CERA's Makovich Speaks Against Price Caps

Imposing price caps as the centerpiece of a federal response to the California power shortage would “make a bad situation worse and do nothing to fix the flaws that so desperately cry out for solution,” Cambridge Energy Research Associates (CERA) Senior Director for Electric Power Larry Makovich told the U.S. Senate Governmental Affairs Committee in June.

According to Makovich, the flawed price cap strategy will:

• Discourage new investment with price controls.

• Shift activity into unproductive directions.

• Create the potential for unexpected complications.

• Create confusion.

• Fail to add capacity or reduce demand.

• Possibly cause the withdrawal of supply.

• Create incentives to run controlled power through uncontrolled sellers to end-run a patchwork application of controls.

“Price caps, although well-intentioned, usually distort the market and create unintended consequences,” Makovich said in his prepared testimony. “We have already seen this in California, and the history of broadly applied wage and price controls or targeted controls on energy prices like natural gas in the 1970s is also a record of distortions and unintended consequences … Price caps on power in California today will do one thing: prolong California's agony.”