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Energy Prices: How High is Too High? PDF Print E-mail
Commentary/Politics - Editorials
Tuesday, 29 May 2001 18:00
A friend of mine attended a luncheon recently, at which a spokesperson for MidAmerican Energy told the audience that her company was preparing its customers for the same cost increases next winter as those we experienced this past season.

In addition, a customer service representative from MidAmerican Energy recently challenged me to show him documentation that proved MidAmerican Energy had done financial damage to any of its customers. I told him to look at any of the gas bills of his entire customer base, but most especially of those on fixed incomes, and he would have all the documented proof he needed. Little by little, the proof of price gouging, questionable supply floors, and many other factors are coming to light relative to the alleged supply shortage of natural gas and electricity, not to mention oil. Last week, hearings were held by the energy commissions at the congressional level to try and ascertain what can be done about California’s problem, as well as the pending crisis nationwide.

Testimony included information given by utility workers, who were told by their management to turn down the generators to give the impression of weakening supplies, while they watched as prices for the energy soared. Various energy experts and officials also testified that there has been no shortage of energy, that in fact, demand for power in California was down in the months when blackouts occurred. Many utilities realized unprecedented profits in 2000. Exxon-Mobile had the highest profit ever recorded in history for an American corporation in 2000 at $18 billion. Its first quarter earnings for 2001 exceeded $5 billion. The other big oil companies, such as BPI and Chevron, also had first quarter earnings in the billions of dollars. Conoco boasted profits of $700 million. These earnings represent 150% increases for some of these companies. For consumers, it has meant triple-digit increases in pricing. First quarter earnings in 2001 have peaked and, at the present rate, profits for this year will easily exceed those of 2000. Where amidst these astronomical profits are the incentives for these companies to do anything differently, including building more refineries and/or generators? In fact, there is disincentive for any change when they are making such huge profits.

This windfall for the energy companies represents greed at its absolute worst because it threatens everything that is good and right about capitalism. Utilities and basic infrastructure needs, such as water, air, electricity and gas (which translates into heat and cooling), have very few suppliers and are arguably oligopolies. Few suppliers exist because of the enormous cost of producing and providing such service to the millions of households, businesses, and industries that require it. At the same time, because the services have such broad reach and comprise the basic necessities of modern living, and because the vast majority of the population participates as consumers, suppliers are able to provide the service economically, which means affordably to the consumer, yet profitably to the supplier. But the risk that suppliers would become greedy has always been there, especially with deregulation. The idea that by deregulating, suppliers would find it in their own interest to increase supply is true only in a pure competitive market of suppliers, and when and if a genuine shortage exists. If supply is intentionally limited, then the rationale exists for increasing price, not production. OPEC does this when it sees fit. It slows down production, tightening the supply, while charging more for what they do produce. Profits soar because they are getting more per gallon with less costs incurred because they have shortened manufacturing time and expenses.

If a true shortage existed, energy policy would be approached very differently, certainly far more aggressively. Competitively speaking, larger markets would exist to justify expanding service, and it would be cost effective to do so. Oil companies aren’t building refineries because it is hugely expensive and they don’t really need to. There is enough being produced already. The key is, at what price? The same appears to be true for natural gas. It too is a commodity, traded on the exchange and vulnerable to the same manipulation as oil. Because so few suppliers exist, they can tighten or expand production at their leisure—or until the American people say enough is enough. By demanding that alternative energy sources are explored, and that our legislators limit the amount of gouging energy companies can perpetrate on consumers, the public can get control of this beast. But only if citizens get engaged in the solution by actively demanding corrective measures. If Americans believe that prices will eventually shift back down and remain at affordable levels—back to 1999 and before pricing, then it is time to wake up. Even if prices drop back to half as much as they were in 2000, it still means prices will be two times the rates that they previously were. There is no other commodity with this level of inflation, so why should Americans tolerate it with respect to energy?

The utility companies’ financial statements tell the story better than anything else. It isn’t about shortages—it is about profits. Meanwhile, the elderly on fixed incomes have to make choices about whether to eat, buy medication, or keep warm. Small businesses and middle-income families are making equally hard choices. Some are closing their businesses, while others are falling below the poverty line just to pay the increased energy costs. This is unacceptable. All so energy company shareholders can make unprecedented earnings, but at what cost to society? If this were a typical company, with products or services for sale in a competitive environment, this rise in prices would not be possible. Unless of course competitors banded together to fix prices, which is considered collusion and is against the law. (An investigation is currently in the works against five of the top natural gas producers for price-fixing, according to the LA Times.) Competition naturally keeps prices where they should be, where they appropriately respond to supply and demand. But when you have such few suppliers, meaning a monopoly or oligopoly, some regulation or oversight needs to be in place for precisely this reason.

In many areas, infrastructure needs such as utilities are municipal non-profit efforts rather than for-profit enterprises. By taking the profit out of the equation, it better reflects the nature of the product or service, while still remaining affordable and economical. When you have so few suppliers and so many consumers, the potential for abuse is far greater, especially without appropriate regulation. No question that if legislators step in at this juncture, as they unfortunately must, it will be a blow to capitalism and set new precedent for governmental interference into the private sector. This is against every conservative precept, and the big energy companies should ashamed for stepping on capitalism—they should be held accountable for such flagrant abuse of the system. But the system allowed their greed when oversight ceased with deregulation of monopolies and oligopolies. These specific economic models don’t function properly without oversight in a free trade environment. That is why deregulation should not have applied in such cases in the first place. Deregulation only makes sense where a purely competitive playing field exists—not where the game is controlled by so few. And it is probably wishful thinking to believe the current administration will lift a finger to resolve the issue, especially with both Bush’s and Cheney’s long and prosperous history in the oil industry, not to mention Vice-president Cheney’s position as point person on energy policy.

In fact, this weekend, there was an article in the New York Times on how Enron’s CEO, Ken Lay, has possible undo influence in Washington. Enron was one of the largest contributors to George W. Bush’s campaign, and the biggest energy company to contribute to Republican causes. Enron is one of the largest traders in the electricity and natural gas markets—a $100 billion Houston-based energy giant. Mr. Lay is also one of the most vocal advocates of deregulating the nation’s electricity markets. The NYT report alleges that Lay is one of the behind-the-scenes interviewers for new commissioners of the Federal Energy Regulatory Commission (FERC), among other commission posts. FERC’s mandate is to ensure fair prices in wholesale electricity and natural gas markets. “The movement toward deregulation sometimes leaves the commission caught in a tug of war: power marketers like Enron are trying to break into markets and grids controlled by old-line utilities, which operate under state regulation. The commission’s chairman has considerable latitude in setting its agenda,” it states. Allowing Enron’s Ken Lay to oversee the appointments to this commission, especially the chairman, is a pure case of the fox watching the hen house.

According to the NYT, Lay supplied President Bush’s chief personnel adviser, Clay Johnson, with a list of preferred candidates, current FERC Commission Chairman Curtis Hebert, Jr. not among them because Hebert blew the whistle on Lay’s involvement in the process and was offended by Lay’s approach, asking Hebert to support certain positions otherwise Lay would not support Hebert’s appointment. It now appears that Hebert will be replaced as FERC chairman by Pat Wood, chairman of the Texas public utility and a candidate heartily endorsed by Enron for the Texas Public Utility Commission when then-Governor Bush appointed him. Hopefully, before he is replaced, Hebert’s current examination of the complex transactions, which represent much of what Enron and other such companies do in the buying and selling of wholesale electricity and natural gas, will yield important information about the impact of such risk-shifting activities on the marketplace.

Meanwhile, Lay’s wish list for Enron is being embraced by Bush and Cheney, evidenced by the recent “White House Energy Report,” recommending “ways to give the federal government more power over electricity transmission networks, a longtime goal of the company [Enron] that was spelled out in a memorandum Mr. Lay discussed during a 30-minute meeting earlier this spring with Mr. Cheney,” the article said. Furthermore, also according to the NYT report, “The commission is trying to speed up the pace of electricity deregulation by opening up the nation’s transmission grid, much of which is owned by privately owned utilities that enjoy retail monopolies.” Even though, since 1996, nearly half the nation has opened their retail markets to competition with the promise of cheaper rates, this has obviously not occurred. And with the recent skyrocketing prices of both electricity and natural gas, deregulation has not seen the advantages that often accompany increased competition. This is because the competitive forces are so few and far between. The same economic principles that apply to free trade do not apply to monopolies and/or oligopolies.

Just last year, FERC found energy prices at “unjust and unreasonable rates” but did nothing about it, according to Senator Diane Feinstein, who called for hearings on the matter this week, suggesting possible improprieties between FERC commissioners and private energy interests.
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