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Politics : PRESIDENT GEORGE W. BUSH
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To: Zoltan! who wrote (132880)3/22/2001 4:39:43 PM
From: Roger A. Babb  Read Replies (1) of 769670
 
Zotan: I take issue with your following point:

"Why? A fundamental axiom of economics states that the most expensive source of supply at the margin must set prices for all sources of supply. If it didn't, shortages would occur. So if 99 percent of all the utilities' power were supplied by long-term contracts at 6 cents per kilowatt hour, as long as 1 percent of that power were coming from the spot market, the price they'd charge to keep the lights on would reflect the spot-not the contract-price."

This "marginal cost pricing" is an old trick the MBA types have been trying to hoist on power consumers for years. Let's compare two cases:

Case #1
A regulated power company is required to supply reliable power and allowed a 10% profit. 99% of the power costs 6 cents and the top 1% costs 20 cents. The rate to consumers will be 1.10*(99*6 + 20*1)/100 or 6.75 cents. There will be adequate power, the power company is profitable, the consumer is happy.

Case #2
The deregulated power company won't provide the 20 cent power unless the rates are above 20 cents. Either the consumer pays more than 20 cents, giving the generator a huge profit 99% of the time, or else there are blackouts at peak times.

I think that consumers would choose case #1 (average cost pricing) but of course the generating companies would choose case #2 (marginal cost pricing). Case #2 is like saying the radio in your car cost $200 per pound, therefore you should pay $200 per pound for the entire car.
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