As rapidly as markets swing and fortunes change nowadays, the politics of energy has lost its footing in the US and Europe. The economic liberalism that characterized the 1990s, and generated unprecedented if uneven prosperity, is slowing under the renewed urge to regulate. Especially in energy, government is edging back toward the middle of things.
In the US, the mechanism for retrogression is price regulation. Much of the electorate seems to have forgotten the dislocations caused by controls on prices of oil and natural gas in the 1970s and 1980s. Or maybe it believes the fiction that electricity is different. Whatever the explanation, the federal government has reentered the perilous business of encouraging consumption and discouraging supply for the comfort of energy consumers who need a market headed the opposite way.
Price mitigation
To its credit, the Federal Energy Regulatory Commission tip-toed into this vat of acid from the shallow end. Last week it expanded the intermittent "price mitigation" plan it implemented late in April for spot electricity sales in energy-short California. Now the program will apply continuously in 11 western states.
FERC's price mitigation falls short of outright control, although the line between the two is indistinct. The program calibrates spot-price ceilings to market indicators. It makes other government involvement-mainly refereeing transactions-an inverse function of spare generation capacity in California.
The intent is noble. FERC wants to let the market work while moderating the extremes through which prices inevitably cycle in a broken market strained by shortage. Letting the market work is the only way to fix what California's politics wrecked. And defending consumers against price lurches is the only way to hold worse political mischief at bay.
In fact, FERC's price mitigation would be tolerable if it came with a guarantee that federal involvement in the energy market stopped there. But California politicians are already calling for a return to cost-based rate-making. And Democrats in Congress, slurping at the same political trough, are thrashing FERC for not doing enough.
FERC seems firm in its opposition to cost-based price caps. Even if it doesn't yield, however, and even if Congress refrains from preempting the mitigation scheme with more-aggressive legislation, market-based indexes will fall prey to political nit-picking of technicalities. And something has to replace price as allocator of scarce supply. Already, California's government is arbitrating exemptions from power outages. It's negotiating to buy power transmission systems. Pressures will build for a federal descent into this economic maelstrom.
Governments never control markets just a little. Controls breed other controls. And controls inevitably collapse under the economic pressures that build up behind them. So FERC's incrementalism would be doomed under any circumstances. The political pressures of a divided Congress and approaching elections make it raw meat.
Most Democrats will say and do anything to exploit public passion over energy prices. It was laughingly typical for Sen. Ron Wyden (D-Ore.) this month to pretend that simple market observations in old oil company documents suggest price collusion. Yet nonsense like that generates headlines.
Republicans, who should know better, offer little help. They act as though they've already lost Congress and the White House. Apparently fearful that someone might accuse them of believing in anything-such as market freedom-several Republican House members and senators actually supported the effort to control power prices in the West.
Redemptive measures
Politicians of both parties have two ways to redeem this step in the wrong direction. One is to ensure that FERC's price mitigation in the spot electricity market progresses no further toward price controls. The other is to reinvigorate the effort to deregulate-not simply restructure-electricity markets nationwide, a goal that California's crisis makes more crucial than ever. The political mood, of course, favors neither measure.
The energy business should resist this swerve back toward market intrusion by the government. The problem won't confine itself to California, where the products of hyperactive governance are on full display, and the neighboring states its mistakes have placed in energy jeopardy. It might not confine itself to electricity. And the problem of resurgent activism by governments takes forms other than price controls. Such is the case in Europe, about which more will appear in this space next week.
