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W. Goes Wrong On Energy
A move that's right out of the old East Bloc planning handbook before the Berlin Wall came down.


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Larry Kudlow

After holding the line on Kyoto global warming and SDI in his recent trip to Europe, President Bush has suddenly gone wobbly at home by endorsing an electricity-price-cap plan ordered by the Federal Energy Regulatory Commission. It’s the administration’s first major domestic-policy decision since Sen. Jim Jeffords’s Republican defection gave Democrats control of the upper chamber.

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Bush initially had it right when he argued that “price controls do not increase supply, nor reduce demand.” He should have stuck to his guns. Instead, he told reporters yesterday: “They’re not talking about firm price controls. . . . They’re talking about a mechanism to mitigate any severe price spike that may occur, which is completely different from price controls.”

Huh? You can’t be just a little bit pregnant. It’s an administration endorsement of the FERC ruling. Maybe a soft endorsement, but an endorsement nonetheless.

The usually free-market energy secretary Spencer Abraham has caught the price-control virus. “This administration does not support prices that are unjust and unreasonable,” Abraham told the Washington Times. “We believe that the FERC should act, and we applaud the actions they’ve taken to force refunds of prices that were not market-driven prices but went beyond that.” Right out of the old East Bloc planning handbook before the Berlin Wall came down.

It would have been much better if administration officials from the president on down had not said anything on the record. On deep background they could mutter to reporters how FERC is an independent regulatory agency, like the Federal Reserve. Hence in the short-run there’s nothing the White House can do. But “senior administration officials” could make it clear that the president is unhappy with the FERC decision.

FERC, meanwhile, has been under pressure from Republican and Democratic congressional members. Republican Tom Delay successfully organized a House GOP caucus to extend the new price caps to all eleven western states. Democratic senators Jeff Bingaman and Joe Lieberman have been hot on the price-control trail. And it is reported that Bush FERC appointee Pat Woods, a former head of the Texas Public Utility Commission, is seen as tipping the agency’s hand toward stricter price controls.

Ironically, there is no longer an electricity-price emergency in California or anywhere else. The media is whipping up a crisis that no longer exists. Golden State electricity prices recently tumbled to $50 per megawatt hour from more than $500 earlier in the year. Nationwide, electricity prices are off 80%, natural gas has dropped 60%, and unleaded gasoline commodity futures have sunk 70% in the open market.

Why? Free prices work, if you let them. Big price and profit jumps attract investment capital and spur production supplies. Outsized energy cost increases curb demands and promote conservation. Before long market forces cause prices and profits to retreat to more normal levels, in line with diminished consumption propensities.

FERC’s new dictum to curb prices will actually discourage new energy supplies and encourage greater consumption. Exactly the wrong fix. Many power suppliers will get around the price caps by selling to rivals who aren’t subject to the controls. For example, smaller municipal utilities, as well as large Canadian and Mexican power generators, are not under FERC jurisdiction.

Additionally, when price controls reduce power-generation profitability, suppliers will withhold power from the market. This is exactly what caused California blackouts in the first place. Profitless price caps cause investors to walk away from the financing of desperately needed new power plant construction. California could be put in an even deeper hole.

Meanwhile, “cost-based” pricing is at best an extremely complex and unwieldy exercise. At worst, it opens the door to a political-bureaucratic witch-hunt against power suppliers. Regulators are talking about short-term price caps, just like budget appropriators who promise short-term spending programs. If you believe that, then you must accept what the meaning of “is, is”.

Following the disastrous 1970s, when energy price controls and allocation schemes wrought continuous stagflation, Ronald Reagan talked about the magic of the marketplace as he deregulated the economy toward two decades of growth.

In present-day Washington, however, memories are woefully short. Price controls never work. Free-market prices are the only efficient means of resolving temporary supply-demand commodity imbalances, be it power, food, dairy, beef, steel, semi-conductors, airline slots, or whatever.

The usually free enterprise President Bush should go back to his philosophical roots, reclaim his free-market policy compass and immediately rescind FERC’s ill-conceived price-cap plan.



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