With Governor Arnold Schwarzenegger vowing to terminate California's energy shortages, and last summer's blackout in much of the US Northeast and Midwest a fading memory, it might be tempting to think that the worst of the country's electric-power woes are over. In fact, the opposite may be true. The United States faces potential supply shortages and sharp price increases during the next five years as economic and political uncertainties—particularly rising natural-gas prices and shifting environmental policy, respectively—make energy companies reluctant to commit the billions of dollars required for new power projects.

The looming power shortage brings with it an uncomfortable dilemma. Rising energy prices could make US corporations less competitive and fuel the movement of jobs offshore. Yet building a new generation of coal plants—probably the most economical alternative to expensive natural gas—could result in a difficult-to-accept increase in air pollution.

To ameliorate the situation, the US power industry can do many things, such as modifying its pricing practices to reduce peak demand. But balancing the country's need for energy with its desire to protect the environment will force regulators to reform its state-by-state patchwork of disjointed policies. Right now neither those regulations nor the efforts of the Federal...