SYNOPSIS: It's time to think of price caps as a short-term solution for a long-term problem.
It's not easy to top Marie Antoinette, but Curtis Hebert, chairman of the Federal Energy Regulatory Commission, may have pulled it off. Even free-market Republican lawmakers, like Senator Gordon Smith of Oregon, have accepted the idea that temporary price caps are a necessary part of the solution to the power crisis in the Western United States. But last week Mr. Hebert, who has the authority to impose such caps, rejected the idea once again. Instead he told Californians to "start putting shovels in the ground" and build more power plants.
On the same day Houston-based Dynegy tried to force the California utility that operates perfectly good power plants on its behalf to shut them down — and claimed that it had the right to do so under new rules issued by Mr. Hebert's commission.
Actually, California is building new power plants: seven plants are under construction, and 10 more are awaiting final approval. In the long run this added capacity will solve the problem. But in the long run we are all dead. The question right now is how California is going to get through the summer. And shovels, no matter how energetically wielded, are not going to help.
The looming summer crisis is both physical and financial. Physically, there just isn't enough generating capacity. And hence the impending financial disaster: the scramble for power, unless checked, will send wholesale electricity prices even higher than they are now. Contracts for August 2001 power are currently running as high as $750 per megawatt- hour, five times their average in August 2000. In 1999 California spent $8 billion on electricity; this year, according to experts like Stanford's Frank Wolak, it may spend as much as $70 billion. No, that's not a misprint.
Since capacity can't be added in time to matter, the only way to deal with the physical shortage is conservation. (Strange that Mr. Hebert didn't talk about that — but then the general attitude in George W. Bush's Washington seems to be that real men don't conserve energy.) Higher prices for consumers will be one incentive to use less power; the state should also do whatever it can to discourage electricity use during peak hours. Unfortunately it seems likely that a lot of conservation will be enforced through brownouts.
But the bigger disaster will be financial. If that $70 billion figure is right, the rise in California's electricity bill over the past two years will amount to almost $2,000 for every man, woman, and child in the state. And most of that won't represent increased costs of production: it will represent windfall profits to the large, mainly out-of-state companies that own the power plants. Does the idea of a temporary cap on wholesale prices, which would limit this huge transfer of wealth from tens of millions of consumers and taxpayers to a handful of large companies, still sound like a crazy leftist idea? (Mayor Rudolph Giuliani has called for a similar cap in New York, where a California-style crisis is quite possible this summer. Maybe we should call him "Red Rudy.")
Of course a price cap that made power generation unprofitable would worsen the electricity shortage. But nobody is calling for price controls at such a low level. A price cap set at a high but not astronomical level would probably increase available power supplies, by eliminating the clear incentive power producers now have to withhold electricity from the market. And it would keep the cost of muddling through this dangerous summer tolerable.
True, a temporary price cap might discourage investment, by setting a precedent. But if I were a power producer, I would be more worried about my long-run prospects in a California enraged over the huge profits earned by Texas-based companies than I would be in a state where the generators and their friends in Washington, instead of squeezing out every last dollar, had helped craft a reasonable transition plan to get the state through a difficult time.
If Mr. Hebert is immovable, and if legislation co-sponsored by Senator Smith doesn't force his hand, California and its neighbors Oregon and Washington may have to try a "buyers' cartel" — that is, agree on a maximum price that their states will pay. This might allow an end run around the obstinacy of Mr. Hebert, and the indifference of his superiors. But a FERC-imposed price cap is the right way to go
Originally published in The New York Times, 4.15.01