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Why Not Control Price Rise in Energy?

by Bill Virgin, Seattle Post-Intelligencer columnist
Seattle Post-Intelligencer - March 24, 2005

Bill Virgin Here's a thought to consider as you're writing the check for the monthly utility bill:

Maybe you're not paying enough for electricity.

Paying more would be for the greater good, after all. It would encourage you and everyone else to conserve more, and it would provide the financial resources, and incentives, to build needed new generating and transmission capacity.

Not buying it, huh?

Nor was anyone else, at least in the Northwest, when the Bush administration unveiled (as part of its budget proposal) a suggestion that federal power marketing agencies such as the Bonneville Power Administration raise their prices. Doing so, a budget memo said, would "create a more level playing field for the nation's electricity suppliers and encourage appropriate energy conservation."

Shockingly, consumers and businesses in the Pacific Northwest seemed perfectly content with an unlevel playing field.

Interestingly, though, the same argument was made, in much greater detail, in a report recently issued by economists at TD Bank in Toronto. In "Electricity in Canada: Who Needs It? Who's Got It?" the economists suggested that the country faces billions of dollars in investment in generation and transmission facilities.

In order to attract that investment, the report adds, Canada will have to move away from heavily subsidizing the gap between the cost of producing power and ratepayer charges (Canadian utilities make up a lot of that gap through sales of power to the United States).

Raising electrical prices now "would appear to be a competitive strike against business," the report says. "However, to the extent that prices increase in the short run, they would ultimately help to raise efficiency, attract investment in new generation capacity and hence assist in averting a full-blown power crisis in the future."

Steve Reynolds, the chief executive officer of Bellevue-based natural-gas and electrical utility Puget Energy, says those warnings should be heeded in the Pacific Northwest, because it faces much the same situation. The base of the region's electrical supply is cheap hydropower. But that supply is finite. Says Reynolds, "We are very fortunate here, but it's not going to last."

In fact, the Northwest may have even less time than Canada in figuring out what to do if the skies around here continue to be blue and dry. "The fact of life is there's a drought in the region," Reynolds says. "We're going to have to support that cheap hydro with something more costly."

Just about every option to supplement hydropower falls into the category of "more costly." Coal and natural gas prices have been climbing along with oil. Conservation has its own inflationary pressures; much of the easily reached "low-hanging fruit" has already been picked, so succeeding rounds of conservation will be more expensive and have longer payback periods.

About the only generating source that isn't seeing an increase in price in the base fuel is wind, which is why Puget and others have been investing in wind farms. "Wind is a great bridging strategy" to the next technology, Reynolds says.

Thus it would seem that one way or another electrical prices are going to go up. What's not clear is when and how that's going to happen.

Do the signals that higher prices send get noticed?

You bet they do. Consider the oil market. Motorists are obviously not very happy with the current sustained high prices for oil. You know who else isn't happy? OPEC. They've been through this before, after all. High prices the last go-rounds encouraged conservation and increased exploration and production in higher-cost fields, which contributed to a collapse in world oil prices.

Every day of oil above $50 a barrel hastens the day of another price collapse. People will buy more fuel-efficient cars or change their driving habits. Oil companies open production in fields that at lower prices wouldn't make economic sense.

And every day at $50-a-barrel oil brings us a day closer to widespread availability, at commercially viable prices, of alternative motor-vehicle technologies ranging from biodiesel to fuel cells.

The more tangled question is when those signals should be sent, and by whom. Oil is a largely unregulated market. Electrical prices are closely regulated at the consumption level, somewhat at the wholesale level. In oil, the market, chaotic though it may be, sets the timing for those signals. In the electrical market, it's up to the regulators.

Those regulators face a choice -- hold prices down long as possible, or raise them now. Raising prices now is politically unpopular but might avoid the shock of crisis-driven run-ups in price later.

Holding down prices increases the risk that conservation, generation and transmission investments will be haphazardly made at the last minute. But it does have this advantage -- no one has to go to the public and sell something unpleasant such as higher utility bills with the message "but it's good for you."

Bill Virgin, Seattle Post-Intelligencer columnist
Why Not Control Price Rise in Energy?
Seattle Post-Intelligencer, March 24, 2005

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