* S&L Deregulation: Led to S&L crisis
* Deregulation of the electrical power industry:led to Enron and the now familiar “rolling blackouts”
* Repeal of The Glass-Steagall Act: Big contributor to the current mess
On one of these, I know a bit.. and your statement is inaccurate. This is the deregulation of the electrical power industry. We are still under the state of deregulation on power generation, and no rolling blackouts.., so what happened? The truth is not that the deregulation caused the problem, it is how the deregulation was done that gives a case study in governmental stupidity (and voters not reading what they were voting for – ie the text of the bill).
The electrical power deregulation bill had two wierd quirks written into it.
1) Electricity was to be bought on spot market on day – to – day contracts.
2) Electrical cost was to be determined by combination of cost of last generator on line and spot market price.
The authors of the bill thought that the spot market price would be best representative of the price. Nothing could be further from the truth. Spot markets are the most manipulated markets around, but they average out in the long term to what the value of power really is (Eventually the speculator has to sell what they bought – they are not holding for consumption). Take down a power generator and the spot prices shoot up. Long term contracts with power generators were explicitly forbidden by the deregulation bill. The way a long term contract work is by stating a delivery of ‘X’ megawatt-hours per hour over a period of ‘Y’ days-months-years for ‘Z’ dollars per megawatt-hour with a must deliver clause. The power generator would have to go out on the spot market to find the remaining power should they be unable to deliver the contracted amount. The power generator would have to absorb the difference in the contract price and the spot price. This forces power generators to keep their cheapest generators running full-out on line as much as possibly and keeping the most expensive ones on standby. Pulling a generator offline as an ’emergency repair’ would cost the power generators because they would be bound by a long term contract and would have to find replacement power through either the spot market or their higher cost generators that were on standby.
The second clause in the deregulation bill allowed power generators to successively add cheap power generators as demand built up.. then at the last moment, add a very inefficient power generator. The way the bill was worded, the cost of the power would be considered as the cost of the last generated added.. for all of the units, even the cheaper ones. The authors of the deregulation bill assumed that power providers would not try to ‘game’ the bill and will add the cheapest power generators to the grid as demand increased.
Where Ex-Gov. Davis screwed up is when he tried to get around the spot market price restriction by having the state buy from the power generators and then sell to the grid using longer term contracts. He bought long ‘multi-year’ contracts for all the power needed during the time when the spot market prices had been manipulated up (bought the house at the peak of the market). He should have bought a mix of 1 week, 1 month, 6 month etc power contracts with mandatory delivery requirements. The longer contracts would stop the manipulation of the spot market, allowing the long term prices to also drop (long term tends to act like an EMA of the spot market), while avoiding a lock-in at the higher price. Ex-Gov Davis could then fill in the long term power purchases after the market stabilized. — wonder why California’s budget is so screwed up even though we have had record property tax and property sales tax revenue??.. take a guess.
