It's electric!

I recently got an email from one of the former students who used to work for our department about the BGE rate hikes. He found it puzzling that Mayor O'Malley was complaining about BGE raising prices in anticipation of the electricity rate hikes.

I admit I haven't really been following the story - pretty much my entire understanding comes from snatches of stuff I've seen on the TV's while on the treadmill at the gym - and since I haven't been very good about going to the gym of late, and half the times all the TV's are on ESPN or MTV, that's not much.

But basically BGE bought a bunch of future contracts the last time they set rates that allowed them to keep rates the same. Now those contracts are expiring, and since energy prices are way higher now, they have to raise rates. This will pretty much double rates for everyone - so people complain, and the government talks about prohibiting or minimizing rate hikes.

Right now, utilities are included in my rent, so this doesn't affect me - but if I go thru with my plan of buying a house, it will. So the future homeowner and cheapskate in me isn't a big fan of paying more for stuff.

But as anyone who has put gas into a car of late knows, energy prices have gone up. And while I really don't like paying $2.50 a gallon for gas, when I remember 6 years ago paying $1.10 a gallon for it, I don't really have a choice if I want to be able to drive. Electricity is the same way, except for the fact that it isn't a normal market. Because of the previous rate caps, the price hasn't gradually increased the way most prices do - so now it's got to do several years worth of increasing in a short amount of time, which causes the dramatic rise and throws off people's budgets.

It's a result of the weird monopoly status of energy companies. Because the government pretty much forces you to only have one energy company (some would argue that this is a natural monopoly, others that it's a government-enforced monopoly to prohibit compeition, others that while it's a forced monopoly it would be one anyway with more inefficiencies if it wasn't), they also regulate it with the previous rate hike caps. In a normal market, prices would have gone up slowly. In a market with rate caps, prices couldn't go up. With a slow rate hike, people would have gradually lowered their consumption as prices went up, but since prices were fixed, people didn't really think about that, and now they are finding out how much the price in the real world increased.

Prices are good - they provide us with information that helps us make decisions about our future consumption levels. Heavy regulation - like enforced monoplies or rate caps - distorts pricing information and thus distorts the market, leading people to make bad decisions. The irony is that this has happened in energy, where many people would argue is exactly where we should be reducing consumption -something that would have happened in a free market as prices went up, but hasn't happened in this heavily regulated market. If it had, chances are we'd have less energy use, and thus less pollution and dependance on foreign oil - in addition to fewer people going thru sticker shock. The irony is that the people who complain about the rate hikes - ie O'Malley and other Democrats - are the very same people who in general are pro-environment and pro-energy efficiency - but by restricting the market, they tend to have the opposite effect.