The Great Price Cap Debate

By<a Href="">carter M. Yang</a>

May 29, 2001 -- To cap or not to cap?

That question is at the heart of the debate over what do about California's record-high electricity prices. President Bush and the state's Democratic governor, Gray Davis, could hardly be more at odds over the answer.

"We will not take any action that makes California's problems worse and that's why I oppose price caps," the president said in remarks to the Los Angeles World Affairs Council today.

After failing to convince Bush to change his mind during a brief face-to-face meeting this afternoon, Davis said he would go to court to try and force the administration to impose limits on the amount of money power companies can charge for electricity.

"We are entitled as a matter of law to some form of price relief," Davis told reporters following the 40-minute session with the president. "We will file a lawsuit against the Federal Energy Regulatory Commission for failing to discharge its legal obligations."

But hours before the governor announced his plans, the 9th U.S. Circuit Court of Appeals in San Francisco dealt Davis' legal challenge a major blow, refusing a request by Democratic state legislators to order the commission to impose price caps.

Davis has been pleading for the federal government to impose a ceiling on the wholesale price of electricity since Bush took office, but the White House has steadfastly rejected such federal intervention.

The Demand for Supply

In January, the average market price of electricity in California soared to nearly 26 cents per kilowatt hour, according to the Utility Consumers' Action Network — more than 10 times the average rate paid only 10 months earlier.

Experts on both sides attribute the sky-high prices to the state Legislature's decision in 1996 — two years before Davis was elected governor — to partially deregulate the electricity market. The move was aimed at holding down prices by opening up the industry to competition, but when rapidly rising demand began to outstrip supply, rates soared.

Democrats from Century City to Capitol Hill have been clamoring for FERC — which oversees wholesale electricity prices — to step in and impose limits.

"There's only one organization that's capable of ending the economic debacle that's happening on the West Coast and that's the federal government," said Rep. Jay Inslee, D-Wash., who is pushing legislation that would direct the federal commission to put temporary price caps in place. "We have an extraordinary economic crisis precipitated by unprecedented price hikes on a basic commodity."

But many Republicans argue price caps would exacerbate the problem by artificially lowering prices in the short-term, allowing politicians and consumers to avoid making the politically difficult, long-term decisions needed to solve the fundamental.

"For those struggling to pay high energy bills, price caps may sound appealing," Bush said today. "But their result will ultimately be more serious shortages and, therefore, even higher prices."

The real solution, the Bush administration contends, is to build more power plants and expand the state's capacity to produce and distribute electricity.

Price Caps: Pro and Con

Experts, meanwhile, are split over the price cap question.

Davis presented Bush with a letter signed by 10 leading economists — including James Bushnell, director of research for the University of California Energy Institute — urging the administration to impose rates based on the suppliers' costs of production.

"We strongly advocate that FERC be directed to fulfill its responsibilities and take the actions necessary to alleviate the market-performance problems that have led to unreasonable prices," read the three-page letter addressed to Bush and Republican leaders on Capitol Hill.

The slate of pro-price-control economists contended that FERC is "required" to ensure the prices electricity suppliers charge utilities are "just and reasonable" — an argument Davis reiterated this afternoon.

But Robert Ebel, director of the Center for Strategic and International Studies' Energy Program, says price controls are a "no-win solution" that would discourage consumers from conserving and energy companies from boosting production.

"If you put a price cap on, you remove any incentive that the consumer has to be more careful with his consumption of electricity [and] you remove the incentive for suppliers to add to the supply," said Ebel. "You'd be finding a short-term solution ending-up with a long-term negative impact."

Though the average market price for electricity in California dropped to 11.9 cents per kilowatt hour this week — the lowest rate since last July — residents are still paying more than three times as much for power as they were at this time last year.

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