- The Washington Times - Monday, June 25, 2001

After holding the line on Kyoto global warming and the strategic defense initiative 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 (FERC). Its the administrations first major domestic policy decision since Vermont Sen. Jim Jeffords Republican defection gave Democrats control of the upper chamber.
Mr. Bush initially had it right when he argued earlier that "price controls do not increase supply, nor reduce demand." He should have stuck to his guns. Instead, he told reporters yesterday: "Theyre not talking about firm price controls… . Theyre talking about a mechanism to mitigate any severe price spike that may occur, which is completely different from price controls."
Huh? You cant be just a little bit pregnant. Its 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," Mr. Abraham told The Washington Times. "We believe that the FERC should act, and we applaud the actions theyve taken to force refunds of prices that were not market-driven prices but went beyond that." Thats 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 theres 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. Rep. Tom Delay, Texas Republican, successfully organized a House Republican caucus to extend the new price caps to all 11 Western states. Democratic Sens. Jeff Bingaman of New Mexico and Joe Lieberman of Connecticut 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 agencys hand toward stricter price controls.
Ironically, there is no longer an electricity price emergency in California or anywhere else. The media are 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 percent, natural gas has dropped 60 percent, and unleaded gasoline commodity futures have sunk 70 percent 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.
FERCs 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 arent 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 George W. Bush should go back to his philosophical roots, reclaim his free market policy compass and immediately rescind FERCs ill-conceived price cap plan.

Lawrence Kudlow is a nationally syndicated columnist.

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