Editorial comment: Power failure Published: January 28 2001 20:25GMT | Last Updated: January 28 2001 20:31GMT

If politicians set the price of a commodity below the cost of bringing in new supplies, shortages are sure to result.

The lesson that proved so difficult in many communist regimes must now be re-learned by a flourishing capitalist state. California's public utilities commission has been holding the average retail price of electricity to about half the wholesale price. The predictable result is rolling power cuts and near bankruptcy for the two largest utilities.

Instead of responding to the market's message with an adequate price rise, the state legislature has sought to impose more controls. In addition to its cap on wholesale prices, it talks about targeting "profiteers" in the generating market. It is looking at ways to stop producers from withdrawing plant for maintenance. It is has considered a state takeover of transmission lines and hydroelectric plant. On top of all this, there are plans for a bailout from public funds.

But time is running out. A week from Tuesday the deadline for California set by George W. Bush is due to expire. The president was right to refuse a further extension of the federal order that producers must sell surplus electricity and gas to cash-starved Californian utilities.

Further emergency measures may be needed just to keep the lights burning. But help from the federal authorities should now be conditional on a fundamental programme of reform. That must start with higher retail prices to restore the utilities to solvency, to promote more conservation and to provide long-term incentives for building new power plants.

Excessively tight planning procedures must also be relaxed so that some of the 40 plants now on the drawing board might actually be built. The state must also abolish restrictions on long-term contracts and the wholesale price cap that inhibits the building of plant to meet peak demand.

The Californian economy has grown by a third in the past five years but no new generating plant has been built for a decade. So the state faces a stark choice: future prosperity depends on establishing an effective power market, and that requires a more permissive planning regime.

Deregulation can be made to work, as has been shown in Massachusetts, Texas, the UK, Germany and elsewhere. But half measures are dangerous. Regulators should seek to promote fully competitive markets in generation and supply to customers. Price controls and regulations should be reserved for the parts of the business that are genuine monopolies - transmission, distribution, the rules for the wholesale market and for despatch (to balance the system).

In California detailed controls may be needed for some time, but they must be seen as temporary medicine, not the final cure.

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-- Martin Thompson (mthom1927@aol.com), January 29, 2001