Special Bulletin -- Reason Fdn work on electricity and Ken Lay ,
 Price caps will not solve the problem
	
	By Adrian Moore and Lynn Kiesling 
	April 19, 2001 
	The drumbeat is again sounding for a return to wholesale price caps in 
California's electricity market. While well intentioned, such a move would be 
a grave mistake. 
	Price controls have a history of distorting markets where competitive prices 
are possible, leading to shortages of supply, inadequate investment, 
over-consumption, and a myriad of other problems. In the case of California's 
electricity crunch, a return to price caps would only increase the threat of 
blackouts, as the supply of electricity would not keep pace with California's 
appetite for power. Unfortunately, state leaders pushing for price caps 
ignore history's lessons and seem destined to repeat past mistakes. 
	California already experimented with price caps and it was a dismal failure. 
As California's wholesale power prices rose rapidly in the spring of 2000, 
the state Independent System Operator (ISO) quickly imposed a price cap. As a 
result, the amount of power supplied to the state decreased as suppliers 
pursued more lucrative opportunities elsewhere, selling their power in states 
without price caps. In fact, imported electricity declined 33 percent in 2000 
from the previous year. 
	Consumer prices in two-thirds of the state were not affected and consumers 
did not reduce demand. Scarcity turned into outright shortages. ISO staffers 
spent much of their time rounding up power to keep the lights on hour by hour 
rather than tending to the needs of the grid. As supplies continued to fall, 
the ISO eventually lifted the caps to avert blackouts. 
	When a similar situation occurred across the Midwest in 1998, policy-makers 
pursued a dramatically different course which resulted in a dramatically 
different outcome. Policy-makers let market prices rise to attract both power 
and investment to the region, and now new power plants are being built. 
	So, if price caps are not the solution, what is? 
	California must choose between two directions for its electricity market to 
move out of its current dysfunctional state: a state takeover of the market, 
which is the direction Gov. Gray Davis' policies are leading, or a transition 
to a deregulated market with real choices for customers. Given the success of 
deregulating electricity generation in states like Pennsylvania and Texas, 
California should pursue the latter course. But the transition will not be 
easy. 
	First and foremost, California must articulate a vision of moving toward 
competition that will encourage new suppliers to enter the market. Too many 
state leaders are offering isolated policy ideas and conflicting proposals 
that do not inform the market in what direction policy is moving and what end 
state is sought. In other cases, the state is hanging a "business not 
welcome" sign on the door by scaring off would-be suppliers with high-pitched 
rhetoric and threats of state takeovers. 
	Once a clear vision is laid out, California will need to move toward a system 
where consumers pay market prices for electricity, as this is the only way to 
ensure that demand does not outpace supply. But this move will inevitably 
cause some transition pains. Laying out a clear plan for this transition will 
make it easier for the public to deal with. 
	The state also can encourage utilities to implement real-time pricing and 
metering so consumers can adjust their use of electricity as prices change. 
Again, by providing more information, customers are better able to manage 
this transition. 
	But the state should ensure that utilities do not simply pass all of their 
previous losses onto consumers through increased prices. The utilities helped 
contribute to the problem and must shoulder some of the costs. 
	Finally, if the state is going to move to a truly competitive market, 
utilities must be free to purchase power competitively. Rather than trying to 
oversee every transaction through a central pool, the state should encourage 
a voluntary, independent competitive exchange and develop bidding rules that 
attract both buyers and sellers, and enable utilities to purchase long-term 
contracts at lower prices. 
	Granted, the electricity crisis is no simple problem that the state can solve 
with the stroke of a pen or public speech about the need for conservation. 
Without a doubt, it is going to cause some pain. 
	But beyond the short-term difficulties,? California can still emerge? with a 
robust,? reliable power supply? that encourages new investment,? empowers 
consumers to choose? providers of their choice,? and lowers the cost of the 
fuel? our state's high-tech economy runs on.? A return to price caps? would 
all but eliminate? that prospect and shatter California's track record? as a 
forward-looking source of new ideas. 
	Moore is executive director of the Reason Public Policy Institute. He can be 
reached via e-mail at adrianm@rppi.org. Kiesling is director of economic 
policy at the Reason Public Policy Institute and visiting associate professor 
of economics at Northwestern University. Her e-mail address is 
lynnek@rppi.org. 
	
	Copyright 2001 Union-Tribune Publishing Co.
ann.schmidt@enron.com, bryan.seyfried@enron.com, dg27@pacbell.net, 