atomic_fungus (atomic_fungus) wrote,

#400: I hope Illinois isn' the next California.

Today's Chicago Sun-Times has an editorial about the proposed rate freeze for electricity.

Here's what happened:

In 1997, Illinois pols decided to de-regulate the power industry. So far, so good. They enacted a rate freeze, setting electricity rates at 1995 levels, and guaranteed that rates would stay there for a certain length of time. (It ended up being nine years.) Commonwealth Edison (CE) got out of the business of generating power, and instead was to buy power from companies which would specialize in power generation; CE would simply be responsible for ensuring that the power was reliably delivered to customers. It would buy power from generating companies, and sell it to consumers at a profit.

Illinois consumers enjoyed a nine-year period--almost a decade--where they paid for electricity at 1995 prices regardless of the market cost of electricity. CE knew that it was guaranteed a profit after the freeze expired; the company would be allowed to charge market prices for the power it sold.

CE would buy power from providers in a "reverse auction" which should have fostered competition and had several generating companies vying to sell power to CE.

There is nothing wrong with this, so far. It's all perfectly reasonable. What happens next, however, isn't.

One major problem was that the price of power was too low. No outside companies could generate power at the prices CE was paying for them; the 1995 rates wouldn't allow anyone to make a profit on selling power to CE. Hence, no competition developed.

The other major problem is that the rate freeze went on for too long--and that is the major sticking point.

In 2007 CE raised its rates, and some people in downstate Illinois saw their electric bills jump as much as 55%. In the Chicago area it was closer to 25%, which is still lower than market prices elsewhere in the United States--but none of that matters to the Illinois voters, who are surprised and unhappy with the sudden rate increases.

The fact is, of course, that the rate freeze simply deferred a lot of small rate increases due to inflation or what-have-you. Things take more dollars to purchase in 2007 than they did in 1997.

There is pressure in the Illinois legislature to re-enact the rate freeze, at the same level as before, which would be a huge mistake.

CE, for one, would be in the untenable position of paying more for a product than it could sell it for. Ask California how well that worked for them; if that happens, it will result in shortages, which mean "rolling blackouts" for periods of peak demand. Re-freezing the power rates would be good for people in the short term, but disastrous in the long term.

What really bothers me about all this is the utter ignorance people seem to have for how things work in America.

CE is a large corporation. People own stock in it; utilities have always--almost always, except for Enron--been pretty good investments, because they provide things that everyone needs. But since it is a large corporation there are people who forget that the corporation has a duty to its stockholders to make a profit.

I've always disliked Illinois Citizens' Utility Board (CUB), because of their parasitic flyers in the Secretary of State mailings and because they're so adversarial towards utility companies. I've always been very pro-big-business because I understand that big business is responsible for a lot of the things we take for granted in this country, including reliable energy supply. It takes big businesses to do certain things, and the big businesses won't last long if they can't make money at it.

When the rate freeze expired, CUB was immediately right there on TV bitching about how big the rate increases were. I wasn't living in Illinois when this stuff was being enacted, so I have no idea if CUB said anything about how a rate freeze would merely defer rate increases...but I am pretty sure they were all for the rate freeze.

Most of the goods we buy and services we use only exist because someone can make a profit by making and selling them. People do not provide goods and services out of altruism, and the consumer does not have a right to any of these things--regardless of whether they are luxuries or necessities--nor does he have a right to pay artificially low prices for them.

CE's rate increase may be inconvenient, but it is fair to let them have it. The company has even pledged $64 million towards rate relief for its neediest customers. CE has upheld its half of the agreement; now it's time for Illinois consumers to hold up theirs.

* * *

In the same vein, then, was this brief note from some moron:
Why do we pay for oil companies' maintenance?

Why are we paying for the ineptness of the oil companies to maintain their equipment properly? Most businesses that can't deliver a product will eventually have to sell that product at what they paid for it--not what we need to pay to fix their equipment so they can deliver this product."
This person is utterly ignorant of how business operates, and doesn't understand the workings of the system which supplies the energy he uses.

No matter what product you buy, you are always paying for equipment maintenance. From the guy who mows your grass to the ISP you download porn from, every one of them figures the cost of equipment maintenance into what they charge you.

Here again we have this entitlement mentality: I need gasoline but I don't want to have to pay for the actual cost of the gasoline, and it sure as hell isn't fair for those bastards to make a profit on the sale!

In the first place, the oil companies can--at least so far--deliver their products at market prices. (Except for some sport shortages, which I've discussed in other entries.)

Second--"at what they paid for it"? Does this person seriously believe this? What business makes a habit out of doing that?

I work in retail. Yes, things go on clearance; but for most of the clearance cycle the items are still priced to generate a modest profit, though lower than "regular price". And after the dregs reach the rock-bottom clearance prices, the cost of these leftovers has been amortized in all prior sales of similar items. All in all, the store makes a profit--nothing is sold "at cost" except in a dire emergency.

Oil companies exist to make a profit, not to generate warm fuzzy feelings. If you want to use their products, you must pay for them.

Today's consumers, it seems, don't understand that you cannot always get everything you want. Here's what our society expects from energy companies:

1) Provide energy reliably--when I need it, I want it now.
2) Provide energy cheaply--I don't want to pay too much for it.
3) Provide energy cleanly--I don't like pollution.
4) Provide energy invisibly--I don't want refineries or power plants near my house.

As our need for energy increases, it is rapidly becoming more difficult to meet all four of those expectations. Number 4, in particular, is increasingly becoming difficult, and may soon be impossible.

Besides that, however, these rules are--to some extent--contradictory. You can have all four much of the time; but you cannot have all four all the time. The four rules balance each other--enforcing one rule makes it harder to enforce the others--and something has to give.

The EPA has pretty much made it impossible to violate number 3. There's not really anything wrong with that, since we have a responsibility to be good stewards of what we've been given, but #3 is a hard rule that must be followed. Fine.

#1 is also pretty much a hard rule--you can't bill people for product you didn't deliver, and if your network isn't reliable, you're not delivering product.

So the only flexibility we have comes in rules #2 and #4. Now, #4 isn't very flexible; again, the EPA has things to say about the construction of power plants and oil refineries, and these are rules that must be followed. Additionally, the ever-present NIMBY faction makes it hard to site plants where they would do the most good. So #4 really isn't all that flexible...and guess what that leaves?

Right. Cost.

So because we can't build new plants, because the distribution network must be maintained, and because it must all be done cleanly, it's going to cost a bit. Right now that means gasoline is $3.26 per gallon where I live.

As for me, I look at the price of gasoline and shake my head while I wait for an empty pump at the gas station, which is full of soccer-mom SUVs tanking up. My car gets 36 MPG; while paying $30 for a tankful of gas is inconvenient for me, it's not going to break the bank since I get a couple weeks' worth out of each tankful.

If gasoline was that damned expensive, wouldn't people be buying less of it? It looks to me like $3 per gallon gasoline is not inconveniently expensive for most people; in fact demand seems utterly unaffected by the high prices.

But, you say, those people need gasoline! They don't have a choice!

Hey, I need gasoline, too. I have two cars; I've sidelined the one which gets 18 MPG because I can't see dumping all that money into the tank for "pleasure" driving. I have modified my behavior.

I know others have, as well. Here in suburbia you can't drive more than a few miles without seeing at least one power boat for sale. In fact, we've got one for sale, ourselves. It's a Rinker 22 footer. It needs a bit of work but it's fun. And, by the way, it has a 45 gallon tank and requires 92 octane fuel, and you can reasonably expect to use an entire tank in a single day of water skiing. (At $3.46 per gallon, that's $155.70 worth of gasoline....)

And yet, despite high prices, demand is being met. That tells me that the law of supply and demand is working; a scarce commodity is flowing feely at market prices.

But if anyone tries to artificially limit "market price"--either with price controls or rate freezes--the end result will be shortages. This means rationing and "rolling blackouts".

Just bear that in mind.

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