DATE: July 6, 2001

BACKGROUND: The price caps on electricity in the West, recently imposed by the Federal Energy Regulatory Commission (FERC), seem to have caused the exact shortages of electricity that many, including the National Center for Public Policy Research, predicted. The New York Times reports in its July 4 edition ("U.S. Price Controls Are Said to Worsen Power Shortage" by James Sterngold) that state officials in California and Nevada blame the new shortages of energy to caps on wholesale electricity prices.

TEN SECOND RESPONSE: It isn't difficult to predict that capping the price energy generators can get for their product would lead to shortages. It's simple economics.

THIRTY SECOND RESPONSE:. It isn't hard to predict that, by limiting what the market can charge for a scarce product, you will get less of that product. It's Economics 101. Now California's power shortages have affected Nevada and may affect other areas as well. What's needed is not price caps but more sources of energy.

DISCUSSION: Price caps do not increase the amount of energy available. Instead, as has now happened in California and Nevada, it makes generators unwilling to sell electricity. Confusion about what price is set under a complicated formula and when exactly the cap goes into effect all lead to a shortage of supply.

Nevada was also hurt because several electric plants were shut down for maintenance and extremely hot weather created a large demand for air conditioning.

California's first new power plant in the last 10 years just came on line. No other plants were built during that time mainly due to NIMBY (not in my back yard) pressures and the environmental regulations that must be met to build plants. New Source Review rules from EPA for building a power plant are complex and have changed 26 times in the last four years. To see a list of the hundreds of varying interpretations of New Source Review, you can go to:
http://www.epa.gov/region07/programs/artd/air/nsr/nsrindex.pdf .

For more information about price caps go to our previous Ten Second Response on the matter, "Democrats Attack Western Republicans for Refusing to Support Electricity Price Controls," at
http://www.nationalcenter.org/TSR53001.html .

by Gretchen Randall, Director of Energy & 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