Message-ID: <22303704.1075840900742.JavaMail.evans@thyme>
Date: Wed, 30 May 2001 13:52:00 -0700 (PDT)
From: ray.niles@ssmb.com
Subject: Interesting Media Article from Dow Jones on Price Controls
Cc: mark.golden@dowjones.com
Mime-Version: 1.0
Content-Type: text/plain; charset=us-ascii
Content-Transfer-Encoding: 7bit
Bcc: mark.golden@dowjones.com
X-From: Niles, Ray  <ray.niles@ssmb.com>
X-To: 
X-cc: 'mark.golden@dowjones.com' 
X-bcc: 
X-Folder: \ExMerge - Kitchen, Louise\'Americas\Regulatory
X-Origin: KITCHEN-L
X-FileName: louise kitchen 2-7-02.pst

INTERESTING MEDIA ARTICLE (SEE BELOW) FROM DOW JONES ON PRICE CONTROLS
- Ray Niles (212-816-2807)

My comments:
This is a good article explaining the complex power market in California.
Basically, the problem in California is insufficient deregulation.  The
problems are worsened by the particular mixture of controls and market
forces which combine to create imbalances.  Specifically, while retail
prices are capped, wholesale prices are market-determined except that there
are restrictions against long-term hedging.  This is a recipe for high and
volatile short-term power prices, which we have seen.

Our view is unchanged that price controls set at a meaningfully low level
will cause blackouts by creating an imbalance between supply and demand.
This is elementary economics.  Price controls reduce supply (electrons flow
elsewhere seeking higher prices and power plants don't get built) while
demand remains artificially high (customers respond to the low, controlled
prices by maintaining consumption at high levels).

Price caps are THE issue now facing the industry.  We think meaningfully low
caps will not be instituted.  If they are, they contain a "self-repeal"
mechanism -- i.e., blackouts.  In our view, the only way to bring supply and
demand into equilibrium is through market-determined prices coupled with new
investment in power plants, electric transmission lines, gas pipelines, etc.

 <<INTERESTING MEDIA ARTICLE 5-30-01.doc>>


Raymond C. Niles
Power/Natural Gas Research
Salomon Smith Barney
(212) 816-2807
ray.niles@ssmb.com

s




 - INTERESTING MEDIA ARTICLE 5-30-01.doc 