DOE Study Prompts Warning About Price Controls
The report, “The Impact of Wholesale Electricity Price Controls on California Summer Reliability,” was prepared by the department’s Office of Policy at the request of U.S. Senator Frank Murkowski (R-Alaska). It evaluates the probable effect of two alternative price cap proposals and concludes that they “are likely to increase the number of hours and the magnitude of the outages that California will experience.”
Energy Secretary Spencer Abraham said the study confirms the federal government’s concern regarding price controls. “The findings of this report are a clear warning that price controls will not help, but only hurt the situation in California,” Secretary Abraham said. “Minimizing the number of blackouts ought to be our principal goal because more intense blackouts would greatly imperil the health and safety of California's citizens and would undermine the state's economy at least as much as high prices. Our analysis is that blackouts will be worse and last longer if price controls are established.”
The two proposals analyzed by the Energy Department are the $150 Hard Cap and the Cost-Plus-$25 Price Cap advocated by California Governor Gray Davis and some Western lawmakers. The report concludes a $150 Hard Cap “could force as much as 3,600 megawatts of generating capacity in the State to shut down.” Likewise, a Cost-Plus-$25 price cap results in the delay or abandonment of about 1,300 megawatts of capacity scheduled to be constructed in the state.
“The problem with many of the price control proposals made so far is that they either make it uneconomic for some of the highest cost plants to operate, or they provide a strong disincentive for adding the type of peaking capacity California hopes to bring on line this summer through their expedited siting process,” Secretary Abraham said. “This report confirms the President’s statement made in California that ‘Price caps do nothing to reduce demand and they do nothing to increase supply.”
The report also concludes that the price control proposals it analyzed “could significantly increase blackouts this summer, threatening public health and safety.” Both proposals directly translate into additional hours of outages and households affected. The analysis of the $150 Hard Cap proposal concludes that the number of hours of blackouts is projected to more than double to about 235 hours, with the average outage size increasing about 230 megawatts.
Approximately 175,000 additional households would be affected. Similarly, the report projects that the Cost-Plus-$25 Price Cap proposal will increase the number of hours of expected outages by about 25 percent this summer, with the average outage size increasing about 120 megawatts. Approximately 90,000 additional households could be affected.
Under current conditions the department expects that California will experience approximately 113 hours of rolling blackouts this summer with an average outage size of about 1,900 megawatts, effecting roughly 1.4 households. One megawatt is roughly enough energy to power 750 households.