Congress finally got around to passing an Energy Bill this week. It didn't address the problems that led to the blackout over the summer though, because that would have meant changes to the existing industry structure, and we all know how much incumbents, especially regulated monopoly incumbents, like changes.
There was an interesting WSJ article last week on the topic. It contained a few gems of logical reasoning:
FERC opponents in the South fear open markets would result in power being exported out of the region, which currently has a huge overcapacity in electricity generation. Draining off the surplus, they say, would lead to higher prices for local consumers. Moreover, the South has invested in power generation, transmission lines and gas-exploration infrastructure that other regions shun, in order to keep its costs low, according to coalition members from the region.
Now, it may be true that 'surpluses', to the extent that they can even existing in a normal market, result in lower prices. In the context of a regulated monopoly though, this makes no sense. Typically the electricity rates are set by dividing the utility's costs by the expected demand. So, if the demand for electricity is 10 units, and that costs the utility $10 to produce, the price would be $1/unit. But what if the utility is underutilized? In that case, consumers are paying for infrastructure that isn't being used. So if demand doubled to 20 units (by exporting the surplus energy elswhere, for example), the utility's costs would only rise to somewhere between $11 and $15. Hey, look at that - the per unit cost, now between $1.10 and $1.50 has fallen.
The only way that rates would rise for consumers would be if taxpayers are in fact footing the bill for the underutilized infrastructure. This is true in most of Europe (independent, in fact, of capacity utilization). People pay very little for the electricity they use, but taxpayers provide extensive subsidies to the state owned electricity firms. This situation is just as bad if not worse than the situation outlined above, because underpricing electricity will distort the market in favor of increased energy use - businesses that could not operate profitably due to their excessive energy requirements will suddenly become profitable, at the taxpayer's expense. Given the environmental problems with energy use, this is unambigiously bad.
Since the South refuses to export it's excess energy, this means that more plants will have to be built elsewhere in the country. Building a power plant is certainly not good for the environment, and building a plant when there's an existing plant that could just as easily supply the necesary electricity clearly makes no sense. But that's politics.
Posted by Stephen Bronstein at November 14, 2003 05:38 PM