New Yorkers take on ConEdison over soaring electric bills
“Exorbitant” electricity bills on the front page. Europe? Great Britain? No, just north of New York, where local politicians have criticized Consolidated Edison of NY, the local electric utility. Additionally, local businessmen noted that they warned of this potential problem a decade ago when the last governor decided to shut down the nearby Indian Point nuclear power plant. Some customers complain that their utility bill (for their electricity use, not lines or wires) has tripled in the past few months. For the average consumer, this is a noticeable increase.
Con Edison – who in the past has taken a stance that he only provides electricity (they don’t actually generate it) so go complain somewhere else – announced he was “reviewing our practices…” and will develop programs to help customers who are struggling to pay these rapidly rising electricity bills. Meanwhile, a local congressman’s staffer said, “Ultimately, it’s Con Edison who bills New Yorkers, and, therefore, Con Ed bears direct consumer responsibility in this blatant price spike…” Politicians have focused on how to help consumers pay their bills this winter, here and in Europe. They do not focus on the possibility that the existing wholesale electricity market, set up three decades ago to make electricity competitive, could also be responsible for the mess.
Here’s how it works. The local utility is a delivery mechanism. He delivers a product (electricity in this case) manufactured and marketed by someone else. In theory, the delivery company shouldn’t care about the price or the quality of the product. And most local delivery utilities don’t. They are simple delivery vehicles (“like the milkman,” a former Con Ed executive explained) that charge fixed costs for their regulated service. Which, from a business perspective, isn’t a great setup. High prices or poor service from electricity producers encourage consumers to disconnect from the grid or reduce their consumption. The activity and the relationship of the local distribution company with the customer depend on the skills and probity of another company. Is this a good business strategy? Doesn’t look like a good for Con Edison.
Now for the second number, a bit more technical. The unregulated electricity market sets prices on the basis of marginal cost. In general, natural gas is the marginal fuel and gas generators frequently set the price of electricity in our region. Remember that in a marginal cost market, every producer gets the same price, regardless of production costs. So if the price of gas goes up, the price of all electricity (not just that produced by gas) also goes up. (In this case, low-cost power generators like hydroelectric facilities reap huge financial windfalls). This differs from the old electricity pricing model which added up the prices of all the fuels used to generate electricity and increased or decreased the prices based on their overall cost. In theory, prices rise rapidly when the marginal price of fuel rises and fall just as rapidly when the price falls. Although, in practice, the price of electricity tends to fall much more slowly than the sometimes volatile price of fuel. The generators manage to keep the difference when this happens.
The third issue is that of caution. The market organizations that manage our electricity network seek electricity at the best price. They don’t need a mix of fuels to be on the safe side. They don’t pay generators to run facilities on more expensive fuels to maintain diversity. They go for the small price. So, there’s not a whole lot of extra supply to bring online when cheap fuel (in this case, natural gas) suddenly becomes expensive. This is the literal price we are paying for our partially deregulated energy system. The previously regulated system had a financial incentive to maintain redundancy and mitigate overall price volatility. But — and this is key — the former regulated utility was designed to absorb the financial risk associated with volatile fuel spending, then settle later with state regulators. A deregulated system may reduce costs somewhat, but all risk of fuel volatility is passed directly to the consumer. Some citizens are discovering the true meaning of deregulated energy markets this winter.
Does this sound like a discussion about Europe’s reliance on Russian gas rather than New York state power generation? Well, in a way, utility deregulation almost always leads to the same result. Go for the cheapest fuel source and assume all is well. And when it does, let consumers pay. The one thing we find remarkable here is that consumers continue to accept this.
By Leonard Hyman and William Tilles for Oilprice.com
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