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'Moral Hazard' in California

Now that California's economy exceeds that of France, one must wonder why it's so dependent on Washington to solve its high electricity prices.

Yet, as a state locked into the Western energy grid, its air-conditioned consumers were subject to regional price spikes that did need to be controlled by the Federal Energy Regulatory Commission on a "just and reasonable" basis.

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In deciding to dampen such spikes on the wholesale "spot market" rather than set permanent price caps, the five-member FERC made a wise compromise on Monday that will keep an incentive for the power industry to invest in new generating plants - plants that California failed to plan for when it partially deregulated its electricity market in 1996.

The commission's timing is a bit suspect. It faces Senate hearings and a possible lawsuit by California. And its three Republican members probably are aware that the GOP might lose House seats in California next year.

Still, its decision holds California's finger to the socket, making it accountable for its risky action, or what economists call a "moral hazard." That's why Congress set FERC up as an independent regulatory agency - to balance market incentives with political calls for relief on energy prices.

The best way for Californians to fix an energy market out of kilter is to conserve more, while they await new plants coming on line. The state has already raised electricity prices, mainly for businesses. Step by step, with more light than heat, California can climb out of this hole.

(c) Copyright 2001. The Christian Science Monitor


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