Power demand dropping? Must be time to raise prices!

Michael Giberson

News headline reflects the stark difference in pricing strategy between competing businesses and regulated monopolies: “Xcel: Slack demand signals need for rate hike.”

The sub-headline reads, “The utility, which posted a profit increase, will ask Minnesota for approval to raise rates.” Profits are up? Must need to raise prices. Reading the article heightens the feeling that regulated monopolies just think differently.

  • “Xcel Energy Inc. reported a 17 percent jump in earnings per share for the third quarter but warned that electricity sales remain slack and that it will seek a Minnesota rate increase.”
  • “Cost-cutting efforts launched earlier in the year and rate hikes in four states boosted the company’s bottom line in the latest quarter, executives said. Yet the demand for power across the company’s eight-state service area remained slack for a utility long accustomed to growth.” — so the problem is that they’re “accustomed to growth” but don’t see it coming?
  • “Xcel intends to file a request next week with the Minnesota Public Utilities Commission for a 2013 electric rate hike, with an interim increase to be sought on Jan. 1. Madden offered few details, but said higher rates are needed to pay for investments in Xcel’s two nuclear power plants in Minnesota and to cover other cost increases.” — So they want to cover new, higher costs, which is normal…
  • “He said Xcel also will file requests this year for … electric rate hikes in Texas, New Mexico and North Dakota. … Xcel also said it won’t need to invest as much in pollution control equipment at its Texas coal-burning power plants. [Xcel] can now defer $470 million in Texas emission-control upgrades for at least five years.” — And they need a rate hike to cover new, lower costs, too.

Price gouging allegations on cancer drugs

Michael Giberson

If you think political interference in gasoline markets is excessive, try reading about drug pricing for a while. From the Los Angeles Times: “Shortage of cancer drugs tied to simple economics, experts say.”

And by “simple economics” they mean the perverse incentives created by government regulation that induce oncologists to prefer prescribing more expensive cancer drugs. Most drugs must be purchased through pharmacists, but government rules allow oncologists to sell cancer drugs directly to patients. These days the  sales amount to about half of oncologist’s income. Government reimbursements through Medicare will only pay 6% over wholesale for these drugs. On this point the Times quotes from a column in the New England Journal of Medicine, “Why use paclitaxel (and receive 6% of $312) when you can use Abraxane (for 6% of $5,824)?”

Last week the President ordered an investigation “to gather information from drugmakers about potential shortages so the government can respond before patients’ lives are threatened and help prosecutors head off ‘price gouging.’ ” If you are like me, you laughed at the phrase “so the government can respond before…” The problem has been created by earlier government responses to earlier perceived problems. Good luck to those who think the problem will be solved by layering on another government response.

In unrelated price hike news: peanut butter prices not so sticky.