Californian controls on energy prices will only add to the state’s problems

Winter power shortages in California, brought about by the bankruptcy of the state’s two electricity distributors, forced Governor Gray Davis to declare a state of emergency in January this year which resulting in a series of rolling blackouts which affected even facilities such as traffic lights (see related story).

According to Bruce Bartlett, Senior Fellow at the NCPA, California’s price caps, which were designed to ease the citizen’s problems, will reduce the incentive for power companies to produce more energy in the future, and will result in the state gaining a reputation as a risky place in which to invest in power plants due to fears of future price caps. This means that producers will demand higher prices for electricity in order to protect themselves against the risk of future price controls. Finally, the price caps are likely to lead to lengthy litigation for companies accused of violating the controls. One example of such an extended legal wrangling is that of Occidental Petroleum who, in 1995, finally settled a case involving its alleged breaking of federal oil price controls in 1979.

“In return for a bit of temporary relief, California and the federal government have embarked down a slippery slope,” said Bartlett. “These temporary controls are likely to last much longer than anyone imagines, because the threat of catch-up price increases will be politically intolerable. But the longer controls last, the more severe their impact on energy supply.”

Not only are the price controls in California brewing up problems for the future, they are also beginning to fail as a mechanism for solving the state’s problems in the short-term, says Bartlett. “If people can buy any commodity for less than the market price, then by definition they are going to use more of it,” he said. California’s scheme also currently encourages businesses to waste energy to ensure that when the state forces them to cut back on energy use they will still have energy to spare. These problems are exacerbated by the state’s temporary blackouts. “At least 10,000 businesses have requested exemptions from blackouts, which means those who must comply may be blacked out more often,” he said.

“It makes no difference how diligently price controls are administered, they still break down,” said Bartlett. “This has been the case throughout history, even when the death penalty applied to violations of them,” such as in ancient Rome, and more recently in Iraq and Libya.

Although the state experienced its last blackout back in May, and the cool summer has meant that air conditioning systems have been turned down – using far less electricity than expected, California’s energy woes look set to rumble on.