VitalAccurateThinking

The Chronicle on Electricity Economics

This is why the Houston Chronicle is such a mixed bag when it comes to reporting. They misreport the chemical industry, then have a good article by Brett Clanton. After that, they get some economic nonsense from Loren Steffy regarding the price of electricity.

That might sound as if competition is working, but there's the rub: The price to beat is based on natural gas prices of about $11 per million British thermal units.

Natural gas prices have now fallen to less than $6, but the price to beat hasn't wavered. Nor does it appear the market's new entrants have adjusted their prices enough to reflect the drop. Even if you're paying 10 percent below Reliant's price, you're probably still paying more than you should.

Who says you are paying more than you should? Steffy?

Here's the thing. Electricity is not a competitive market at all levels, production, distribution, wholesale and retail, so how can it be expected that prices will act like it is competitive. Until it is totally deregulated and the price action can move with the market, there will always be a distortion.

Second, even though natural gas prices have fallen dramatically, most of the electrical providers hedge natural gas purchases to lock in that price. Who knows, maybe Reliant locked in the price at $11 to ensure it would not be caught if the price went up to $15 or $20. I will publicly predict natural gas will be at those prices within five years. That takes the uncertainty out of the downward and upward price action for natural gas. If you recall, some years ago, the natural gas price was $2 per million BTU. It rose very quickly to $12 per mmBTU and the utility company could not raise its rates fast enough to cover the price increase. When they lost money, did the business writers say the reverse "you should be paying more."

The bottom line is this, utilities have never been a perfectly competitive industry, the government has seen to that. Don't expect supply/demand price action when there are market distortions. Also, when a business's costs decrease (unless they hedge and it doesn't), don't always look for a decrease in their sales prices. That is now how things work in the real business world.

posted by Jim VAT @ 7:38 AM