Electric power price caps in U.S. have created shortages

July 31, 2012

Free Market Foundation

Officials in California and Nevada have admitted that controls on wholesale electricity prices throughout the western states imposed by the Federal Energy Regulatory Commission have worsened power shortages.

State and utility officials said the federal price restraints put in place on June 19 seem to have had the perverse effect of worsening supplies when they were most needed.

President Bush had earlier warned that price caps would only worsen shortages, and a Department of Energy report predicted power blackouts in California would double.

The price controls initiated last month by the Federal Energy Regulatory Commission are based on an enormously complex formula that experts say has sown confusion in the markets.

Under the process, the level at which caps are set can change rapidly and generators say the system is so complex and so changeable that they do not know how much they will be paid for a given amount of power.

For instance, experts say that when a power alert is called, the market does not know whether it will last for minutes or hours.

The confusion under the rules is said to have led generators to withhold power until they know where they stand.

And California officials charged with purchasing power say the caps have caused them to hold back on purchases at critical times.

Source: James Sterngold, U.S. Price Controls Are Said to Worsen Power Shortages, New York Times, July 4, 2001.

For more on Electrical Power http://www.ncpa.org/pd/regulat/reg-4.html

RSA Note:
The shortages created by the California price controls on electricity were predictable. Price caps always cause shortages unless they are set above the market rate. Illogical bureaucratic intervention is sadly also predictable, but not explainable.

Eustace Davie, Director, Free Market Foundation

FMF\17 July 2001