CA PUC Chairman Peevey to Illinois: Don’t Continue the Rate Freeze

Lynne Kiesling

Today’s Chicago Tribune has a commentary from Michael Peevey, Chairman of the California Public Utilities Commission. Based on his experience in California since 2000, he cautions the Illinois legislature against continuing the retail rate freeze that has been in place for a decade, during a period of rising fuel costs.

To placate suspicious consumer groups, the law [the 1996 restructuring bill in California] directed the commission to provide an immediate rate reduction of no less than 10 percent for residential and small commercial rate-payers for a transition period envisioned to last no longer than 2002.

The legislation “anticipated” a cumulative rate reduction for small commercial customers of no less than 20 percent by April 1, 2002.

Even a casual follower of the energy woes in California can recall the serious problems that confronted the state in the short period after the new law took effect: wild energy price escalations, unusual generating-plant outages, brownouts, several rolling blackouts, endless litigation and finger-pointing in the quest for bad guys, and figuring out what went wrong.

Whatever short-term gain might be enjoyed by extending the Illinois rate freeze, it will be greatly eclipsed by the long-term pain that will follow.

The populist perpetuation of these long-term, discounted retail rates does more harm than good, particularly in a period of high fuel costs. When fuel costs are rising, all that a rate freeze does is make the retail price adjustment more discrete and more abrupt, because there is no adaptive mechanism for prices to adjust gradually as fuel costs change. And, as we saw in California, that discrete, artificial mechanism raises utility costs without their ability to share those costs with the people who actually cause them to be incurred: the end-use customers.

Furthermore, the proposed rate increase in Illinois is on the order of 20%, when fuel costs have increased by over 200% in the decade since the rate freeze was established. Why is it such a travesty to have default retail rates go up by 20%, when you put it in that context? And when retail customers don’t see these cost increases reflected in prices, they do not use price to ration their use, so they have more incentives to use more electricity. What does that mean? More use of non-renewable resources, more emissions (demand for emissions permits), more carbon, more more more. Is the Illinois legislature willing to perpetuate such an anti-green policy?

Further-furthermore, this rate freeze strangles competition. What potential supplier would enter the Illinois market and compete against such a low, frozen retail rate? Retail competition for residential customers is already on shaky legs in Illinois, because the BGS-style wholesale procurement auctions for default service have undercut most incentives and opportunities for new supplier entry to compete against default service for these customers.

It also takes away the most important and effective tools for disciplining cost increases and price increases: customer choice and active demand responding to dynamic pricing. Rate freezes stifle consumers and imprison them in a world where what they get to buy is mostly plain-vanilla default service at this discounted rate. This is ironic, given the bright movements toward residential real-time pricing that I discussed yesterday.

I agree with Commissioner Peevey: don’t do it!