Taken to the Cleaners

You're a federal utility regulator. You want to place a ceiling on electricity prices paid to power producers in California, but you don't want to impose those evil price caps. No sir.

So you set a proxy price for a hypothetical competitive market, based on what you think are reasonable costs for operating a typical power plant, like thermal efficiency (plant heat rate) and buying natural gas for fuel. Then add $2 for miscellaneous operating and maintenance expense. That should do it.

But something goes wrong. After you've written your ratemaking order, have seen it hit the street, you discover that one of your cost categories--the cost of purchasing emissions allowances to meet environmental requirements--isn't even a cost any more. While you had your back turned, two or three months earlier, that darned governor out in California granted a reprieve to power plants designed to bring more supply to the market. He freed local generators from having to buy additional emissions credits for nitrogen oxides (NO_x) for each hour of operations, but your fellow regulators somehow remained clueless.