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Directive 10-289

I have spent this morning learning about the energy crisis in California that occurred about a decade ago. You should all have the pleasure. The summary is, not surprisingly that in 1996 the state of California “deregulated” the electricity sector by allowing wholesale electricity prices to fluctuate and then slapping price controls on the retail side.

For those of you who understand that lots of political discourse is about narrative and crafting it, keep this in mind when you hear about an “environment of deregulation” that has swept the nation for the last 30 years.

In any case, the result was predictable, and per usual the government behaved much like a dog running but attached to a long, slack leash. I’ll tell the whole story one day, but my favorite episodes include these two facts:

  1. Governor Davis of California lobbied the Federal Energy Regulatory Committee (FERC) to impose price controls on states outside of California. You heard that correctly. The governor of one state argued that “we” needed to put price controls in other states. Why? Because Davis was not stupid. He knew that putting price controls in California would provide electricity suppliers with the incentive to sell power to people in other states. So only by maiming electricity markets elsewhere would he have a chance of surviving in California. Who do you think won the day?
  2. And here is the inspiration for the title of the post. After FERC “solved” Davis’ problem, the rolling blackouts continued. In an effort to deal with it, the California Public Utility Commission established, “The Optional Binding Mandatory Curtailment Program.” Seriously, did someone make that name up and congratulate themselves? No need to get into the details into what that disaster ended up leading to.

But that was all in the past, nothing like that could possibly happen today. Remember, we are getting down to the hard work of evaluating every single rule and regulation and getting rid of the dumb ones. Have a nice day, as they say.

4 Responses to “Directive 10-289”

  1. Rod says:

    Pennsylvania has also been similarly deregulated. Now the utilities can recover the cost of paying penalties for the burning of fossil fuels and of paying extra for expensive wind and solar energy. I’d prefer real deregulation, where I could buy electricity from Delmarva Power and Delmarva could keep it cheap by burning coal.

    But think of all the social justice I achieve when I pay my electric bill. I create jobs for those alternative energy sorcerers.

  2. Michael says:

    I’ve spent a bit of time at work explaining transaction costs and trying to argue what they are developing in MISO is not a “spot market,” but I’m too small a cog to make much difference.

  3. Harry says:

    Michael, one time, tellingly, I asked what ASAP meant. A friend and I share my humiliation.

    Therefore, I ask humbly what MISO stands for. I could have Googled it

    As far as transaction costs go, I am a back-of-the envelope world-class expert. The rule is that every transaction costs you money. I would not waste much time writing a book quantifying transaction costs, but it might be worthwhile writing a book, maybe fiction, about the many villains who by force impose transaction costs.

    I understand your concern, and you are on a big point fundamental to productivity. I just wonder whether quantifying the costs is worth your time, unless you are selling a project where you are saving someone several millions, in which case precision about transaction costs, which are never quantified by the accountants, are all gravy.

    Meantime, those transaction costs are important to your broker, who calls himself a financial consultant. The more transactions, the better.

  4. Michael says:

    MISO is short for Midwest ISO which is short for Midwest Independent System Operators. Another relevent term in RTO – Regional Transmission Organizations. Basically these are electric companies that trade electrical capacity between different plants and loads, subject to transmission limitations. In and of itself, it’s a good idea, but then there are some things that I guess would depend on your perspective. It is my opinion that they are feigning free market, in the meantime they are really becoming one large electrical company.
    The transaction costs comes in via Williamson and asset specificity, where essentially due to transaction costs, it may be better to have a vertically integrated market transaction rather than a spot market. When states forced “deregulation”, prices rose, which is evidence to me that perhaps the most efficient market transaction was verticle integration. I better stop here because I would be writing all night otherwise.

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