When government plays in markets, customers pay

Government sometimes promises consumers that by paying higher prices now, they will pay lower prices later.

The government gets into the market, but leaves all the risk to customers.  It’s happening again, and this time the market involved is New England.

The six New England states have agreed to ask federal regulators to allow the cost of new natural gas pipelines to be included in electric rates.

The region’s power suppliers are increasingly using natural gas to replace imported oil and domestic coal.  It beats the traditional fuels on price and environmental impact.

But natural gas has been in tight supply at times, driving up its price, because of too few pipelines to bring the fuel from outside the region.  And the market has not yet spurred private investment in new pipeline construction.

So government would step in and require electric customers to pay subsidies to the natural gas pipelines.  Then, the theory goes, natural gas will be readily available at lower costs, thanks to the removal of the supply bottleneck.

Perhaps, though unregulated natural gas suppliers might not sell cheap, but could go for as much as they can get from customers who had become heavily dependent on them.

In the electric business, the promise of “pay me now and you’ll get lower rates later” has been made before, but it has not been kept.  

In 1978, faced with a slowdown in Middle East oil supplies, a federal law decreed that states should use renewables if they could be purchased at the same price as forecast for other sources.  Maine regulators guessed at high future oil costs and required the introduction of costly renewables.

In the end, the renewables cost too much, and plants were shut down.  Customers got to pay for the “stranded costs” of the shuttered plants, essentially getting nothing for their money.

In 1992, a new federal law required the transmission grid to carry power for generators, which were to be managed independently of the wires companies.  The idea was that competition among generators would bring prices down.

That was a good idea, but federal regulators could not leave it alone. Without being required to do so, they set up markets.   Under their system, New England customers are charged the cost of the most expensive supply even if their power comes from cheaper units.

The old system had charged customers different prices for various units, depending on their cost of fuel.  The new system, with its uniform high price, denied customers the benefits of competition.  Prices did not fall.

New England has among the highest electric rates in the country, hardly conducive to attracting business.  Maine, the poorest state in the region, may suffer the most.

Public policy keeps finding ways of raising rates.  The offshore wind project recently approved by the Maine Public Utilities Commission will add to rates.  The new pipeline proposal would do the same.

There’s still some hope for customers.  The proposal may not be legal.  There’s a real question if federal electricity regulators have the authority to include the costs of natural gas pipelines in electric rates.

But here’s more bad news for customers.  New England, having made hydro development almost impossible in the region, longs to buy “cheap” hydro power from Canada.

Why would Canada sell to New England at a price below the market?   

A recent long-term deal between two Canadian provinces sets the selling price of hydro at the New England market price of power as it floats in the future.  If they use the New England price for Canadian sales, why wouldn’t they do the same for New England sales? 

Politicians keep looking at Hydro Quebec, where rates seem to be lower. And that utility has a long-term deal with Vermont utilities that looks pretty good.

Provincial rates are political rates in some Canadian provinces, so it’s unlikely they would treat New Englanders the same way they treat their own customers.  After all, Hydro Quebec is owned by the Quebec government.

As for long-term deals at contract prices, buyers never know how the deal will look years after it was made.  One Canadian province has been litigating unsuccessfully for decades with Hydro Quebec over pricing in a long-term deal. 

If New England were to tap those Canadian imports, new transmission lines would have to be built, paid for by customers.

There are lessons here.  When markets don’t produce desirable results, government probably can’t fix the problem by fiddling with the market.  And when government electric policy fails, the customer gets the bill.