NCPA - National Center for Policy Analysis

Why Price Caps Won't Work

June 15, 2001

Imposing controls on California electricity prices "will do one thing: prolong California's agony," Larry Makovich, Senior Director for Electric Power at Cambridge Energy Research Associates, told the Senate Governmental Affairs Committee Wednesday.

Under new Chairman Joe Lieberman (D-Conn.), the committee held hearings on the California energy situation and whether the Administration is responding properly. Some have accused the Federal Energy Regulatory Commission (FERC) of inaction, and say FERC should impose price caps to prevent wholesale electricity prices on California's spot market from rising, particularly at peak demand times.

Among the criticisms of price caps Makovich offered were:

  • Price controls will absolutely discourage new investment.
  • The bureaucracy to administer price caps always becomes many times more complicated than originally expected.
  • Controls will create confusion and arguments over how to set the caps, how they are implemented and enforced, and by whom.

He also pointed out that only half the power produced in the western power market is subject to FERC jurisdiction. Thus FERC price caps will create incentives to run controlled power through uncontrolled sellers to end-run patchwork application of controls.

"Price caps are likely to cause the withdrawal of supply" because they "create the perverse incentive for generators not to operate when they face a higher-than-average fuel prices," Makovich said.

Source: White House Bulletin, "Cambridge Expert Warns Senate Panel Against Energy Price Controls," June 13, 2001,


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