Opinion: Price Caps on Electricity—Where's the Outrage? Bridge News

Knight Ridder/Tribune ( July 20, 2001 )

Jul. 19--How Can a Federal Bureaucracy Hijack the Deregulation

of the Power Industry and Not Raise a Murmur of Protest on Capitol Hill?

By Malcolm Wallop, the Frontiers of Freedom Institute

ARLINGTON, Va.--Defenders of the free market system in Congress slept right through a thundering wake-up call from the Federal Energy Regulatory Commission last month.

On June 18, FERC's five commissioners voted unanimously to impose government price caps on wholesale electricity suppliers, not just in troubled California but in the 10 other states in the Western Region as well.

Price caps will not only make a bad situation worse, but FERC's imposition of caps means the federal government is injecting itself deeper into the electric power market, a market that is supposed to be on its way to deregulation and consumer choice.

I don't know which is more shocking, the Big Brother-style interference with a free market by FERC, or the failure of conservatives in Congress to stand up and protest it.

Perhaps California's recent energy woes have intimidated our free market watchdogs into silence. But the imposition of regional price caps means the rest of the West will have to suffer the consequences of the mess California has created over the last 15 to 20 years through its regulatory regime.

Those consequences weren't long in coming. Two weeks after the FERC decision, the desert sun was pushing temperatures in Las Vegas up to 120 degrees. With air conditioners blasting away all over town, the city ran short of power.

Nevada Power, like most utility companies, has to depend on wholesale power suppliers to supplement the juice it generates locally. In the wake of price caps, though, the wholesale suppliers the local utility was counting on suddenly couldn't or wouldn't sell them the power they needed. Some residential areas were cut off from service for almost an hour. Only massive cutbacks in usage by the big casinos (which use power equivalent to 10,000 homes) kept Vegas from frying in the July heat.

That was a taste of what other Western states can look forward to if price caps stay in place. Price caps have never worked in any market. They violate the law of supply and demand. That free market principle says that when a commodity like electric power is in short supply but demand is high, the price goes up.

Nobody likes high prices, but the way to bring prices down is by increasing supply, not slapping unworkable, arbitrary price caps on suppliers. Price caps only prolong the misery by holding back the growth of new power supplies. Eventually the tissue paper dam of price protection breaks and electricity prices go up anyway.

In the process, millions of consumers, small businesses, ranchers and farmers will be especially hard hit by rolling blackouts and soaring prices.

Given the long history of price cap failures, it's amazing that anyone considers them an effective economic tool. As my fellow Wyomingite Dick Cheney said about price caps in the energy market: "Price caps do not promote conservation, nor do they help to increase supply."

The energy problem in California and to a lesser extent the rest of the country is the result of our failure to expand the supply of energy to keep up with the growing demand.

Fortunately, the energy policy Vice President Cheney is shaping for the Bush administration emphasizes the expansion of energy supply. That will lead to lower prices as well.

That is a solid market-based solution. And if there is one principle conservatives agree on, it's that markets work. They're better than regulators, better than bureaucrats, better than academics.

Market fundamentals will work in the electricity market. But we have to do something about those supply-inhibiting price caps imposed by FERC. I have to ask, where is the sense of conservative outrage in Congress? How can a federal bureaucracy like FERC hijack the deregulation of the power industry and not raise a murmur of protest on Capitol Hill?

This is more than a challenge to the conservative philosophy. It's a threat to the living standard of American families. For members of Congress, silence is not an acceptable option.

MALCOLM WALLOP, a retired three-term U.S. senator from Wyoming, is chairman of Frontiers of Freedom, based in Arlington, Va. His views are not necessarily those of BridgeNews.

http://199.97.97.163/IMDS%PMAKRT0%read%/home/content/users/imds/feeds/knightridder/2001/07/20/krtbn/0000-0066-BN-OPIN-ELECTRICITY

-- Martin Thompson (mthom1927@aol.com), July 20, 2001

Answers

Response to Price Caps on Electricity—Where's the Outrage?

Puget Energy says caps discourage power plant construction Filed: 07/20/2001

Bellevue, Washington, July 19 (Bloomberg) -- The chief executive of Puget Energy, a utility owner in the U.S. Northwest, said federal price controls imposed on electricity sales in 11 western states are "extremely low," and will discourage power-plant construction need to prevent blackouts and shortages.

Puget Energy will seek changes in the controls imposed on July 19 by the Federal Energy Regulatory Commission, Chief Executive William Weaver said in a statement. The controls, designed to bring down soaring prices brought by electricity shortages in California and neighboring states, were "hastily thought out," Weaver said.

Other utilities in the western U.S. have criticized the caps, including Spokane, Washington-based Avista Corp. and Sierra Pacific Resources, owner of Nevada's two largest utilities.

Avista said yesterday lenders have refused to give the company money to finish a power plant near Boardman, Oregon, because they are concerned about power-buying losses compounded by the federal price caps. Avista owns utilities in Washington and Idaho.

Sierra Pacific Resources said it couldn't buy power needed to avoid blackouts in Las Vegas on July 2 because other utilities refused to generate more at the prices set by the caps.

Power-plant developer Reliant Resources Inc. said today that the caps have led it and other power generators to cancel plans to build generators capable of producing 1,100 megawatts in Nevada and other states that supply power to the western transmission system. That's enough power to light 850,000 million average California homes.

The caps are tied to the cost of generation during the most recent power supply alert in California. The cap now is $91.87 a megawatt hour except in California, where suppliers can charge 10 percent extra.

Wholesale power prices on the California-Oregon border averaged $266.87 a megawatt hour this year through June 18, when FERC approved price controls. Since then, they have averaged $63.74 because cooler weather and conservation programs cut demand, more power plants have come on line, and California has entered into long-term contracts at lower prices

http://www.bakersfield.com/oil/Story/802430p-801639c.html

-- Martin Thompson (mthom1927@aol.com), July 20, 2001.

Response to Price Caps on Electricity—Where's the Outrage?

All the residential consumers that are generating there own electric must be feeling pretty satisfied at this point. My hat is off to them, and someday I hope to be a bona fide member of the Off-grid society. Congratulations to Swiss-rose and Spider and all others that have taken the leap and are no longer dependent on electric utility providers.

-- Guy Daley (guydaley1@netzero.net), July 22, 2001.