Everyone’s for a Free Market Until They Get One
ArchPundit
I’ve been somewhat quiet on the whole electric rate increase because everything has been pretty predictable to date.
The entire problem was predictable though. A rate freeze meant that power for residential homes was not going to develop competition. Since rates were frozen there was a limit as to how much could be charged by alternative providers given the freeze on prices to the larger utilities. This was problematic on several levels. First, alternative producers were discouraged from entering the market until after the freeze was over since there was no reasonable way to compete given the low prices mandated in 1997. Second, even green power was discouraged since it is generally slightly higher than market rate for power. The selling point is that people can pay just slightly more and have far less impact on the environment. However, with a rate freeze in place, the difference between the two prices became larger and any green supplier would understand this and be afraid to invest in the market.
The choice for a rate freeze was made because the bill required that utilities divest their power production to at least affiliated companies. That reasonably meant that the utilities deserved to be compensated for the sunk costs. The state agreed in the legislation, but handing out money to utilities regardless of the reason behind it isn’t terribly popular. Hence, a rate freeze was put in place for 10 years providing consumers some benefit as a trade-off.
But now the bill has come due since there is no such thing as a free lunch. Because rates increased and there is no effective competition (a little in the business sector, but not much even there) people are complaining about the increases since they hit at one time instead of over the 10 years. Beyond that there is no downward pressure on the prices because of no effective competition.
The amazing thing about the deal is that the power companies didn’t phase in the increases over time since anyone could have predicted the public reaction. Smart politics would have meant 10% increases for 3 or 4 years until the price caught up with costs. Ameren especially decided that wasn’t the way they were going to go and have probably shot themselves in the foot. Almost assuredly some sort of limit is to be placed on the utilities under the current situation.
The worst thing that can happen though is a three year extension of the rate freeze under the same conditions. The impact of such an extension would go beyond just current rates, but it might well discourage competitors from entering the market ever if the concern is that the State Lege will step in to tamper with the market regularly and drastically.
Obviously, barring Ameren coming to its senses, there will be intervention in the market. The best way to do it is to limit the increases over the next three years to about 10 percent per year. That’s greater than the cost increases per year, yet small enough people can adjust to them. At the end of the period the increases would be limited to 15 percent per year until effective competition is present and then the limits would disappear.
This does several things a market will eventually require. Immediately prices will still be going up, though not as dramatically as they were before providing a clear signal that investment in power production is worth it in Illinois. That signal also means that knowing for sure there will be a 10 percent increase for 3 years and then 15% increase allows companies to project their future costs against potential prices giving them a reasonable measure of security that if they invest, the State Lege won’t cut their legs out from underneath them later.
There’s one final step that should be taken. The state should offer a subsidy on all green power provided in the State of Illinois. This would lower the cost to consumer’s directly, but also provide an spur to market driven investment in green power making it more cost effective as an alternative to traditional fossil fuel sources. Additionally, it would have positive effects on more traditional forms of air pollution.
Will it happen? Probably not. The level of anger is so high at this point, I tend to think punishing Ameren has taken over any impulse toward improving the future power generation.
The hysterical part of the debate are the shots being taken at Emil Jones by conservatives. The bill was passed by a Republican Senate and a Republican Governor and a Democratic House. The people who like to throw around terms like socialist at Democrats are now infuriated that a Democrat thinks the market should be given the time to work. Funny that.