WASHINGTON – Just weeks after federal authorities imposed controls on wholesale energy prices in California, what many economists warned could happen in the Western states appears to happening: Befuddled by the complex pricing formulas as energy reserves fluctuate, energy producers are withholding power and making the shortages even worse.
The price controls, imposed June 19 by the Federal Energy and Regulatory Commission after much debate, were intended to maintain a steady supply of energy to watt-short Western states and prevent price gouging in times of dire need.
Instead, generators in some Western states are holding back supplies this week because they say they have no idea how much they will be paid for their product.
This energy withholding — coupled with the facts that several Nevada plants have been closed for repairs and soaring temperatures have nudged up demand — resulted in rolling blackouts in Nevada for the first time earlier this week.
Some critics are now blaming the FERC controls for California's "Stage 2" alert that occurred on Monday, the first alert that severe since the imposition of the controls. California suffered another Stage 2 alert on the Fourth of July holiday.
'We Predicted This Would Happen'
Economists who argued against the price controls were already shaking their heads.
"There seems to have been the desire to repeal the laws of economics," said Lynne Keisling, director of economic studies for the Reason Public Policy Institute and professor of economics at Northwestern University.
Many economists and energy policy analysts are skeptical of severe manipulations of the marketplace such as price controls. These controls sever the feedback loop that helps determine an adequate supply for fluctuating demands, they say.
"We predicted this would happen when they first started talking about the price caps," said Myron Ebell, director of international environmental policy for the Competitive Enterprise Institute in Washington, a pro-market think tank.
And economists feared that price controls would do nothing to help increase the supply of energy in the Western states or would fail to decrease the demand for that energy or both.
Reason's Keisling said she believes FERC knew the Pandora's box it might be opening, but bowed to political pressure. "I think it's a mixed bag — it was the politically wise thing to do; but as an economist my views are more cynical than most."
She pointed out that under the FERC order, the power suppliers in the Western states are given a 10 percent "risk premium" that kicks up the incentive for the states to sell as much as they can to big buyers in California, even at the risk of their own state customers. But it's not necessarily enough, she said.
"I give the FERC commission a lot of credit to working very hard to get a balanced compromise," she said. "My take is they knew they were making a compromise but knew the possibility of what happened in Nevada was there."
Blame the Suppliers, Not the Caps
Meanwhile supporters of energy price controls continue to blame power companies for the ongoing shortages, saying they are defying federal orders that require them to sell as much power to California as possible.
A spokesman for Sen. Diane Feinstein, D-Calif., who pursued permanently fixed caps on wholesale energy prices before the FERC action in June, said she expects FERC to initiate an investigation into Monday's shortages. She says it was this defiance that led to the price caps and that there "is no evidence" the price caps led to the capacity alerts.
But Sen. Gordon Smith, R-Ore., one of the few Republicans who jumped the aisle to sponsor the congressional price cap bill with Feinstein, acknowledged the problems while withholding judgment.
"It's too soon to come out one way or another," said Smith spokesman Joe Sheffo. "It's obvious there are some kinks that need to be worked out … the senator is following it and is going to hold off for a least a little while to see if these are chronic problems or something that can be worked out fairly quickly. I don't know if he's willing to throw the hat in yet."
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