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Beware the Easy Fix of Energy Price Controls by Editors Seattle Times, February 11, 2001

The West Coast is gasping from wholesale electricity at prices one would expect to pay on the moon. It is appealing in such a squeeze to ask for price control. Pass a law to push prices down. But history is not favorable to price controls: In almost every instance, they have created shortages and rewarded waste. Yet, out of desperation, they are being promoted by several utilities here, and by Gov. Gary Locke and Oregon Gov. John Kitzhaber.

Proponents argue that power producers are deliberately taking plants off line in order to drive prices up. Price controls, they say, will foil such conspiracies and entice the companies to plug their plants back in. Lower the price, and the supply will increase - just the opposite of what experience says.

There is no hard evidence of this conspiracy. Investigators will be looking for it. If they find it, they can nail the energy providers under the antitrust laws and collect billions. But the evidence has to be found. Politicians cannot merely assert it and take away the energy providers' business. Furthermore, the policy the governors want - price control - has the wrong effect. It sends a false message to every user of electricity.

Consider Southern California Edison. As of last month, this once rock-solid Los Angeles utility had piled up $5 billion in losses. It has suspended its common-stock dividend. It has defaulted on its commercial paper. It has exhausted its credit and is on the verge of bankruptcy.

The blame has been put on the wholesale price of power. Partly so - but Edison's retail rates have been allowed to rise just 9 percent, half of what Seattle has taken, and one-fifth the increase in Tacoma. Edison may exhort its customers to conserve, but its power rate to customers says, "No worries." That is the false message. It entices Edison's customers to use more power than they should and Edison to buy more than it should, thereby prolonging the shortage all along the West Coast.

Short-term, the answer to this crisis was outlined by a group of economists in a "Manifesto on the California Electricity Crisis" issued through the University of California, Berkeley. Their recommendation: "Raise retail prices. There is no other way out."

Retail prices would not have to go up tenfold, as wholesale prices have. They would have to go up only enough to persuade people to turn off unused computers and printers, turn off lights and conserve. This could be done with inverted rates, to protect people with low incomes. It could be done with time-of-day rates, to reward people who shift power use to hours when it costs their utility less.

Yet, in California, it has been politically near-impossible to even discuss these things. A political promise was made not to raise rates until 2002. It was a stupid promise. It is causing utilities (who agreed to it) billions in damage, and if it is not broken it will put them in bankruptcy. Yet, no politician dares to do it.

In the meantime, the price set in California bites here. Seattle City Light is in the same surreal world as Edison: buying high and selling low. City Light forecasts a $350 million to $400 million cash deficit this year - an amount nearly equal to a full year's revenues. It proposes to make up the money by borrowing on Wall Street and paying it back over three years.

Price controls would help City Light's financial problem. But unless there really is a conspiracy of power providers, controls will not help the electricity problem. By encouraging consumers to waste electricity, price controls will make the problem worse.