November 30, 2005

An Electric Discussion, Part 1

Carroll Andrew Morse

National Grid, the company that most Rhode Islanders send their electric bills to, says it is not responsible for rising electric rates. Here's a spokesman from National Grid quoted by Jim Baron in the Pawtucket Times...

National Grid says the climbing cost it isn't their fault, they take care of the wires and the poles and the switching stations. The law forbids them from owning electric generating capacity. They deal strictly with transmission and distribution.

National Grid spokesman Michael Ryan likens the company to services like UPS and Fed Ex - it can't be blamed for the price of the goods it delivers, he says.

The analogy doesn't work. When I use UPS, I pick the sender on the other end and I decide if I want to pay the cost of item being delivered. When I buy my electricity from National Grid, I don't get to choose whether I want oil-generated, nuclear-generated, or otherwise-generated electricity. National Grid picks the flavor of electricity that I receive. Mr. Ryan's analogy would only work if I told UPS "send me a book" and UPS picked the bookseller and price without consulting me.

And Rhode Island residents do have different flavors of electricity to choose from. According to a letter sent by Governor Don Carcieri to the Federal Energy Regulatory Commission, "roughly half of Rhode Island's energy comes from sources other than oil or natural gas". Here's where things get less-than-intuitive. The price a customer pays for electicity is not necessarily tied to its cost of generation...

In his November 18th letter to the FERC Secretary Magalie Roman Salas, Governor Carcieri cited his concerns regarding "serious problems in the electric energy markets in New England that unnecessarily increase the price of electric energy to consumers"...

Specifically, the Governor noted that two mechanisms for determining the price of energy are primarily responsible for this phenomenon. First, the market price for energy is determined by the highest cost charged by any single producer, forcing local energy distributors, and thus consumers, to pay inflated energy prices.

For instance, if the cost of producing energy from oil and natural gas goes up, but the cost of producing energy at a nuclear plant remains static, the nuclear producer increases its rates to match the price being charged by the oil and natural gas producers. In this scenario, the nuclear producers are enabled to charge higher rates even though their actual production costs have not increased.

The Governor's press release is a tad ambiguous about whether suppliers of non-oil, non-gas electricity raise prices because they can or whether they raise prices because of government mandates. Baron�s article explains that uniform pricing is the result of government mandates�
In testimony earlier this year before the [Public Utilities Commission], Gov. Donald L. Carcieri pointed out a quirk in the law that ties the price of electricity to the price of oil and natural gas, even though that power may have been produced at a nuclear plant, or a coal-fired generator or at a hydroelectric facility.

That decision was made when the URA was written, said Ryan and Robert H. McLaren, senior vice president of New England Regulatory Affairs and Energy Supply for National Grid.

The URA is the "Utilities Restructuring Act of 1996", which ties electric rates to a "Standard Offer" tied to the prices of oil and gas. At first glance, the URA seems to be yet another example of government's uncanny ability to design systems that combine the compassion of raw capitalism with the efficiency of bureaucratic socialism.

Understanding the details of the current price regulations is the beginning -- not the end -- of understanding the relation between government intervention, markets, energy policy and electric rates. There's a whole other level of considerations centered on regulations disallowing companies from owning both electricity generation and electicity transmission facilities. However, from Baron's articles and Governor Carcieri's letter, two points emerge right away, one substantive, one seemingly semantic, but not...