lot 378 or we will drive up the prices of other lots you really want.

It is hard to mount a legal challenge to this sort of behavior, particularly if there are no specific rules against it. Mr. Klemperer argues that a better way to avoid such ''implicit collusion'' is to require bidders to bid in round numbers, anonymously.

In addition to discouraging collusion, good auction design should also encourage entry. If everybody thinks a single strong bidder will win, it is hard to encourage others to enter. So, companies have a strong incentive to try to scare off potential competitors. Mr. Klemperer cites examples of public pronouncements of news releases and interviews that seemed intended to have this effect.

In November 2000, Switzerland was selling off four mobile-phone licenses but used an auction design that favored stronger companies, thereby discouraging entry. Furthermore, a week before the auction started, the nine likely bidders made a number of joint-bidding agreements, leaving just four coalitions bidding for four licenses.

Since there was no competition, the licenses sold at the minimum price set by the Swiss government, one-fiftieth of what had been expected.

There are many more fascinating stories. In an Australian sealed-bid auction for satellite television licenses, one company submitted several different bids on the same license and then, after winning, defaulted on the bids that were too high. It ended up paying a price only slightly higher than the amount bid by the next-highest bidder.

In 2000, Turkey auctioned two telecommunications licenses, with the rule that the minimum price for the second license was equal to the winning bid for the first. One company left itself with a highly profitable monopoly by bidding a very large price for the first license, rightly figuring that no one would be willing to pay that much for the second.

Mr. Klemperer emphasizes that auction design must be sensitive to the context. Are there a few dominant bidders or lots of potential entrants? Is this a one-shot or a repeated auction? Are there ways to signal intentions before the auction commences?

An appropriate design depends critically on the answers to questions like these.

One form that Mr. Klemperer particularly likes is the ''Anglo-Dutch auction.'' This uses an open, ascending-bid auction until only two bidders are left. These two then submit final sealed bids.

Auction designs like this may well help control manipulation. When a lot of money is at stake, every design will be probed for weaknesses, and attention to detail is critical.

Follow-ups: Felix Salmon with "Electricity: Deregulation Sends Prices Soaring" and Free Exchange's "Power Failures".

Comments

[real person from the real world]

In a age where businesses easily influence law-making, is it so strange, that deregulation, that "virtue" of the libertarian privitization society, actually raises prices? we live in a business environment, hungry for fees, and streams of income that have no underlying relation to the actual costs involved with producing. Prices are, "What the market will bear," not a reasonable markup on the actual cost. But of course, the apologists for companies fighting to keep their provides are creative and prolific with justifications. Too bad there are so few creative and prolific apologists for the average joe six-pack, who constantly has the money sucked out of his pocket and is now failing due to age, lack of healthcare, fewer decent paying jobs, and fees, fees, fees, and more fees on credit cards, mortgages, etc.

[bakho]

Incentives matter. In competitive markets, companies are competing to sell the most electric at the highest price. What do you get with a customer owned electric coop? You get a system wide approach to low electric rates. If it is cheaper for the system to provide incentives to save electric rather than build a new plant or buy electric then you get a conservation program that provides rebates for efficient appliances, heat pumps, insulation, etc instead of more expensive electric. This provides a short term incentive to make the correct long-term decision.

Do you get that with competitive pricing of electric? No, because they want to keep use high so the more expensive electric can be sold. Conservation is not encouraged.

This is not to say that coops don't make stupid investment decisions from time to time that raise rates. However, when the goal is to delliver electric to the customer at the lowest possible price VS generate the largest possible profit from electric customers, which system has the most incentive to deliver electric at the lowest price?

[Farrar Richardson]

This is important ! I hope the EEC commissioners in Brussels will take heed.

[ken melvin]

Seems to me that if markets really work why bother with auctions (but a variance). If they don't work, why bother with the variant form. I remember farm auctions where when farmers colluded they could make it a pretty 'good sale' for the seller, but too often the collusion was amongst livestock dealers and/or the auctioneers and the guy selling out lost big. There's a lot of sleaze, and sleazes, involved with auctions; even more than with lotteries.

[Richard A.]

Deregulation of price ceilings can lead to higher prices while deregulation of price floors can lead to lower prices.

[diz]

This "study" is seriously flawed if it does not attempt to control for the mix in fuels used.

In general the states that de-regulated were among the higher costs states. The higher costs states tended to be more reliant on fossil fuels, and in many cases were in need of considerable amounts of new generatio capacity additions (almost all of which is natural gas fired).

The states where energy is cheapest have lots of low cost hydroelectric power. Or they may have lots of cheaper coal burning or nuclear plants and limited need to add capacity.

Anyway, over the period in question natural gas prices have risen considerably -- on the order of magnitude of a quadrupling. If there is a correlation between the states that use more gas and the states that deregulated (and I suspect there is a strong one), the results of this study are somewhere between "misleading and "total crap".

[diz]

OK, just for the heck of it, I got the data here and thru the joy of excel pivot tables calulated the following mix of generation capacity:

http://www.eia.doe.gov/cneaf/electricity/page/capacity/existingunits2005.xls

Deregulated states (per original article):

Coal: 17%
Natural gas: 57%
Nuclear: 9%
Hydro: 6%
Petroleum: 8%
Other: 3%

Regulated states:

Coal: 37%
Natural gas: 34%
Nuclear: 10%
Hydro: 8%
Petroleum: 5%
Other: 6%

Anyway, it seems rather dubious to compare changes in prices for these two groups of states as if "regulation" is the primary factor driving the change when one group is much more gas weighted than the other, and the price of gas has undergone a dramatic increase.

[kthomas]

When someone preaches about deregulation, it's because they're a brainwashed idiot, or they have some vested interest in the act of deregulating the market.

Either way, after Enron, I go for my sidearm when I hear someone preaching deregulation.

[johnchx]

I'm forced to agree -- more or less -- with diz. To use the lingo, I don't think the paper sufficiently addresses the identification problem; it wouldn't be accepted by a refereed journal.

The basic problem is that there's no reason to assume that the states that chose deregulation and those that didn't are otherwise the same. A sound econometric approach to the problem would probably begin with a model of the choice to deregulate, with an evaluation of the effects of deregulation layered "on top."

[dsgadsjl]

I think diz/johnchx's questions are important.

That said, let's ignore for the moment the possibility that biases are driving this disparity in electricity prices.

I don't think it's surprising that in a period with rising energy costs, electricity prices charged to consumers in deregulated states have grown faster than those in regulated states. After all, the purpose of the regulation is usually to keep prices down. I'd put this in the "DUH" category.

An analysis that focuses only on price in a context where some markets have price ceilings is not going to be especially meaningful. You also need to look at rationing or (if we are dealing with subsidies rather than rigid price caps) the cost to government finances.

That said, yes, the argument that deregulation would lead to lower _prices_ looks pretty stupid right now.

[anne]

Actually, as Paul Krugman wrote about so well, electricity prices in deregulated states rose when energy prices were falling and decidedly low from 1998 to 2002. Warren Buffett understood as well that this was just the time to buy electric utilities in regulated regions. Regulated utilities were bargin priced when unregulated utilities were at a premium because the thinking was with deregulation prices increases could be endless because competition was just a pretense. Krugman and Buffett and investors who attended to them were awfully right.

[anne]

The trick that I understood early on in looking at Enron in the 1990s, and watching what Berkshire Hathaway was buying, was that the competitive power generation model was not where the profits were an then Krugman explained what should have been obvious, but was not, that competition was leading to higher consumer prices not lower.

Krugman was ridiculed by analysts, but stock prices had already told investors that Krugman was right. Buffett, after the buying had been done, joked about analysts having no understanding of power generators or generating markets.

[johnchx]

dsgadsjl writes: I don't think it's surprising that in a period with rising energy costs, electricity prices charged to consumers in deregulated states have grown faster than those in regulated states. After all, the purpose of the regulation is usually to keep prices down.

Actually, electricity regulation in most states is what's called "rate-base rate-of-return" regulation, which basically means "cost plus." Regulated utilities are allowed a fixed rate of return over and above their costs. Which means that, as costs rise, prices rise, even in regulated markets.

The rationale for deregulation -- in part, at least -- is that profit-motivated firms will do a better job of controlling costs than the utility regulators, and that competition will keep profits under control. If it were to turn out that either (a) utility regulators control costs better than profit-motivated firms; or (b) that competition failed to keep a lid on firms' profits, that would constitute a pretty serious critique of deregulation (at least as implemented).

[diz]

I don't think it's surprising that in a period with rising energy costs, electricity prices charged to consumers in deregulated states have grown faster than those in regulated states. After all, the purpose of the regulation is usually to keep prices down. I'd put this in the "DUH" category.

Competition keeps prices down too.

If you really think regulated utilities keep prices down, you are seriously unaware of how regulated utilities work. Their primariy incentive is to increase their rate base.

Anyway, that's not so much the point here. The author did not even bother to control for significant differences between the two populations. A real analysis might show de-regulated customers fared worse but this analysis is DOA.

Something that should make people highly skeptical is that re-regulation resulted in a) massive amounts of new capacity being added and b) lot's of bankruptcies and other financial distress among the people who built that capacity.

Within the industry, the period after de-regulation was called "the overbuild". The overbuild should have represented a massive wealth transfer to consumers. If regulated utlities had built these plants, they would not have gone bankrupt, they'd have added the cost to their asset base and passed it on to consumers. This wealth transfer was concealed by the concurrent rise in natural gas prices.

Anyway,the person who wrote this article seems oblivious to these sorts of issues. You could have talked to almost anyone who followed the electric industry through the last ten years to get these issues on the table. I'm always fascinated by the fact journalists don't make even make modest effort to understand what they write about.

[dsgadsjl]

>>I don't think it's surprising that in a period with rising energy costs, electricity prices charged to consumers in deregulated states have grown faster than those in regulated states. After all, the purpose of the regulation is usually to keep prices down. I'd put this in the "DUH" category.

Competition keeps prices down too.

It can, but that depends on the market structure.

[anne]

"Anyway,the person who wrote this article seems oblivious to these sorts of issues."

Anyway, the person who wrote this article may just be the finest economics journalist in the country, anyway.

[Lord]

Deregulation increases the incentive to not produce electricity even more than to produce it. Price spikes can yield much greater profits than constructing plants that may or may not be needed in the distant future. It's a market that induces collusion even without collaboration.

[dale]

Deregulation was sold state by state- including here in Oregon- as a way to increase competition and thus lower prices. At the time I wondered why folks in the industry would be so interested in lowering my electrical rates. I didn't believe they were.

David Cay Johnston spent quite a bit of time here in Oregon looking into the local Enron-PGE fiasco.

Newspaper articles are not academic journal articles. But when we see that the promised benefits of deregulation did not appear - whatever the peculiarities of each individual state- that is enough to take a story to the press.

[Bill C]

If energy consumption has a negative externality - e.g. carbon emissions - then higher prices are exactly what we want! De-regulation acts like a stealth carbon tax (except no revenue for the government). Perhaps the folks who pushed it were really engaged in a conspiracy to fight global warming (no wonder Cheney kept those meetings secret!).

[Don]

Going back to Econ 101, it seems to me that there are two electricity markets--one for generation, and one for transmission. The transmission of electricity being a sub-set of a category of goods I'd call communication (e.g., roads, software operating systems, etc.). Communication systems are natural monopolies, i.e., per-unit costs decrease as more units are supplied. Once an electricity transmission system is constructed and in place, with a bit of excess capacity for its anticipated demands, the cost of using it for one more kilowatt is virtually nil and its per-unit costs actually decline, sort of like a road--one more car traveling along its path uses up very little of the road.

Electricity generation is not as clearly a natural monopoly, except for the system as a whole. Any old electricity is just fine for sending down the wires, but the problem is that the system, to do what we expect of it, must have an operator that is tasked with ensuring that there is generation capability for peak demand. The excess capacity needed for peak demand ensures that auctions are a very poor way to reach the goal of a low-cost, but reliable power supply. Each generator must, of necessity, build excess capacity if the system is to have what it needs to meet demand in July and August (at least here in the South). With each generator having to be compensated for its excess capacity, it is little wonder that de-regulated electricity prices exceed those of regulated entities. Even if electricity generation is not necessarily a natural monopoly, i.e., with per-unit declining costs, there are efficiencies to be gained by having system-wide excess capacity, and not having each generator keeping it's own inefficient excess. Peak demand days were what killed de-regulation in California, as spot prices (gamed by sleazebags at Enron, to be sure) reached record highs.

Accordingly, most of the provisioning of electricity is a natural monopoly because of the need for excess capacity, and the huge sunk cost of transmission lines. De-regulation in attempting to capture efficiencies from that sliver of electricity provisioning with something of a competitive slant was ill-advised--the best check on a nearly natural, or natural monopoly is government regulation.

I might add that, in my home state of Alabama (or at least the part covered by Alabama Power, which is the center 2/3rds), electricity provisioning is one of our successes. We are blessed w/ abundant hydroelectric potential, which helps, or at least did until this year, but we also have a public service commission (three commissioners elected state-wide) that sets electricity rates on a cost-plus basis, and have some of the lowest rates in the country, along with some of the most reliable service.

I only wish the water works in my fair city were similarly regulated. Alas, city-owned utilities are not regulated by the public service commission, or actually, by anyone, and it shows. Only an unregulated government-owned monopoly could be so stupid as to plan its water provisioning on the basis that the rain never fails. Alabama Power, even though generating upwards of 20% (in a normal year) of its electricity via hydroelectric dams, hasn't missed a beat. The Birmingham Water Works Board had to start rationing in May.

[tadhgin]

Diz is right, not only is mix key, but deregulation is a misnomer. It is really about changing from being a "regulator" who sets allowable rates of return/revenue caps etc (all with their own incentive problems) to becoming a body to set market rules and is essentially a competition authority (at least as regards generation and retail, transmission and distribution and system operation are different). Moreover the special nature of the electricity market mean that market power can exist at quite low concentration levels so you need to actively monitor the market for evidnce of abuse.

BTW the nuclear plant's excess profits at high demand are what pays it ridiclously high capital costs (or not as the case may be). There are good questions as to whether the risk faced by individual investors might be better socialised but I think that the history of nuclear in the uk is worth considering in this regard.

[diz]

Anyway, the person who wrote this article may just be the finest economics journalist in the country, anyway.

And yet this particular piece of "fine economic jouirnalism" can be revealed as a stinking pile of crap with a few minutes analysis of publicly available data.

[David Cay Johnston]

The issues in electricity pricing are remarkably complex, which is why, sadly, they are seldom examined in newspapers.

Anyone who is familiar with the body of my work on utilities (which goes back more than 35 years) knows how I have tried to make clear to ordinary readers in plain English arcane issues such as how asymetrical markets affect prices, how clearance price versus as bid markets work and the role of market design in affecting prices.

The longer version of this article, which was posted on the web (but cut back when, as often happens, space limitations forced a shorter print article) dealt with some of the market design issues.

In any event, my piece today was not a comprehensive examination of the issues (see my six part series late last year and in early 2007), but a discrete 840 or so words about the curious fact that advocates on both sides issued reports with the same basic conclusion -- prices rose everywhere, but more in states that adopted market pricing.

The second paragraph, what we reporters call the nut graf, reads:

"The findings, by advocates for both sides in the market-versus-regulation debate, RAISE QUESTIONS about the reasons market competition produced higher retail prices than government regulation."

The article I wrote does not purport to answer the questions -- and in 840 words it could not. That nut graf is a signal to readers to think about the reasons and to watch for more coverage, answers always being more matters of viewpoint than hard facts, while pricing data (especially over many years) is hard fact.

The mix of fuels, cited by posters above, tells us about why those states that choose to adopt market pricing tended to be the same ones that had relatively higher costs. But this was not a story about that issue, it was about what official pricing data tell us, over many years, about states with clearance price auctions -- where natural gas tends to set the price more than any other fuel, regardless of the share of juice produced from coal, uranium and other sources.

There are three chapters about these issues, and some fascinating findings about how market design affects pricing, in my next book, FREE LUNCH, which will be out Dec. 27.

Free Lunch is largely about government interference in markets (there is no such thing as "deregulation," only new regulations) and who benefits from those interventions. In part, Free Lunch compares what Adam Smith actually wrote to policies adopted in his name, including the how government rules affect market results.

[anne]

The above comment was from the superb David Cay Johnston.

[Rajesh Raut]

This is a stupid study. Did they check the state of the electricity market at the beginning of the study period? Did they notice that areas that were short of generating capacity, thus in need of capital investment to create more generating capacity? Did they notice that areas with surplus capacity didn't change their regulatory regime? Did they track the amount of capital the different areas attracted into their power generation after the changes? Or did they just want to score stupid points about "greedy" power companies? Did they compare the rate of return between regulated utilities and unregulated utility to decide who was greedy? Bah!

[reason]

Rejesh Raut...
You may get the answer to your questions, but until you do you should be polite.

[johnchx]

David Cay Johnston writes:But this was not a story about that issue, it was about what official pricing data tell us, over many years, about states with clearance price auctions -- where natural gas tends to set the price more than any other fuel, regardless of the share of juice produced from coal, uranium and other sources.

Yes...that's called setting price equal to marginal cost, and it's the perfectly ordinary market outcome.

Holders of sources of supply with lower cost but inelastic quantity of output reap a windfall, called Ricardian rent. If, as in energy production, supply is inelastic in the short run but elastic in the long run, the windfall profits to the lower cost technologies draw additional investment, and we wind up with more coal, uranium, etc.

The intuition that Johnston seems to endorse -- that it is an outrage that low-cost producers should earn higher profits than high-cost producers -- is understandable, but is also profoundly economically illiterate. The idea that it is some kind of incompetence to structure auctions so that they send correct price signals to producers ("more coal, and pronto!") is...well, let's just say that it's open to argument.

Finally, a big "Why oh Why Can't We Have a Better Press Corps" for David Cay Johnston's retreat into "questions have been raised" journalism, the last refuge of the sloppy and ill-prepared. The "nut graf" is supposed to alert the reader to the fact that the journalist doesn't actually stand behind the implications and insinuations that follow? C'mon!

[john c. halasz]

Er, natural gas has gone up in price in part because it is the cleanest burning, hence most environmentally desireable conventional fuel. Also, in electricity production you have a base-load generation, which must be continuous and reliable, but tends to be cheaper/larger scale, and peak load suplementary capacity, which doesn't operate continuously and tends to be much more expensive and smaller scale. Because natural gas plants are smaller scale and quicker to construct, they tend to be preferred for peak load capacity, and the spot market price for electricity concerns peak load demand. Which is presumably why natural gas tends to dominate the spot market price. But as to spot market prices signaling for planning construction of base load capacity, I'll point out the long lead time for any large-scale generating plant construction. Part of the reason NE uses so much gas is that it was much cheaper 6 or 7 years ago when the plants where constructed.

[anne]

David Cay Johnston is simply superb, and this article which carries forward years of articles following power generators and generating is completely sensible and long anticipated by investors as by Paul Krugman and several California energy experts with whom Krugman consulted at a time when they were all thoroughly ignored much to the distress of Californians who depended on power generation by unregulated companies. The distress which was thoroughly distorted by conservatives curiously enough became a significant contributing factor in the election of a certain terminating Governor.

Try paying a little attention to Warren Buffett the next time he decides to talk about power generators. I always pay attention to him as to Krugman. It pays. Duh.

[anne]

Those years ago, I remember watching Wall Street Week with my father and listening to deceiving conservatives explain away California's supposed energy crisis in the midst of blaming environmentalists. Krugman was fiercely criticized, while Buffett was unmentioned, but we understood and stock price patterns had already showed investors understood.

[diz]

Yes...that's called setting price equal to marginal cost, and it's the perfectly ordinary market outcome.

It's also important to not that in the regulated utility world the marginal plant earns a profit. Even the sub-marginal plant earns a profit. Every dollar spent earns a profit, regardless of the wisdom of spending it.

Most people who remember the transition to de-regulation remember that a big issue was how the incumbent utililties would recover their investments in plants that were economically obsolete (aka "stranded assets"). Stranded asset = a plant which should not have been built that the utility customers pay for anyway, with profit to the builder.

The true benefit to de-regulation comes from better decisions surrounding capacity additions, and to a lesser degree, greater incentives to operate assets efficiently.

A far better analysis would be to take a state that has deregulated (like Texas) and estimate what the electricity price would be if fuel prices were what they are and cost of service type regulation had stayed in place.

The state would have added a lot of gas plants to the rate base and would be paying a lot more for gas regardless.

Comparing Texas prices to what people in Idaho paid for cheap hydro power over the same period is pretty meaningless.

[john c. halasz]

Er, natural gas has gone up in price in part because it is the cleanest burning, hence most environmentally desireable conventional fuel. Also, in electricity production you have a base-load generation, which must be continuous and reliable, but tends to be cheaper/larger scale, and peak load suplementary capacity, which doesn't operate continuously and tends to be much more expensive and smaller scale. Because natural gas plants are smaller scale and quicker to construct, they tend to be preferred for peak load capacity, and the spot market price for electricity concerns peak load demand. Which is presumably why natural gas tends to dominate the spot market price. But as to spot market prices signaling for planning construction of base load capacity, I'll point out the long lead time for any large-scale generating plant construction. Part of the reason NE uses so much gas is that it was much cheaper 6 or 7 years ago when the plants where constructed.

[real person from the real world]

In the new, your on your own, privitized world, everything costs more, and some of the stuff you used to take for granted, now also costs. The use of bank ATMs was sold to the public as a way to lower costs (cheaper than hiring tellers), but now it is a "convenience" for which some banks charge. Smaller packages of food can actually be quite expensive, because they are a "convenience." I guess you aren't supposed to notice in this arithmetic challeged age. Microsoft likes to tout it's Total Cost of Ownership TCO, but basically the arguments are marketing spin. Corporate types have had increasing power over life in this country over that last 30 years. Their income is up. I don't know about you, but mine is DOWN.

[David Cay Johnston]

may I suggest johnchx read my brief article, which says nothing like what he imagines. I just reported the data from both analyses. Zero on 'outrage' in my piece -- no sides, just facts, which are NOT in dispute.

[anne]

David Cay Johnston is emphatically denying being Molly Ivins in disguise. I do miss Ivins though.

[david cay johnston]

...so do I, but reporting and op-eding are different, each with their own rules, traditions and expectations about readers knowing the difference. Sadly, the last few years suggest to me that ever fewer readers grasp these critical didtinctions.

[diz]

Zero on 'outrage' in my piece -- no sides, just facts, which are NOT in dispute.

The facts are used to create a false impression.

An opportunity to educate and inform was lost.

A person who sincerely wanted to understand the pros and cons of de-regulation would be better off not having read the article.

As we can see in this very comment section, this article gives undue grist to the chicken bone waving anti-market Madame Defarges and detracts from the ability to conduct a dispassionate policy debate.

I can observe that back during the Clinton Administration, when much of the energy de-regulation we are discussing here was accomplished, Energy policy discussions were much more apolitical and reasonable. If only rhetoric and ideology caused electrons to flow...

[anne]

http://www.nytimes.com/2007/02/01/washington/01ivins.html?ex=1327986000&en=3421d3ca1042983f&ei=5090&partner=rssuserland&emc=rss

February 1, 2007

Molly Ivins; Writer Skewered Politicians
By KATHARINE Q. SEELYE

In 1976, her writing, which she said was often fueled by "truly impressive amounts of beer," landed her a job at The New York Times. She cut an unusual figure in The Times newsroom, wearing blue jeans, going barefoot and bringing in her dog, whose name was an expletive.

While she drew important writing assignments, like covering the Son of Sam killings and Elvis Presley's death, she sensed she did not fit in and complained that Times editors drained the life from her prose. "Naturally, I was miserable, at five times my previous salary," she later wrote. "The New York Times is a great newspaper: it is also No Fun."

After a stint in Albany, she was transferred to Denver to cover the Rocky Mountain states, where she continued to challenge her editors' capacity for prankish writing.

Covering an annual chicken slaughter in New Mexico in 1980, she used a sexually suggestive phrase, * which her editors deleted from the final article. But her attempt to use it angered the executive editor, A. M. Rosenthal, who ordered her back to New York and assigned her to City Hall, where she covered routine matters with little flair.

She quit The Times in 1982 after The Dallas Times Herald offered to make her a columnist. She took the job even though she loathed Dallas, once describing it as the kind of town "that would have rooted for Goliath to beat David."

* Ms. Ivins prankishly referred to the chicken slaughter as a "gang pluck."

[anne]

David Cay Johnston is a gem, as was this perfectly clear and important article, and I make a point of looking for his articles. But, since chickens were mentioned, well, I thought to add, you know, and even on a family blog. Madame Defarges? Say what?

Happily Johnston's article reminded me to read back clever Paul Krugman on the supposed California energy crisis. Not to mention to think about water pricing in Latin America. Not that I am thinking of beheading anyone, though. Yet.

[anne]

De-regulation or privatizing of utilities respectively here as through Latin America was wildly political through the 1990s.

[anne]

"The data are the latest to show that competition, which was promoted by big industrial companies and Enron as the best way to create competitive incentives to reduce prices, has instead resulted in higher ... prices."

Enron was on our portfolio wish list for a while, but the relative valuations simply never made sense. I remember though reading a long New York Times article on Kenneth Lay, when Enron was the darling of investors. The article described the internal competitive structure of Enron, which for any company let alone a "public" utility struck me as breeding competition to insanity and at the expense of consumers. About that time, I knew only regulated utilities would fit our portfolio.

[johnchx]

David Cay Johnston writes (in the New York Times): The data are the latest to show that competition, which was promoted by big industrial companies and Enron as the best way to create competitive incentives to reduce prices, has instead resulted in higher and faster rising prices.

I don't think it's wildly unfair of me to read this as a conclusion, reported as fact, that a causal link exists between deregulation and higher and faster-rising prices. I don't think it's crazy of me to read "has resulted in" as "has caused," and I don't think I'm nuts to read "to show" as "to demonstrate" or "to prove."

The data are said to "show" this conclusion, when in fact, the data reported in the article show no such thing. As a demonstration of causality, the report cited is wholly inadequate.

And singling out Enron as an advocate of deregulation...that's not meant to imply anything, is it?

Here's the thing: I personally have little doubt that deregulation has been a boon to well-connected interests, and, on balance, a bad thing for consumers. I'm an advocate for publicly owned utilities. That's why it irks me so to see completely bogus research given such prominent play; it makes "my side" look stupid and ill-informed.

Mr. Johnston: surely you have in your Rolodex the telephone numbers of numerous, well-qualified professional energy-market economists who are not employed by advocacy groups, industry trade associations, or thinly-disguised "think tanks." Surely some of them can point you in the direction of real, statistically sound, even...who knows...peer reviewed and published, literature on the effects of energy deregulation. And surely the readers of The Times would be better served by learning what the real literature has to say on the subject, than by being distracted by the noise of obviously flawed "studies."