Please Blame the Deregulation and Regulation Fiascos Parte 8

Dick Maclay is suggesting that my insights be considered in the following quote:

Len, Southwest was profitable for years offering lower fares than American, while American lost money. That speaks to overall efficiency. If American beats Southwest on one measure AFTER imitating Southwest that is amusing, but not important to the discussion. The description of how Southwest differs from the pre-deregulation airline model has been written many times, and it is too long to retell here. But if you want to understand how competition upsets inefficient old cartels, do take the time to read about Southwest. Ferdinand, the point is that when customers are no longer denied the full range of choices they choose low cost options, not high cost options.

I bet the failure to deregulate would fail. I would never bet against actual deregulation. You are welcome to your opinion about deregulation, but consider Dr. Vanderhorst-Silverio’s insights.

The great failure in California was that insulating retail customers from wholesale prices was a perfect barrier to a functioning market. When the shortage occurred there was no price signal to reduce consumption. Some described the result as giving everyone market power. It did create an opportunity for everyone to raise their prices, but that is nothing like the economic or legal definition of market power. It was a marvelous demonstration of the basic fallacy of attempting to have half a market.

Dr. Hogan was very influential in the early development of California’s restructuring, and the restructuring did follow the mental of model of isolating wholesale from retail that Dr. Dr. Hogan appears to persist in pushing. I did not locate the description of the Enron model, so I have no way of knowing how it may differ from the Hogan model.

Our modeling of the western interconnect in the mid 1990s forecast prices over $300 /MWh in the 6*16 market if there was a major draught on the Columbia River before 2003, and wholesale markets were isolated from retail customers. Unfortunately, the draught occurred and prices were as forecast. When the generally accepted short-term price elasticity of -.02 was introduced in our model, prices topped out at about $100. Too bad California did not use something along the lines of the Schweppe model.

Even $100 per MWH is high for 6*16, but high prices are part of a major shortage period. Spot prices in all years except 2000 and 2001 have been unsustainably low; too low to justify building new power plants. Some periods with high prices are needed. In context $100 is not bad. The good thing about large variations in prices is that it guides customers away from high cost periods, towards lower cost periods. That is how deregulation resturctures an industry, reducing costs and prices.