Price Stabilization Plan Should Avoid Taxpayer, Ratepayer Bailouts

Consumer advocates raised warning flags concerning terms of the deal being worked out by state and federal officials with utility companies and other power generators in Washington, D.C. this week.  No consumer advocates were asked to participate in the negotiations.
 

“While stabilizing prices is important, it all depends on the terms worked out behind closed doors. Handled incorrectly, the deal could prove to be a massive boondoggle for taxpayers and ratepayers,” said consumer advocates Harvey Rosenfield and Douglas Heller. “And, of course, any such deal will still leave ratepayers at the mercy of deregulation and the insatiable greed of the energy companies. It is critical to move forward with the public power and other legislative reforms endorsed by Governor Davis on Monday night.”
 

The proposed deal consists of the following elements, according to a news release issued today by the US Treasury:
 

Long term contracts: This is the worst possible time to negotiate long-term contracts with the power suppliers who have us over a barrel, with a gun to our head.
 

While such contracts could provide a significantly lower price than the artificially-created windfall prices in the market at present, electricity prices are likely to drop in later years, when conservation and other energy sources become available. The long term contracts thus could lock us into paying rates that look good now, but might turn out to be excessive later on.
 

Indeed, market prices could drop right away as a result of the long-term contracts. The long-term contracts could pop the artificially-high price bubble by leaving some electricity suppliers with excess energy they cannot sell. This, in turn, would cause high prices to collapse, perhaps falling below the long-term contract price.
 

Much depends upon the terms of the deal: the length of the contracts, the amount of energy purchased, etc.
 

Finally, there is an alternative way to keep electricity prices from rising for residential ratepayers. Edison and PG&E have sufficient in-house generation facilities to cover the electricity demand of their core residential and small business customers (but not of larger users). FTCR supports a TURN proposal to require the utilities to sell this in-house electricity at cost to core customers; the cost of the in-house energy could be as low as 3 to 4 cents kWh. This would protect small ratepayers against the higher market prices; however, large users would be forced to buy at the market price.
 

By contrast, long term contracts will no doubt cost residential and small business ratepayers more than the TURN plan. This is because the cost of such contracts may be passed-through to all ratepayers evenly. In effect, unless they are structured properly, long-term contracts will force small ratepayers to subsidize big industrial users of energy. The best approach would be to adopt the TURN plan for residential and small business ratepayers, and use the long term contracts to cover the needs of larger users.
 

State Purchase of Electricity: The D.C. deal may obligate the state to enter into the long-term contracts, purchasing electricity and selling it to the utilities. This is a taxpayer subsidy that could turn into a full-blown multi-billion dollar bailout, depending upon the terms.
 

Assume that the state buys the electricity and is immediately repaid by the utilities. Taxpayers are in effect making a short-term loan. The utilities should be forced to pay interest for this service.
 

However, the subsidy becomes a potentially huge bailout if the utilities are not required to repay the state immediately. The utilities could take the electricity, sell it to ratepayers, and use the proceeds to pay off their back bills, rather than repay the state. Taxpayers risk being left unpaid, especially if the utilities choose to declare bankruptcy later.
 

Again, the details are crucial.

 
“We look forward to learning the details of the deal before we can determine whether it harms or helps ratepayers,” the advocates said.
 

###