7/3/2000

KUFM / KGPR

T. M. Power

The Spike in Electric Prices: Hold onto Your Wallets

Wholesale electric prices have gone through the roof this last week. Large business that had been buying electricity for less than 2 cents per kilowatt hour were suddenly having to pay 13 cents to keep the juice flowing. That led Montana Resources’ copper mining and concentrating operations in the Butte area to shut down. Several Pacific Northwest aluminum smelters have also shut down and the pulp mill outside of Missoula is pondering doing the same if electric prices remain high. The Governor’s office held a powwow today with energy experts and Montana’s large industrial concerns to figure out how to avoid additional shutdowns and layoffs.

The folks meeting with the Governor today are exactly the same group of people who engineered Montana’s precipitous rush into electric deregulation that has already led to the demise of the Montana Power Company and its conversion into a telecommunications company. That rush to competitive electric supply was led by the large industrial customers, some of whom are now bitterly complaining about high market prices and looking for government assistance. These big electric users wanted to get rid of government regulation of electric supply because they thought they could get even lower electric prices if the government would get out of the way. The Governor and his advisors enthusiastically agreed and the barely thought out rush to deregulation was imposed on all of us. The long line of unintended and not very pretty consequences has yet to end. The slow train wreck continues with none of the parties responsible willing to admit that maybe this wasn’t the most brilliant public policy ever adopted.

Small residential and commercial customers are being protected from the ten fold increase in wholesale electric rates by old fashion government regulation that requires that electricity be provided at a price tied to the cost of operating the electric generating facilities in the state whose construction was financed by customers’ rates. That protection will end in a few years, at which time all of us will get an opportunity to enjoy market-based electric prices of the sort that are shutting down large industries this summer.

The current ten-fold increase in electric prices almost certainly is a temporary phenomenon tied to the fact that summer heat waves came early while several major generating facilities were shut down for maintenance. It is also true that all large industrial customers are not being hurt by the high rates. Some, not willing to gamble with fluctuating market electric prices, signed long term supply contracts at fixed prices and are not being affected by the current spike in wholesale electric prices. It was only those large electric users who chose to gamble that electric prices would remain low and chose not to pay for any insurance against price spikes that are being hurt. Clearly the government should not even consider bailing these businesses out. They made a market-based business decision, opting to accept the risk of high prices in return for the benefits of the lower short-term electric prices of the past. They gambled and lost. To bail them out will simply encourage them to make careless decisions in the future. Regulation in the past sought to socialize this risk and the large industrial customers quite consciously led the political effort to end that risk sharing. They should not be allowed to dig into our pockets now for a bailout.

Although this electric price spike will pass, high electric prices are likely to become a permanent fixture in the brave new world of competitive supply. Something that has gotten much less attention than rising gasoline and electric prices is rising natural gas prices. They have doubled in recent months as utilities have been replenishing the gas they store for winter delivery. That will impact home heating this winter, but it will also impact electric prices since natural gas is the fuel increasingly being used to supplement the supply of electricity. When natural gas prices were low, additional electric supply was projected to be available at 2.5 to 3 cents per kilowatt-hour, not much higher than the price we are now paying for electricity in Montana. With rising natural gas prices this could be 3.5 to 4 cents per kilowatt hour, 50 to 100 percent higher than what we have been paying.

Our electric future does not look very bright. We do not know who will buy the Montana Power delivery system. What we do know is that the bidders intend to pay more than current rates will support and then turn to us to finance that golden parachute being provided to Montana Power executives and stockholders. On top of that, we will face the higher electric prices that unregulated markets are almost certain to bring us.

We again have to ask why, in a state that had some of the lowest electric rates in the nation, supported permanently by some of the lowest cost electric generating facilities in the nation, our political leadership decided to engineer this economic trainwreck. The answer, of course, is uncritical political ideology mobilized by short-sighted special interests. In the market such a disastorous mistake would have severe consequences. It is unclear, however, that our political system will impose the same sort of accountability. That is up to us in November.