House Bill 110, recently filed by Rep. Jim Gooch, D-District 12 in the 2013 legislative session, presents a curious scenario for principled free marketers.
Ordinarily, when a utility in Kentucky wishes to raise rates on customers, it must file a case with the Public Services Commission. However, a law currently on the books called the “fuel adjustment clause” allows utilities to automatically adjust rates based on changing operating costs when switching from one energy source to another. Because of the monopoly power afforded these utility companies by government, rate payers have little choice but to fork over the dough when the fuel adjustment clause is implemented. If passed, HB 110 would block this fuel adjustment clause.
With natural gas becoming an increasingly competitive energy source relative to coal in the commonwealth and more power companies considering a switch, this bill could significantly affect both industries.
So how should a supporter of individual liberty, smaller governments, and freer markets feel about HB 110?
Well in a free market, prices are determined by supply and demand conditions. However, because of the monopoly power granted to these utilities by the state, utility rates are determined by government fiat – usually based on cost plus profit. Such a scenario discourages incentives for utility companies to discover new and innovative ways to provide electricity to consumers since they generally receive the same profit margin regardless of how efficiently they provide their services. So why make the effort?
So we’re outside the realm of free markets right from the start. Whether a free marketer supports HB 110 or not then becomes a question of one’s view of the role of government.
If the state is already setting prices in the utility industry, should it also allow prices to change instantaneously once a differently priced energy source is substituted in to produce electricity – a move that would eliminate the risk of natural gas prices rising in the future to utilities considering a switch? Or should the the state require utilities to go through the same motions as always when changing rates – a move that would maintain the risks associated with switching to natural gas?
Bottom line: the first move subsidizes natural gas while the second subsidizes coal.
Since principled free marketers shouldn’t support any sort of government subsidy, I don’t see how one can come down one way or the other on this issue.