Arnold Kling

California, revisited

Arnold Kling, Great Questions of Economics
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Paul Krugman revisits the California "energy crisis," and he finds that it was caused entirely by ruthless supply restrictions on the part of large energy companies.

this was the most spectacular abuse of market power since the days of the robber barons and the feds did nothing to stop it...

So we ignore California's experience at our peril. It's all too likely to be the shape of things to come.

I believe that it is fair to say that most economists would predict that California's experience is not the shape of things to come. Even among those who believe that companies found it profitable to withhold energy (and by no means do all analysts hold this view), there is a consensus that the California regulatory regime had unique aspects which made it brittle when demand increased. For example, Lynne Kiesling points out that power disruptions were as often caused by overwhelmed system operators as they were by actual shortages. Moreover, the cost of selling power in California was high due to scarce emission permits and a risk premium associated with a fear of not getting paid (fears which in fact were realized when the main electric utility went bankrupt). Finally, to the extent that suppliers were able to exercise market power, she points says that

the dysfunctional California restructuring labyrinth gave the generators market power on a silver platter.

Discussion Question. In his last sentence Krugman evidently is predicting that there will be widespread electricity shortages, due to market manipulation by energy suppliers. Kiesling would argue that shortages can occur only when state regulatory regimes disconnect retail consumers from prices. How can we use future performance in energy markets to evaluate these conflicting viewpoints?

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