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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: Gottfried who wrote (3638)	4/23/2001 2:24:09 AM
From: dfloydr	Read Replies (2) \| Respond to of 23153

Good post re "those two posters struggling with the issue." Electricity used to be sold under regulated circumstances. PUC's looked at the power suppliers costs, disallowed a few, allowed others and then set a percentage return above costs and let them go forward. Importantly, most PUC's allowed a utility to include in it's rate base a percentage of excess capacity ... often as much as 20%. Investors willing to settle for steady but modest income streams invested in utility stocks or utility bonds. It was pretty dull. Companies in fast growing areas grew a bit faster than others. Generally people expected 4 to 5% returns with an occasional 6 or 7%. Now as we convert to a free market utility world, we are really changing the nature of the whole business. This change goes so far as to overturn the whole investor base in the industry. The rate of return in a free market is not set and steady ... it fluctuates ... sometimes good sometimes bad. Those old utility investors want nothing to do with this kind of world. The only way investors are going to be interested in a free market utility system is if they can make lots of money some of the time because they know instinctively that at other times they will not do so well. And they have little or no incentive to carry the burden of excess capacity unless their rate of return is really high as after all it may never be needed. So expect investors to want to see two or three times the level of returns in a free market environment than those old investors were prepared to accept. Accordingly the old thinking of cost plus a modest percentage = a fair price for electricity is history. Now we need to look at the marginal cost of production to determine a fair price for incremental supplies. Now the pricing scale has to change. Under the old system, with lots of built in excess capacity, the cost of which was shared by all, it was OK to give big users a discount. After all if they used a bit more, the excess capacity was there to be had. Now, with companies running "lean", incremental usage is probably the most expensive kilowatt. Prices should now escalate as usage goes up to reflect the fact that the incremental usage is what is going to pay for new, more expensive sources of power. All this change is way beyond the expectations of any FERC or CPUC or state Governor. They are all looking at the political impact and trying to squeeze their end of the balloon to make their constituents happy. I also have no doubt that some pricing has swung to extremes. This will happen in a new market ... but let it swing ... it will balance out once the impact flows through to the consumers and they cut back in response. Remember, price is a real source of information. Mess with price and you obscure the information and blur the response. By the way, my cousin has a very nice house in Central California. He is retired, and a bit of a nut, but he is a very conscientious thinker and by a little careful planning they cut both their electric and gas consumption by 40+% for the month of March. A few hundred thousand responses like that and the CA power problem would go away fast. So CA, stop bitching and start switching a few things off! As whitepine suggests, get out of the myth phase of your thinking.