Wednesday, September 25, 2002

Last year, when Enron was going down, some conservative bloggers found a silver lining in the cloud: no longer, they claimed, would "liberals" be able to grouse that Enron was responsible for the California energy crisis --- if they were running a scam, how could they go broke?

The logic here was never quite clear (things certainly didn't work out that way for Boston boy Charles Ponzi), but in any case, we now know that Enron was running several scams, not a few related to the California energy market. Nor were they the only ones --- the entire energy industry seems to have ganged up on California, while Dubya's FERC, staffed by his friends from the oilpatch, was refusing to intervene, and telling the state to bend over and take it. Over the past little while, we've had news of:

  • Enron's schemes to, among other things, tie up transmission lines with bogus transactions, to run transient local shortages into price spikes, by making sure they couldn't be relieved from elsewhere.
  • A report that companies running generators were playing the same game --- deliberately withholding available generator capacity (in plants which they had reported to the market regulators as in current working order, and ready to go).
  • Most recently, a similar scheme by El Paso involving its natural gas pipelines --- again, withholding capacity, with the obvious goal of running up the price.

Well, don't all rush to apologize at once.

An interesting sidelight is watching economists come to terms with what was clearly a massive failure of market machinery. Brad Delong notes that it's "[e]conomists' conventional knee-jerk belief" that scams like this shouldn't work --- "it almost never pays a company to withhold output unless it has a durable monopoly" --- and relays some analysis from his colleague Severin Borenstein, a specialist on energy markets, on structural reasons why they are peculiarly subject to this sort of manipulation. With all due respect to Profs. Borenstein and Delong, there's more going on; if all we have to consider are structural issues which are common to all energy markets, wouldn't we have seen the same massive wholesale price run-ups in, say, Pennsylvania?

What's odd is that there's an obvious factor which Delong hasn't bothered to mention yet: the California energy market failed because it was rigged to fail. Energy company lobbyists, particularly from Enron, were heavily involved in writing the legislation which created the market, and were directly responsible for some of its peculiar features, particularly the lack of transparency which enabled some of Enron's trading games. And while it's not been clear to me exactly who was responsible for the outright ban on long-term energy contracts, which power retailers otherwise might have used to limit their exposure to short-term price fluctuations, the energy suppliers certainly didn't disabuse the legislature of that notion, nor hesitate to take advantage after the fact.

Economists sometimes describe markets as natural phenomena. Personally, I think of them as carefully engineered human artifacts; it makes it easier to pose the questions, engineered by whom and for what...


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