DATE: May 7, 2001

BACKGROUND: The Federal Energy Regulatory Commission (FERC) voted 2-1 yesterday to cap the wholesale price of California electricity any time reserves in the state drop below seven percent, triggering an emergency alert.

TEN SECOND RESPONSE: FERC may have delivered the straw that will break the back of California's electricity problems. Price controls inevitably reduce supplies, not increase them.

THIRTY SECOND RESPONSE: Price controls can increase the supply of electricity, or anything else. At a time when we should be doing everything we can to encourage investment in additional generating capacity FERC is saying the federal government will determine whether you can get a return on that investment. Retail price controls helped create California's problem, more controls won't solve it.

DISCUSSION: Peacetime price controls were tried in this country just once, when Richard Nixon ordered wage and price controls in the 1970s. The results were a predictable disaster: restricted supplies of goods, business bankruptcies, unemployment and, paradoxically, runaway inflation.
 
FERC should have noticed that it was retail price controls that drove California's largest electricity retailer into bankruptcy.
 
At the heart of California's, and soon the nation's, electricity shortages is New Source Review (NSR). Executives of power generating companies have told us that that NSR is so complex and ever-changing (28 changes in the last four years), that there is no way of being sure how a new generating plant will be reviewed until after it is built.
 
It is very likely that NSR is actually contributing to air pollution. Because it encourages the building of small peaker plants, under 250 megawatts. These plants are usually single-stage gas turbine generators which are heavy producers of NOX and VOX but do not fall under NSR due to their size.

by Tom Randall, Director of Environmental & Regulatory Affairs, The National Center for Public Policy Research

Contact the author at: 773-857-5086 or [email protected]
The National Center for Public Policy Research, Chicago office
3712 North Broadway - PMB 279
Chicago, IL 60613